Doing Good Is Not the Trade-Off

0:03Welcome to Swimming with Alligators, the VC podcast from the LP perspective with your

0:09Roy Swan: hosts, Alexa Benz and Ernest Stepp. You ready? Let's dive in. Roy, it's a pleasure to have you back on Swimming with Alligators. Thanks for being on. I can't believe it's been 15 months. Time flies. I saw that in one of the emails. I'm like, really? 15 months? Wow. Anyway, thanks so much for having me. Always. Yeah, that's where I was actually going to start. It's been 15 months since we first had you on or recorded. And I'm just curious, what's changed most in kind of your worldview and work since then? Well, to be concise, I'll say that there are more opportunities to do more good things that make more money.

0:56How's that?

0:58Roy Swan: that's a great way to start. I like that. I think everyone now is on the edge of their seat. They're like, wait, that's what we're, that's what we do for a living. Tell us how, Roy. Yeah, tell us more. What are the details? Well, let's start with a sense of urgency. And that sense of urgency from the Ford Foundation Mission Investments perspective doesn't come simply from making more money. It comes from the idea that the more we can do, the more we can invest in a way that helps people, the more positive impact we're going to have and the more money we're going to make for the foundation. You know, we survived.

1:53The last time we received any funding was 1947 from the Henry Ford estate. So we've been living on our endowment. So it's absolutely essential that we make more money so we can pay our bills, which includes our grants, which is the biggest bill that we have to pay. So I guess you can say that purpose can create urgency, and we certainly have no shortage of feeling a strong purpose here at the Ford Foundation. For listeners meeting you for the first time, how do you describe the mandate of the – this is a$1.3 billion mission-related investments portfolio within the larger endowment, if I'm correct?

2:41To be precise, we have a$1 billion notional endowment. It's an impact investing endowment. If you're in the foundation world, it's mission-related investments. The other roughly$450 million, rounded up to$0.5 billion, is capital that we call our catalytic capital. If you're in the foundation world, it's program-related investment. That capital, that second category, can be used to generate the primary purpose is impact and financial is secondary. With the$1 billion, just to add more precision, because I know public pension funds will have a specific cost of capital to properly service their retiree beneficiaries.

3:41So our cost of capital is today roughly 9.5%. So if we're not making 9.5 % with our$1 billion endowment, then we are eroding our corpus. So as a perpetual foundation, it means you need to make a financial hurdle rate of our legal spend rate, which is 5%. We spend more than that, plus inflation. That's how I get to the roughly 9.5%. From what I've seen, that hurdle rate is higher than many public pension funds and some sovereign wealth funds. But I provide that information to help people understand that impact investing has a spectrum of potential target investment returns.

4:51Roy Swan: I remember from our last conversation, you spoke about how the work of the foundation, specifically in its investments, was also being kind of utilized as a proof point, right, to show that you can do good work and make money. And you said the portfolio has exceeded both your expected return and financial hurdle rates. What do you think has driven that, most of that success? Divine intervention. Now, let me put some flesh on those bones. The case has been proven over and over and over that doing well and doing good doesn't necessarily require a financial tradeoff. and even that term I kind of cringe when I use that term because we don't even know what trade off means until we get the final answer on our actual financial return.

5:59So but the reason why repetition is important is human psychology. So human psychology suggests that storytelling is more important than data. So the data has been out there for a while that you can do well and do good, meaning you can achieve market rate returns with impact investments, but we have to continuously prove it over and over again to build the narrative. And at some point, more people will believe the facts. Sometimes it's hard to believe the facts.

6:46Roy Swan: What's your take on, from your seat, on the importance of narrative and how do we empower more people with narrative? One of the things I learned from the research I did when writing my book is the extremely outsized influence of human nature, human psychology, neuroscientific triggers, etc. So, we've heard terms like pattern recognition, which means you see something and if it's familiar, you feel more comfortable. That applies to humans and the way we see others. So to use the extreme case, there was a time when every person or animal who was outside that lonely cave where we were cold and shivering with our direct relatives, everything that moved outside was a threat, a predator.

7:58And in order to go from a cave to a village to a town to a city, we had to suppress sort of what I'll call pattern recognition and tribal instincts in order to live together. And we did that because we came to understand that there was greater value from the collaborative interactions that come with more people and more animals and et cetera than when we're alone in caves. In the investment world, the situation is obviously different than being in a cave, but it also is just easier to go with what you know, just generally speaking. And what we know from Nobel Prize winning economist research is that when you're comfortable with a situation, you're actually willing to pay to maintain that situation or give up potential upside.

9:05And part of that has to do with a loss is more painful than a gain. So I say that to say that even though it may be possible to have a better performing portfolio by allocating to a broader universe of asset managers, it requires evolved thinking and a different way of looking on returns. So that is to say, current behavior that is narrowly tailored and not expansive and very affinity-based may not be economically rational, but it is psychologically rational, given the point of view that many people have who are similar to the people who are alone shivering in caves, have not come to evolve to the broader possibilities outside the cave through cooperation.

10:18You hinted at the research that you've done for this book, and I would love to introduce our audience to what you've been working on. This is Positive Sum is a true, I would refer to you as, Roy, an intellectual historian. You have gone back to sort of understand why we're in the cave, right? I think it's interesting for anyone who is a history buff or thinks of themselves as a financier to sort of reflect back on what are these things that I have come to assume are true and why. your book really does sort of unpack the miseducation of those of us in the finance industry to use your own words.

11:13So could you jump in to some of these examples of what you've unpacked looking at the classic history books? I think on the last episode we did get an incredible example about Adam Smith and what it truly says, but maybe Milton Friedman, you know, some of these examples you give of where we've been misinterpreting and misremembering the text. Yeah, so I have been afflicted since my youth with a condition that requires me to question many things that most other people consider to be obvious and I I I've asked questions that people thought were silly questions from from lots of folks who a lot of people think well you know that person won a Nobel Prize why are you asking them whether their algorithms right.

12:22So that led me to act upon the confusion I had about a few things in our capitalist system. The first was Adam Smith, which I talked about before, and I wondered, you know, how was it possible that the person whose first book was the theory of moral sentiments, that person's economic philosophy got reduced down to a so-called invisible hand that essentially implies that morals and ethics don't belong in capitalism. And the answer was, even though I was taught that in school, it was completely untrue. Milton Friedman, it's funny, I've said before to people there's a category of reading assignments that are in fact assigned but not read on the syllabus.

13:18And it was easy for me to look at the headline of that Milton Friedman famous essay, The Social Responsibility of Business is to Increase Its Profits. And I could have an easy takeaway, which is, oh, business is supposed to just, you know, that's shareholder privacy essentially. And then I decided several years ago to actually read the essay. And I had to read it several times, literally like 10 times, because I couldn't believe my eyes. Because what I saw was surprising because essentially that essay is a stakeholder capitalism essay. Basically, to summarize it, it says that businesses should follow the rules and invest in workers and communities for the purpose of increasing enterprise value, which is not a that's not the same as being socially responsible.

14:23That's that is what I'll call enlightened self-interest. I'm a committed capitalist. But Friedman understood that even if people had a fair opportunity to participate in capitalism and gave it their best, that some people just aren't going to make it, given the competitive nature of capitalism. It's like the people who were scribes at the time when the printing press was created, they were super educated at the time, highly skilled, but their gig was over. So Freeman thought that we waste a lot of time worrying about freeloaders and cheaters when we come up with social programs. His belief was that most people want to contribute to society.

15:18Most people understand that, you know, moral and ethical behavior is good for everyone. You know, unless, of course, they're driven by, you know, driven to fear and anxiety, and then it becomes survival, and then all bets are off. But ultimately, Friedman wanted to provide a basic income for everyone and not worry about those teachers because there's such a small number of them. Now, let me be clear. Friedman could be described as a libertarian. So he also thought, if we're going to do that, why do we need a kind of welfare system? and there's something to be said about that, by the way. I haven't studied it, but the point is, it's not a stretch to think of the same person who believed in universal basic income, but also believe in stakeholder capitalism.

16:23Roy Swan: Now we're going to take a quick break to speak with our sponsor. On the show today, we have our stellar partner and industry expert, Shane Gowdy, leader of Sidley's Venture Funds Practice. And now host of the podcast Talk VC, we highly recommend you listen. If you get value from this podcast, we have Shane and his team to thank. So appreciate you so much, Shane, for being a part of this show. And the perspective you bring, really the bird's eye view is second to none. So thank you. Well, it's, as you know, Alexa, I think the world of both you and Ernest and Swimming with Allocators. and our partnership has been utter gold for us, whether it's content or just great industry speak or friendship.

17:09It's an honor to be here always, and I'm super excited to talk a little bit more about VC stuff going on. Our listeners have heard from many of the Sidley partners that Shane has introduced us to across the ecosystem, and today we get to hear from the boss himself running the venture part venture program specifically on fund formation and operations for VC funds so in that context I am curious what has been keeping you busy Shane yeah what hasn't been keeping you busy it is it is gangbusters on the fund formation front a lot of that is just not garden variety, but just regular mainline, main fund activity.

17:56Funds that have been last raised a couple years ago are coming back online. So the normal course kind of every day, but there's also been just a ton of very deal specific work. So a lot of work in co-investment funds and SPVs, some of that tailored and tied to some of the main fundraising because oftentimes you'll have the commitments going into main funds tied to additional participation in SPVs or an opportunities fund. So there's a lot going on in the way of a more holistic look in the LPs, institutional LPs viewpoint on how and where they're investing in venture and actually what bargain they're striking and a lot of that.

18:39So it's a lot of same as it ever has been with the acceleration, obviously, of the impact of AI and, you know, these hundred and billion dollar deal specific deals that have put a lot of gasoline in the tank of venture these days. But there's, you know, like it's whether it's defense tech or D tech or a lot of life sciences activity You know venture is just hot now and not surprisingly that is you've gotten a lot of work on the fun formation front so But you know, but but there's also been a lot of trans migration of talent people, you know New people leaving old funds starting new ones. There's you know new entrepreneurs who finally had exit opportunities are starting their own funds So, you know, a lot of the just broader venture ecosystem has allowed there to be more activity and newer emerging managers, newer firms for established managers.

19:36And that's all resulted in just kind of a tidal wave of really, really great work on our side. Oh, I have so many questions based on this. So starting with the top, you were describing sort of people coming back to market. Do you think that timing is working out for folks? Everybody was sort of sitting back waiting for DPI, waiting for – what's driving this now? What's changed? Yeah, I just think one is investment opportunity. One is a lot of really great deals out there. And the sort of FOMO, of course, progeneralists a lot of movement in venture. and with a lot of these incredible rounds and really frankly, early stage emerging companies, any AI, deep tech, defense tech areas popping up all over the place now.

20:26And a lot of it is also people coming from very large companies, OpenAI, Anthropics, starting new ventures. And that has been a lot of the opportunity cost if you don't have a fund out in market right now that you're not able to really take advantage of it unless you sit on a lot of dry powder. And frankly, from 2021, there's not a heck of a lot of dry powder left, to be honest, just given the past year plus and the healthy spending that's gone on in the venture industry. So that lag or that sag of a lot of extra capital that really weighted down the timing of a lot of funds coming to market, But air has been let out of the balloon so that the normal market cycle is kind of just coming back now here in 2026.

21:14And a lot of people starting, again, thinking about early 2027. And this is about the time we start talking to those folks about their fundraisers and getting all their documents ready so that around Thanksgiving, Christmas time, they're launching and then having first closes at the beginning of Q1. So some of it is that, but I do think that there's just been a little extra catapulting on some of the timing. So someone who maybe was going to wait until 2027, in mid-2027, late 2027 is now, I think that FOMO effect is really starting to impact a lot of people's decisions. And frankly, the availability of LP Capital.

21:54You know, this is about the time of year when, you know, traditionally in years and decades past, you look at what capital is left to invest in a venture fund on the LP side in the last half of the year. And usually it's not a ton. You know, they've been very strategic about planning for their asset managers, their fund managers who are raising B's, not M's. You know, and they've been careful to allocate to those, you know, best of breed names. but then it's, you know, there's a lot less opportunity and capital available to invest in just-in-time funds coming on market right now. So, you know, and that all changes again in January when fresh allocation buckets get filled up.

22:34And so there's just, there's a lot of discussion around about timing and planning and strategy and who's out in the market. And a lot of people are asking us, you know, which LPs are investing still this late in the year? And so it's helping clients kind of align and land their planes on the right part of the runway to be able to have really successful first closings to be able to launch them into great second closings. Or if they're really advantaged, you can do it one and done. Then how in a market like this do you help them navigate all that? Thank you for joining us on the show, Shane. If you're a GP or LP looking for expert guidance on fund formation and venture capital legal matters, you can visit Sidley's website, S-I-D-L-E-Y.com.

23:16And now back to our LP interview. And now back to our LP interview. No, I highly recommend this book because it gives you – Roy has done all the work for you.

23:37to understand how to start actually applying this in your day-to-day life. This is not just theory. It sort of transitions from the text to the applications. And maybe there are a couple stories from the book, Roy, if you have a favorite of what this looks like in practice. I think my favorite, possibly because a part of my sense of urgency has to do with

24:17the fact that the more I can help folks, the better we serve humanity. I think it's the Pete Stavros work and the Nine Dean work and the MIT Sloan School Good Jobs Institute work. And the reason why is because those three entities and people, Pete Stavros has a team, Aaron Lee Kong has a team, Zeynep Tun has a team, but they're leaders of each of their teams. The work they're doing is singularly focused on workers, families, and strengthening what I'll call everyone beneath the 1%, because it hits there. And the 1 % benefit from that, but the focus is the 99%. And I see that. So that all fits with our quality jobs impact investing theme.

25:30And I think that is, it certainly rivals our one of the other themes as being, well, all our themes are so important, but we have housing, we have healthcare, we have financial inclusion. But what I love about the quality jobs thing is it is it directly strengthens our democracy and the reason why it directly strengthens our democracy is because of something that Peter Drucker the you know the person who was basically the father of management consulting and professional management and and Louis Kelso who is a the creator of the Employee Stock Ownership Plan. They both knew that economic alienation erodes democracy and leads to authoritarianism.

26:27Peter Drucker saw that and, believe it or not, predicted the Holocaust in the early 1930s during the research he was doing for a book called The End of Economic Man, which is one of the 142 books in my bibliography. And Louis Kelso studied the breakdown of democratic societies, mostly in Europe, and realized it was because people didn't have enough of a piece of a pie to feel a part of the overall country's economic system. So he said, well, if we're trying to battle communism, actually, yeah, he studied also parts of Asia. If we're trying to battle communism, the best way to do that is make everyone a capitalist.

27:25Hence the Employee Stock Ownership Plan. That's what Pete Stavros, Aaron Lee Kong, Zeynep Tun, that's what they talk about, is making everyone an owner. When you sort of talk about these tools that aren't necessarily obvious to folks if they haven't heard about them in the past, this is employee ownership trusts are a way that you can transition ownership as a business owner to your employees if you're looking to retire or sell. Roy's putting these things on the map for those of us who haven't heard about them. So thank you. Boy, that's my next book. Yeah.

28:03Roy Swan: Roy, I think from that anecdote, what I get is like there is an opportunity also for operators and founders on how to create cultures that, using your words, can create more internal capitalists in those companies. But from your book and other anecdotes, what can actually the asset managers, venture capitalists take as their role and responsibility in using some of these tactics? Is it about who they invest in? Is it about how they diligence? Curious on what your answer would be on that. Yeah, I would say that the fastest thing you can do at any given moment is also the hardest thing. And that is to question conventional wisdom.

29:02For example, I'll use a term that is a part of the legal vocabulary in the fiduciary world. there is this term non-financial factors. So let's take empathy and culture. They seem like non-financial factors. I would ask people to think more deeply because from, let me just use the easiest to measure factor, the absolute easiest is attrition. So not even getting to innovation and productivity. So when you have a C-suite, and this is not my opinion, by the way, I rarely do things based purely on opinion. I typically like to understand the data. And I don't just take the data at face value. I kind of dig a little bit deeper.

30:14I'm a rabbit hole guy. And so empathy and great culture instills a sense of loyalty and reduces attrition. attrition is very costly and there are some sectors where 200 % annual attrition is not unusual but when there's empathy and great culture those those numbers drop and and the value the savings go right to the bottom line so that's that's one of the one of the challenges of just accepting things without questioning them. One of the problems is that you can lose out on alpha. And I think the only way to generate alpha is to be a contrarian when it comes to the conventional wisdom, whether that be interpreting the interpretation of rules or whether what everyone else thinks is true is actually completely false.

31:27Yeah, Costco comes to mind on the one hand versus sort of what we've got happening in Silicon Valley right now with like a 996 culture that sort of burns through people with the assumption that you're you're dispensable. Wait, what's 9.96? I don't remember. 9 a.m. to 9 p.m. six days a week. Oh, yeah, okay. That's light work as far as I'm concerned. Yeah, I was going to say. I'm old school.

32:01Roy Swan: Yeah, yeah. We were doing that in Wall Street. That's nothing. Oh, that would be a half day. Yeah. You know, it's funny. It reminds me. See, there are very – I'm going to state the name of a controversial figure, Elon Musk, and just an extraordinary business person. The one thing I firmly agree with him is when he has this little thing where he talks about you've got two people. One works 40 hours a week. The other works 100 hours a week. what do you think is going to happen? So I, look, I feel that I'm being insensitive right now to the work balance crew, but let me explain though something that's I think really important to add to what I just said.

32:58And that is this, wealth can be measured and defined in different ways. So for the people that want to become wealthy in the image of Elon Musk, then you might want to do that 100 hours a week of work. The nine, nine, six becomes nine, twelve, whatever. Nine, twelve, seven. No, not even nine. What am I saying? I can't remember. So so all I'm saying is a lot of work if you want that wealth. That's typically how it happens. But if you want to be your daughter's soccer team coach, that's also wealth. And I've made those types of choices myself. I left an investment banking career when my oldest daughter got a certain age because I'm like, you know what, I have a different definition of wealth.

33:57And that definition means I want more time with my daughter than my second daughter, and I have zero regrets. I don't, you know, so I'm sorry, that was a bit of a tangent, but I did want to just chat about that. But on the Silicon Valley piece, here's something that just came to mind, and that is the company Anthropic. Here's why I thought of the company Anthropic and Silicon Valley, traditional Silicon Valley culture. That is, a lot of venture capital these days is based on making a lot of bets, setting impossible targets. I shouldn't say impossible. setting very aggressive targets, milestones, et cetera, growth sort of metrics that are very difficult to achieve.

35:00So what did Anthropic do? Anthropic sacrificed rapid growth, market share acquisition in order to focus more on humanitarian safeguards, controls, things like its constitutional AI. When we were offered an opportunity to invest in Anthropik in March of 2024, there were real questions about whether the company would make it. It had fallen so far behind the kind of foundational model race that it seemed extremely risky at that time for a lot of people. But at the end of the day, that public interest focus that initially slowed growth ended up being a big asset.

36:01Roy Swan: But Roy, from our last chat, one thing that we left all of our audience with was just kind of like a reading list from you because you've read so many books. And you've told us and I think maybe your editors told us as well that, you know, they made you cut some books off the bibliography because there are hundreds of them. But I'm curious, not including the myth and other books that you've mentioned, were there one or two that really changed your perspective the most? Yeah, so a couple things. Soon and very soon, if people go to positivesomebook.com, there will be my full annotated bibliography.

36:52all 142 books with a description of why the books were relevant to positive sum. That document itself, I think, is around 35 pages or so. But trust me. No, no, no. Trust me. It's worth it. It's fun. It's fun. No, it's good. And you don't have to read it all in one. But I even have a section called The Shortcut. So I cover the top books that I think were most important to me. But let me tell you, I think the two that were most meaningful to me in my research, I think they were The End of Economic Man, which is Peter Drucker's first book. And it talks about how economic alienation leads to authoritarianism and talks about it from business systems perspective.

37:47Number one. Number two, I'm going to say Why Nations Fail, which is a book by Nobel Prize winners Darren Asimoglu and James Robinson. And they provide the deeply researched proof that inclusive economies in the long run succeed and extractive economies in the long run fail. And that doesn't mean the extractors don't get rich. It just means everyone else fails. and I guess the third is more a document than a book it's the Powell memo and the reason why the Powell memo was so important was it's it is a brilliant blueprint on how a small number of people who are committed to a singular objective and are willing to pull their resources and patiently chip away, it's extremely powerful and effective.

39:21And I talk about in the book why Lewis Powell was perfectly suited to create that extraordinary blueprint. Now, spoiler alert, I completely disagree with the intentions, but for anyone who wants to bring about change, it's a great blueprint and just plug in the type of change that you'd like to achieve. I have a bonus chapter that will be coming out in my book that's going to talk about the Powell memo because what I've done, spoiler alert, it's not a spoiler alert. The obvious first thing we recommend everybody read is Positive Sum. This is from all the newsletter slop that you get in your inbox every day.

40:10I would say it will not remind you as clearly what the hell are we doing with these skills that we have. We're in these positions of incredible influence and power by determining where capital goes. And you may forget occasionally what is it all for? And I recommend reading the book because it does remind you that you're the one in the driver's seat.

40:41Roy Swan: well said well said yeah Roy thanks so much for being on the podcast again we'll have to have you again for the next book okay oh boy I think the next one has to be fiction because those citations drove me crazy see you later allocator after portfolio tile investing with a smile