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Gavin Ezekowitz on AI Valuations, Asymmetric Returns, and Why Great Investors Fail
Gavin Ezekowitz argues that venture returns come from backing adaptable teams, sizing for power-law outcomes and pacing investments rather than timing markets.
How I Invest · David Weisburd
- Gavin Ezekowitz is co-founder and chief investment officer of BFA Global Investors.
The best minutes
- 9:07Underwrite the team and milestones, not a distant market forecast6 min
- 29:19Venture returns require convexity, pacing and position sizingPro pick 6 min
- 48:09Avoid letting macro timing override your investment mandatePro pick 5 min
Also worth watching
- 1:49Early AI markets can produce more than one leading company5 min
- 26:59SpaceX's compute buildout shows the value of anticipating shortages3 min
- 37:28Small funds can turn a focused founder network into an edge5 min
- 43:18Small initial stakes can dilute a fund's biggest winner3 min
- 1:06:49A manager's response to a mistake can end an LP relationship5 min
Skip the roughly two-minute Juniper Square and AlphaSense sponsor reads and the closing career-advice exchange.
Full analysis · 6 min read
Real Alpha · Nov 7
Gavin Ezekowitz says Anthropic looked good at $17 billion
- Weisburd said BFA entered Anthropic at a $17 billion valuation after FTX's forced share sale.
- Ezekowitz's method pairs near-term milestones with a return test, while leaving the price assumptions largely undisclosed.
- For venture budgets, pacing and follow-on reserves determine whether a rare winner can matter.
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Anthropic's entry reflected room for multiple leaders
Weisburd put BFA's Anthropic entry at a $17 billion valuation. Ezekowitz described an opening after FTX's bankruptcy estate had to sell shares, following a round that valued Anthropic at $30 billion.
At the time, he said, Anthropic was pre-Claude and OpenAI looked likely to win everything. He saw room for multiple leaders because early-cycle forecasts often miss the eventual winners.
That logic is not an earnings model. A forced seller can create an entry window, but it does not establish what the company is worth.
BFA's access came through relationships with general partners, Ezekowitz said, and BFA was not on the companies' cap tables. That puts its investment behind another manager's allocation.
So this is not a direct account of BFA's negotiated ownership or control. Weisburd also disclosed his own Anthropic investment, making both speakers financially exposed to the thesis.
Our read
Multiple winners make an early bet less dependent on naming the eventual leader. But a favorable entry point does not establish a company's value.
Revenue forecasts fail, but Ezekowitz still tests returns
Ezekowitz said the early Anthropic bet did not use revenue or another conventional metric. He later called that an exception, not a template for BFA's usual process.
His broader approach starts with a best judgment of growth and market opportunity, maybe three, four, or five years out. He then asks whether that scenario offers a sensible return from the entry price.
After that base case, he leaves room for outcomes current forecasts may not capture. He said a market can grow beyond its obvious reference point, creating convex exceptional returns.
For example, he said an Uber underwrite based on taxi and black-car markets would have missed how the service expanded the market. That supports possible market expansion, not a promise that every AI company will expand its market.
He said Anthropic's wet labs and work on new molecules might produce outcomes investors do not focus on today. Those possibilities support upside scenarios, not assured revenue.
The episode does not spell out the return hurdle, valuation range, or downside case behind his price test. So the framework takes price seriously, but leaves its application open to judgment.
“the current revenue and revenue projections are so imperfect”
Our read
Ezekowitz's point is not to ignore price, but to avoid false precision in distant forecasts. The unanswered part is how his return-profile test gets quantified.
Compute bottlenecks reward teams that build ahead
His SpaceX account shifts the forecast question toward capacity. Ezekowitz said he passed on xAI's $25 billion round because he could not understand the investment.
He then cited Musk's rapid data-center buildout before comparable capacity was widely appearing. When compute became scarce, Ezekowitz said, SpaceX could charge other companies a super premium to use it.
This is a case about one entrepreneur anticipating a bottleneck, not proof that every build earns its cost. The episode gives no spending, utilization, or payback figures.
On Big Technology Podcast in October 2026, Sundar Pichai said Google gives frontier research first claim on compute. He also said data centers take years to build.
That comparison supports tracking lead times and allocation priorities. It does not verify the economics of SpaceX's capacity or xAI.
On 20VC in November 2026, Erik Bernhardsson said Modal's customer demand had grown about 30% to 40% month to month. He said Modal uses aggregate demand to forecast capacity against three-to-four-month lead times.
That is an operating measure for one GPU aggregator, not a market-wide growth rate. Still, it illustrates a more testable way to size capacity against demand.
Sundar Pichai · Big Technology Podcast · Oct 20Google puts frontier AI compute ahead of other uses
Erik Bernhardsson · 20VC · Nov 2Aggregating GPU demand helps Modal manage capacity
Our read
A shortage can reward builders who see it early, but investors still need cost and utilization evidence. The episode supplies a vivid case, not a general valuation rule.
Venture needs convexity and survivable position sizes
Weisburd framed venture as a source of rare, asymmetric returns, and Ezekowitz said the approach was similar. The guest warned that indexing can remove the convexity that justifies venture.
Ezekowitz said BFA uses 10 in its strategy, compared with Weisburd's example of five funds. He said even strong managers can have flat stretches in a 20-year asset class.
Weisburd said he and partner Matt Cortola focus on pacing and sizing. His prescription is to spread commitments across funds and years, then size checks so one loss cannot wipe out the program.
Matthew Harris said on How I Invest in October 2026 that Bain invests $500 million annually to avoid chasing cycles. His rule mirrors steady pacing, although it is not the same portfolio plan.
Neither steady pacing nor broad diversification removes vintage risk. They make room to continue investing and retain exposure to a rare company like Anthropic.
So the practical test is whether an allocation can survive a run of failures without forcing a sale of the few positions that work.
Our read
The guest emphasizes retaining convexity, while the host's pacing and sizing framework addresses survival. Both point toward a portfolio that can stay invested through losses.
Follow-on reserves determine whether winners matter
Ezekowitz described a manager whose early Cursor allocation was too small to affect fund returns, even after the company became a major winner. The manager changed the process to add capital later.
The lesson is not simply to hold more reserves. A fund must balance early ownership against later follow-on capital, or a winner's return contribution can be diluted.
For instance, Ezekowitz said he had lots of opportunity to invest in Cursor at $10 billion and passed. He later recognized how often the company had changed its product and direction.
That is a separate underwriting problem. Investors must judge whether a team can adapt, then decide how much of a winner to own if the adaptation succeeds.
Ezekowitz said focused small funds can find companies through founder networks that large funds may struggle to make meaningful. But he also asks whether that network stays current across later funds.
Fund-one results can show taste, yet they do not by themselves establish that a sourcing edge persists. Allocators can examine whether access depends on relationships that fade when a manager leaves a company.
Our read
A winning company is not enough if the original stake cannot affect fund results. Allocators should test both a manager's access and its plan for following through.
LP trust depends on operations and candid reporting
Ezekowitz's manager test includes people, process, operations, and LP communication, not investment selection alone. He said a firm is a business whose operating quality affects how it serves its customers.
He described a manager with good returns but an operating setup he considered not institutional enough for some allocators. He said a big four auditor and suitable service providers can matter even when cheaper alternatives work.
That is partly a sales constraint, not evidence that expensive vendors improve investment returns. The buyer's requirements still shape whether a fund can raise from institutional LPs.
On mistakes, he said an investment error was tolerable, but a manager did not clearly own or explain one. He discovered it later, and the relationship ended.
He said candor and corrective action matter because no investor or organization gets every decision right. That standard cannot remove losses, but it can show how the manager responds.
Ezekowitz is BFA's co-founder and CIO, describing his own firm's approach to private markets. That gives him a financial and reputational interest in the method, not a reason to dismiss his observations.
“here are the three things we really just missed”
Our read
Operations and honest reporting do not guarantee returns. They help LPs judge whether a manager can be trusted when the investment case breaks.
What it means for you
- Test milestone evidence. For each AI investment, record the next customer, product, or sales milestone that would strengthen the case. Keep that test separate from the long-range market forecast.
- Check compute assumptions. Ask what capacity is available, when new capacity arrives, and how utilization supports the build cost. Track demand growth against those specific constraints.
- Model follow-on impact. Measure how larger reserves for the strongest companies would change ownership and fund-level returns. Compare that with the dilution risk of making first checks too small.
- Review manager candor. Ask managers to describe a real mistake, when they discussed it, and what they changed afterward. Assess the answer alongside their investment record.
What to watch
- Whether AI produces several durable leaders or concentrates value in fewer companies.
- Whether compute capacity arrives in time to support the demand investors are underwriting.
- Whether focused early-stage managers can sustain their sourcing advantage across later funds.
Send this to the LP choosing a venture allocation or evaluating fund managers.
Watch the exchange where Weisburd gives Anthropic's $17 billion entry valuation.
Written by Real Alpha from the episode's transcript and the other moments it links, then checked against the transcript. Quotes are the speaker's exact words.
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Read it with Pro, 7 days free- 0:43BFA accessed three private companies
Ezekowitz says BFA first invested in Anthropic and built LP momentum around the prospect of generational companies, later gaining exposure to SpaceX, xAI and OpenAI. He says BFA accessed Anthropic, OpenAI and SpaceX through GP relationships rather than holding direct positions on their cap tables.
- 1:49Anthropic looked like another winner
Ezekowitz says FTX’s bankruptcy sale of Anthropic shares created an opportunity after a round valued the company at $30 billion; BFA invested at $17 billion. Before Claude, he thought OpenAI might win everything, but saw room for multiple leaders and believed Anthropic had a strong chance to become one.
- 3:36First movers do not always win
Ezekowitz says investors often try to identify the eventual leader too early, even though several companies can emerge as winners. He says AI’s rapid changes also made it possible for disruptors to be disrupted. He regrets passing on Cursor at a $10 billion valuation, having missed how often its team could iterate and adapt.
- 6:41Teams matter as AI markets evolve
Weisburd says his Anthropic thesis included AI’s transformative potential and OpenAI employees moving to Anthropic. Ezekowitz says investors can form a base case for a company’s next few years, but should allow for markets to expand beyond familiar categories, as Uber enlarged the transportation market. He argues that adaptable teams matter because products and markets can change dramatically.
- 11:37Valuation relies on milestones and judgment
Ezekowitz says BFA did not rely on revenue metrics when it first invested in Anthropic; the company seemed capable and well supported, and he says some naivety helped. For later investments, he looks at revenue uncertainty, milestones, customer acquisition and sales execution. He describes using a company’s product and observing its sales process as ways to assess the team.
- 14:37Capital magnets need execution and integrity
Ezekowitz says founders who attract capital can also attract talent, creating a useful flywheel, especially in AI. But he warns that fundraising ability does not guarantee honesty, good execution or good character, and private-market investors may have few exits after committing capital. He says integrity matters because employees often know whether a company’s claims match reality.
- 20:15SpaceX pairs mission with entrepreneurial timing
Ezekowitz says former SpaceX employees describe strong mission alignment and clear performance standards, even when people were dismissed abruptly. He says SpaceX shares looked attractive over a three-to-five-year view and even more so over ten years. He also points to Elon Musk’s data-center buildout, including at a time when few were building at a scale of 100,000 GPUs, and says he passed on an early xAI round at a $25 billion valuation because he could not understand it.
- 29:19Venture returns require diversified exposure
Weisburd says venture should deliver asymmetric returns, not behave like public-market benchmarks, and describes a portfolio of roughly 20 positions. Ezekowitz calls venture a 20-year asset class and says broad indexing can lose the convexity investors seek. He recommends a planned program across funds and years, with position sizes that allow investors to survive losses and keep investing.
- 34:52Small funds can win through early access
Weisburd argues that simply investing across many managers does not guarantee access to the best companies. Ezekowitz says well-connected seed and pre-seed managers can still find strong companies early, while the size of a large fund can limit the return even when it backs a winner. He says allocators should assess a manager’s network and sourcing process, including whether the advantage can last.
- 43:18Conviction shapes follow-on bets
Ezekowitz describes a fund that realized its early allocation to Cursor was too small to affect fund-level returns and changed its approach to reserve more capital for later investments. Weisburd says venture managers often concentrate follow-on capital in a few winners. They also discuss the trade-off between selling shares in secondary markets to return cash and preserving exposure to a company’s potential.
- 48:09Pacing beats market prediction
Ezekowitz says managers should invest according to their mandate rather than wait for a perfectly timed market entry. He suggests adjusting check size when a market seems expensive while retaining the ability to invest more during a downturn. He says managers are often wrong, even when they have conviction, so they need humility, company knowledge and the capacity to act on their views.
- 55:59Strong managers need people and process
Ezekowitz says manager quality rests on exceptional people and a process for sourcing, assessing and diligencing investments. He cautions that strong returns may reflect market conditions that are not repeatable. He also expects successful IPOs to create succession challenges as senior partners become wealthier and firms work out how to bring in new leaders and share carry.
- 1:02:31Fund operations support institutional trust
Ezekowitz says allocators assess a firm’s operations as well as its investment process, including whether its auditors, administrators and custodians meet institutional expectations. He also stresses clear LP communications and says managers should be ready to explain their worst decisions, especially when the news is bad.
- 1:08:54Candor preserves investor relationships
Ezekowitz says mistakes are part of investing, but he has ended relationships when managers would not acknowledge their errors or explain what they would change. He says investors can build trust by being candid about what went wrong and how they will respond. Asked what he would tell his younger self, he advises listening more and finding mentors who give honest feedback.
Published Oct 28, 2026.
Transcript · 51 min read
How I Invest, hosted by David Weisburd, with Gavin Ezekowitz.
From the transcript How I Invest publishes with the episode.
When you're very early in a long cycle, people try to predict who the eventual winner will be. And most often, it's not that company. It's not Yahoo. There are multiple winners or they could be different leaders. And so it has turned out with Anthropic, our view is quite simple. They look like they've got tremendous shot at being the other company or one of the other major companies. You're recently sitting down with Top 10 Fund with... He said that they look for companies that are capital magnets. Mhmm. Do you agree with this strategy? I would observe over my entire thirty year career in the investment world, there are really special people that can accumulate capital, that can generate investor confidence.
They are not always honest people. They're not always good people. Occasionally, they're exceptional at all of these things, and they're wonderful entrepreneurs. But this is certainly... There's a pattern that we can observe over time, but it is not a terrible strategy. So, Gavin, you're one of a small group of investors that are in OpenAI, SpaceX, and Anthropic. How did you become an investor in all three companies? Oh, it started out with Anthropic, and then we, built some momentum largely with our LPs of saying that these are generational companies and, subsequent investments in, first of all, in SpaceX, XAI, SpaceX, OpenAI.
And, you know, I think along the way, what we began to recognize was that not only were these likely to be generational companies, we didn't expect the kinds of returns that we've had, obviously, But then investors want to own these in their portfolio. Right? That they didn't... And they had very few ways of accessing those companies. And it was really an out... It was an output of relationships that we had with GPs that gave us the confidence because, you know, obviously, we're not on the cap table in any of those three names.
Read the whole transcript
“what I missed, it's so clear in that company now, is that that was a company that iterated multiple times on their journey.”
Presented by Juniper Square, the operations partner for private markets. It's fascinating that you said team and this evolution of products. I invested in Anthropic as well, $4,100,000,000 valuation. And I had a relatively simple thesis. One was that AI was gonna be transformative. I had the benefit of actually having a few friends at OpenAI, and they were like, this is it. Because people have been talking about AI, I think, going back to fifties. I can't confirm that firsthand, but they've been talking about AI for so long. And so many really smart people have been talking about AI for for so long.
It felt like it was actually gonna come. Nobody could predict how quickly or or to to what degree. The second part of the thesis, I knew that a lot of the top OpenAI investors were... I knew that a lot of the top OpenAI employees were actually going over to Anthrop. Mhmm. Mhmm. Yep. Including, of of course, Stario. And that to me was the strongest signal. Yep. And then I had a relatively simple underwrite, which was, okay, if AI is gonna be big, there's probably gonna be a consumer version of it and an enterprise version of it. And I I just, like, licked my hand finger, put it in the in the sky, and thought it has to be a $100,000,000,000 plus company.
Although, at that point, a $100,000,000,000 companies were just insane. In fact, it was the exact same time where Founders Fund was going to their LPs and pitching this whole concept, which was very controversial at the time, which is in order for us to get the kinds of returns that we're gonna continue to get from previous vintages, we need $100,000,000,000 outcome per vintage. Every three years, we need a $100,000,000,000 outcome. And I remember because LPs would would ask me, do you think they could deliver $100,000,000,000 outcome for three years? And my answer was, a, it's Peter Thiel. So maybe.
And b, it sounds absolutely crazy. There's no way they could do that. So I was kind of conflicted myself. Yeah. But if I was to re underwrite Anthropic today or a new company today, I think I would actually take one of those legs of the stool. The whole idea that it would be an enterprise business, I think that's... It's so unpredictable to predict what a company will be like on evolution version number 93. I think you just go back to market, and is the team good? And I know that's not that rocket science, but I feel like in the age of AI, the team becomes so much more important because the evolution and the iterations are just so much greater.
It's almost impossible for the human mind to predict where the company itself is going.
“the current revenue and revenue projections are so imperfect both on the part of ourselves, other investors, and the company themselves”
that runs the fund. He said that they look for companies that are capital magnets.
Mhmm. A, what does that mean? And b, do you agree with this strategy? The quote from the individual was they look for founders that are capital magnets, and and those individuals that they think have have that incredible fundraising power. I would observe over my entire thirty year career in the investment world, there are really special people that can accumulate capital, that can generate investor confidence. They are not always honest people. They're not always good people. They're not always even good at executing. Occasionally, they're exceptional at all of these things, and they're wonderful entrepreneurs.
This is certainly... There's a pattern that we can observe over time that it is not a terrible strategy. The challenge, of course, is that in the private market, when we make a commitment to one of these companies, we have very few exits. In the public market, you can put a stop in if you like, or you can do all sorts of things. Most often, we need to commit a relatively sizable amount of capital at a period of time, and then we got to play it out. Your conviction around that singular point relies on a certain capital markets dynamic persisting over the time period that the company will have to execute.
You're making a macro bet. I think you're making more of a macro bet. Now, I think if you've got that individual, those special individuals, and you talked about talent, I agree with you. They can attract talent, they can attract capital, that does have a flywheel effect, particularly the scale of capital that we require in the AI space, very important. But you better make sure that those folks are able to shore up the rest of their business. And I would I would say that as an investor, I tend to be very focused on integrity, whether it's a venture manager or a founder. Maybe I'm a little quaint, but I very much value honesty, integrity, transparency.
And sometimes those folks who are exceptional are not exceptional in that regard. Yeah. I don't think you're quaint at all. And just take away the moral lens on integrity. I just think it's an efficient market. And when you're a top space x engineer and you have the choice between working... Continuing to work at... For Elon Musk, so obviously this great high integrity founder literally sleeps on his sleeps on his factory floor, or Brian Argus, former SpaceX guy, just like highest integrity guy, or somebody else, they're gonna go... All things being equal, which they're not always equal, they're gonna go with a high integrity.
I think there's an efficient market. They hit up three of their friends that work there, and they're gonna get the truth. Even though some investors may not get the truth, the employees, the source of truth, the ones that are actually building the foundational value in these companies, get to the right answer very quickly, and it's an extremely efficient market. I think that's actually a fantastic point, David. And and I think you make it really, really well. The market for talent at this... At the sort of at the at the tier of talent we're talking about, these are always the top folks, whether it's space There's tech hundreds of them.
There's hundreds or maybe thousands. There are very few of these people. Those folks know what's happening in those companies. I mean, they they really know. And and I think that there is no question that if the company in their view is not seen as... Is presenting perhaps an incorrect or overly audacious or or potentially untrue reflection of its capabilities and timelines and so forth. I think that they will look at both their own moral compass, their own economic reality, and ask the question, do I really want to be here through the part where reality meets? Having said that, when you speak to people from SpaceX, they will tell you that Elon Musk went around for many years saying, We're going to Mars.
People would repeat that over and over again. And there were plenty of times where the things that they were hearing in the public market didn't conform to where they were at. But the difference there was that they genuinely believed they were going to get there. Right? They they genuinely believe they had the skill set. They saw the talent around them, they said, well, look. Even if we're not gonna get there in three months, like I hear him saying, we're gonna get there. We like... You know, or I will die trying kind of thing. And I think that that that's a difference maker in that kind of company.
And it is one of the things that you do hear most often from those employees about kind of why they loved it. Personal responsibility, absolute commitment to a goal, and some of that other stuff that was, you know, a little bit optimistic was sort of forgiven. I've talked to some of these lifers at SpaceX, and the thing that you hear over and over again is essentially, they can't find a bigger mission. They can't outframe the mission of making human beings multi planetary. So Mhmm. They're inevitably, on some level, they're stuck in this mission. They're mission maxed, and now they can't find the the next great...
Bigger mission. I was sitting with a couple of folks who've started a business former... Both formerly worked at SpaceX. I think the the thing that's really interesting is that they would observe that coming out of that experience, there's actually lots of stuff to now do that builds on the the platform that that company built. And I'd... I always ask the question of, like, what would you... What are you doing in your business today that takes away directly from SpaceX? And what are you doing that is absolutely not, you know, what you saw at SpaceX and you would do completely differently? And I and I think that fundamentally that you've got it exactly right.
I think you've got to be mission driven. And in large part, when we were in the innovation world that we're in, there there is almost an irrational alignment to your and commitment to we will make something happen here. Like, we will crack the code, figure it out, build it out, get the customer. We will do what it takes. And I think that that is... That's something all of them take away. I think interestingly, from a people management perspective, one of the observations they they often make is it was... The quote was, I think Elon cares a lot about humanity. I'm not so sure he cares that much about humans.
I wasn't there when Elon may have said anything of that kind, so I don't know that to be true. But let's take it at face value. The one thing that they mention is that people could get marched out the door at any time. But they quickly follow that up with, But it was never confusing to us. It always seemed like that was the right thing. Was very rare that the wrong It's not ego driven. Was the right decision. It was the right decision. And and I think it's such a a powerful such a powerful business and so so difficult, but such a a powerful business mindset to say, our mission really matters. And if these people or this person isn't of the level, isn't of the capability, it's better for both of us that you're gone today, and we'll both move on with our lives.
We'll both be fine. But we need a certain thing. And if you don't have it, I'm gonna go get it elsewhere. And everybody understands that those are the the rules of the game. One thing I've learned from talking to hundreds of investors is that great investment firms aren't built on investment returns alone. The firms under are great at the things most people don't see, their operations, their relationship with LPs, and the quality of information they use to make decisions. And here's what AI has changed. Every firm now has access to the very same models, so the intelligence isn't the edge anymore.
The edge is what you could feed it. Firm with its fund operations and data in one connected record can actually put AI to work. A firm running on able that make opportunity to working with LPs, and building your firm. This episode is brought to you by Juniper Square, the operations partner for private market GPs. Learn more at junipersquare.com/howiinvest. That's junipersquare.com/howiinvest. Everyone I talked on the show is chasing the same thing, an edge, and more and more of the edge comes down to your information, not just having it, but being able to trust it when the stakes are highest. AI is doing more of that information gathering for you every day, and most tools are very good at sounding right.
The summary reads claim, but can you trace it back to filing the transcript, the specific passage that drove the answer, or are you just trusting the confidence of the output? For investors, that's not a minor concern. A miss filing, miss weighted source, context that got lost somewhere in the retrieval chain, those aren't edge cases, they're how decisions go wrong. AlphaSense is the AI market intelligence platform built specifically for this. They own the content, over 500,000,000 curated documents from broker research and expert transcripts to filings and earnings calls, and they own the retrieval layer on top of that.
So every answer links back to an exact verifiable source because the answer is only as good as what's underneath it. And with AlphaSense, you know exactly what that is. The edge goes to whoever can trust their information and prove it. See it for yourself. Start your free trial at alpha-sense.com/howiinvest. That's alpha-sense.com/howiinvest. Said another way, SpaceX is a company, not a day care. Absolutely. Yeah. And we're not here to entertain you. Yeah. We're not a fan. I have to I have to disclose as well. Also, investor in SpaceX, I think I have something like 90% still in my position. Good for you.
And I have a crazy thesis on SpaceX and in terms of data centers, but also asteroid mining, all this. I'll I'll spare spare the audience. I love it. I love But I I do think there's still this asymmetry that's embedded in the stock. I'm not telling people to buy the stock, but it is interesting how today you have these trillion dollar plus companies that seem like they're still early. I would agree with you. I mean, I I often say, again, this is not investment advice. To our investors, many of whom are taking the SpaceX shares that they've owned a long time. We distribute cash or shares depending on what people wish to.
And I've said the three to five year view here is fantastic. The ten year view is even better. So why... You know, what other asset are you going to replace that is going to potentially give you that kind of incredible return. Like, I don't know what else you would buy instead of that. And also, what is it correlates? It seems like a great asset to have you in your portfolio. What is core... What is SpaceX correlated to? Is it correlated to gold Something different every day. Something... I I guess now it's correlated to AI. So if you have some AI concentration, you might be But I think, you know, let...
Let's observe, like, some really incredible dynamics. And and I... And it...
“In fact, I passed on XAI in that $25,000,000,000 early round. I just couldn't understand it.”
“the very difficult part for investors is to understand that venture is a great twenty year asset class.”
On the indexing point, I think the biggest myth in venture capital across the last ten ten or so years is that ever... Any manager could get lucky and to get into the greatest companies. And not only was I think this was a myth a decade ago, today, it's almost impossible.
These these companies become so consensus so quickly Mhmm. That unless it happened to be that you... Your Stanford roommate just happened to be, you know, Evan Spiegel or or something like that. Like, that... That's the level of luck that you need today to get into a company that you don't deserve to be in Right. From a brand perspective. Even a decade ago, I think that was much more likely the case. We just know the counterexamples are just so memed sometimes for Uber. Everyone knows that Uber was going around and and raising in 25 k checks, a lot of people that weren't even, you know, restaurateurs and things like that got into got into the company.
But how many stories are there like that? Not that not that many, especially in the last ten years. And on top of that, you learn, and frankly, I I was heartbroken to learn that Airbnb itself was also... You know, people love this, like, story of the David versus the Goliath Airbnb. Nobody loved them, and, you know, they... It took ten years for them to get all this attraction. When you actually look at the facts, and I was told this by by early investors because my my interpretation of the story was wrong. Yes. It is true. Airbnb, when they went to pitch to Paul Graham at YC, he didn't really like it.
And then they're like, well, what do you have there? And they had these cereal boxes and that that Obama owes and the McCain, and he's like, holy crap. You guys are selling cereals in order just to, like, make make it and kind of the tenacity that you need as a startup. But they were hot at their vintage... At their y c class. In fact, Sequoia, I believe, invested. They didn't even go to Demo Day because they got that investment from Sequoia. So even these stories that are supposed to be these great counter examples, these great examples that anybody could invest in these great companies that they are on the lookout enough, even they themselves are not are not true.
So I think that's the problem is when people hear indexing, sometimes they start to think, okay. Let me just say yes to every manager that I get, and I'll get exposure to that. And that has not been done well. And I I think that's a trap that you fall into if you if and when you start to subscribe to this indexing style. I think it's true. I... You know, you bring up a lot of a lot of things that are really curious in the... In that conversation.
“small funds, early funds, well, managers with a very clear network can produce really incredible outcomes by being close to founders.”
And and it's it's interesting because it's the most difficult thing to to find and to underwrite those funds, and there are some exceptional allocators out there that And they're all almost by definition unbranded.
Yes. Oh, I First first ever there have been Yeah. And often, you know, it's a single individual. And it's more difficult than people might perceive, not only to find these folks, but to correctly judge that they can do the job properly. Because it's not a simple job. And often quite interesting. I'm sure you find it yourself. You'll meet someone at Fund two or three, and you'll ask them about fund one. And they may have done... Had some amazing returners, and they'll tell you all the things they did wrong. Yeah. Because invariably, they've done a ton of things wrong. And the things that they've evolved and processes and so forth.
“if they didn't get enough of the company in that pre seed stage, because of the nature of how they were investing, their returns just got so diluted”
I'm not sure about it over time where with the focus of DPI, folks are selling more positions in the secondary market a little earlier. Some of that I really like. Some of it concerns me that we're effectively cutting off the potential in our portfolio. You you did all the work to get your... This incredible thing to hear. Now you're gonna go sell half of it. Yes. We appreciate getting the capital back, but we can't necessarily go, you know, replicate that position ourselves. How do I feel about it?
I I mean, I get torn. I get torn because, of course, we want DPI to do other things and so forth. That goes back to what I was talking about, like, venture being this singular asset class. You have to know how to use it. And it's on the GP level, it's on the LP level. There's this concept that I've been talking about, LP capture, which is an otherwise good manager. If you have the worst LPs in the world, they could end up making you sell your anthropic position at this, you know, at a five x or or sell your space x out of three x. And you would have... All you had to do was not sell, but because you have these LPs that are pressuring you, because they're misusing the asset class, either they're overly concentrated.
We didn't... We haven't talked about this, but you shouldn't have too much money in venture because lo and behold, if you're having a bad vintage, you might do you might do the dumb thing because, you know, your other part of our portfolio is struggling and you need that capital. To be very careful on how you look at venture and how you use venture out of portfolio. And then on a GP level, in many ways, the GPs should be encouraged to take more risk because they have this n of one. They have this one fund. In many ways, you should want them to be more risk on because they're doing all this career managing.
They're trying to get to at least a two x Mhmm. Ideally three x returns so that they could raise another fund, get more management fees, and they're kinda managing their career. But oftentimes, you have the GP that's trying to be more bullish, and LPS are kind of asking them to cut back, and then that that could be highly counterproductive.
“if I am taking too big a macro leg view, too big a macro view on allocating capital, I'm doing you a disservice”
I'm always thinking about what's in this coffee? I need to put this in the coffee because I'm meeting with top people at Sequoia, at Andreessen Horowitz, at Thrive, on or off camera, and I'm like, what inning are we in? Are we in the second inning? Like, I have absolutely no clue. Yeah. I can't even tell you whether they were in the second inning or the seventh inning, let alone the second or the second And then I talked to macro investors in the public markets, and they're like, they could beat the market by 1% a year Mhmm.
On, like, thousands of trades. And yet these people are sitting down and telling me directionally exactly where the market's going. I'm like, how do you have... You're obviously a smart person. You've been around for for thirty years. So when when I'm sitting down with someone, I'm like, how do you have so much confidence still? You've gotten beaten down so much by the market, but you still have this level of confidence, and it's incredible. We are, to a great extent, in the predicting the future business. You get paid for having this confidence. You you have to have a measure of conviction. And I think and then I think what you've gotta balance that with, I don't know, I think it's the Kendrick Lamar song.
It's like, you know, sit down, be humble. Yeah. Right? You've got to be humble. You... You've got to have great humility. And that what is your ability to to predict the future across any set of parameters, including our own lives often. Right? It is very limited. And so in that environment, with that limited information, that limited window, how do we do it the very best we can? How are we great fiduciaries? People entrust us with their capital. They entrust us to to make a a good, solid, well founded decisions. And that's, you know, that's what we do. And to be careful. Right? And if you're thinking about you've got your 20 positions equally weighted, and you've invested in 18 companies, you got the last two, and you're sitting down getting ready to write that check for number 18, I think if you're not sweating, if you're not going, Am I convinced that this one is the deal I should do?
I wonder about what investor you are. I think we need to feel the weight of that of that decision. You know? And I also think we need to be aware that we're always gonna have limited information. And the the hard challenge for us is how do we, to the best we can, give ourselves an unfair advantage. What can we do to give ourselves more conviction to believe that we've got a more precise view, which which underpins the underwrite and and so forth? And then are we willing to say no? One of the hard things, you've done all this work, spend all this time, and you've got to be able to come to a no.
You've got to be able to say no. And it's not the easy no. The, you know, one call, you know, got... I'm not... That doesn't work. It's the no where you've put in tons of hours. And that's what we talk a lot... About a lot on our team is what level of conviction do we have. We can't be afraid to say no regardless of how much work we've done. I realized we started the podcast. I I didn't I didn't even credentialize the year. BFA, one of the top adviser. I think you just won an award in private equity, so congrats congrats on that. If you had to really sum up to what you're looking for in the best venture capital managers, how would you stack rank those characteristics?
There is our line, which is, you know, people and and process. I think fundamentally believe that the investment management world is driven by... And returns are driven by exceptional individuals. Sometimes they're they're in collections of teams. Sometimes it's just simply a person. Sometimes that person is in a leadership role. Sometimes they're deep in the team, and you you gotta figure it out. But I think it is all about people. Those people tend to have process that whether it's a very refined process that they, you know, they can write down almost like a script, or it's a little looser. It is a process for creating the opportunities, for spotting them, for working them through, and diligencing them, how they start.
Some people start thematically. Some people just take every meeting. Manager told me the other day, he said, the meetings I like are when somebody says to me that... That they come... You know, they're they're talking about their new idea. And he and he says, I... I've never thought of that. I never thought that was a business. I never even thought that was possible or whatever. He said, I get excited. Why? Well, because with those other businesses, if I've thought about it, there's probably 30 other people that are already doing it anyway, and I'm just meeting one of them. But this thing, I'm pretty sure there's not going to be many other people.
Right? And and that gets me excited. I start to do work. Think, oh, that's interesting. There there are a million ways to to assess, but I think it is people and then in that process. And then you've got to see some evidence of how that process has played out. And I think that there's an overreliance on it playing out with amazing returns. Mean, wonderful if it does. But sometimes returns occur because of market events. Maybe you had a bunch of companies that were ready to SPAC during that SPAC period in 2021. Wonderful. You got the returns. I mean, I think that's spectacular. And but but is that are those conditions repeatable?
Like with those... Can you go find businesses like that? And does that environment exist in that way? Yeah, maybe you've got a narrative, but maybe it's okay to get lucky. But maybe that was a bit lucky. And we need to look for something else other than just those It goes back to... How do you repeat that? I think the repeatability comes in a bunch of different areas. One of them is, can you create a team so that you can scale the breadth of your activities with your capital? Which is quite hard in venture because, of course, often you have to invest ahead of the fund closing and and so forth.
And we talk about the quality of teams in founding businesses, you know, with founders and so forth. The quality of teams in venture businesses, very interesting. Very interesting. It is so often the case that you have one or two, particularly in smaller earlier for one or two really exceptional individuals in in their own way. They don't all look the same. And then you'll meet the rest of the team. You got pretty ordinary group of folks. Right? Pretty ordinary. They... I'm not seeing a lot that's interesting here. Now that's fine if people are junior analysts and tasked with doing things like...
But if you... If that's your next level, in the same way as you you would assess SpaceX or or a founding company of the quality of people that they can recruit, I look at that and I go, oh, that's interesting. Is it they couldn't recruit someone who wanted to believe in the journey? Wouldn't we all love to be joining a rapidly growing venture firm? Is this what they think good looks like? What if the founder gets ill? Would any of these people be people that I'd want allocating capital? So you do see wide variety. And as an aside, I think we're gonna go through the most interesting period here over the next three to five years as we see, hopefully, all these IPOs that come to pass with tremendous returns, a number of firms have got senior partners who are between 40 and 60, 65, who are going to have made more money than they've ever made in their lives.
They may already be affluent, but they're now going to be uber affluent. And the nature of these firms is that it is often hard to bring new blood in to share the carry and so forth. And we could see some vacuums. And I think it's gonna be really interesting to see how firms deal with that that dynamic. And, again, you know, I think like any industry, it's there's there's often that really weird spot mid career for folks where they it's it's quite hard. It's quite hard to find people that would fit that slot. They're either happy where they are. They've started their own firm. Well, you gotta give up a lot of of economics.
And sometimes folks who were, you know, in in the VC space were willing to do it and sometimes not. So I think we're gonna see a really interesting period here of transition. Generational transfer has been so poorly done in venture capital that people only know the cases where it's worked. Yeah. Yeah. It's a great point. It's it's like this powerlot outcome. You have Sequoia, third generation Benchmark, third generation. I think Excel has done fairly well as well, but I'm probably missing somebody. But the fact that we can't rattle off a dozen cases is itself a sign. You can see why it's difficult.
I mean, we can understand why it's difficult. But I think it does come down to something we haven't talked about, which I, you know, and again, maybe my character as much as anything. I'll often spend a bunch of time with a venture manager, even if they're at the early stage, about the business of how they operate their business. So, you know, it's a business. The business behind the the firm. Behind the, you know, other... Okay, great. That's the capital allocation and and what you do as an investor, but talk about your business. By the way, generally in the investment world, it is amazing how varied the business capabilities of people in the investment world are.
It is astonishing. What's an example? Let me give you an example that is not directly from venture, but it... To me, plays out. You've got a a manager that's raised some reasonable amount of capital to manage, and he's got really good returns. Really, really good returns. He's he's stressed out because he doesn't know how to grow his capital enough to really make it into now a real business. Right? He's got a couple $100,000,000, but it's not enough. Little team. So you talk to him a little bit about it. Then you flip to the back page of his deck, and you look at all of his supporting cast, the custodian, the auditor, and all of these folks.
I'm like... I said, I'm I'm looking down this list, and I said, I'm not, you know, here to judge anybody, but this is not an institutional page. You gotta have a big four auditor. Like, it's just the way. And there's a few administrators and custodians that you've gotta have for your firm. Of course, use Juniper Square, our sponsor. Wonderful. Is the number one sign of of an institution. of an institution. There we... Would be a wonderful choice for this this individual. Text me later, and I'll give you their name. You need to have that caliber. Not to say these aren't fine. They probably are fine, and that that was his argument.
But they're they're really great. I've been with them forever. They do a great job. The costs are lower. Like, all that may be true. It's just not gonna work. So so let's think about your business. Right? What is your business when you go to large family office or allocator? These are the factors that matter to them. So if you're gonna be in business selling to them, that might matter. Now That's your customer. That's your customer. That's what they... So that that would be an example. The other the other challenge I think we all face, investor communications. You know, at the end of the day Or lack or lack of.
Lack of. I mean, we we are all, to some extent, in the marketing and sales business. We are building up our cohort of LPs. We're hopefully getting some referrals from them. We're all doing the same thing. So how do you think about your communications? How do you write it? What do you write? What do your current LPs think of it? How do you think about it? It's incredibly, incredibly important. The the challenge, of course, if if you've got a small team is is how to do that. And then, of course, how do you apportion your time between capital raising for a new fund, particularly if you've a very small fund allocating to your current fund, you can very quickly see that people are quite stressed by by that.
There's a famous founder of a $200,000,000,000 plus private equity firm that is known to told many people that asset management is about generating average returns with exceptional customer service. Some... Yes. Well And that has worked to $2,200,000,000,000. So it's hard to argue with that that kind of strategy. I think investors deserve good communication. Especially when there's bad news. The ability to deliver authentically and honestly your case study from your worst decisions is something that I really... You know, again, we talked about integrity and so forth. That's something that I see that I hold dear.
“when you are candid about those things, and then when you are clear about what actions you've taken”
Gavin, if you could go back to the beginning of your career, and you could give yourself one timeless piece of advice to younger Gavin, what would that be?
Doctor. Listen more. Find great mentors. It's the advice I can give young people today that there... And I see so many great young founders, particularly, who who really take this on board, that there is so much value early in your career to working for, or if you don't work for, finding in your world great mentors, people who will give it to you straight, people who you can ask, who don't have an impact on your direct career. It's rarely, you you get to work for great people, but that person often isn't the only mentor. You need other folks to give you perspectives, help you understand yourself better, help you evolve, push you to invest in parts of your toolkit that may be underdeveloped.
Know, I think it's fortunately, And, I see it so often in really great venture managers and founders that they inhabit this today, and maybe it's a time where people understand that better. But it is it is the thing that I I... There was, you know, probably a good decade in there where, boy, I I could have really used some really good, honest feedback. Well, Gavin, this podcast is my way to get mentored by some of the greatest minds in the world. So I really value you spending time, and thanks so much for sitting down. It's wonderful. I love the questions and really appreciate you having me on.
Thank you.
