Podcast Summary
Making payroll easier with Gusto and investing in art with Masterworks: Gusto simplifies payroll for startups, while Masterworks offers access to blue chip artwork investment, and Capital Allocators provides insights into managing large investment portfolios.
Running a startup comes with numerous challenges, and Gusto aims to make one of those challenges, payroll, easier. Meanwhile, for those interested in investing, Masterworks offers access to the blue chip artwork asset class, bypassing a long waitlist for Twist listeners. Additionally, Dell provides up to 40% off select products during Black Friday, making it an ideal time to upgrade home offices or data centers. During the podcast, Jason Calacanis shared his diverse listening habits, including authors Brett Easton Ellis and the podcast "Red Scare." He also discussed the importance of appealing to Limited Partners (LPs) when raising funds, emphasizing the need to present a compelling investment strategy. Capital Allocators, a podcast hosted by Ted Seides, stands out as an essential resource for understanding the world of capital allocators, as it features interviews with individuals responsible for managing large investment portfolios at institutions like Harvard and Yale endowments. Seides' background in the industry enables him to secure high-profile guests who are typically media-shy.
Identifying audiences for capital allocators: Capital allocators serve diverse audiences and seek to partner with top investment managers for long-term capital preservation and growth.
People, even those who may seem unapproachable or uninterested, often have an audience they serve. This concept applies to capital allocators, whose role in managing large pools of capital for long-term preservation and growth necessitates diversification. In the past, these organizations had to either compete with specialized firms or identify and partner with the best. The concept of capital allocators is relatively new, originating around the time of modern portfolio theory. The path to becoming a capital allocator was not clear-cut due to the industry's recent emergence. Instead, individuals often gained experience through education or connections to these organizations. Ultimately, the role of a capital allocator is to identify and partner with the best investment managers, creating a mutually beneficial alignment of interests.
The Importance of a Clear Investment Framework: David Swenson's success managing Yale University's endowment highlights the importance of a clear and disciplined investment framework based on academic research.
Having a clear and disciplined investment framework, as exemplified by David Swenson, is crucial for successful capital allocation. Swenson, known for his innovative thinking and teaching skills, developed a framework based on academic research and stayed disciplined to it. This approach, applicable across all investing, helped him manage Yale University's endowment with a long-term equity-oriented strategy. Gusto, a payroll solution, can save business owners time and resources, allowing them to focus on their customers and building delightful products. By offering services like automatic tax filing, time tracking, and HR support, Gusto enables business owners to streamline their operations. For new business owners, Gusto offers a free three-month trial by visiting gusto.com/twist.
Growth of Endowments: Balancing Liquidity and Long-Term Capital: Endowments, like those at Yale and Harvard, have expanded due to population growth, aging populations, and retirement/natural resource capital. They function like mutual funds, balancing donor restrictions and long-term investment goals, requiring careful management of liquidity.
Endowments, such as those at Yale and Harvard, have grown significantly in size over the past few decades due to a confluence of events including population growth, aging populations, and the emergence of large pools of retirement and natural resource capital. These endowments, however, are not simply large piles of money that can be spent at will. Instead, they function more like mutual funds with various shareholders who have specified where their donations can be used. While there is some discretionary money, the majority of funds come from donations and returns on investments on those donations. This means that endowments must balance the need for liquidity with the long-term nature of their capital, making illiquidity a feature and a challenge.
Growth of Institutional Investing and Challenges during Pandemic: Institutional investing has grown significantly, creating large budgets for spending. The pandemic presents unique challenges, particularly in the alternative asset space where Masterworks democratizes access to blue chip artwork for diversification and uncorrelated returns.
The world of institutional investing has grown significantly over the years, with endowments like Yale's growing from billions to tens of billions of dollars. This growth has led to large budgets for spending, making it challenging to reduce spending. Meanwhile, the pandemic has presented unique challenges for these institutions. In the alternative asset space, Masterworks is democratizing access to blue chip artwork, allowing investors to buy shares in masterpieces by artists like Basquiat, Picasso, and Warhol. This asset class offers portfolio diversification and is not correlated with the stock market. Capital Allocators podcast, hosted by Ted Seides, provides insights into the world of institutional investing through in-depth conversations with experts. Seides is also writing a book on the topic. Podcasting offers a unique opportunity for deep, unfiltered conversations, providing valuable insights that journalism often cannot match.
Creating positive and supportive podcast interviews: Effective podcast interviews foster open conversations, allowing guests to share stories freely, and offer a valuable outlet for connecting with interesting individuals.
Effective podcast interviews require a positive and supportive approach, allowing guests to tell their stories freely without evaluation or pressure. This creates a more enjoyable experience for both parties and leads to deeper, more engaging conversations. Contrary to popular belief, those who manage endowments, despite having similar skills to hedge fund managers, often choose this path for intellectual fulfillment rather than financial gain. Endowment managers typically earn lower salaries, ranging from low millions, while their potential earnings could be significantly higher in hedge funds if they were successful. The difference lies in the nature of the work, with endowments focusing on long-term investment strategies and hedge funds prioritizing short-term gains. Ultimately, podcast interviews offer a unique opportunity to connect with interesting individuals, providing a valuable outlet for sharing stories and insights.
Managing Endowments vs. Hedge Funds: Different Roles for CIOs: CIOs in endowments/foundations focus on long-term strategies, while hedge fund managers prioritize short-term returns. Intellectually stimulating roles, but complex compensation and governance structures, with new challenges from the pandemic and SPACs.
The role of a Chief Investment Officer (CIO) in managing endowments or foundations is vastly different from managing hedge funds. While CIOs in endowments and foundations have the luxury to think and act long-term without the pressure of daily market fluctuations, hedge fund managers are constantly under the spotlight for their short-term returns. The job of a CIO is intellectually fascinating, offering access to conversations with top money managers and the opportunity to make a significant impact on various institutions. However, the compensation structures and governance in this field are complex and often flawed, with some CIOs being judged based on the performance of their peers, leading to unhealthy competition. The ongoing pandemic and the rise of Special Purpose Acquisition Companies (SPACs) present new challenges for CIOs, and it's crucial to build strong relationships with them to navigate these complexities effectively.
Dell's Black Friday Deal and Data Center Upgrades: Upgrade your home office or data center with Dell's 40% discount. Consider hybrid cloud solutions for backup strategies and owning your data.
The upcoming Black Friday marks an excellent opportunity for individuals and businesses to upgrade their home offices or data centers, especially in the current work-from-home scenario. Dell is offering a 40% discount on select products as part of an exclusive sneak peek deal. Additionally, with the increasing trend of hybrid cloud solutions, it's crucial to assess backup strategies and consider owning your data. Capital allocators are facing unique challenges in the pandemic, focusing more on people evaluation and adapting to virtual meetings for portfolio evolution. Pre-order Ted Sides' upcoming book for valuable insights on capital allocation during this uncertain time.
Building relationships with investors takes time and patience: Building a successful venture fund requires a long-term perspective, strong relationships, and adaptability to changing market conditions.
Building relationships with potential investors, especially high net worth individuals and endowments, takes time and patience. The speaker shared his personal experience of seizing investment opportunities during market crashes and growing his fund by catering to smaller investors. However, he expressed frustration with the slow process of converting long-standing relationships into actual investments. Endowments are known for their deliberate approach, wanting to get to know the fund manager and their investment strategy thoroughly before making a commitment. The speaker emphasized that the duration of the tenure of the individuals in those positions can be unpredictable, leading to a slow but potentially rewarding process. As for getting kicked out of an endowment, the speaker acknowledged that it can happen but didn't provide specifics on the reasons or circumstances. Overall, the key takeaway is that building a successful venture fund requires a long-term perspective, strong relationships, and adaptability to changing market conditions.
Reasons for LPs to leave or be removed from a venture capital fund: LPs may exit due to changes in strategy, growth beyond their sweet spot, underperformance, or partnership disputes. Some LPs feel pressured to stay for future fund opportunities, while those with long-term trust in a firm's performance are less likely to leave.
In the private markets, especially in venture capital, there are various reasons why Limited Partners (LPs) might choose to leave or be removed from a fund. These reasons can include changes in investment strategies, growth beyond what the LP perceives as the sweet spot for that strategy, underperformance, or partnership disputes. LPs may feel pressured to stay in a fund due to fear of losing their spot in future funds or missing out on potential home runs. However, LPs who have seen consistent performance and discipline from a venture firm over a long period are less likely to turnover. The percentage of venture capital in endowments can vary, but some endowments have increased their venture exposure due to the success of large tech companies. The removal of a fund manager from a fund is not a common occurrence and usually involves significant changes within the fund.
Shifting Allocations: More Capital Moving to Private Markets: Traditional allocations range from 0-5% for less sophisticated investors to 10-20% in the endowment world, but some foundations hold up to 90%. Venture capital sees a notable increase. SPACs, once risky, are now mainstream for later-stage tech companies. Low-interest-rates fuel demand, but concerns remain about dilution and selling process.
The allocation of capital between public and private markets has seen a significant shift towards the private side, with venture capital seeing a notable increase. Traditional allocations range from zero to five percent for less sophisticated investors, to 10-20 percent in the endowment world. However, there are exceptions, like a Pittsburgh foundation with 90% of its capital in private markets. The decision on the ideal percentage depends on the pool of capital's serving purpose and liquidity needs. Another intriguing development is the rise of Special Purpose Acquisition Companies (SPACs), which have evolved from being seen as risky investments to a more mainstream option for later-stage technology companies going public. The low-interest-rate environment fuels demand for these vehicles, offering asymmetric risk-reward opportunities for investors. Despite the allure, concerns remain regarding dilution and the selling process for the business owner. Overall, these trends reflect the evolving landscape of capital markets and the continuous quest for higher returns.
Investing in a changing market landscape: As more companies stay private longer and the public market's receptiveness to negative cash flow businesses varies, investors must adapt their hedging strategies and consider new ways to mitigate risk and maximize returns.
The trend of companies staying private longer before going public and the rise of direct listings are changing the way investors approach capital allocation and hedging strategies. The discussion highlights how Yale University, in the past, hedged against losses from its publicly listed stocks by shorting the market when the publicly traded shares were larger than its largest private holdings. However, this strategy proved costly when the market recovered, leaving a significant opportunity cost. Today, with more companies staying private longer, it's harder for investors to hedge against potential losses. The public markets' receptiveness to negative cash flow businesses varies, and the return window for investors could be shortened, potentially impacting the industry significantly. The question remains: how should investors adapt to this new landscape and what strategies can they employ to mitigate risk and maximize returns?
New business playbook: Prioritize top-line growth over profitability: Investors in the private markets focus on top-line growth and believe prices can eventually be raised, while public markets prioritize profitability and pressure companies to become profitable quickly.
The business landscape has changed dramatically, allowing companies to grow quickly and scale at unprecedented rates. However, the public markets may not fully embrace this new playbook, which prioritizes top-line growth over immediate profitability. This was evident in Uber's case, where the company was pressured to become profitable and faced competition from rivals like Lyft. The new playbook in the private markets is for investors to focus on top-line growth and believe that prices can eventually be raised without significant user behavior change. Companies like Netflix, Amazon Prime, Peloton, Tesla, Slack, and Zoom are seen as examples of this trend. Despite their high valuations, these companies are believed to have sticky products and a strong future. However, the market's overvaluation and the printing of money are concerns for some investors. Ultimately, the future of the public markets remains uncertain.
Investment landscape shifting in private markets: As interest rates rise, entry prices matter. Societal trends broaden investable opportunities while addressing biases.
The investment landscape has drastically changed, particularly in the private markets where technology growth-oriented businesses are valued much higher due to low interest rates. However, as interest rates rise, the discounting mechanism could be impacted, making it crucial for investors to consider entry prices and maximizing their "shots on goal." Additionally, societal trends such as sustainability, ESG, and diversity are increasingly influencing investment decisions, broadening the investable opportunity set while addressing unintended biases. Overall, it's essential for investors to adapt to these changes and stay informed about the evolving investment landscape.
Fostering diversity and sustainability in VC and hedge funds: Established firms like Sequoia play a crucial role in promoting diversity and sustainability in VC and hedge funds. Long-term focus and action are required from investors and emerging managers. ESG considerations are gaining importance due to market forces and consumer preferences, potentially leading to better returns in the long run.
The push for diversity and sustainability in venture capital and hedge funds is a long-term effort that requires sustained focus and action from both investors and emerging managers. The allocator community's focus on established funds and the need for training and resources for underrepresented groups mean that Sequoia and other established firms have a crucial role to play in fostering diversity. The growing interest in environmental, social, and governance (ESG) issues and the consumer shift towards sustainable products suggest that these considerations will have a positive impact on returns in the long run. However, it remains to be seen whether this trend is driven by genuine concern for these issues or by market forces. Regardless, the next generation of investors prioritizes sustainability and social justice over returns, indicating a potential sea change in the industry.
ESG initiatives gaining popularity among consumers: Apple's green efforts, ESG debate, role of government, election outcomes, China's impact, industry concentration, shaping future business landscape
Consumers are increasingly embracing Environmental, Social, and Governance (ESG) initiatives in a way that is surprising to some. Apple, for example, is leading the charge by reducing the carbon footprint of its products and eliminating unnecessary accessories. However, the definition and implementation of ESG are subjects of ongoing debate, particularly regarding the role of government and the potential influx of capital. The relationship between China and the US election outcomes also remains uncertain and could significantly impact both economies. The increasing concentration of industries, with technology being the most prominent, is a growing concern due to the decrease in competition. These trends, while not directly related to capital allocation, are shaping the future business landscape.
Tech Giants Risking Legal and Ethical Boundaries: Tech giants' dominance can lead to antitrust issues, negative competition impacts, and privacy concerns. Generosity and collaboration are encouraged instead of monopolistic practices.
Tech giants like Amazon and Google, in their quest for dominance, risk overstepping legal and ethical boundaries by promoting their own products or services at the expense of competitors. This behavior, while seemingly incremental, can lead to antitrust issues and negative impacts on competition. The speakers also discussed the importance of privacy and data ownership, as well as the potential consequences of companies' relentless data collection and reselling. Another key point made was the importance of generosity and collaboration in business, as opposed to greed and monopolistic practices. The speakers suggested that tech giants could avoid potential backlash by being more generous to smaller companies and respecting user privacy. They also recommended booking great podcast guests for future episodes to ensure high-quality content.
LPs may not always agree with your approach, but finding those who appreciate your uniqueness is key: Stay true to oneself and focus on building relationships with LPs who value your unique qualities, even if not all agree with your approach.
In the world of investing, it's essential to understand that not every Limited Partner (LP) will back your fund. The investor in the discussion shares his experience of having a meeting canceled due to his outspoken nature, which went against the LP's beliefs. However, he emphasizes that it's crucial to find the LPs who appreciate and endear your unique qualities. Just as in the world of angel investing or starting a new fund, you only need one win to define your success and reputation. The investor also encourages supporting great podcasts like Capital Allocators and following guests like Ted Seides on Twitter. Overall, the conversation highlights the importance of staying true to oneself and focusing on building relationships with the right LPs.
