Introduction

Patrick: [00:01:24] My guest this week is Chris Douvos, a managing partner at Venture Investment Associates, which allocates $1.6 billion on behalf of investors. Chris is the first professional allocator I've spoken with who focuses specifically on venture capital funds, so I had a ton of questions for him on how to build a portfolio in an asset class known for uncertain but often enormous outcomes.

We discuss the major recent changes in the asset class and where things might be going. I sought Chris out because while this is an investment style that is full of creativity and hope, I've always felt it could use a healthy dose of skepticism and a value investor's mindset. He delivers in spades as we try to separate the real from the ideal. We didn't record it, but Chris's tour of Palo Alto was one of the most interesting and entertaining hours I've spent. He's a student of markets and of history, and I look forward to learning more from him in the future. Please enjoy our conversation on venture capital investing.

Top Factors to Select Venture Capital Firms

Chris, I'm going to start with a question that is antithetical to most venture investing by forcing you to play a little game, which is if you had to build a comp model where all you got to select venture firms was four factors that have to be objectively measurable.

Chris: [00:02:32] Objectively measurable?

Patrick: [00:02:34] For example, assets under management could be one factor that you could use in your way of screening, or track record, or something like this. What four factors, knowing fully that this is a silly place to start, do you think are most positively related to future success for venture firms?

Chris: [00:02:51] Well, I didn't go to law school, but all my friends who went to law school said professors always say, "Don't fight the hypo." But I'm going to fight the hypothesis here a little bit, because I almost think that if you found four factors, I'm not sure they would necessarily correlate with success. They might, but they would certainly correlate with volatility, and I think you can positively skew volatility.

One thing I would actually say, and this is my bias and there are a lot of people in the opposite side of this trade, my bias is... Portfolio concentration is number one. On the margin, I believe that people who are more concentrated will have more success, because each win has much more impact. Now, the reality of it is, then you have to step back and say, "Are they choosing well enough?" This isn't monkeys throwing darts at a dartboard, because in that scenario, actually, portfolio diversification would... 50, 60, 70 companies a fund would probably give you a better chance of hitting a winner, but if you can apply thoughtfulness to the problem and have a portfolio of 12 to 20, you could really make a structural alpha, I believe. That's one.

Another, and this is actually an interesting question. How can you quantify this? I'll say maybe it's a qualifier thing, not a quantifier. But one thing that I focus a lot on, and I know you talk a lot about, is repeatability, and I believe that process drives repeatability. People who have thoughtful processes around building hypotheses and testing those hypotheses and executing those hypotheses, that's a really powerful...

I'll say the poster child for that is Union Square. They spend a lot of time talking process driving repeatability, and I think that... You look at the First Round guys, and they've built a big infrastructure, the True guys, a bunch of folks who've built process for driving deal flow and driving decision-making, building that investment engine. I think that's another one.

A third factor, I think, quite frankly, if done well, just being early. This is completely exposing my bias. Early-stage investors, I think, are structurally advantaged versus late-stage investors, just because they have a better cost basis. All right. We've got three. We've got concentration.

Patrick: [00:05:03] What's the hammer?

Chris: [00:05:05] It's funny, because I think a lot of people in my seat would say track record, but I actually think track record is a lagging indicator, not a leading indicator. And there's this... I call it the financial law of levitation.

Stepping back a moment. In venture, the horizon is so long. It takes eight to 11 years for companies to get public from first investment on average. It takes, I think, six years on average to get to an M&A exit. Telltale's a long way, but the evaluation horizon is actually sometimes a multiple of the fundraising horizon. You'll raise four funds, conceivably, before fund one starts really showing results. And that's longer than most people's attention spans. And in fact, it's longer than a lot of people's career tenures.

You've got all these principal-agent problems, which we'll talk a ton about in due course, but one of the things that's really challenging is, then... Here we go to the financial law of levitation. People have success, or at least perceived success, with their early funds, and then basically have money thrown at them.

Somebody once told me it's harder than you ever dreamed it would be to raise a fund one, but far easier than you ever thought it might be to raise fund two, and so on and so forth. By the time you really know if a fund is good, it's usually a lot larger. I do think that size is a contra-indicator to success. I think size-disciplined funds that can continue to repeat on this process-

Patrick: [00:06:32] Benchmark as an example.

Chris: [00:06:33] Benchmark is the poster child. They've done a great job. First Round has done a great job of staying in their fund range. There are plenty of arguments against that, but I think those two are really the poster children for being able to drive repeatability at size. And look, at the end of the day... Back to this principal-agent problem, and then I'll stop jibber-jabbering. You've got me on my soapbox, of which I have many.

Patrick: [00:06:54] That's the whole idea.

Chris: [00:06:54] Yeah, right? The principal-agent problem is, I don't understand why people don't value cap gains, although they may be uncertain, over more certain W2. I guess that makes sense. I asked it as a question, but intuitively, it makes sense. Cap gains is so much more powerful, but yet, I think people get intoxicated by the ability to spin funds, raise money, become mini asset managers. I think size discipline would be the fourth. There we go. Size discipline, portfolio concentration-

Patrick: [00:07:29] Repeatability of some kind.

Chris: [00:07:30] ... repeatability, and-

Patrick: [00:07:31] Whatever that last one was.

Chris: [00:07:32] Whatever that last one was. It's all good. But we've basically described Benchmark, Union Square, First Round, a bunch of these ideal firms.

Venture Capital Firm Landscape

Patrick: [00:07:40] Maybe we can step back a couple steps to draw a map of the entire venture landscape from your perspective. This would be... Rates of change is what always interests me. I've heard you talk about the rise of all of these micro-cap venture firms. In one of your letters, there was a great little phrase, where it was like, "Snow-blinded by opportunity." There's just such a glut of capital and interest in this world.

We also joked when we were on the phone last time that we might call this episode something like, A Value Investor Lost in the Valley, and that you have this, in your DNA, contrarian-type mindset. With the contrarian hat on, looking at the landscape today, maybe describe what it looks like relative to history, and then we'll get into where we might be going.

Chris: [00:08:17] Sure. You think about it, venture was almost this cottage industry, up until the mid, late '90s. Sub, a lot of cases, $5 billion a year, then maybe $10 billion a year. David Swensen wrote first the HBS case, which eventually turned into the book. Swensen talks about long equities being illiquid. All these things that, when you put them in a jar and shake them up and spill it out, it says venture capital. And Yale had a great run with venture capital, and continues to do really well.

I teach the Yale case every now and again at business schools, and I ask people, "What's the lesson of the case?" And people say, "Oh, be illiquid, be long," whatever. I said, "No, the lesson of the case is actually, don't try this at home." So many people then piled into venture capital in the late '90s, we saw 2000 was a $100 billion fundraising year, and returns really suffered. And then that created this six, seven, eight-year period where venture was somewhat depressed.

And then what happened is, by 2008, we started seeing this fundamental change in entrepreneurial finance that started becoming obvious. It really started happening in '03, '04, but it's what collectively we call today lean startup. Basically, instead of buying servers, you can now rent them. Instead of hiring all these developers, you can find open-source stuff and integrate it. All these things happened first in the consumer web, then migrated into other areas, into enterprise.

Chris Anderson from 3D Robotics and Wired always said the peace dividend of the cell phone wars was creating this cheap library of things that used to be unobtainium. We've seen lean startup in the hardware space, et cetera. There's been this explosion in entrepreneurship, and it used to cost... Josh Kopelman at First Round always says his first startup took $7 million to get to first revenue, his second startup took $700K to get to first revenue, and then his third startup took $70K before he was at first revenue. Today, the cost of getting to first revenue can be the opportunity cost of unemployment, and you can scale in response to growth, rather than in advance of it. And all these things led to a flowering of entrepreneurship.

Meanwhile, the venture industry was still chugging away, where the archetypal fund was a $400 million fund, and people were used to doing these large rounds. But companies suddenly didn't need that kind of money. This created what people started talking about in '08, '09, 2010. Sophisticated people started talking about the capital gap, because if you're a $400 million fund, you can't write a $500K check.

That led to the rise of these funds. First Round, IA out of New York, True, Floodgate, SoftBank, Felicis, some of the pioneers in that space. And those guys, right away, got on a bunch of great companies. Every one of those companies I just named has a signature deal or two. What's the Buffett line? "The innovators are followed by the imitators, who are followed by the idiots." I sometimes feel like we're in the idiot phase.

Patrick: [00:11:12] We're at the idiot stage.

Chris: [00:11:13] Right? Now, there are 550 micro VC firms.

Patrick: [00:11:21] It's unbelievable.

Chris: [00:11:22] It's unbelievable. Now, you've got crazy competitive intensity in every single space. And what that does is, it's really driving up price, and the return on any asset is a function of the price you pay to get in plus the capital it consumes. It's almost simple math.

I spent a lot of time talking to new people coming into this space. I'm like, "Look, maybe this may sound like a fuddy-dud, but I believe in Buffett's equation." And I don't know if Buffett actually said this. I just throw that out... I call it Buffett's equation to make it sound smart. But opportunity equals value minus perception. It's simple.

Patrick: [00:11:57] Basic, yeah.

Chris: [00:11:58] It's basic.

Patrick: [00:11:58] It's hard to do, easy to say.

Chris: [00:11:59] Hard to do, easy to say. Exactly. But what's interesting is, in this zip code, or these three area codes, 415, 650, 408, basically what people sometimes think is, if you can drive perception, that can drive value. There's almost this mental recursiveness. Some people call it the TechCrunch effect. When a company gets hot, all of a sudden, it's more valuable. And that's actually interesting to me.

There may be some truth to that. There might be some reality to the recursion, because if a company can get quote-unquote hot, it can rise above its competitors. But the reality is, there is some sense of fundamental value. Ultimately, revenue and-

Patrick: [00:12:42] It always matters in the end.

Chris: [00:12:43] It always matters in the end. And in the end, this is what the challenge, I think, that we run up against as a business. In the end, there has to be a last buyer. There has to be a last buyer for your shares, or next buyer for your shares. And that's either an acquirer or the public markets, both of which tend to be, as sets, pretty smart folks, and really actually care about value with a capital V, not how many mentions you have on TechCrunch. It's been really interesting to me, because we've seen a bunch of these IPOs go out, where the opening, or I guess the range, and the ultimate IPO price is below the last round private market price.

Patrick: [00:13:23] Right, so it's a public down round.

Chris: [00:13:24] It's a public down round. And that's actually really interesting, because that's where now, we see... Perception has gotten so big, value is what it's perceived to be, so opportunity has shrunk. It's almost this seesaw around the pivot of value. And I think a lot of people in this zip code think about sexiness as a proxy for opportunity, but really, they've got to create-

Patrick: [00:13:48] It's the exact opposite, probably.

Chris: [00:13:50] Exactly. Now, I don't mean to be a total cynic, because there's amazing value that's being created. We're reshaping the way people live and work. But there has to be a sense for what the value creation actually is, in a way that's articulable to the ultimate buyer.

Being Optimistic on the American Economy

Patrick: [00:14:07] Do you think that maybe part of the problem might be there's so much funding, the 550 micro cap VC firms, so much experimentation happening, the lean startup, you can do any idea on the cheap, that this all ends up as consumer surplus? It's fantastic for society, because we get to use the products and services, but the investors that win are maybe just lucky. And the prospective returns that venture has delivered for so long just won't happen, that it'll be captured by consumers.

Chris: [00:14:33] I'm not going to answer that question first, but I'm going to answer it eventually. One thing that actually keeps me optimistic, because I don't want to sound like a radical pessimist, but one thing that keeps me optimistic is what Nicholas Nassim Taleb said about the U.S. economy. There was this thing in 2008 when everything was going haywire. A magazine, I think, wrote an article, or asked a bunch of leading thinkers, what are they optimistic about?

And he wrote this great piece that said, "What I'm most optimistic about is the American economy." And it was almost a contrarian thing to say, because things were looking grim in '08. Less so here, but elsewhere for sure. And what he said is, "America's economy is the most open to optionality of any economy in the world," and I really believe that the essence of that is distilled here. 1,000 flowers are blooming and the vast majority of those will die off, but the few that really survive will flourish and thrive and really be transformative, and continue to be transformative, and I think be great investments for those who are well-positioned with respect to some of the things I talked about around right size funds, concentration, conviction, process, all that stuff. There will be money to be made, but I think, as we've always seen in venture, if you were to index venture, you would've wasted your time. And this goes back to the Yale case, which is, "Don't try this at home."

It's amazing to me, living out here, I was attracted to California because it's a sunny and magical land. Walt Whitman has this great poem called Song of the Redwood Tree, and he talks about populous cities and the latest inventions. This is in 1850 he's talking about this. He goes, "In California, I see the genius of the modern." He talks about the "child of the real and the ideal." And that's what's here. And being on the ground here, it's amazing to see the richness and the texture and the flow.

And yet, one of the challenges is, we see people fly in here from Dubuque and Dubai and spend three days each quarter or a week every six months, and then think they've got it all figured out. But as an ecosystem, there so much more richness and texture, and it's a lot of that outside money that's generally less... I won't say less sophisticated, because it's very sophisticated money, but less attuned to the true opacity of the place that is funding a lot of these marginal investors. And then as a result, you've got chaos capital, especially in the early stage.

I think we had a barbelling of the ventures, 550 micro funds who really have created this cauldron of both innovation, but funding where things are... I'm shocked at, sometimes, the valuations that things get as seed investments. And then on the high end, you've got these mega funds now. This barbelling has really created some funky dynamics, but the large funds will continue to raise money, because some of these large pools of capital that want innovation exposure have no place else to go. They can't invest in some of the early stuff. It's an interesting time, because the barbelling has gotten so much more profound, and I guess the long answer to the historic arc question.

Patrick: [00:17:33] It's fascinating. I'll pull on that real versus ideal, it's a nice little dichotomy and it rhymes, as a means to talk about a little more optimistic question, which is... Okay, if we buy this creative, nascent style of investing is going to be around for a long time, and that the U.S. has a structural advantage in terms of optionality and all these things, where to look next? Part of the contrarian idea isn't so much as doing the opposite of what other people do; it's more just doing stuff from first principles that it's just new and interesting. Maybe micro fund, or however you want to approach the question. How do you, as an allocator to, as an LP in venture funds, think about finding things that's a little bit different, maybe where the prices aren't as crazy high as they are in the five-square blocks around where we're sitting?

Chris: [00:18:17] It's an interesting question, because no matter where you shine your flashlight right now, there are... I was going to say 50 cockroaches scurrying, but I don't want to make it sound like I'm super negative, because there's a lot going on. But that said, there are so many people seemingly in every corner, and it's amazing. One way in which this articulates itself in the market is how quickly things get overheated.

Crypto's a new thing now. We've got crypto funds, we've got space. There are space funds. It's amazing how dynamic the market is, and it's interesting, because then you get this build of anticipation that crashes into whatever they call the trough of disappointment. Maybe that's an interesting place to invest.

But me personally... A couple of things, actually. One is, I like investing post-hype, because I feel like there are a lot of technologies out there that are over-hyped in the short term and under-hyped in the long term, to borrow John Doerr's phrase, and there're some things that I think are interesting. But where I'm spending a lot of my energy lately is on college campuses. I have found that, historically, people have looked to colleges and research institutions for IP to pull out, and that's a tricky, thorny road, because you've got thick institution universes and licensing offices and this and that. There are some success stories, but also a lot of broken plows.

However, I've got a thesis that... What we're seeing now is real authentic entrepreneurship among college students, and in very sophisticated ways. This isn't just two guys in a room with an app. I spend a lot of time at Berkeley. We just invested in this thing called the House Fund that sits on top of some of the entrepreneurship and is trying to create almost a clearing house. They've got a great space on campus.

I talk to these students, some of these PhD students, who have novel pieces of software that are disrupting interesting... I probably shouldn't get too far into it, lest the incumbents hear footsteps. But amazing computational physics, or computational biology, or some of these things. They're really student-driven. They rely on some stuff that's going on on these campuses, but really, more so rely on the energy, the entrepreneurial energy and the invention energy that turns into innovation energy. We're looking at something at MIT that's similar. Boy, I'd love to put somebody in business to sit on top of Carnegie Mellon or some of these other places. That's really interesting to me.

Role of Geography in Venture Capital

Patrick: [00:20:52] Closer to the sources. What about geography? I had a really interesting conversation with an angel investor turned small venture capitalist in Jerusalem, and what I loved about the conversation was... His investing thesis was basically, there's a lot of smart, talented technologists in Jerusalem and literally zero people investing in them. All the money's in Tel Aviv. And even though it's a short drive, culturally, it was just an odd discrepancy. He got preferential pricing and all these other interesting deal flow access, as just being the only person there. I've been thinking a lot about geography as it pertains to venture, and I'd love to get your take on that, sitting where we sit.

Chris: [00:21:27] It's so interesting to me, because I've often thought about how spiky the world is. This is Richard Florida's analogy. "The world isn't getting flatter. It's getting spikier." There are these centers of innovation. But one of the megatrends that's going on in venture is what used to be an opaque... And this is driving a lot of fund formation activity, especially in other geographies. We used to be an opaque field. Nobody really knew how to do venture. It was this dark art practiced by a few people in Boston and a handful of folks in San Francisco Peninsula.

Now, we've got blog posts for days. Brad Feld has done an incredible service to the... It's amazing how widely disseminated the knowledge is. Yet, venture keeps concentrating in a few key ecosystems. New York, Boston, Los Angeles, San Francisco, Seattle. Steve Case obviously is trying to do some really interesting stuff on the Rise of the Rest front, and I think that's really, really important stuff for the country. But what I've seen is that the talent continues to congeal in these magnetic spots.

To your point, one thing that's interesting, and I don't know as well the geography of Israel and Tel Aviv versus Jerusalem, but I look here in the Bay Area, and I think Berkeley is structurally underfunded. Cal is an incredible innovation engine, and if you throw on Lawrence Berkeley Lab, just right up the road, which has a lot of... There's $850 million in Department of Energy funding there, and another $1.1 billion in sciences funding at Cal, and yet, all the venture capitalists spend their time at Stanford.

And there's something to be said for culture, but boy, I think at Berkeley, you go over and the folks are so much more hungry and dynamic. Boy, if I could make a pairs trade, I would go long Berkeley and short Stanford. And that's not a lack of excitement about Stanford. I think it's a fantastic and important place. But I think the fecundity, I think that's a $10 word for my $5 brain, of ideas at Berkeley is incredible and completely under-banked, and why? It's a 30-minute drive with no traffic from Sand Hill Road. Actually, probably 45 minutes now. The reality is there's a lot of traffic, but so what? What a great place. This is a really important question, and I think... I forget what the question was, even though it's really important.

Patrick: [00:23:46] Just geography, whether that's within the city, like you're mentioning Berkeley versus Stanford, or internationally. That seems to be one way of finding differentiation as an allocator to venture funds.

Chris: [00:23:57] One of the challenges is, I think there was this thought for a while, everybody wanted to recreate Silicon... Reality is, Silicon Valley is unique in the history of the world as a place that's magnetic, because there are certain things that are in play here. That said, there are other places that'll create their own dynamism and their own template. I don't want anybody else to be the next Silicon Valley; I want somebody to be the new Biocoast, or whatever it'll end up being.

But this ecosystem question is a really important one, and I actually often think of it in the following way. I live in Palo Alto, and I don't think most people within a several-block radius of me, I don't think anybody gets W2 income. They're all equity or consulting, 1099-based. And the founder of this company lives whatever blocks away from me, founder of that company. And they're magnetized here, and they create this great mentorship loop. I talked to somebody in London once. I said, "Well, what happens when a company goes public in London? What happens to the founders?" He said, "Oh, well, they move to the South of France." But the magnetism of the Bay Area, money is an important... I always talk about the four M's. Money is a really important thing.

Patrick: [00:25:07] I'm glad this isn't the four P's. I'm so sick of hearing that.

Chris: [00:25:09] Oh, yeah. I'm over it. Totally over it. Money is crazy important. Tom Friedman talks about the Electronic Herd. Money goes here, money goes there. It's just a blink of an eye away from appearing. But then, momentum. You have to have an ecosystem that has traction, and we see that in New York, L.A., and that's very attractive and magnetizes capital and people.

But then, the two things that I think the Bay Area has in spades relative to other ecosystems are mentorship, this persistence of people who know how it's done. And then the last one, this isn't quite an M but I cheat a little bit, it's entrepreneurial management. Taking a company from $10 million to $100 million in revenue is an amazing challenge. John Lilly and Reid Hoffman talk about blitzscaling. Blitzscaling is really hard. I see portfolio companies who are in the midst of this, and it's-

Patrick: [00:25:59] Such a different skillset than the zero to 10.

Chris: [00:26:02] Exactly. Zero to 10 is amazingly hard, and there are things that go into that that are unique to that skillset, but then building that business with alacrity. It's like riding a tiger whose fur is on fire, running through an oil field.

I will tell you one thing that worries me about the Bay Area prospectively. A lot of the people who used to be those great entrepreneurial managers, like CFOs, VP sales, head of product, et cetera, they would continue to recycle into new companies. A lot of those folks are becoming venture capitalists now.

Patrick: [00:26:39] Oh, no.

Chris: [00:26:40] And I'm just like, "Oh my gosh." Or in some cases, the scale of the outcomes is so large that some of those folks can call in rich. This is the thing that worries me most. Look, we invest nationwide, and we just did a fund in Toronto. I have not invested as much in China, historically. We've done dribs and drabs. Just think of North America. As I think about where to vector my capital, I'm looking at those four M's, and understanding the intellectual capital in a place is critical.

Hot Button Issues in Venture Capital

Patrick: [00:27:13] This is a unique opportunity for me, because you're the first super-allocator to venture funds that I've talked to. Your perspective is quite a bit different than the entrepreneurial layer and even the venture GP layer that I'm used to asking these similar questions to, and my guess is that your take is slightly different.

I'm hoping to go through a couple of the hot-button issues in this world, both investing trends or ideas, memes if you will, but also specifics like hard sciences or something like this, and get your perspective from your seat as to whether or not it matters or what your take is. The first of these is the rise of cryptocurrency as a... I forget most of what people talk about with cryptocurrency, but as a threat to traditional venture capital.

Chris: [00:27:53] It's interesting, because... One of the trends that was talked a lot about with respect to crowdfunding was that we'd start seeing the separation of capital and influence. And you've got these guys out there. If you think about it, it was this un-bundling, because venture capitalists ceased to have capital and mentorship.

Patrick: [00:28:16] Control the pipe and everything.

Chris: [00:28:16] Right. But they also very much could plug companies into somebody at Cisco who could buy their product, or find the perfect VP of engineering hire, et cetera. That was part of the promise of the catalytic equity of venture capital. This was a catalytic value-add asset class. By the way, I think Swensen sold us all that that ability, because I do think it's somewhat of a myth. There are firms that do it really well, but a lot that... The vast, vast majority are just passive capital. And I think with crowdfunding, we started to see the un-bundling.

And you look at people, there are guys like Peter Currie, CFO of Netscape, and is just a Valley guy, and he's been on the board of Twitter. I don't think he invests out of a fund; I think he's just a guy. And other people are investing, and he's the brain. And I think crypto is that trend perhaps taken to the next level, because we see folks going... They can go out and they can raise, with coins-

Patrick: [00:29:17] Crazy amounts, yeah.

Chris: [00:29:18] ... considerable capital. It's amazing. It's almost like you created a more effective vehicle for crowdfunding, in a sense.

But you still need help. So much has to go right in building a company that you want more people in your squad than you ever dreamed possible. I think it's going to still be important to interface with people who have expertise. Whether we call those people venture capitalists, or whether we call them people like Peter Currie, these high-impact outside brains will take on different... It'll vary what we call these people, but ultimately, venture capital firms will have to recast themselves as service providers. They provide a suite of services as entrepreneurs.

Keep talking about First Round and True and some others who have done a great job of packaging an offering, in a sense, for entrepreneurs. There's a suite of services that's available, and this reorientation from venture capital fund as capital source to venture capital fund as service provider, who actually just provides... I think that's the trend. Andreessen Horowitz has cast itself as... They describe themselves as a talent agency. There's so much, I think, that's innovating in that regard that'll stave off some of the crypto stuff, but crypto's going to change the nature of VC as well.

Patrick: [00:30:37] I'm going to come back to the Andreessen Horowitz idea in just a second, but first, just to point back to our earlier conversation, there is nothing that would terrify me more than being the venture investing that's happening at places that raise money through an ICO, and they've got so much cash that they don't know what to do with, and it's just going to fund all these experiments. I couldn't draw up something that seems to have worse prospective investment results.

Chris: [00:30:59] Well, it's amazing to me, because one of the things that I look for in entrepreneurs and encourage my VCs to look for is accountability. I think the whole ICO thing changes some of the accountability dynamics, and that's really unsettling to me. I'm going to keep watching this closely. We had this wave of... Last half of 2017 and then obviously in 2018, we've had Telegram raise however many-

Patrick: [00:31:30] Hundreds of millions.

Chris: [00:31:31] Hundreds of millions of dollars. It's amazing. I hope it slows down, and I think the market will find its equilibrium. But over that time, I think that pressure will be on venture capital firms to step up their game as service providers.

Patrick: [00:31:43] I want to come back to this service provider idea and spend a little time here, not just as it pertains to venture, but all asset managers. This is something that started to really pop up as... Andreessen Horowitz as the CAA of the venture world is a popular meme, but I wonder how much of this is actually true, versus something that sounds nice. Seems to me like it has to be hyper-specific if it's actually real.

There's a firm in New York that does software for equity, where they literally program your MVP, or examples like that that are really, really specific. Not like, "We're going to help you with everything and be a service provider," which sounds nice but probably doesn't mean anything. I'm curious how much real versus ideal, back to that idea again. How much reality there is to this service provider model, because as someone that runs an asset management business, I'm interested in this idea.

Chris: [00:32:25] Yeah. It's a really interesting question, because you have to... As between being a service provider and providing a service, there's nuances. And I look at First Round, for instance, and they're the firm I know best, especially in this regard. They've invested a ton of money in building a suite of services that are available to entrepreneurs. And yet, I look at... Their signature investment, in some ways, is Uber. I've talked to Rob Hayes about it, and he was just in the right place at the right time. I think he was buddy-buddy with Garrett Camp and what have you. I don't think Travis ever asked a question of FRC's venture concierge. I can't get into any specifics, because I just don't know, but Travis is a particular guy. I don't think Travis would call up First Round and say, "Hey, what do you think I should do here? I'd like some help with this." That's just not his footprint.

There is this question of real versus ideal. I've seen the value of the First Round suite of services. I think there is a nice recursiveness to drive deal flow in that case, and I do think that entrepreneurs get a lot of value out of those services. Now, I've seen some of these service offerings that some venture firms are suggesting that they offer, and they're, in some cases, ludicrous. I don't want to get into specifics, because I don't want to embarrass anybody, but I think we're continually refining this model, and to your point...

It's actually interesting. I should double-click on this. We had a big debate at Princeton, "What are we going to call our hedge fund portfolio?" I was at Princeton's Endowment back in the early '00s. "What are we going to call our hedge fund portfolio?" A lot of these funds don't hedge. Ultimately, we settle on idiosyncratic return, which I thought was actually pretty clever.

Patrick: [00:34:15] That's true, yeah.

Chris: [00:34:15] Which I thought was great. I would actually hope that that would propagate throughout the universe. But there are a bunch of others. We had this brainstorming session, we were looking up in some of the literature, and some people were calling hedge funds skill-based investors. Are you kidding me? Are bond fund managers not skilled? It's the most ludicrous thing I've ever heard, but it's out in the literature.

And I think, as we look forward in investing... You know. You've talked about this a ton. Passive investing, it's so cheap to buy beta. How does active management continue to look and evolve? And one of my views is across markets, public, private, et cetera, I think that active management will look more like catalytic management. How can those active managers bring some resources to bear?

Patrick: [00:34:55] Actually do something.

Chris: [00:34:55] Actually do something, or offer some information or insight. I think public market's starting to look more like a deep value play, where you have maybe some catalytic investment going. There will be many, many other strategies that a lot of people, including you, are far smarter to figure out than I am, but as I see the world, it'll be more catalytic in nature.

Patrick: [00:35:15] What do you think about the focused mindset versus the generalist mindset for venture investors? I was going to ask originally about what you think about topics like machine learning and AI or CRISPR technology or some of these really buzzy, hyped-up areas of investing. But maybe a more interesting way to think about it, since you're an allocator to venture funds, is whether it's, in your experience, better for someone to be, say, laser-focused on finding the best AI companies, or someone that just sits and views the world broadly and pounces on opportunity when they see it.

Chris: [00:35:46] This is a question I wrestle with a lot. I'm an investor in a group called Data Collective, and I actually co-office with those guys, and they're super smart guys. It was interesting to me that, when they raised their first fund that I committed to... I was, I think, the first institutional investor in that fund in 2011. They were talking about big data. Today, the vast majority of what they do is AI, which is a cousin of big data. But the footprint that they built in those early years really has put them in the catbird seat as so many people are now flocking into big data.

Now, it's a little self-serving and uninteresting story, but the reason I bring it up is because it challenges my own view of something. So much of what we learn about venture is anecdotal and passed down from the greats. I remember Mr. McCants putting his arm around me and saying at a Greylock meeting in 2011, "Douvos, when venture's working well, time is cheap and capital's expensive, and when that relationship is reversed, watch out." These things stick with you.

And one of the things I read a long time ago, we're talking 2002, which is almost in the primordial ooze days of venture, because it was written in '97, '98. It was written by this guy Bill Davidow, who started Mohr Davidow Ventures. It was one of the early titans of VC. And he did some analysis of venture up until 2000, and he found that, as spaces emerged, the first movers, the specialist funds, would capture... Eventually, over the fullness of that idea playing out, those people captured all the early returns, but only 20% of the total returns, and 80% of the returns accrued to generalist firms who were nimble and could get up to speed. And his hypothesis was that those generalist firms would bring business-building resources. Not just insight and domain knowledge, but business-building resources.

Now, what has changed from that point to the story I tell about Data Collective? I think that venture, as the entire economy is, I think this is true, is getting more and more esoteric. I think understanding something about AI, and the nuances and intricacies, is much different than understanding computer hardware, which was itself difficult and challenging, but you just had to find the right... You had to find Stephen Woz in a garage. I think the barrier to entry is much higher.

In the stuff that's durable, I think anybody can fund some clown with an app. I don't mean to be dismissive of that, but it's funny. A little bit of a soapbox. The New York Times for a while was on this riff that there's no real innovation going on in Silicon Valley. Farhad Manjoo was saying things like, "How many dating apps can we have?" And I'm like, "Wow, I wish for 10 minutes..." I think I tweeted this at him once. I'm like, "For 10 minutes, come hang out in my portfolio, and you will see really smart domain-focused people doing amazingly deep world-changing stuff." Whether it's synthetic bio or AI or robotics as human augmentation, there's such amazing stuff that's going to change our world so radically, and I think that is what makes this specialist theme much more important than I historically have given it credit for.

Patrick: [00:39:00] Fascinating stuff. What of the hot-button areas are most interesting to you? And the more interesting question is, why? From an investing standpoint. Obviously, the technology behind all this stuff, again, is fascinating. We could talk all day about how AI and robotics are going to affect our lives, which is great, but my interest is always more, "Okay, is there a mis-priced opportunity here?" How do you think about the overlap of interesting and opportunity?

Chris: [00:39:25] Yeah, that's an interesting question, because there're so many things that are interesting, but you need to believe so many things for those things to happen. In fact, Josh Kopelman wrote this great blog post called Domino Rally Business Models, and he talked about... There's this game in the '70s where you'd set up all these dominoes in the wall, and then you'd hit them, and if they went all around you, you'd get the win. But everything had to work just right.

In so many of these startups, you have to believe not only that they'll be able to execute, but then this other set of things will happen, and then another set of things will happen. And the probability. What some people don't realize is, the joint probability of all these things happening is actually pretty small. That's something that stresses me out.

But what I would say is really exciting to me in terms of inspirational, and this is not without controversy. I think robotics as human replacement, and everybody's worried about the robot future and everybody losing their jobs, but especially as the economy continues to evolve and mature, there are a lot of jobs that people just don't want to do. Either they're dirty, they're dangerous, they're disgusting, what have you.

It's amazing. We actually have an investment in a company that does... It's a robotic drywalling company. You'd be amazed. Once you learn about demographics of drywallers, it's amazing. They're, on average, seven years older than the average tradesperson. And it's hard work, and you're in dust, and there's all these new OSHA regulations around silica dust. To have now a robotic arm, basically, that finishes and sands and can even paint at extremely high precision is amazing. Nobody's really getting thrown out of work. It's just augmenting. In fact, you need people to supervise.

Since the beginning of the Industrial Revolution, technology has actually created more jobs. But, in certain places, it's getting hard to find people to do these jobs. Farm work is hard, tedious, laborious, so we have a portfolio company that's an automated picker. We're seeing all this stuff around precision farming, and that it can integrate with robotics. This kind of human augmentation, then augmenting humans' work, and then another robotics thing that I get excited about is augmenting ourselves. We have another portfolio company that's doing some interesting stuff around soft exoskeletons that can now help you run faster, have better metabolic benefit, jump higher, ski for the whole day without getting tired. This human augmentation, I think, is real.

Now, I'll tell you what stresses me out, is the old phrase, "The future's already here. It's just not evenly distributed." There're certain people that are going to be affected by this more than others. There're certain people that are going to have more opportunity than others to be augmented humans, and that's a really interesting and challenging societal question that's probably above my pay grade. But getting us there, I think there'll be a lot of net benefit to society.

Being a Value Venture Investor

Patrick: [00:42:22] Back to this concept of being a value venture investor, which I just love that idea, because especially early stage, there's not much against which to compare the price. The fundamentals, if you will, are mostly qualitative and hard to judge across a set of firms. In that analogy, that value investing idea, what other ideas can we pull out that you think are useful, as someone that allocates to venture funds, that might comport with how a public value investor thinks about the world?

Chris: [00:42:49] Yeah. It's interesting, because I think portfolio construction's huge. I think really sophisticated venture investors, as really sophisticated public market investors do, can differentiate themselves on portfolio construction. In venture, the way I articulate that is... I wrote a blog post a long time ago called All About the Benjamins, and I introduced this concept called RTFE, return the fund equivalent. Although, I think when I first thought about it, it was the RTFF, return the fricking fund.

Venture is such a power-law market that the top 10 deals in any year are all that matters of the 3,000 deals that were done. What you need to do is you need to make sure, as you construct your portfolio, that both in terms of your own sizing and the valuation, any one of those companies can return the whole fund.

And it's an interesting exercise. It's almost like a Rorschach to go through with some of these investors. And this goes back to what I said earlier about portfolio concentration. You look at some people, and they own so little of these companies that, even if the company is a $60 billion outcome, it returns a third of their fund. You need three of those then. And you can actually then look at the weighted average thump value that you need, and you start realizing that people are making implicit assumptions that are expressing themselves through portfolio construction.

That's really dangerous, because strategy is not just what you do. It's what you don't do and what you ignore. I think you'd be far better versed to talk about it on the public side than I would, but even when I was doing public market stuff at Princeton, or before business school where I worked briefly with a hedge fund, it was amazing to me how little thought the average manager gave to making sure that their portfolio was constructed in such a way as to give them an advantage.

Patrick: [00:44:38] Yeah, it's changing rapidly, I would say. Portfolio construction as a topic, people realize how powerful a tool that is, that even with the best insights, if you don't know how to piece a portfolio together. And the other interesting thing, and my guess is this doesn't happen a ton in the venture world, but in the public markets, more and more people think about covariances. And if they've got 100 portfolio companies, how many bets do they really have on? Do five of those companies give you the same exposure?

And in venture, especially if it's a focus on AI or something, there's going to be a ton of... Actually, probably not much covariance, because most of them go out of business, and one will succeed. But it's a really interesting thing. Portfolio construction in the context of venture is so interesting.

Chris: [00:45:15] Well, and it's interesting, too, because then... Abstracting it up to the meta-level of allocator, we used to sit there, I used to be the model jockey at Princeton who put together the mean-variance analysis. And you have your expected return and your volatility and your covariance matrix, and you plug all these things in. I was such a prankster. I would always put... This matrix would come out, and you would have domestic equity, here's international equity, here's real assets, here's venture capital. And then as a gag, I'd put on the bottom, rare coins. Really high volatility, very low return. Baseball cards. I'd plot all these lottery tickets, I'd plot all these goofy asset classes that didn't exist, and I'd try to sneak them by to see if I could get them in the final board book, but they were lotto tickets -

Patrick: [00:45:58] Lotto tickets never made it?

Chris: [00:45:59] Yeah, and lottery tickets never did make it. That's one that gets selected out in the process. But that said, I'd sit there and I'd be like, "Oh my god, how do we assign risk?" "You use standard deviation as a proxy."

Patrick: [00:46:11] Doesn't make sense.

Chris: [00:46:11] Makes no sense. What is it in venture capital or private equity that we think of as risk? We think of things like technology risk, market risk, team risk. And how many businesses do you have to worry about, "The VP of sales went to Ibiza and didn't come back the same person." That could wreck a company. That's risk. Don't give me the standard deviation BS. How do you even begin to integrate this?

From the alley here, I wrote this blog post a long time ago called Speak Like the Locals, and you sit down... This is what people in venture don't get sometimes, oftentimes. You walk into a Monday meeting in an endowment, and you've got... I called it Speak Like the Locals, because I was like... And then you've got the Germanic hedge fund person who speaks, "Ah, the Sortino ratio is..." It's very specific, it's very quantifiable, you've got the bond guys. And then you get to venture guy, and it's Italian like, "Hey, it's everything fantastic." It's a different mentality, because you sit there, and people say, "Oh, why did you, hedge fund manager, hedge fund asset allocator, invest in this hedge fund?" "Oh, well, their Sortino ratio is this, and your Treynor ratio is that, and all this stuff. Their omega was whatever."

Patrick: [00:47:27] First omega reference on the podcast.

Chris: [00:47:28] I was going to say, there you go. Will Goetzmann was trying to get that in our heads in 2001, whatever. And then you get to literally the venture guy, and you're like, "Why'd you invest in that fund?" "Oh, the team."

Patrick: [00:47:37] Like the guy.

Chris: [00:47:38] "I like the team. The team as a franchise." This is what led me to the... How do we find people who are leveraging ecosystems? And that led me to these platform managers, which eventually then led me to universities. How do you punch above your weight? And that's something that's tough to quantify, but important to recognize. And I think that, as a whole, the venture industry doesn't recognize that disconnect very well.

Manager Selection Process

Patrick: [00:48:00] A ton of people that listen to the podcast are allocators of some type, and that could be individual, they could be a financial advisor, they could be a professional allocator like you are. If you had to distill down some of the key things that you look for in managers. Ideally, some of these would be transferrable out of venture, but ones that are particular to venture are fine as well. I read one of your quarterly letters that... I can't remember the guy's name, but a friend of yours who you viewed as a really effective evaluator of manager talent. What the dimensions of that are, things that you think are important to look for in allocators, because so many people out there are hiring managers of some type.

Chris: [00:48:34] Yeah. I'll start with my own manager selection process, which has four parts, and then I'll double-click on each of these. The first is the people. Do the people have some edge? That's hard to quantify, but we'll spend some time on that in a sec. The second is the strategy. I don't have a monopoly on wisdom of strategy. In fact, I'm almost diversifying my strategies. What's important with respect to strategy is, is there a resonance between the strategy and the people? It's amazing to me how often there's a slippage between cup and lip there.

Out of the people and the strategy falls the portfolio. The portfolio is the proof of the pudding, and you can touch and taste and see the portfolio, visit with companies, see what they're doing, understand how the team has helped that company grow and kinked upward the trajectory of its growth, et cetera. That's where I spend the bulk of my time. And then out of that, false performance. But again, performance is a lagging indicator, not a leading indicator, and very, quite frankly, size dependent, in my opinion. Back to this law of financial levitation, as funds grow bigger, they almost can't resist.

Patrick: [00:49:35] I call this assets versus alpha.

Chris: [00:49:37] Right, exactly. But back to the people. I think that's where it's most important, as an allocator, to really understand the people that you're getting in bed with, because the average venture fund lasts twice as long as the average American marriage. You're really making a bet on people, and you're probably betting on at least two funds, if not more, because you're not going to turn over enough cards in the periodicity of fundraising. As long as people are making good deals and staying on strategy, you're going to probably invest in that second fund.

You're really getting on board for a 20-year ride, and you need to make sure that the people are not only excellent, distinctive in their space, have particular domain expertise, have a philosophy. It's amazing how many people are... One of the questions I ask is, "What's your strongest held opinion? What's the biggest hypothesis that you're testing?" People who are reflective but also opinionated, but also have the humility to make sure that they're learning. That's critical stuff for me.

But then, understanding their behavioral footprint. This is where I spend a lot of my time, is understanding what they're afraid of, what they're excited about, what gets them eager to do something, what are the red flags that they seek, where are they off-market. But then, understanding people as people is something that is more necessarily in venture and private equity than it probably anywhere. You want to understand alignment across asset classes, but the illiquid nature of venture means that if you get in the mix with the wrong people, you're stuck. Really understanding them as human beings.

I have meetings sometimes where people come out and they're like, "Wow, that felt like therapy." I want to understand what they're afraid of, I want to understand the bad choices they've made, I want to understand their disappointments. In the last year, I've had a couple of people cry after I asked a question. I retired the question, but I'm not sure I should.

Patrick: [00:51:22] What was the question?

Chris: [00:51:23] Well, the question is, "Tell me about the worst career thing that's happened to you." And I had a woman who talked about her early career at a big tech company in the late '90s and the harassment that she... It's not question porn. The reality of it is, I want to see how they learn from it. And this woman had an amazing answer about how hard she... She had a mentor who basically helped guide her through some of the, quite literally, harassment that she got that was appalling to me. She was able to then take lessons from that about how to vector her energies and how to interact with people and how to work... She was like, "And part of the challenge is I had to work twice as hard as the men, and I did, because I was driven." The lessons that she took out of that. But in describing it, she got very emotional. It threw me.

I ask, sometimes, people what their biggest disappointment was, because a disappointment is a time when your hypotheses are misproven. And people always ask me, they're like, "Personal or professional?" And I always say every question's a Rorschach, and people got very emotional talking about that. That's a question I've retired a little bit, but maybe I'll say, "What's your biggest professional disappointment?" You get some really interesting-

Patrick: [00:52:35] Those can be emotional, too. Yeah.

Chris: [00:52:36] Those can be emotional, too. I once talked to Jeremy Grantham about almost losing his business in the late '90s, but he had such great conviction. What an interesting, illuminating question that becomes. It then becomes almost a referendum on his conviction, and that's really amazing. I don't know if that's helpful or interesting, but that's just some of my own tradecraft. So many people, though, start with performance, because it's easy-

Patrick: [00:52:58] How can you not?

Chris: [00:52:58] ... and it's quantifiable. Right. How can you not? But the reality is... I will tell you, our best-performing manager at Princeton. When I got there, our best-performing manager on the venture side, or one of our best, was a fund that had a killer $75 million fund. Their $150 million fund crushed it. The $300 million was okay. Their $600 million fund that they were raising, we said no to, I don't know how that one worked out.

But then, they had a $1.2 billion and a $2.4 billion fund, and I later read in II, which did a report about these guys. II had their results, because of course, at that size, you go into state plans and everything and people have to report. They just shat the bed. Excuse my French. But boy, if you're looking at that $600 million fund and looking at the performance of the 75 and the 150 fund, it's a total... Go for it. But you really got to unpack that... What'd you say? Assets versus alpha?

Patrick: [00:53:51] Yeah.

Chris: [00:53:51] It's a real thing.

Who Should and Should Not Make a Venture Investment

Patrick: [00:53:53] Who should and should not make any type of venture investment? There're a lot of types of investors out there. This is an interesting and sexy asset class, we know what that usually means for returns, and there's a lot zeros. Usually, when I ask this question of people that are in this world, they say nobody should be an angel investor, unless you have some super special set of circumstances. Different way of asking it is, who, of the broad general categories, from individual investors to ultra-high net worth investors to whomever else you want to categorize, should and shouldn't invest in venture, just in general?

Chris: [00:54:26] I would say the biggest driver of venture success is a willingness to have a long horizon. It is the asset class where you have to take the most on faith for the longest amount of time. Actually, quite literally the longest-dated, furthest-out-of-the-money options, you can buy in all of the firmament of assets, I believe.

Having that high tolerance for risk, illiquidity, and horizon is a really rare trio. I used to say that makes it a particularly interesting asset class for endowments. This is the Swensen line. But again, with respect to, "Don't try this at home," you look at the team at Yale, and the core of that team has been together since, in some cases... Tim Sullivan, the private equity guy, has been there since the mid '80s. Dean Takahashi's been there since '81. Swensen. You have this amazing persistence and institutional memory.

There are other endowments who... There's this one school that we'd all be happy and proud to send our kids to that's gone through seven generations of private equity guys. And every time there's a new sheriff in town, all the managers are anxious, and it starts to, I think, erode franchise. The right endowments are important.

And then, high net worths who have an entrepreneurial outlook. Think more principals than agents. That's where you get some of the problems in institutional investments, is if people think too much like agents and they want short-term results. That's a challenge.

It's interesting. My jury's still out on sovereign wealth funds, because they should have a long horizon and high tolerance. They're pushing around big dollars, they're playing in a different stratum of the venture space, but what I would say is that I've also seen sovereign wealth funds, in 2001, 2002, retreated pretty aggressively. I think some will be good long-term investors, but others won't.

It's funny, because you do have to look at venture through its own prism, or private assets through their own prism. You almost can't integrate them in a portfolio-wide...

Patrick: [00:56:39] A model of income, yeah.

Chris: [00:56:40] Right, because the stale prices are amazing. One of the dirty secrets is, venture and private equity almost have a pacifying effect on volatility in large institutions, if for no other reason than for-

Patrick: [00:56:54] To not mark.

Chris: [00:56:55] They're not marked, right? It's interesting, because I think Lerner and Gompers at Harvard took the S&P 500 and marked it daily, and then they would mark it, just a daily series. And then they took the gen two mark, rolled it forward to the end of the quarter, and they got a .65 correlation of the S&P versus itself. By the way, .65 is what most people use for private equity correlation.

I will say the other thing, back to this question. The reason I bring this up is you really have to understand holistically what your aims are and what role that venture and private equity play in your portfolio. And it was funny, because... One of my favorite stories. This is more of a story, apropos of nothing.

In the early 2000s, there was this great guy, good friend of mine and a great mentor to me, who was at the Harvard Endowment. There was a fund that Harvard was in, where they raised a lot of money, and they were in a position where they had a big management fee draw. And one year, 2001 or 2002, it was a really quiet year in venture, so they didn't draw a lot for investments. Basically, it just created this huge J curve.

And this guy had this portfolio that was benchmarked against the Cambridge pooled mean for the years in which they'd been investing, so you've now got this big draw in management fee without corresponding NAV growing. It's bringing his whole performance line down against the benchmark. He's sitting there and he's like... Literally, I was in the business three or four months, and I'm sitting there, it's an advisory board meeting.

And the guy's like, "You guys are killing me. You guys drew all this money for management fee and nothing for investments. You know what that's doing? That's dragging down my benchmark. And Jack Meyer, Jack pays me versus my benchmark. See what happens? If you guys are bringing me down, then I'm not going to get paid. And you know what happens when I don't get paid? My kids, I can't buy them a bicycle. And what happens when I can't buy them a bicycle? Then they go complain to their mom. And if they complain to their mom that I can't buy them a bicycle, then their mom gets mad at me and I don't get any loving. Because of you guys, I'm not getting any loving."

I don't know if this part of the story is true, but apparently, that Monday, there were two bicycles at the offices of Harvard Manage Company. I don't know if that part of it is true, though. But this speaks to the long horizon.

Patrick: [00:59:13] This is life in our business.

Chris: [00:59:14] Life in our business.

Optimizing Discomfort

Patrick: [00:59:15] If you had to give all your money to some other allocator, who would it be to?

Chris: [00:59:20] It would be to the people who I think have the highest pain tolerance, and that articulates itself in a bunch of different ways, one of which is taking the longest-term bets and having the most contrarian nature. I think there are a bunch of people. I've spent some time with David Swensen, the Yale guys are amazing in that way. Andy Golden at Princeton has done a great job. I learned a lot from Andy, working for him for three years. And then David Salem is an amazing... I know you've had him on the... I think you've-

Patrick: [00:59:50] Yeah, he's been on. Yep.

Chris: [00:59:51] Yeah. I've learned a ton from David, and he really taught me about optimizing discomfort.

Patrick: [00:59:55] Interesting. Great phrase.

Chris: [00:59:56] Isn't it a great phrase? I've often thought about optimizing discomfort. He told me when I joined TIFF, he plucked me out of Princeton and he said, "I want you to invest courageously. I want you to invest without the fear of being wrong and alone, because if you're afraid of being wrong and alone, you'll never be right and alone." And I was like, "Wow." He's like, "I don't want career risk to enter your mind for one moment." And that really gave me the courage and the institutional backing to go and fund some of the first wave of great micro VCs like First Round. And that's paid great dividends for TIFF and its investors, and I put that all on David. Maybe it would be David.

Patrick: [01:00:33] Awesome. Love it. He's a magnetic guy.

Chris: [01:00:35] Oh my gosh.

Patrick: [01:00:35] One of the most interesting people to be at a table with, because you feel like such the focus of his attention. I think that's such a nice quality in people.

Chris: [01:00:42] And I worked with David for seven years. It's really interesting how, when you talk to him, you feel like there's nobody else in the world.

Patrick: [01:00:52] It's cool. It's rare.

Chris: [01:00:54] I've never spent any time with Bill Clinton, but I hear that Bill Clinton is exactly the same way. I just remember, David and I were talking about baseball, and we were talking entropic homogeneity, which is actually a really interesting whole other topic. Stephen Jay Gould wrote an article a long time ago about the limits of human performance and how-

Patrick: [01:01:10] Sure, yeah. I've heard of it, yeah.

Chris: [01:01:11] Yeah, it's really a great piece. And David was looking... I felt like there was nothing else in the world. He kept saying, "Yes, Chris, yes. Oh, absolutely. Yes." Sometimes, when my kids are talking to me, I'll be like, "Oh, yeah. Uh-huh." And meanwhile, I have no idea what they're saying. They're just jibber-jabbering about whatever happened. I've channeled that Salem-esque clarity of focus, although I've used it for nefarious means.

Patrick: [01:01:39] I'll borrow from your dichotomy earlier and ask my normal closing question a little bit differently. Personally or professionally, what is the kindest thing that anyone's ever done for you?

Chris: [01:01:51] This is actually a really awesome thing, and I can't really thank anybody. I grew up really poor. My dad was a cab driver and my mom worked in a hotel. I was in Brooklyn back before Brooklyn was cool. Actually, there's a little story here. There was a guy named Jim Ventre who came... He was a young admissions officer at a school called Phillips Academy Andover, and Jim's job was to go out and find students from inner cities to pluck out. If your scores were above a certain thing and your family income was below a certain threshold, your application would be subsidized, and you'd go to school for free.

Jim stood up there, and there was a near-riot. Food fight and spitball in the auditorium, the all-school auditorium, while he put up these slides. I was like, "Oh my gosh, this is the most amazing place. Amazing pictures." I got home and I told my dad about it, and my dad said, "My son, in America, there is a system, and this place sounds like your entrée to the system. I want you to apply. I will miss you, but go and become part of America." And I was like, "Oh my gosh."

I applied and got in as a 14-year-old and went up to Andover as a freshman and went looking for Jim Ventre, and he was gone. He'd gone to law school. I was like, "I never got to say thank you to Jim Ventre." And by the way, the program's called the Rockwell Scholars Program. It was funded by Mr. Rockwell of Rockwell Aerospace. I never got to say thank you.

Fast forward 25 years, there was an event for admitted students at the Olympic Club. I get a call from the Major Gifts Office. They're like, "Look, we know you live in a good zip code, but we're not calling for a gift just yet, but we want-"

Patrick: [01:03:30] Patience.

Chris: [01:03:30] Patience, yeah. They're patient folks. They're like, "Look, we want to put you on the masthead of sponsors, and all we're asking is that you show up and talk about your experience for some of these admitted students." It's me and Peter Currie and these people. I'm like, "Holy smokes. I'm such an impostor here."

And I show up, and the guy handing out name tags, I look at his name tag, it says James Ventre, assistant director of admissions. I'm like, "What?" I'm like, "Jim Ventre?" He goes, "Yeah." I'm like, "Were you here?" He goes, "Yeah, I had a 20-year career in the law, but decided that my true love was admissions." I go, "Oh, why is that?" He goes, "Well, because I love the idea of changing people's lives. I love the idea of really making an impact."

I'm like, "Well, have I got a story for you. The last time I saw you was 25 years ago at a middle school in Brooklyn in the middle of a near-riot, and you convinced me to apply. I never saw you when I went up for my interview, I went looking for you when I arrived to say thank you, and I can now say thank you 25 years later. The last time you saw me, I was a snot-nosed punk ass, and here I am, co-sponsoring an event at the Olympic Club of San Francisco with Peter Currie and all these other luminaries. I feel like, as my dad would say, that I'm part of the system, and I owe that to you and the academy."

That's my long-winded answer. I'm sorry for belaboring it. This is why I'm such a fan of need-blind admissions, and very much the idea of America is the idea of social mobility. And I believe that creating this optionality... Even though things are constantly evolving, I do believe that, through hard work and education and pluck, you can really make a difference, which is why I like to support charities, with both money and time, that help kids from disadvantaged backgrounds rise through education.

Patrick: [01:05:07] Man, what an amazing, incredible answer to that question. Definitely one of the best. Highlights something that I've been thinking quite a bit about because of a prior guest who talked about, in the study of happiness, this idea of sacrifice. A lot of the people who he found that were happiest, qualitatively speaking, could very clearly point to sacrifice that they made on behalf of their relationships. It's indirectly related to your answer, but it's the same idea of helping others in these really interesting ways. You can't imagine the impact that something like that could have, even if it's not that hard. Just a phenomenal place to close. This has been a wonderful conversation, so thank you for your time.

Chris: [01:05:46] Oh, thank you. This has been amazing. You're a gentleman and a scholar.

Transcript by @ScarrottKalani