Letter #145: Lindsay Larsen (2019)
Letter #145: Lindsay Larsen (2019)
Managing Director of University of Virginia Endowment (VC, Growth, HFs) | Origins Podcast about the LP and VC Ecosystem
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Planning letters through year end and realizing Letter #150 will be last week of December... might be a good time to retire it!
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Today’s letter is the transcript of a conversation with Lindsay Larsen. In this conversation, Lindsay shares a unique look into how a large university endowment is managed, from inheriting portfolios to setting return targets and goals. She starts by discussing her path to asset management that started with her mother’s refusal to let her move to California, then dives into her path to asset management from Goldman to Bluestem (Tiger Cub) to Sequoia Heritage to University of Virginia Investment Management Company (UVIMCO). She talks investing in and evaluating emerging managers, setting return targets, having long-term time horizons, venture as an asset class, developing relationships, inheriting portfolios vs building up cultures and best practices from scratch, the importance of reputation and relationships, searching for alpha, the China ecosystem and what’s attractive about it, the Southeast Asia ecosystem and what’s not attractive about it, her bottoms-up approach to picking managers, investment sizing, collaborating with other allocators, Softbank’s effect on the private markets, diligencing managers, and more.
Lindsay Larsen is a Managing Director of the University of Virginia Investment Management Company (UVIMCO), which manages UVA’s ~$15bn endowment. At UVIMCO, Lindsay is responsible (as head or co-head) for venture capital, growth equity, and hedge fund investments. Prior to UVIMCO, she spent eight years helping Sequoia Heritage grow (she joined when it was just one year old). Before joining Sequoia Heritage, Lindsay worked for Michael Bills (former CIO at UVIMCO and Senior MD at Tiger Management) at Bluestem Asset Management. Lindsay started her career at Goldman Sachs.
I hope you enjoy this conversation as much as I do! Not many LPs are public-facing, so it’s rare and fun to see one go so in-depth on so many topics.
(Transcript and any errors are mine.)
Related Resources:
Tiger Ecosystem
Sequoia Ecosystem
Letters
Compilations
Michael Moritz Compilation (642 pages)
Don Valentine Compilation (347 pages)
Transcript
Host: Lindsay Larsen is a Managing Director at UVIMCO, the University of Virginia's endowment at UVIMCO. She oversees their venture capital investing, the growth equity investing practice, and also hedge fund investing. She was previously a Director at Sequoia Heritage and Bluestem Asset Management. And she started her career at Goldman Sachs after graduating from UVA. Lindsay, thank you so much for being here. We really appreciate it. We're traveling in San Francisco this week. We're here for the [inaudible] Conference, which is exciting. Could you just tell us a little bit about yourself and your background and where you grew up, and I'll bug you about the rest in a minute.
Lindsay Larsen: So I grew up in New England, in a small town in Connecticut called Pomfret. I went on a full scholarship to a private boarding school in that town. And that gave me a really global perspective. My classmates were from 26 different countries. And I didn't grow up in a family that was discussing investments at the dinner table. My parents are teachers, but from a young age, I was interested in investing and business.
Host: Why? Where do you think that came from?
Lindsay Larsen: My grandfather started his own business. He made boxes, like the boxes that Johnson & Johnson Band-Aids come in, or US Surgical, and I would, on school vacations, go do random things around his plant and office. A good friend of mine in our little town, her dad was a stockbroker, so that was always interest—and just, it was interesting to me to think about businesses and their application to the world. I wanted to go to California for university. My mom said No, she couldn't afford to fly me home for breaks. So I went to... I was fortunate and went to UVA in a different region, but I could still drive 10 hours and get home for breaks. And also UVA had an undergrad Business School, McIntyre. And that was really exciting. And so that was, that's kind of where my connection to UVA comes in. I got more of my foundation in investing there. Had some great professors, including a guy named John Griffin, who was one of the original analysts at the original Tiger and then started his own investment firm, Blue Ridge Capital. And had done some internships. I interned at a mutual fund company for two summers in Boston, and I sold life and health insurance, which was really hard. Cold calling wasn't very fun, but I learned a lot. And then I also interned at Goldman in their equities division in New York, the summer of 2000, when things were their peak, and returned after I graduated in 2001, after the tech bust, two months before 9/11, and worked in tech sales, which was a really interesting time.
Host: So it was like a sales trading desk.
Lindsay Larsen: Exactly, yep.
Host: Got it.
Lindsay Larsen: But our team was specialized in that we only covered technology. So we had, I'd say, more touch points with hardware analysts and software analysts and security, and it was pretty interesting that we didn't, in the two years I was there, we didn't do any secondary, any primary, we emulated one secondary deal, Polycom, the phone that is sometimes in the middle of conference rooms. And 9/11 happened... not too far from our office. So that, then, I had the chance, when I finished my analyst program to stay, but I also had the chance to go do something more entrepreneurial. So I went, moved back to Charlottesville and joined an investment firm that was starting up called Bluestem Partners.
Host: And how did that—was it like a professor that you had gotten to know, or a student, or something?
Lindsay Larsen: It was a professor—I didn't have him—it's Michael Bills founded the firm. I didn't have him as a professor, but I'd met him through recruiting at Goldman. And he had actually gone to UVA, then worked at Goldman in the equity risk arb & trading desk, and then been the eighth employee at Tiger Management in '86. And also had most recently, before Bluestem, been the CIO at UVIMCO, and taken his first analyst as his partner. And that was where the connection kind of came in. And it was just a great chance to learn and work for people that I could respect and admire. We set out to be excellent, really focus on performance. We actually mostly invested in hedge fund managers. Over time, 30% of our portfolio became invested in privates. But we didn't do real estate, we didn't do venture, we didn't do resources.
Host: So he was the CIO of the UVA endowment, UVIMCO. He left to start, what sounds like kind of a hedge fund and private equity fund of funds, and convince you to move back down there and work for him.
Lindsay Larsen: Yes. And take the pay cut and all the risk. The electricity got shut off the first day I was in the office, because the bill got sent to the wrong place. But it was really fun. Like, we built how we would do our performance from the start, before we even had the numbers, saying what information do we want to see? How do we want our brand to be out in the marketplace? We spent a lot of time on our logo—and the colors in it?
Host: What were the big learnings from that experience? You were there for [eight years]. So you really got to see the firm built. And I guess were a part of building it. What were some of the big lessons learned over the course of that period, where I guess you focused on investing in hedge funds, private equity, not venture?
Lindsay Larsen: Well, Moneyball, also, Michael Lewis's book came out in '03, the same year we launched. And we were kind of like, this is what we're doing to pick managers. And I actually think there's analogies to that in venture because sometimes you don't have more standardized data. So we would say, These people are starting up, and we don't have easily—we have a lot of noisy data. But let's go see what statistics are—sometimes qualitative characteristics we think are the most important, that may drive success, and try to solve for those. So it was really fun to be building our brand from the start, saying, Here's what's important to us. We reprioritized trust and good partnership, and then secondarily, but very importantly, investment acumen. And then other things that we would look at would be how someone structured their firm, how they think about their team, how repeatable their investment process is, are they in a geography that makes sense? Things that I think still apply today, across asset classes, including some of which applies to venture. But it was fun to—at the beginning, too, to see people really help you because they want you to succeed, and you're not a threat. So I think that—some people who've been very successful, it's harder because everyone's trying to compete with you versus aid you. We were always a small team and intended to be that way. But being part of the hiring process and the review process and thinking about the firm culture and values and setting that were really important things in terms of how we operated.
Host: What were the most important—I mean, we're obviously going to talk about venture a bunch over the next 40 minutes, but I'm just curious, what were some of the most important indicators of investment acumen and investment process in hedge fund and private equity land?
Lindsay Larsen: Sure, so I would say, If someone said you can have a pitch book and only look at two pages, I would take, if they had any bit of a track record, I would take the track record, and I'd take their bio. And the track record, because Mr. Market's really the only objective judge. And so I'd want to have that. I think, in venture, you need an even longer time horizon than you do in public markets. In public markets, you can really see over three to five years. In venture, you don't start to see until at the very earliest, six to seven years, and arguably longer. And then bio, because, like patterns of people who are excellent tend to stay excellent. And exhibit signs of that excellence and good decision-making throughout their lives and their careers. So there are exceptions and people sometimes learn great lessons from bad experiences and those can happen and that can be a great thing, but also you want to see sort of progression. And some—whether it's... oftentimes investing can be an apprentice business, so did someone learn from a great mentor or did they get the right cultural values at places they've been a part of?
Host: You were at Bluestem for eight years, and then you went to join Sequoia Heritage, I guess here in San Francisco, [in Menlo Park]. How did that come about?
Lindsay Larsen: Sure. So I was moving to San Francisco for personal reasons and Bluestem was like, Great, you can't work for us from the Bay Area, but... and sort of did a wider search. One thing that really appealed to me about Sequoia Heritage was that they were investing globally in all asset classes. And as I said, we didn't do... I didn't really look at financial statements from a real estate firm at Bluestem, and didn't do venture, and no resources. And Sequoia Heritage, we were generalists. And so while I did still a lot of work in hedge funds, I got exposed to venture and to real estate. And that was really fun.
Host: What the heck is Sequoia Heritage?
Lindsay Larsen: So I joined a year after they launched. So they launched in 2010, I joined in 2011. And I think what started as a place for partners at Sequoia to put their personal capital had become a place that was more of an outsourced CIO model and was a place that tech entrepreneurs who'd achieved an exit or a certain level of success could put some of their capital there in more of an endowment style firm, or even small and other endowments and foundations could also be there.
Host: So essentially, acted over time, like a multifamily office that started with a lot of the Sequoia partners and grew over time.
Lindsay Larsen: Exactly. And really is set up like... from an investment standpoint, when I was there, it was more of an institutional... and the portfolio, I would say, would look not dissimilar from many endowments in terms of its asset allocation and asset classes.
Host: Yep. And so you went there to originally focus on, I assume, hedge funds and private equity, like you had done at Bluestem.
Lindsay Larsen: Mostly hedge fund. We just did private coinvest at Bluestem, so those looked more like direct deals than what you'd consider buyout, maybe a little bit of growth. So I did that, but knowing it was a generalist model and a small team, where we'd get exposure to everything.
Host: What were your first experiences and exposure to venture, which I imagine there were many experiences there over [three years], and obviously, in Menlo Park, I assume there was a lot of venture stuff.
Lindsay Larsen: Yeah. So well, one, having a pretty close seat to one of the best, in my opinion, one of the best venture firms in the world, was just a really amazing opportunity. And getting to see the intensity and the focus with which the guys on the venture and growth side operated—
Host: And Sequoia Heritage had some sort of access and look into Sequoia itself.
Lindsay Larsen: We could invest. And we also were in—we officed with them. So every day for lunch, and offsites, we had shared global offsites. Really, really cool. And then, as Sequoia Heritage, we couldn't—we didn't often invest in a lot of the really established—I guess more brand names, if you will, because there was—while we had a wall, there was fear that there wasn't a wall.
Host: So Sequoia's competitors were somewhat sensitive to having all the Sequoia partners, through Sequoia Heritage, invest in their firms. That makes sense.
Lindsay Larsen: Exactly. So our strategy tended to be into more managers that—I wouldn't call them on the periphery, but were not those bigger, established brands, that were more up and coming managers that may be in regions or exploiting a sector that wasn't as generalist. And so that was a really great learning experience for me to get to evaluate those. See what you look at, that was different than—like, we didn't have—we couldn't—pulling information on private companies and looking at what they're evaluating is different than looking at public managers.
Host: How did that portfolio grow over time? I mean, it was started in 2011, I'm guessing—was there a seed program or it was mostly—what did the venture program ultimately look like over there?
Lindsay Larsen: So I think they started it before I got in 2010. And today, I'm actually not sure where it is today, but at the time, we would do—we kind of had a broader asset allocation with sizing within that for managers, like public side being probably sized a little bit larger than private opportunities. And we started by backing managers, more emerging managers, not dissimilar from what we do at UVIMCO, and so I don't know that there was a like—this could get to a certain—it was like every year you have a certain amount to deploy into venture. It was very bottoms-up. If you found something great that you saw had big return potential with partners you could trust, you would deploy there. And like the same challenge we have an UVIMCO, most of those strategies are capacity constrained, so it was just smaller investments. But it included things in the US, included things in China, other emerging markets.
Host: Yeah. And Sequoia Heritage is still going strong today, correct?
Lindsay Larsen: As far as I know, yeah.
Host: I'm really excited to talk about UVIMCO, because, indeed, we haven't had a ton of endowment managers on origins. And so you join UVIMCO a year or two ago?
Lindsay Larsen: In the end of March of 15.
Host: So three years. And you're the managing director of the private program, is that correct?
Lindsay Larsen: I actually co-lead venture with my colleague, Caitlin Fitzmaurice. And then I co-lead long/short. And Caitlin's actually co-lead growth. So kind of all equities, but no buyout and no real estate equity.
Host: So you co-lead venture, long/short hedge funds, and growth. Okay, that's an interesting combination.
Lindsay Larsen: It's an interesting combination. I don't get much sleep.
Host: And you were saying before we started, you moved back to Charlottesville for a year. And you're based in SF, which I imagine is somewhat unusual, also, for most endowments. Tell us a little bit about the decision to go back there.
Lindsay Larsen: So I mentioned that I went to UVA, I feel like I got my investing foundation there, I owe a lot to UVA. So in that sense, it was a really easy decision, and a conscious choice to go back and do this work on behalf of a mission I really care about. At the time, I also think about my time—and time being our most limited resource—it was a place that I felt good about spending my time on. And the first year I was back there, I co-taught a class, which was really fun. It's been harder—I would like to... it was credit and risk. For my boss at Bluestem, I had TAed in the past. And so, super interesting. We had some cases on Lending Club and other things that were really—Puerto Rico debt, things that were relevant at the time.
Host: And one of these days, many years, you'll leave the UVA endowment, and there'll be some analyst up in New York that will go convince you to hire them.
Lindsay Larsen: I hope so. Actually, that'd be great. And so, also, at the time, our CIO had been my equities professor in undergrad, like a decade and a half prior. So knowing him was helpful in terms of the decision to go back. And I also think one of the few structural competitive advantages in investing is having a longer time horizon, and endowments just structurally, inherently have that. And also, it's the ethos of the... it's kind of institutionally part of the memory and the way we work. And I think that's really important to long term success in investing.
Host: Could you tell us a little bit just about the high level numbers and goals of UVIMCO?
Lindsay Larsen: Sure. So we have two objectives. One is to preserve the purchasing power of the endowment. And that, we do that by producing returns that are above the spending rate (of the university) plus inflation. And the spending rate has a slight band, but let's say it's around 5%. And then inflation, our number that we use, which is a particular number that a lot of data goes into it, but right now, we're assuming it's around 3.2 or 3.3, so our hurdle, if you will, is like 8.2 or 8.3.
Host: So basically, stay at par, you've got to do 8.3% a year in returns.
Lindsay Larsen: Yeah. And if inflation's slower, that changes, but—
Host: Although that doesn't necessarily factor in donations, right?
Lindsay Larsen: That does not. And we don't factor that in when we're doing all of our asset—we do factor it in in some models, but actually, into that, we kind of try to keep it—
Host: Why is that?
Lindsay Larsen: Just to be more conservative. But I do think that is a—that versus some foundations that are just constantly spending and don't have it inflows—that's a benefit to us as they think about managing and rebalancing. But we don't try to factor that in, because they're also uncertain, and some of those could be restricted, and some of those could be spent. So it's not something that we sort of factor in.
Host: So it's like a startup has, I don't know, X months of runway, and they just assume no revenue just to be super conservative, or something like that. How big is the endowment total?
Lindsay Larsen: It's about $9.5 billion.
Host: Okay, so 8.3% on $9.5 billion is... I can't do the math, but call it like $700mn a year is the goal. And obviously that doesn't have to be necessarily fully realized, right? Like a lot of the positions, I assume it's—particularly in venture and private equity—are illiquid, so marked each year, essentially. So how do you go about doing that?
Lindsay Larsen: So we follow—we have an investment policy statement, but we also invest, like most endowments, a lot of our exposure's via equities. And we have allocations to public equities, long/short equity, credit, like, non-correlated hedge funds, venture capital, growth equity, buyout, resources, and real estate. And we have a team that does that. Some of us are more generalists, like myself, and some are more specialized. And our goal is to—we do it via partnering with who we hope to be the best investment managers in the world. And we do—our portfolio's predominately invested via active managers. We'll do some coinvestments alongside our managers, but that's the way we go about executing. And have a team of about 15 people on the investment side that go out to achieve that. And the other factor, I said there's a few things, we also keep in mind short-term spending. So we don't want to be at a position where we're having be a seller into difficult markets. We would rather be a provider of liquidity than a taker of liquidity. And so we're also factoring in short term spending, and that risk, in contrast to being comfortable with the long term volatility to achieve our long term returns.
Host: So in other words, if I'm understanding that correctly, you have a super, super, super long term investment horizon, obviously. But there are also just short term realities of the university needing to spend capital for projects and other things that they're going to do and build and invest in. And so understanding that through the lens of the investment profile is you're constantly managing short term liquidity needs with an infinite investment time horizon.
Lindsay Larsen: Exactly. And also, as we back and fund illiquid or private managers, what those kind of—you can't perfectly map out draws and redistributions.
Host: Right. So if 8.3% is the target, do you then—and you mentioned a bunch of different asset classes that the that the endowment invests across—do you then drill one level down from that 8.3% and say, Alright, venture should target 20 and public equities should target six, or whatever it is?
Lindsay Larsen: We have a lot of internal models. And some of those involve factors, some of those involve alpha estimates, which really are—that's really hard to estimate. For us, particularly in venture, how we think about it, like Caitlin and I say, in doing venture, what we want to achieve with every manager we invest with, is a 3x money on money multiple over the life of the fund we invest in. And venture is where we take risk and where we want to get higher returns. And so all of our models have the venture beta higher than other asset classes. And we're comfortable with volatility and risk. That's kind of our—if we think of venture, that's how we think of it. And we think of multiples the right way to think of it as opposed to even an IRR, although we do also look at DPIs. But you need to take a super long view on those.
Host: Why is that?
Lindsay Larsen: Just because that, to us, is like the ultimate return of the fund, like how much capital someone returns from money in the ground.
Host: Yeah. And why is that more important than thinking about it on IRR or percentage returns basis?
Lindsay Larsen: I guess—it's more—IRR is important too, so I don't mean to—because if someone got to a 3x, but it took them 20 years, that's less compelling than someone doing it over a shorter period of time. So I shouldn't say the IRR is not not important, but I think we also think about realizations, ultimately, as opposed to just marks, and sort of take the long view on that.
Host: How do you manage your time across the three areas that you just described? Are there certain areas where you think are bigger drivers for UVA, where you naturally spent more time?
Lindsay Larsen: In terms of value creation and alpha over UVA's longer—like the prior decade plus, growth equity has been a big driver, public equity has been a big driver. I do try to think of my time in terms of these asset classes as portions of our exposure. Long/short equity is about 19.5% of our exposure, venture's 5%. But venture requires a disproportionate amount of time for the capital you can put in the ground. But we also think venture can differentiate endowments. And so we actually, as an institution, have a lot more resources in venture than you would expect given that it's 5% of our portfolio. We have two co-heads, our teams—other folks on our investment team spend time on it with Caitlin and I—we very much value it.
Host: Why?
Lindsay Larsen: Because you can deploy a small amount of capital and get to great returns. It's also one of the few ways we think you can differentiate your returns, because the dispersion in venture returns is so wide that getting big opportunities that happen if you capture the GPS chip that went into the iPhone and all of the businesses that were created from that, or if something huge comes about from blockchain or healthcare, it's a way you can capture really big upside. And also the firm's have significant potential to be big drivers that we think there's a lot of differentiation that can happen, versus the—I'd say on the public side differentiation is there's a smaller range of outcomes.
Host: So you joined UVIMCO in 2015. I assume they already—just to drill into venture a little bit specifically—I assume they already have a portfolio of managers there. I'm just curious, as a new co-head of that practice, how you think about inheriting an existing venture portfolio and evaluating that, and then thinking about how to evolve that over time?
Lindsay Larsen: Well, I think one of the huge benefits on the private side of inheriting an existing portfolio is we don't have to go through a J curve. And we also have some vintage diversification.
Host: So explain that a little bit, because I'm not sure—I think I understand that, but I just want to make sure that the Origins folks do too.
Lindsay Larsen: So when you commit to a private fund, you commit a certain amount, say $10mn. But that capital all doesn't get called day one. But we still have to sort of reserve that we could get capital called against that $10mn. So there's a period of time where you as a venture manager are finding those opportunities and deploying the capital, but while that's happening, that kind of capital that's not invested yet could be a bit of a drag on returns, because it's not money in the ground that's working for you. But you also are reserving some capital for those calls that you get against that.
Host: So if you're building a portfolio from scratch and you don't have existing managers, there's essentially, there's a lot of money going out the door, there's more reserved that you can invest in other things, and so the returns—the J-curve, I think, is typically an indication that the returns in the first few years of a typical venture portfolio don't look so good.
Lindsay Larsen: Yeah. And it's just like you're getting fees taken against your capital. And then, also in venture, the companies that you've backed that aren't going to work tend to fail faster, so you might have write-offs earlier. But then the real big winners, you start to really see them six to seven years in. So that's another factor in that.
Host: And so because there's an existing portfolio there, a lot of the funds are already more mature. And there's liquidity, both going back to UVA in addition to investing just—there's money going in the door in addition to going out the door.
Lindsay Larsen: Yes. And we're in a world where relationships and brand and reputation really matter. I think it's a competitive advantage and really a great help that UVIMCO has been investing in venture managers for three decades. And also has done emerging managers. And that's a core component of the philosophy and strategy. And so I think that's also a competitive advantage. Although, you then have that legacy. So you've got to live up to that reputation, too.
Host: So how do you—I assume you knew a bunch of the managers already, given your experience at Sequoia Heritage, but how do you get in the seat and figure out what the heck is going on?
Lindsay Larsen: Sure. We actually read white papers, which there aren't that many, but there are some. We built out—Caitlin and I did a framework that we shared with our team in the Spring of '17, when one of our colleagues retired where we said, Here's how—just so our team knows—Here's how we're thinking and approaching venture. And some of it was based on UVIMCO's history and experience in the asset class. Also just surveying the landscape and then reading. And we kind of said sourcing, decision making, and ecosystems. And when we meet with managers, we'll always talk to you about how they source and what their strengths are and weaknesses there. Decision-making is harder to evaluate—we're often backing people where you don't get a long runway to see their decision making...
Host: And I assume that includes investment process.
Lindsay Larsen: Exactly. And then ecosystems are like where they're operating, like the Bay Area, China, Israel, Europe. And we have a framework for how we look at ecosystems. And then underneath all of that, we also look at the partnership and partnership dynamics, how a firm uses technology, how they build their portfolio, how they think about ownership—which we think is really important as it fits into their portfolio model—and a number of other things that we kind of, say, feed up into our conviction.
Host: When you joined, was the venture portfolio already at the target allocation for the fund? Or was it maybe under the target so that you could immediately add new managers? Or I guess my question is, as you evolve the portfolio of venture managers, if you were to add to that, does that mean that you have to take away from existing relationships?
Lindsay Larsen: In venture, No. I wouldn't say that it's kind of like you get a certain amount of the budget for venture every year, or even have a We want to target X. Venture for UVIMCO has been 5% for a really long time. I would guesstimate, if like we could, it would actually be a bit higher because of the return characteristics of the space that I described earlier. But it's—the strategies are usually capacity constrained. So that's where we run into challenges.
Host: What does that mean?
Lindsay Larsen: Meaning that there's like a rule of thumb—I mean, some funds, they say, If you've managed north of $250mn, it's hard to get to returns I talked about ownership. Basically, and at seed stage, a lot of funds are small and under $100mn. And when you do the portfolio math, and you try to get to You need X number of companies to return the fund, you need X number to return half the fund, X number to return a quarter of the fund. The bigger the denominator you're working with, the more winners you need, and getting to ownership in a world that's getting more competitive with more funds is harder. So typically, funds will say we can only deploy $75mn. And so if we've kind of done all the work on our side and said, our ideal sizing per fund would be $25mn, that leaves us in a tough spot. So we've taken the tact of being really opportunistic, and flexible, and will invest small amounts, smaller amounts that maybe some of our peers would do, saying we want to be with the best managers. And our hope is that we build the relationship and grow over time. But even if we can't, we still want to invest.
Host: So that's interesting. Just so I understand this. So that means that if you meet an amazing manager, and maybe the math doesn't quite work, just in terms of UVIMCO's need to invest a certain amount of money, you might still move forward just to build the relationship just because that firm might grow, and so it won't necessarily affect the 5% targets that much.
Lindsay Larsen: Exactly. That's exactly it.
Host: That's really interesting. Why do you think—because we do hear from—I mean, I know you can't speak for other endowments—but we do hear all the time from other endowments that they just say, Look, if we can't write a $50mn check, then it just doesn't make sense. So the fund needs to be hundreds of millions of dollars of size or it just doesn't make sense. Why this approach, because it does feel unique, particularly for the large endowments.
Lindsay Larsen: Yeah. Well, I mentioned earlier time is our most limited resource. And that's probably, most endowments, we all are really probably overly diversified. So it's the same amount of time for our operations and accounting team—
Host: To do a $1mn check versus 20—
Lindsay Larsen: 100mn. So I think that's why some have taken that tact. We're staff staffed in a way that we've said, We can be opportunistic. And at the risk of spending our time on things that are less—but even if you are in a smaller size, since we're looking for outcomes that are 3x+, they can really move the needle and matter actually, in the overall returns. I think if this were other asset classes, it's more questionable. But in venture, it is worth it to us still to do the small investments.
Host: That's really cool. I love that. Obviously, as a biased, very small fund. How do you—so let's say you back, I mean, it seems like you guys are willing to back more opportunistic, smaller firms, and emerging managers even. How do you decide to not continue that relationship? Because I assume you're running a lot more experiments than the typical endowment. And so I assume there will also be more failures, just by the nature of working with more experimental new firms. How and when do you decide not to continue investing in that firm?
Lindsay Larsen: That's one of the hardest things. Our dream would be to invest and be there for them, forever. Many, many funds, and it's a relationship business. And we invest a ton of work, and then for it not to continue is really hard and not our ideal. As I mentioned, we're really excited about the China ecosystem, in early stage. One thing that's challenging for us there is just observing the turnover amongst GPS within partnerships, which is hard, as outsiders, to understand. And then also they are raising, like their subsequent funds that seem to keep getting really large. And that's just harder for us as we think about wanting to be there for the long run. I would say we do look at that, as I mentioned, the portfolio math. So if someone got to a fund size that we kind of said, This seems like, well, one we'll take into account the market and maybe there is a justification in terms of what's happening in the marketplace and why they need to write bigger checks and get bigger ownership early, or increase the fund size, there's a good rationale. But if it seems like it's more fees, or it's gonna size them out of their sweet spot, that's much harder. It's harder to figure that out. So we'll try to give someone a longer runway and say, Well, we'll figure that out for the next fund. We do focus on partnerships. So if there was turnover at the partnership level that wasn't healthy, that's another factor we really consider. But the intention isn't to have short-term relationships.
Host: Right. So you mentioned China. So it sounds like you invest outside the US, in terms of venture. I'm curious where you do find the most interesting areas in venture today, whether that's from a stage perspective, or geo perspective, or something else, maybe I'm not thinking about. Or maybe sector. I'm curious to to hear what you—
Lindsay Larsen: Sure. And we do growth separately, so I was like, still focused mostly on—
Host: How do you define growth, by the way?
Lindsay Larsen: Growth for us is later, like probably B or even beyond B, probably C and beyond. And we're just observing all the data that companies are staying private longer, and companies that have the revenues and like, the businesses that in other environments because public or not, but that's sort of a separate for us than our venture. And where we're seeing—so I mentioned we study ecosystems—China has come back as being really compelling in that they have great engineering talent and a lot of engineers, even relative to the US. The cost of employing an engineer there is much less than its US equivalent. A 1.4bn population going to 1.7bn versus the US at a fraction of that. We also think that you could see emerging global technology leaders there. Competition is very intense versus competition for the large US tech companies. So we expect there to be just a lot of market cap potential created. In payments, you have under 100mn users in the US versus over 700mn in China. Like when we get into the data of all this, it's sort of mind-blowing.
Host: Like a small little cute market.
Lindsay Larsen: Yeah. People spend 30% of their discretionary incomes on private education, which has a lot of technology angles. So we are pretty excited about the opportunity there.
Host: And has UVA had any historical relationships there, or this is a newer part of the venture practice?
Lindsay Larsen: I'd say this is newer. UVA has had great relationships there and growth on the public side. And for us in terms of venture, China's only like 10% of our venture portfolio, or 50 basis points of our total portfolio. And so it's an area we've been focusing on, since we did that work in the summer of '17.
Host: How do you how do you practically go do that? Like, does that mean that you're on a plane all the time there trying to meet with people or...
Lindsay Larsen: We have Mandarin speakers on our team, which should help. We've discussed if we should have someone on the ground, which we don't have, but that's up for discussion. Our team travels pretty frequently. A bunch of us are headed back in November. But we probably should be there even more often. It's frankly really hard as outsiders. One of the important pieces of our diligence is we call founders and company executives, both private companies and public companies for our whole portfolio, and that's where it helps that we have Mandarin speakers, but also we're outsiders. So are we getting the right information we need to make good decisions? And so we're approaching it with caution and then trying to just gain more expertise from local experts.
Host: You said there's 15 managers on the UVA endowment. 15 investment professionals. Why not double the team?
Lindsay Larsen: So investing I think is one of those businesses where you get big economies of scale with a small team. And double—sometimes it's already a big group to have around the table when our investment committee meets weekly that it would be really challenging to have that many voices in the room on a weekly basis. So I think we can grow, but there's a limitation to that growth.
Host: Okay, that makes sense. Same way, I guess, a partnership with a venture firm—you want to keep it small, doesn't get too noisy. Any other areas that are, you think, particularly interesting today, outside of—and you're talking about early stage venture—
Lindsay Larsen: Yes, yeah.
Host: How big are the funds, by the way? Like when you say they're getting really big, I mean, they seem to be getting really big here, in the US. Are we similar scale?
Lindsay Larsen: Even bigger. And even faster. So in the US, maybe a fund will go up in size by 10% or 20% in its next fundraise. There, we're seeing doubling and tripling.
There are funds here, though, that'll go from $20mn to $100mn pretty quickly.
Lindsay Larsen: That's true. But at that scale—so I'm talking to funds that maybe were $250mn going to $1bn between Fund 2 and Fund 3.
Host: Okay. Got it. Companies are going public earlier there, too correct? Like, they're getting liquidity sooner, was my understanding.
Lindsay Larsen: Yeah, yeah. And you're seeing that with both the exchanges in China, and in Hong Kong, and then also companies listing in the US. One area—like just on the ecosystem—we did a lot of work thinking Southeast Asia looked really interesting, and we've pulled back from that work, thinking it actually is a lot more like Europe. You have 600mn people, but it's island countries, different religions, different governments, different languages. We think down the road it could be really promising, but today, we've kind of said, it doesn't have as many of the important tells, like they're still more nascent in the engineering talent than China or the US. We also really still like the US even though valuations are higher in California. We still think it's an important place for talent. And we have exposure to New York and California in the US.
Host: How do you think about the early—or really, not early—but I guess, how do you think about the private markets, broadly, today?
Lindsay Larsen: So in growth, we think things look pretty—valuations are pretty high. We're also pretty far into a bull market cycle on the public side, which is important for those companies that are going public or getting acquired. In early stage, we actually don't—we think we should invest through cycles. And because returns can be episodic, because the dispersion between the top decile and bottom in funds is so large, we don't think we should change our investment pacing due to the market cycle. So in early stage, we're sort of always looking and always—I think great companies are built through troughs and peaks in market cycles. And that's how we approach it.
Host: How do you think about Softbank in this market?
Lindsay Larsen: So we've gotten takes from our managers. We've gotten both positive and negative takes. I've seen some of the statistics on what certain companies within their portfolio, what valuations they need to reach to be profitable for them to be able to get their incentive, the way it's structured, from their clients. And those are pretty lofty. And they're coming in at lofty valuations. They're also sometimes changing industries. Like the money they put into Wag really changed that landscape for the pet-care and pet-sitting companies. And so I think you have to really pay attention to them. And their time horizon is often quite different. And maybe their return expectations could be different than some other firms. And we're seeing some other funds go out and raise big pools of capital. And in China, we're hearing the companies are wanting people to just bring more capital and pay higher valuations. And...
Host: Yeah, I always think about Softbank through the lens of the US market, but I guess they're investing everywhere. So I guess they're impacting pretty much the private markets globally.
Lindsay Larsen: A lot of—there are some regions it seems like they're staying away from, but there, I think, is potential everywhere. And so I think—some cases, they've been a great exit. Like I think they were really helpful to Flipkart and the ultimate majority acquisition by Walmart there. So I think they've been both a positive force and would be compelling takeout for some people, but also they're creating risk in terms of their potential entry into certain players within one sector. And if they're a factor that people have to pay attention to.
Host: I'm curious—you've been through a number of different organizations now that are investing in the private markets. And I'm sure lots of the other either endowment managers or fund of fund managers and other folks at lots of these other organizations, whether it's fund of funds or endowments or family offices. I'm curious—and it sounds like you do a lot of your own bottoms up research and work at UVA—I'm curious how much you trade notes and research and collaborate with other similar folks, maybe that's another endowments or institutions when you're trying to make some of these decisions.
Lindsay Larsen: So as time has gone on, I've collaborate—just traded notes—I think less and less with peers at other allocators. There are some that I hold in really high regard, and we also, I think, are really friendly and collaborative. And if people call us, we'll chat and try to be helpful. Also, if we're trying to really be thoughtful about a great manager—we want great people that are as long term as we are alongside of us, we might try to get them to come in and invest alongside of us. But I also... I think, in investing, you have to be really comfortable standing alone. And you have to really be comfortable sometimes being contrarian, and you have to be just comfortable making your own decisions. And everyone has a very different portfolio, very different objectives, sometimes different constraints, different needs. And so trying to base our decisions, or getting too much leaning from other allocators who have different incentives and portfolios, I think can be really risky. So I would collaborate, maybe it could be more along the lines of like, let's have better governance here or let's be helpful. And in doing so, it's better to partner to be helpful to the best outcome for everyone. But otherwise, I think it's a little bit—I don't want to chase other people's conviction or ideas. We really try hard to do primary research and build our own conviction, which sometimes means standing alone, although then we'll look around and we'll say, Oh, wow, people we respect a lot got here, but they got here independently too.
Host: How competitive is it? I mean, it's gotten very competitive for venture to win the deal and compete. And it's very—there's a lot of capital in the market, it's crowded. Is it just as competitive from the allocator's perspective, from the LP's perspective?
Lindsay Larsen: Since I've been at UVIMCO, it's gotten even more competitive. And I would think we are in a position to compete really well. I think we serve a really great mission that a lot of venture managers can relate to. And one challenge we have is we have fewer UVA grads than maybe some of our peer universities in technology or in venture. But I still think we... because of the mission we serve, do appeal and fit that. But also we have been edged out of things that we've been really excited about because people can just have a world where they can choose and capacity is constrained. And so we found it to be just increasingly competitive. And we're sort of being pushed to operate in a world where you're having to make decisions earlier and be ahead of the game and kind of figure out who you may want to commit to well ahead of when someone's out raising a fund. So we're just trying to work hard and stay competitive.
Host: What do the next 5-10 years look like? I'm assuming you're at UVIMCO 5-10 years from now, like, what are your hopes and goals over the next number of years as you continue to manage investments across those three areas that we discussed?
Lindsay Larsen: So I would hope that we have these really long term relationships that we keep, have continued relationships with our existing managers that we're really excited about. Continue to build with new managers and have a really long runway. Continue to focus on excellent risk-adjusted returns that we do capture some of those next big areas, whether it's blockchain or healthcare and synthetic biology or automation and robotics or things that we aren't even—quantum computing—things we're not even—that are still very much on the cusp of what's next. And so I hope we just capture some of that, and also have partnerships we're really proud of, and people that we have great relationships with and that we feel good about from an integrity and character standpoint representing the University who also want to generate great returns and get their capital alongside ours and some other missions to generate more scholarships and more faculty that are creating more people that go out and do good in the world. So that's kind of our long term goal.
Host: Amen. Lindsay, thank you so much for doing this. I really, really appreciate it.
Lindsay Larsen: Thank you.
Host: Thanks so much.
Wrap-up
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