Miles Dieffenbach: Inside Carnegie Mellon’s $4BN Endowment & The Math Behind DPI, TVPI, Illiquidity

1. 0:00 – 1:00

   Intro

   1. MDMiles Dieffenbach0:00

      So my message here to all venture capitalists, now is the time. Please, take your companies public. I breathe investing. These business models these GPs are creating are some of the best high-margin businesses ever created. My question to any new allocator or an investor is, do you think you're going to have access to top decile managers? Because at that point, top decile, you are achieving returns above the PME consistently. But below that, even top quartile, you're not.

   2. HSHarry Stebbings0:26

      Ready to go? (instrumental music plays) Myles, dude, I'm so excited for this. Listen, we've been friends for a while. I'm so excited that we could also make it happen in person. What no one knows is I dragged you round London for a walk last night and it poured with rain. You were so patient and great, but thank you for joining me, man.

   3. MDMiles Dieffenbach0:54

      Thank you for having me. It's a, uh, pleasure to be here, uh, you've had some incredible, uh, guests on, on the podcast and

2. 1:00 – 4:31

   "I Had Cancer at 26 – It Changed Everything"

   1. MDMiles Dieffenbach1:00

      I'm honored to be one of them.

   2. HSHarry Stebbings1:01

      You know what, dude, it's, it's amazing given the fact that I've known you for a while and then also, like, in the research for this, learning more and more about you, because I didn't actually realize this but at 26, you, uh, kind of went through a cancer experience and, you know, you're a cancer survivor now. Pretty unbearable to think about given the fact that I'm 29, like just the most incredible strength. How did having cancer and facing your own mortality change your mindset? And I've never asked that question to start a show before. (laughs)

   3. MDMiles Dieffenbach1:29

      Well, let's dive into it. We'll dive into the, into the heavy and hot. I mean, it's a surreal moment when that happens, you know, I think everyone at that age thinks you're invincible. I did, right, uh, and you get that news and you're in a bit of shock, right? And it was, it was so abnormal to me when they told me I had lymphoma. I said, "Oh great, what's lymphoma?" I thought it was like a, a cold. I didn't even know what it was. And they said it's, uh, it's, it's cancer and it's progressed, you know, quite substantially and, and we need to, you know, start a chemo process here within the week. Um, and so like I'd say most all people I, I sulked for about 12 hours, went home, uh, was, was mad at the world, didn't wanna speak to anybody. Why me? Um, and, and I woke up that next morning and one of my college football coaches had a, had a great quote that, that really stuck with me which was, you know, "Success in life is, you know, 10% what happens to you and 90% how you react when it happens to you." And so, uh, you know, I took that running that next day, I said, "I'm gonna attack this. I can't change the situation I'm in, but I can change, you know, how I react to it moving forward." And so I basically said, you know, "Cancer can't kill me if I don't stop moving," so I basically started, you know, the, uh, a pretty insane regiment of, of workouts, uh, and when I would go in and get my chemo, uh, that was like my RnR, that was my recovery period. I'd get out, I'd, I'd, I'd start that again and flash forward four months, I was, uh, cancer-free and have been so ever since.

   4. HSHarry Stebbings3:03

      Do you remember the moment you were told you were cancer-free?

   5. MDMiles Dieffenbach3:06

      Yeah. It was crazy because I, I, w- I got in there, uh, you get a scan right before and then you go into the office, and I waited two hours in the office, post-scan. Usually it's like 30 minutes, and I'm sitting there like, I'm, and I'm like a, I mean, I, I might be like biased towards negativity. I'm like, "It's, I mean, it's, it, I, it's gotta be bad news if he's waiting two hours." And he came in, he had his arms wide open, he gave me a big hug, it was, uh, it was pretty incredible.

   6. HSHarry Stebbings3:34

      Wow. That must be the most special moment.

   7. MDMiles Dieffenbach3:37

      Yeah, it's special and, you know, looking back on it, um, you know, everyone's had adversity, you know, you, you've had adversity in your life, you know, a lot of people do, everyone does. No life is, is perfect. But there's, there's beauty in the struggle, right? Like that makes you who you are as a person, right, and it, and it builds you into a stronger person, uh, and so the trials of life are many and, and, um, you know, I wouldn't change anything.

   8. HSHarry Stebbings4:00

      Did it set a benchmark of shit that now everything else seems kind of okay?

   9. MDMiles Dieffenbach4:05

      Oh, uh, I mean, the, the perspective you have, you know, moving forward after that is, uh, one of the great blessings of that, right? Life is, uh, an incredible joy and a blessing, right, and so there's, there's not many things that can, that can take me down, uh, you know, mentally at this point.

   10. HSHarry Stebbings4:19

       I mean, how on earth does one go from like surviving cancer, beating the odds, amazing, to the Endowment Model?

   11. MDMiles Dieffenbach4:27

       Ex- there we go.

   12. HSHarry Stebbings4:28

       I, I mean, it's a pretty smooth transition for me. Give me credit.

3. 4:31 – 8:28

   Inside the $4BN Carnegie Mellon Endowment: The Investment Blueprint

   1. HSHarry Stebbings4:31

      I do wanna start with just laying the kind of landscape framework for how CMU operates its structure today. If you think about like a construction that's easy for everyone to understand, how does that portfolio construction look like for CMU today from a top down?

   2. MDMiles Dieffenbach4:46

      From a, from a top-down perspective, we manage 4 billion on behalf of the university. And so starting at the highest level, we think of equity and fixed income as, as kind of the two parts of the endowment. 85% of the endowment is equity, 15% is fixed income. That is our allocation. And, and we manage to that on a, on a quarterly basis. One step below that then is the sub-asset classes within that, and so our target is 50% of the portfolio is in privates, that's a mixture of venture capital, private equity, real estate, natural resources, private credit.

   3. HSHarry Stebbings5:19

      Mm-hmm.

   4. MDMiles Dieffenbach5:20

      Um, the other 50% is hedge funds and liquids, which the liquids are public equities and fixed income. Uh, and so that is the, the top-down management of the portfolio. Within that private bucket, we have, um, free rein into the underlying allocations within that, so we call it a best athlete portfolio. So how do we find the best risk-adjusted returns globally across all of those different private asset classes so we can have the best risk-adjusted return for the portfolio?

   5. HSHarry Stebbings5:49

      When you look at it today, how has that makeup changed over time in terms of where the private distributions or, sorry, uh, commitments lie?

   6. MDMiles Dieffenbach5:59

      Yeah, so we, uh, you know, from a liquidity perspective...We've been fortunate compared to most endowments where that private equity book has been self-funding the past three years. So our distributions have paid for our capital calls over the past three years. Now, the sub-asset classes within that have had much different performance so our buyout portfolio, our private equity portfolio has contributed the most to those distributions. Venture has been the largest detractor, uh, of those, but it's been self-funding, right? So our, our private equity book at, at kind of that 50% number has stayed relatively consistent for the past six or seven years. Um, venture, as the distributions, uh, had slowed down over the past three years dramatically, has risen as then averaged them but there's been markdowns over the way as well.

   7. HSHarry Stebbings6:43

      So when you think about, like, commitment to venture as a whole, what is the percentage commitment to venture as a whole of the endowment?

   8. MDMiles Dieffenbach6:49

      So for us, venture globally is a little less than 25%, uh, the total endowment, so almost half of that private equity book.

   9. HSHarry Stebbings6:55

      How does that compare to others like you?

   10. MDMiles Dieffenbach6:57

       I'd say we're overweight venture, but I call it anywhere from five to 10 points versus most other endowments of our size. We're underweight hedge funds and real assets, which would be real estate and natural resources. On privates as a whole, we're right on par with, with most endowments, plus or minus five points.

   11. HSHarry Stebbings7:15

       When you think about all of those different asset classes that you can allocate to, how do you think about opportunity cost? And I think you said it before, which is unit of return per unit of risk.

   12. MDMiles Dieffenbach7:25

       Yeah. I mean, we take everything from a, a, a lens of risk first starting off. So when you think about the different, you know, private asset classes there, you've got real estate, natural resources, private equity, venture capital, which is a mixture of growth in, in early stage. You know, take real estate, for example. This is a, you know, you could have a, you know, industrial building that does triple net lease rents, being leased to Amazon, those rents increase 3% a year. It's a very stable asset. There's a replacement cost to that, to that asset. It's not nearly as risky and so the returns will compensate for that it is not as risky of an asset, right? Venture, picture early-stage venture. You know, it's $100 million fund investing into two or three people in an idea, um, that is... Could be a completely new idea, could be an idea going against big incumbents and the company's not gonna be profitable when they start out. It's probably the riskiest asset class you could have. So you want to get compensated, you need to get compensated for that risk you're taking within that, within that asset class.

4. 8:28 – 10:04

   Are LPs Getting Screwed in Venture?

   1. MDMiles Dieffenbach8:28

   2. HSHarry Stebbings8:28

      Do you think LPs are getting paid for the risks that they are taking investing in venture?

   3. MDMiles Dieffenbach8:34

      Absolutely not.

   4. HSHarry Stebbings8:36

      Why not?

   5. MDMiles Dieffenbach8:37

      Uh, I mean, we take a very hard look at the data that comes out of the asset class from, you know, there's, there's really good data from about '98 to today. You look at the, you know, the, the, the median IRR for the asset class over that time period for mature funds, right? So, so we'll look at the, the 10 and 15-year returns for every one of those vintages, kind of stopping at 2016 as that's gonna be the closest to a mature vintage you're gonna get. The median IRR is about 8% net for that asset class and, and, and in the top quartile, uh, is a bit higher, 15%, but the MOIC is about two and a half X, right? And the big, you know, the, the difference is when you look at that, those performance numbers then on a DPI number, we'll stretch that from 10 to 15 year top quartile DPI from 1998, 15-year vintage funds per vintage year up until 2015 is 1.8X top quartile. And so, you know, when we think about those underlying asset classes and our public equity portfolio, we have a public market equivalent for every private asset class we invest in, right? For real estate it could be VNQ, which is Vanguard's, you know, REIT index. For our buyout portfolio- portfolio it could be a smaller mid-cap value index. And for venture, it's the QQQs, the Nasdaq-100. And that's been the best performing PME globally over the past, you know,

5. 10:04 – 11:55

   90% of LPs Shouldn’t Be in Venture – Here’s Why

   1. MDMiles Dieffenbach10:04

      25 years.

   2. HSHarry Stebbings10:04

      When we think about though, like, absolutely not. You're not getting paid for the risk that you're taking. And then a statement that you said to me before which is 90% of LPs shouldn't be investing in venture. Who should and who shouldn't then?

   3. MDMiles Dieffenbach10:17

      That's, that's the million-dollar question. I think you need to have a frank conversation with your... So say you're a, you're a new endowment or a new family office and, and you say, "We want technology exposure," right? You've got two options. You could do that through the public markets. You could do that through the private markets. And so my, my question to any new allocator and investor is, do you think you're going to have access to top decile managers? 'Cause at, at that point top decile, you are achieving returns above the PME consistently. But below that, even top quartile, you're not. And so that is the question. And, and I think most people clearly by the data, especially as a new entrant to a mature asset class, are not going to have top decile access.

   4. HSHarry Stebbings11:02

      That instantly suggests though that you're working on historical lagging data which is obviously that prior returns, not a first-time fund or smaller micro-funds who are in their first vintages. And that is where we see a lot of family offices and even smaller endowment funds playing today. How do you think about that then?

   5. MDMiles Dieffenbach11:19

      It's, uh, a strategy that a lot of people are taking, you know, first-time funds and, and smaller funds as, as the incredible performance of, you know, the, the now multi-stage venture firms have, have... They've scaled, right? Uh, as that performance has allowed them to. Um, we spend time in that space as well, um, but it is a time, uh, uh, place that is quite risky, new funds, small funds, and it's at a hyper competitive part of the market. There's thousands and thousands of managers, uh, a- and, you know, specific seed funds, angel funds, operators,

6. 11:55 – 35:29

   Seed Funds Are a Trap (And No One Wants to Admit It)

   1. MDMiles Dieffenbach11:55

      and, a-

   2. HSHarry Stebbings11:56

      So, so you know what I find funny, so I'm ju-... I want this also to be an, an open and free discussion.

   3. MDMiles Dieffenbach12:00

      Yeah.

   4. HSHarry Stebbings12:00

      But I find it really funny how all LPs love $50 to $100 million dollar seed funds. And when you actually run the maths now on average seed fund, uh, seed round sizes, it's the worst place to be. The average seed round is $4 to $5 million dollars. To write a check with ownership you need three, three and a half. If you want enough diversification you need 30, and so you need $33 million checks. Well, there's 90.Well, you're not gonna have that with a $50 to $100 million fund. It's impossible. So then you either have subscale ownership or subscale diversification, or you do what everyone does, which is, like, they end up writing tweener checks, like one and a half million dollar checks. It is fucking hard to get a one and a half million dollar check in a three to four million dollar seed round when the best in the world want it. Put a 50K in, but one and a half? Mm-mm.

   5. MDMiles Dieffenbach12:45

      My, my response to that would be consensus seed deals, either a consensus founder or a consensus idea, extremely hard to plan because the multi-stage firms have, have all planted a, a flag at seed and have essentially said, "We're gonna, you know, all these seed funds are our shrapnel. Like, we're, we're gonna blow this, your model up, right? Via we have a much cheaper cost of capital than you, and we can deploy five, 10 million checks at seed when, when the model traditionally was, you know, two to three." Um, but if you're doing non-consensus founders, non-consensus ideas, you know, those rounds are usually non-competitive, uh, and, and that shows up in price and ownership. And so I, I'd say that's the question I would posit back.

   6. HSHarry Stebbings13:23

      Do you actually see that in your portfolios? 'Cause I, I don't actually know what is non-consensus anymore. Like, the rounds that were in the old days, they're kind of not now. Like, fine non-AA ideals, but non-AA ideals are still priced incredibly rich. I actually, when you push now, it's, um, such a mature asset class, I don't think you have that luxury on price.

   7. MDMiles Dieffenbach13:43

      I think the, the true moat of early stage venture capital, the picking skill, and, and you look at some of the, the most incredible companies that have ever come out of the venture asset class, Airbnb, Uber, SpaceX, Amazon, all struggled mightily to raise their seed round. So to your question, is there so much capital available at seed today that that's never gonna be the case moving forward? I hope and pray not, right, uh, uh, as an allocator to the space. And so I, I still believe there is a, a moat around picking. Um, but we'll see.

   8. HSHarry Stebbings14:20

      So, so unfair of me. Do you think venture's an access game or a picking game?

   9. MDMiles Dieffenbach14:24

      You're in some of the best brand names. Um, is it access or is it picking?

   10. HSHarry Stebbings14:29

       I think it's both.

   11. MDMiles Dieffenbach14:30

       You have to weigh it out of a hundred. Ooh, weigh it out of a hundred. Um, I would say if you are a multi-stage firm that is, you know, deploying large checks at scale, 70% access, 30% picking. If you are a small and nimble early stage fund that is trying to break into the mold, I'm gonna say it's, you know, 80%, 70% picking. I'll flip it, yeah. 30% access.

   12. HSHarry Stebbings14:58

       Okay. So we mentioned that, you know, multi-stage funds going to seed, we mentioned the seed firms which at 50 to 100. Uh, I don't like them. Um, what do you like? When you see a fund come through the door, where are you like, "That's straight down the fairway for me," size wise, geo wise? Hit me.

   13. MDMiles Dieffenbach15:15

       I think for us, the, the sweet spot, uh, is dependent, one, on the GP skill set and what they've done prior. But for us and our commitment size, which at the low end, call it 10 million bucks, um, anything from, at the low end, we'll do an $80 million fund. At the high end, you know, anywhere from 400 to a billion, right? In that range, dependent on the skill set and the track record of the team, but it's very much dependent on the people, what they've done, what they've proven, what they want to do with this fund, and the pattern matching and diligence we can do against them.

   14. HSHarry Stebbings15:49

       We said about access and picking. We spoke before this about the pillars of venture. I'd love it if you could just unpack the pillars of venture and how you think about them and where you place more and less emphasis.

   15. MDMiles Dieffenbach16:01

       Yeah, yeah. So, so the five would be sourcing, picking, winning, helping, and selling. Um, selling is gonna be the most, the new of those five, I think, for the asset class as a muscle, as a whole. Um, and so, um-

   16. HSHarry Stebbings16:17

       Do you think your managers have been good at selling over the past decade?

   17. MDMiles Dieffenbach16:21

       Some yes, some no. Some have been better than others. I think, you know, Union Square broadly, uh, and, and we're not an investor there. We wish we were, but I think they've perennially been the best at selling, and they've got a very strict protocol that they run through, you know, from years eight to 12 on those funds and with those founders to let them know that they are going to be active sellers. Um, so some of them have met better than others.

   18. HSHarry Stebbings16:42

       Do you think managers should distribute shares, stock? Do you think Sequoia are right that the evergreen fund structure, they are best placed, they have asymmetric information? How do you think about that?

   19. MDMiles Dieffenbach16:52

       We like them to distribute cash versus stock. Reason being if they distribute stock to us, there is a ti- sometimes a time lag between when we sell that and when others sell that. And so there could be a one to 2% pricing discrepancy on that. Um, versus them distributing, uh, cash day one is quite easy. They sell that entire book immediately, and they distribute that to all their LPs equally.

   20. HSHarry Stebbings17:13

       Do you think the last generation did a good enough job selling in the '21, '22 vintage?

   21. MDMiles Dieffenbach17:19

       Clearly not. Um, I, I mean, I think that's a pretty easy one. The one thing I'll say is the reason it got so crazy was the public markets were, were pricing growth assets for an 18-month period. And, you know, the median AR multiple for a software company was 20 times. And if you were a top quartile grower, it was 40 times, right? And so everyone looked at their models and thought their company was gonna be worth two, 3X what it was in, in three years. Um, and so you had, you had public market comps to support your reasoning of holding stock. But that all changed very quickly.

   22. HSHarry Stebbings17:53

       Do you believe managers' books? And we all come back with these prices, yeah, in terms of the marks on our books, which is where we mark our portfolios, latest valuations, da da da. Do you think managers are accurate enough in how they price their books?

   23. MDMiles Dieffenbach18:06

       Certain ones, yes. Certain ones, no. We, we-

   24. HSHarry Stebbings18:08

       Who's the best?

   25. MDMiles Dieffenbach18:09

       Um, usually the, the, the multi-stage firms, think your Perennial, like, Accels or Sequoia. They're, they're, they're taking very aggressive discounts on, on basically all of their securities. Um, even if it's a great company that is maybe achieving even a higher price on the secondary market, they're still gonna hold that at a, at a 20 to 30% discount, right? Um...... but, but we, you know, 2021 caused us to create new muscles in regards to underwriting as a group as well. And so for any re-up or any new manager we diligence, we'll look at the top 10 company NAVs within that general partnership. We'll underwrite those companies ourselves, and, and we will, uh, you know, on a rough approximation determine, are these assets extremely o- overvalued? Are they undervalued, or are they fairly, fairly valued?

   26. HSHarry Stebbings18:54

       I think my biggest worry is that you've got a generation of, like, marked books where they're like, "Oh, it may not be the 5X fund. It might be the two-and-a-half-X fund." I'm worried that it's not even gonna be that. Do you think there's a realization amongst LPs of, of bluntly the dire nature of some of the books?

   27. MDMiles Dieffenbach19:10

       Look at the data, you know. Uh, yeah, I quoted that Cambridge data to you. A, a, a top quartile, uh, TVPI is, is 2.5X. Top quartile DPI is, you know, 1.8X.

   28. HSHarry Stebbings19:22

       One thing that really pisses me off, 'cause I do do some LP checks when I meet managers is, um, they're like, "Listen, I, I don't know if we're gonna do, like, a, a, an 8X, but we'll definitely do a 6X." And I'm like, "Do you know how hard it is to do that?"

   29. MDMiles Dieffenbach19:35

       Brutal.

   30. HSHarry Stebbings19:36

       Any things that managers say in th- early meetings with you where you're like, "Oh, no. Just don't say that"?
7. 35:29 – 42:22

   The $140BN Problem with Multi-Stage Funds

   1. MDMiles Dieffenbach35:29

      carried interest? It's a problem.

   2. HSHarry Stebbings35:30

      How do you think about the rise of multi-stage platforms, dude? You mentioned there that 8 to 10% that these kind of, uh, endowment funds and the endowment model kind of relies on to keep that, um, kind of corpus the same. Everyone says, "Oh, well, it's gonna be fine," because basically, yes, they will have worse returns being multi-stage funds, 8 to 12%, say, but the LPs they have are different now, and that's good enough for them. How do you think about that?

   3. MDMiles Dieffenbach35:57

      It worries us. The funds are extremely large today, and I think it's hard to assume the same returns you had from, you know, 2010 to, call it, 2017. I, I think, you know, Masa and SoftBank I would, I would put as the, the, the flag-in-the-ground vision fund one when, when all the other venture firms saw that as the opportunity to just absolutely scale their capital base. Um, I think it's, it's wrong to assume the returns you had from, from those years where most all venture funds were basically raising a $400 million Series A fund, all the premier funds, and maybe they had a, maybe they had a 400 million growth fund attached to it. But the fund sizes stayed basically the same for a decade. Um, and so it, it worries us tremendously.

   4. HSHarry Stebbings36:40

      Do you think they will post as good returns then? No.

   5. MDMiles Dieffenbach36:43

      No. I mean, I'll walk you through a very simple math that other LPs can, can put in their back pocket. But for, for how we underwrite, you know, these big funds now today, it's simple math but, but I'll walk you through it. So, uh, and this is a live manager, won't share their name, but, um, this is, uh, you know, a manager we underwrote a year ago. So we'll look at their fundraise. So this manager was, was targeting a $7 billion fundraise. And so what we do is we do a dollar-weighted entry ownership across their different funds. So this had a billion-dollar early stage fund, a $2 to $3 billion growth fund, and the rest was an opportunity fund. And as an LP, most LPs have to invest pari passu across those funds, so like equally as a percent of the fund across those funds. And so inherently, your, your smallest check is gonna be to that early stage fund. Your largest checks are gonna be to the growth and opportunity funds. And so what we do is we look at the early stage fund. So this fund call had 15% entry ownership for that fund. The growth fund, uh, had about 6 to 7%, and the opportunity fund had about two and a half, 3% ownership. And so we, we, we dollar-weight that on the funds and then we look at our check, what is the average entry ownership our check is getting within those funds? And so this fund was about 5% across those vehicles, dollar-weighted. And so the very simple math there is $7 billion, you know, divided by 5%, which is $140 billion, right? So that's the enterprise value. That is the market cap of companies that the size of those companies, they are just deploying that fund into, $100, $140 billion. And so for us, when we do a venture fund, our target is a 4X net. That's our goal. And so if we want a 4X net, these funds, you know, the early stage funds charge two and a half and 30, growth funds charge two and 20. Um, you know, so you're gonna need a 6X gross at least to get a 4X net on that fund. So, you know, $140 billion, you know, times six, you know, you're close to, you know, $800 billion of market cap needed to return a 4X net for those multi-stage funds. Now for reference, 2021, the best exit year of all time, there was $850 billion-ish of market cap exit value from that year. Okay, you need an entire year of IPOs and M&A just for this, you know, one manager. Clearly, it's gonna be broken up, o- off of numerous years, but it's a, that's a staggering number.

   6. HSHarry Stebbings39:05

      My counter to you there would be you're assessing performance today on the current outcome size, not projecting forward to what it could be in 10 years' time. In other words, you know, now we have, you'll correct me, nine, 10, $1 trillion companies, um, we didn't have any 10 years ago. The outcome sizes are so much bigger than they've ever been. If we project forward a decade, there's a very real chance that Microsoft is worth $10 trillion and actually we have, I don't know, $50 trillion companies. If that's the case, we could see that play out.

   7. MDMiles Dieffenbach39:37

      It could. I, we, we, we acknowledge that we could be wrong and (clears throat) SpaceX and OpenAI and Anthropic go public at, at trillion-dollar valuations. What we look at, and like I said, this is, is backwards-looking data, but we'll give you a few data points, there's been 11 $50 billion IPOs ever, venture-backed. 11, okay? The, the two largest venture-backed IPOs ever were Facebook in 2012 and Alibaba in 2014. So we've gone a decade and one of the greatest venture bubbles of all time, 2021, and we still haven't had a bigger exit than we were getting in 2012 and 2014. So, so my guess is that $100 billion IPO over the next 10 years is still going to be a generational outcome. And so the question I throw back is, you know, do you think there's gonna be 10, 20, $100 billion-plus IPOs? I do not think so. You know, you look at the trillion-

   8. HSHarry Stebbings40:35

      Well, I, I think there'll be 10, 20, way more actually $100 billion-plus outcomes 'cause I think what, what I find so worrying right now is bluntly, there are so many exciting companies that I would love to be a part of, whether it's your Anthropics, whether it's your OpenAIs, whether it's your SpaceXs, just can't get access to them given the extension of private markets. These are all companies that will be in the $100 billion IPO price range for sure.

   9. MDMiles Dieffenbach40:57

      Oh, Stripe, SpaceX-

   10. HSHarry Stebbings40:59

       For sure.

   11. MDMiles Dieffenbach40:59

       ... OpenAI, those are all-

   12. HSHarry Stebbings41:00

       (sighs)

   13. MDMiles Dieffenbach41:00

       ... $100 billion companies today, for sure.

   14. HSHarry Stebbings41:02

       But where does the rubber meet the road there? Some, at some point, the liquidity can, has to be passed to someone who goes, "Fuck it. I need it."

   15. MDMiles Dieffenbach41:09

       Yeah. And, and even still, I think, you know, 2021 is a, is a good learning opportunity. Most, if not all, call it except maybe Palantir and a few others, these very large 2021 i- IPOs are down significantly still today from that price. These were the greatest venture assets of that vintage. And so to say that it's a guarantee that, you know, OpenAI is gonna be worth, you know, a trillion in, in five years, there is a lot of risk involved in that. And so what we posit back to our team is, you know, what is the margin of safety, you know, you know, the, you know, great investors Warren Buffett and Benjamin Graham kind of coining these terms, what's the margin of safety we want investing in a fund for what we have to believe in to achieve our desired return? I would rather not have to believe in $800 billion of market cap IPOs and M&A transactions to get a 4X net versus other funds where maybe we have to believe in maybe it's a billion-dollar fund, but kind of that entry ownership is 10% and, and we have to believe in, you know, $10, $20, $30 billion, right? And, and anything above that is where you get the real alpha, right? And, and so it's, it's hard for us to imagine on, on these very large multi-stage funds having that kind of alpha.

8. 42:22 – 1:01:03

   "Index Is the Best in the Game” – Here's Why They Win

   1. MDMiles Dieffenbach42:22

   2. HSHarry Stebbings42:22

      Who is the single-best performer to you at Scale?

   3. MDMiles Dieffenbach42:25

      Index. I think they have to be. I mean, the performance they've put up in the last 12 months is... (smacks lips) I've, I mean, in a, in a market that is as bad as you hear in the news and from all the folks on the podcasts, the performance that they've delivered and are, are delivering here in the future is unbelievable. I mean, largest shareholder in, in Figma-... largest shareholder in Dream Games, largest shareholder in Wiz, um, you know, second-largest shareholder in Scale AI, Revolut. I mean, it's unbelievable. And, and I give Index all the credit in the world for not scaling. They even reduced their latest fund size. They reduced it after the 2021 era. Like, the, the credit I give them for, for not ag- They could raise as much capital as they want to, and they don't. They, they are the most performant-driven culture that we see. Uh, and so I give them a, a ton of respect for that.

   4. HSHarry Stebbings43:25

      Danny has been unbelievably good to me since I was very, very young, 18, 19 years old, which I, I think is a testament to him helping the next generation amazingly. Fuck, it's annoying though, isn't it? It's like the perfect kid at school-

   5. MDMiles Dieffenbach43:37

      (laughs)

   6. HSHarry Stebbings43:37

      ... but's also really nice. M- my question to you on the back of that is, do you think they're in for a hard time? And not singling them out, but the funds that are in that billion to two billion range, where they're sizable but they're not that sizable. When you're GC Lightspeed, um, SoftBank, your cost of capital is just like (blows raspberry) to throw out a $10 million check and say, "Thanks for the coffee." When you're in the Index range, you're not one or the other, you're in the middle ground. How do you assess and think about that?

   7. MDMiles Dieffenbach44:09

      I absolutely think they will continue to survive and thrive at that range. I think you have enough capital to write big checks, right? So you can participate in the abnormally large seed Series A, Series Bs, um, and you have enough, uh, and so, excuse me, it's a limited amount where you can still drive extreme power law outcomes within the fund. And I think the, the performance-driven culture and, and what that brand stands for, being, you know, the backer of some of the most generational companies of all time. And you had, you had Vlad on the show recently. You should a- ask him why did he go back to Index for his new, uh, his new math company, right? He could've gone to probably a cheaper source of capital and gotten-

   8. HSHarry Stebbings44:51

      'Cause Mickey told him to fuck off.

   9. MDMiles Dieffenbach44:53

      (laughs)

   10. HSHarry Stebbings44:54

       (laughs)

   11. MDMiles Dieffenbach44:54

       He probably could've gone to a cheaper source of capital and raised from Masa at SoftBank, or general catalyst, or, or you name it, right? Um-

   12. HSHarry Stebbings45:01

       But just to be clear, you don't actually inherently believe in that fund size range. You actually just think Index is so good.

   13. MDMiles Dieffenbach45:09

       It, it... What do you mean?

   14. HSHarry Stebbings45:10

       Like, you don't love the $1 to $2 billion fund sizes. You just think that Index are so good that they'd make anything work.

   15. MDMiles Dieffenbach45:18

       Well, I mean, uh, uh, most people, right, most funds can't raise $1 or $2 billion, right? So, so most are inherently gonna be in the lower end, and then the ones that can, they've had good enough performance, most of them scale.

   16. HSHarry Stebbings45:30

       Have they? Most of the big funds have not got great performance.

   17. MDMiles Dieffenbach45:34

       I think so. I, I... We've looked at all of their returns. I mean, these, these people deserve to raise larger funds, right? I mean, they've, they've produced really strong performance.

   18. HSHarry Stebbings45:42

       So when do you say, "Enough's enough, I'm out. It's too big. It's not my game"?

   19. MDMiles Dieffenbach45:48

       I think, um, one, we lean on the math, right? Where even if you do own 10% of a generational $20 billion outcome, which is still gonna be generat-... You know, Figma, generational company. It's probably gonna... We'll see where it prices, call it $20 to $25 billion. You know, if you're a GC and their last fund raise was $7 billion, say you own 10% of a Figma, which is a generational company, $2 billion, you know, they're gonna take 20% of that. I mean, you've returned, what, .0, 0.2X? You need, you need, you need 15 Figmas. I mean, I, it's mi- it's just mind-boggling to me.

   20. HSHarry Stebbings46:26

       I mean, my favorite also was Wiz which was obviously a, you know, $30, $31 billion outcome in the GDP of the country.

   21. MDMiles Dieffenbach46:33

       Yeah.

   22. HSHarry Stebbings46:33

       Uh, and it returned a third of Insight's fund.

   23. MDMiles Dieffenbach46:36

       Yeah.

   24. HSHarry Stebbings46:36

       And you're like, "Oh, I'd be really pissed-"

   25. MDMiles Dieffenbach46:38

       Yeah.

   26. HSHarry Stebbings46:38

       "... if I was the guy that led Wiz," and I'm like, "Oh, well, thanks for the first." (laughs)

   27. MDMiles Dieffenbach46:42

       I'm sure he's, I'm sure he's happy enough that he still did it.

   28. HSHarry Stebbings46:44

       I... Listen, I'm sure he is, but I'm just like, "Ah."

   29. MDMiles Dieffenbach46:47

       Yeah.

   30. HSHarry Stebbings46:47

       So you go back to core math-
9. 1:01:03 – 1:11:02

   Yale vs. Harvard Analysis

   1. MDMiles Dieffenbach1:01:03

      one day?

   2. HSHarry Stebbings1:01:03

      How did you analyze the Yales and the Harvards doing sales of their venture portfolios?

   3. MDMiles Dieffenbach1:01:08

      I...I think there's a lot of factors that go into it. One being the headwinds we talked about to the endowment model. Um, and, and, and, but you know, you look at Harvard selling one billion, it's a 50 billion dollar endowment. I mean, like, so, so one billion, it's not, like, some monumental thing for them. That's probably just a refresher of their portfolio. But, like, I think there's real lessons learned. I mean, there was an article, um, out today about Yale and, and CalPERS. Uh, CalPERS was the buyer, you know, a piece of Yale's portfolio. And, and, you know, I was on, on the phone with our CIO this morning, you know, so, you know, to take a step back, we had a venture capital fund that we committed to in 2012. This fund was in its tail life, 13 years old. We hadn't looked at this fund in three or four years. There was one asset left in the fund, it was basically fully realized. And the, the, we have a great analytics team and a analytics system that tracks our underlying portfolio companies. But the company would have to be over a million bucks in NAV to us, for us to be, it in our system. And so this company wasn't even showing up, Circle, uh, the company, uh, we're talking about, in our system because it was below a million bucks. You know, flash forward, you know, they were holding it, the manager, at a, at a 30% discount. Like I said-

   4. HSHarry Stebbings1:02:20

      And you saw it on TV, right? When you saw-

   5. MDMiles Dieffenbach1:02:21

      Uh, no, I was reading the S-1.

   6. HSHarry Stebbings1:02:22

      Yeah.

   7. MDMiles Dieffenbach1:02:23

      My, my son woke me up one morning and I was up early, uh, and so I'm reading the S-1, kind of, as just, you know, for fun, and I'm looking through the cap table and I, I see our GP on there. And I'm thinking, "Oh, my gosh." And so I go and start looking through the quarterly reports. And so they were holding at a 30% discount, uh, plus or minus, to the last round valuation, which was, I think, their last price round was around five billion. So, call it, you know, three and a half billion-ish valuation, and, you know, you look at, at Circle and it's a $50 billion company today. This is a 13-year fund that is essentially gonna do an extra three turns on the fund in its thirteenth year. Unbelievable. And, and so the article with Yale and, and, and CalPERS was, CalPERS bought a very large piece of their portfolio of which part of it was General Catalyst, and Circle was the, the largest position in that fund and essentially in, you know, a two months timeframe, I, I think it said in the article they bought 500 million, you get $100 million rate up from Circle alone. And so that is... That's the risk of selling secondaries as a long-term venture investor is that you're gonna have these crazy right tail outcomes in the fund that could come to fruition at years eight, nine, 10, 11, 12, 13 that you're traditionally, even if... Uh, I said to Chuck, I mean, like, I'm not that smart, right? And, but, like, we would under... We would've underwrote Circle if we were looking to sell that fund a year and a half ago. And we probably would've sold. Like, who would've guessed that Circle was gonna trade at 100 times EBITDA in the, in the public markets, and that stable coins, in a year and a half, were gonna be like the hottest sector in crypto. I mean, y- y- you could not have predicted that. So I'd imagine Yale probably did the same. They probably underwrote that and they're like, "There's probably not a juice, not a lot of juice left to squeeze here."

   8. HSHarry Stebbings1:04:07

      I have friends at Yale who I'm crying for, and I have friends at CalPERS who I'm crying for with happiness. (laughs)

   9. MDMiles Dieffenbach1:04:13

      Well, I'm sure, I'm sure, you know, I'm sure Yale will do well. It's a fantastic team with, with a great portfolio. But it just goes to show the, the risk of these, these fat tail outcomes in these funds.

   10. HSHarry Stebbings1:04:23

       Dude, 10% discount, I think, was the reported number. How did you analyze that? Higher than you thought, lower than you thought?

   11. MDMiles Dieffenbach1:04:29

       Much higher than I thought.

   12. HSHarry Stebbings1:04:30

       You thought it was higher?

   13. MDMiles Dieffenbach1:04:32

       Yeah.

   14. HSHarry Stebbings1:04:32

       You thought... Wow.

   15. MDMiles Dieffenbach1:04:35

       No, sorry, much l- wait, you're-

   16. HSHarry Stebbings1:04:36

       I, I think it's a good deal for that.

   17. MDMiles Dieffenbach1:04:38

       No, it's a great deal.

   18. HSHarry Stebbings1:04:38

       Yeah.

   19. MDMiles Dieffenbach1:04:38

       That's what I meant, yeah, sorry. Yeah, so it's lower.

   20. HSHarry Stebbings1:04:40

       Yeah, so it's lower. Yeah. Yeah.

   21. MDMiles Dieffenbach1:04:41

       Fantastic deal. Fantastic deal. I, I, I, you know, not knowing the underlying GPs in that fund and not knowing the mix between, you know, buyouts, real estate or, or venture, you know, I would've guessed, you know, Yale, Yale's got incredible management in their, in their portfolio, right? So they'll have some pricing power. I would've guessed 20%. You know, that would've been probably the number that I woulda, I woulda put on the board.

   22. HSHarry Stebbings1:05:02

       Do you think we will see many more of these large institutions doing strip sales of their venture portfolios?

   23. MDMiles Dieffenbach1:05:06

       I'm not sure. I mean, uh, certain ones with, with real liquidity needs, I think they'll have to, right? And so that'll be a, a, a forcing function. But still, I mean, there, there, there's not a ton of secondary capital out there that's gonna be able to swallow all of that NAV, right? So if every, if every, you know, billion dollar endowment comes out and says, "We're selling 10% of our venture book," I mean, the pricing there, it's a supply-demand market, right? There's only so many buyers.

   24. HSHarry Stebbings1:05:33

       You said about, kind of, the liquidity problem and that, kind of, being a driver in terms of the brutality of the fundraising market. Scale, Wiz, Dream Games, Figma, Revolut Secondaries, um, Circle, uh, CoreWeave, uh, Hinge Health, which IPO'd-

   25. MDMiles Dieffenbach1:05:50

       Chime, yeah.

   26. HSHarry Stebbings1:05:50

       ... Chime. Are you just, like, drowning in distributions now?

   27. MDMiles Dieffenbach1:05:56

       We are thankful to say that we're now self-funding in our venture book this year, which is-

   28. HSHarry Stebbings1:06:01

       Woohoo.

   29. MDMiles Dieffenbach1:06:02

       ... which is, give us a round of applause. I mean, it's the first time since 2021.

   30. HSHarry Stebbings1:06:05

       Time for investment.
10. 1:11:02 – 1:20:32

    Cash-Rich Giants vs. Liquidity Drought: The Market Paradox

    1. MDMiles Dieffenbach1:11:02

       it's a tough place.

    2. HSHarry Stebbings1:11:02

       We've mentioned the liquidity. The thing that is also kind of weird and paradoxical to think through is, you mentioned the public markets players just having absolutely ripped. You see Meta throwing out $14.9 billion for Scale. It's like 45 to 50 days of free cash flow. (laughs) It's really not very much for them. You know, Google's buying Windsurf. We all, you know, give a shit about it. Uh, it's like a coffee. They put $3.5 billion into Ray-Ban at the same time and no one-

    3. MDMiles Dieffenbach1:11:28

       Yeah.

    4. HSHarry Stebbings1:11:28

       ... paid any attention. My point being, we have these kind of opposing worlds of liquidity starvation or drought, and then the glut of these public markets players who just, uh, are playing with market caps that are 2 trillion. How do you think about that?

    5. MDMiles Dieffenbach1:11:43

       I think, uh, if Wiz gets approved, I think every other large, mag seven company is gonna see a green light in regards to making big, splashy acquisitions again, which is a good thing. Um, I mean, you look at Google, Microsoft, Amazon, and Meta combined, I mean, they're doing 600 billion of operating cash flow, just cash coming off the company every single year. And I think they would much rather make very strategic acquisitions than buy back 50 basis points of the company, right? Um, I, I think the, the big worry that I think those companies see today from our purview is that the AI landscape is changing so rapidly that the, the, the 12-month time period it could take to go through a review to get that acquisition done, that company could be obsolete in 12 months.

    6. HSHarry Stebbings1:12:35

       Dude, you saw this with Windsurf, like, changed a lot in a couple of months.

    7. MDMiles Dieffenbach1:12:39

       Yeah. And, I mean, uh, you know, lots of, of, of great hot AI companies, you know, have, have been very hot and then not hot, you know, Stability AI, you know, lots of companies have gone through these waves.

    8. HSHarry Stebbings1:12:51

       Mm-hmm.

    9. MDMiles Dieffenbach1:12:51

       And there will be many more. And so that, you know, that chance... And, and you look at the Wiz deal, there's a 10% breakup fee there, largest breakup fee ever for an M&A transaction. So, you know, say that someone else wants to do a $30 billion acquisition of Perplexity and Perplexity says, "Ooh, we have to wait 12 months. Our board's gonna recommend a 15% breakup fee." Now, will those big funds, uh, you know, will those big companies risk a four, $5 billion breakup fee and 12 months where this company might not be what it was 12 months ago? I, I think that's what is, is, the reason these folks are acting in such a fast way in regards to...... take the top talent, license the IP, license the tech, get these people building within our company now, day one.

    10. HSHarry Stebbings1:13:39

        Totally agree. I think it's the most smart maneuver around it. But it only works when the people and the tech are the assets and not the revenue and the customers. Like, in the Wizz's case, the revenue-

    11. MDMiles Dieffenbach1:13:50

        Yeah.

    12. HSHarry Stebbings1:13:50

        ... and the customers are the asset. Don't get me wrong, the team and the technology is too, but-

    13. MDMiles Dieffenbach1:13:55

        It also helps it's not an AI company.

    14. HSHarry Stebbings1:13:57

        Sure.

    15. MDMiles Dieffenbach1:13:57

        (laughs)

    16. HSHarry Stebbings1:13:57

        But, like, without the revenue and customers-

    17. MDMiles Dieffenbach1:13:59

        Yeah.

    18. HSHarry Stebbings1:13:59

        ... it's not worth $31 billion.

    19. MDMiles Dieffenbach1:14:01

        No.

    20. HSHarry Stebbings1:14:01

        So, I completely agree with you there. I do want to ask, you said to me before, "OpenAI could still be a zero." When you think about that, what did you mean by that?

    21. MDMiles Dieffenbach1:14:11

        You know, the way we think about it is we very much spend time on unit economics, and from what we see with OpenAI, unit economics are improving rapidly, which is great to see. But still, when you take into account capex, you know, why has Open AI, OpenAI raised two of the largest venture capital rounds ever in a span of 12 months? It's not because they want interest income from the cash on the balance sheet. It's 'cause they're burning five to $10 billion a year. Right? And so, um, in my opinion, the music will stop eventually, right? Like, I, I, this would be the ultimate anomaly if a bubble did not pop in AI, right? You look at past historic incredible technological moments, right? You think of the railroad, you think of cars, you think of electricity, you think of steamboats, you think of the internet. Every single one of those, there was a bubble that popped, every single one, that impacted the equity markets at that time. So like, it's a, you know, inherently for the long term, it's a good thing, right? Like, it shows that this AI thing is real and people are going to overinvest. And so I, I, I, I would find it extremely anomalous if, if there was not a bubble that popped here. And so, if, if, if folks align with a bubble will pop eventually, if you do not have control of your own destiny and if you're sitting like OpenAI and your pref stack... What's their pref stack today, 70 or 80 billion? And, you know, stuff hits the fan and no one's willing to write you a $40 billion equity check anymore because the capital markets have completely gotten smoked, like, what happens?

    22. HSHarry Stebbings1:15:49

        Do you think there is a chance that happens though, honestly? Like, when you look at, like, SpaceX, I have so many-

    23. MDMiles Dieffenbach1:15:55

        SpaceX is, SpaceX is, is, is self-funding. They don't need cash. That's, that's what I mean. So, and you look at Google and Meta, right? When they went public, Google and Meta had like 30 to 40% GAAP operating margins, right? Those were like, these were the most profitable companies ever. They had complete control of their own destiny, right? So capital markets, whatever happened, it didn't matter, they could not be killed. SpaceX cannot be killed. You know, Starlink has reached escape velocity. That's a very high margin product. They do not need cash. They're doing secondary tender offers. OpenAI needs cash.

Episode duration: 1:30:35