E401: Einstein Was Wrong About What Actually Compounds

Albert Einstein famously called compound interest the eighth wonder of the world. Today's guest is your host, David Weisberg, and he believes Einstein was wrong. After more than 400 conversations with some of the world's greatest investors, founders, and capital allocators, he's come to a different conclusion. The thing that compounds the most aren't financial. They're relationships, their reputation, their access. Today, the tables turn. I'm Curtis Pierce, David's co-founder and business partner, for the second time in over 400 episodes, David is taking the guest seat. We discuss why relationships may be the highest return investment you'll ever make, why the best opportunities are rarely available to everyone, and what actually compounds over the course of a career. After 400 conversations with some of the world's top investors managing over 10 trillion in assets, what's one belief that you now hold more firmly that many people in finance still underappreciate? Einstein was wrong. Einstein famously said, Compound interest was the eighth wonder of the world, but he was wrong. What really is the eighth wonder of the world is the compounding of other things, specifically brand and access to information. Give me a specific example of what you're talking about. Let's take two people. Same IQ, same pedigree. One starts at IBM. One starts at Goldman Sachs. The one starting at IBM has a one in 100,000 chance to become a billionaire. The one that starts at Goldman Sachs has a one in 3,000 chance of becoming a billionaire. Why? The answer is the compounding of several things. One is brand and one is information. Let's talk about brand. Why is brand such a big compounding force? Brand leads to more know-how. Know-how leads to better access to information. Access to information leads to better know-how. And so it continues the cycle. Where you start your career is one of the most important aspects of whether you become successful. And that is far more important than just the compounding of capital. Said another way, it's famously known that billionaires by the third generation, 95% of those families no longer are wealthy. Why is that? It is because compound interest, despite Einstein saying this, is not as powerful of a force as other factors. How would you steel man that argument? Try to take the other side of it. I wouldn't actually steelman the argument. I would strawman the argument. If you think about wealth, if wealth was truly this compounding force and you had a billionaire family, think about the advantages that that billionaire family has. Why is it that 95% of those families by the third generation no longer have any wealth? and the answer is because it's not as important as other things such as brand and access to information you could also look at the five percent of family offices why do some family offices like the dupont family which we've had on how do they make the 10th generation or the pritzker family that we've had on as well now on their fourth generation and more wealthy than ever and the answer is they're able to instill the right culture the right know-how into their kids and they're able to raise them in a way that compounds much more effectively than finances compound by themselves. But maybe just to test you on that a little bit, couldn't you make the argument that someone born into a wealthy family has brand and has access to information and therefore should also have those positive elements in addition to the financial compounding? Yes, and I think that's why you see this dichotomy in families. And for whatever reason, there are always extreme outcomes. I've talked about Nepo babies multiple times on the podcast. I know a lot of these billionaire families. I've probably interviewed more than anyone else on the face of the planet. And the kids tend to fall into two different camps. One is the camp of the Nepo baby, which is this baby that goes around and buys Ferraris and parties all the time and blows capital. And the second one is somebody that wants to succeed and wants to surpass the family and continue the family's legacy. And in many ways, this is the A-B test of the compounding of wealth. If I were to reframe what you're saying, those that simply pass down money, those are the families that tend to run out of money. They go from sure sleeves to sure sleeves in three generations. The families that pass down the institutional knowledge, the networks, the relationships, how to manage them, how to cultivate them, in addition to all of these other financial elements are the ones that are successful over long periods of time. The one solve that I found for every family is what I call finance boot camp, which is going into investment banking. When you have a billionaire son go into investment banking, he ends up being with other very privileged people, and they end up beating this entitlement out of them. And alongside that beating of the entitlement out of them, they also get many skills that compound through their entire generation. I interviewed Jason Pritzker. He started his career at Goldman Sachs. He was able to learn all the know-how and everything that he needed to then become vice chairman of the Pritzker organization and become a big force in the business world versus somebody that went and, let's say, worked for the family business. They're going to struggle because they never have to go through that gauntlet, that challenge of getting those skills and getting that work ethic that you need to succeed. If you were to take a generous view, I think beyond work ethic, you get to sort of see what excellence looks like in other contexts. And so you gain better perspective. And I think that helps. And some families kind of have this mantra of they want people to go and work in industry for a while before returning to the family business, ultimately. You said something extremely important. Seeing what excellence looks like is the number one predictor of whether somebody will be successful in their craft. Seeing excellence is one of these things that you can't unsee. When you see an excellent founder, if you're a venture capitalist, when you see an excellent company as a private equity executive, you now have that standard of excellence. And now you know what it takes to be successful in that craft. And the sooner you could compress that, the faster you could get to what excellence looks like, is more predictive of success in the career than any other factor. That sounds kind of obvious and people would probably agree with that, but I think practically implementing it is what's, I think, challenging. Most people, you start a career, you get an entry-level job. Sure, if you're at Goldman or some of these elite organizations, you have elite competency up and down the stack. But I think a lot of people end up in a junior role. It's hard to find the right situations to put yourself in. So what practical advice would you give people that are maybe earlier in their career trying to figure out how to get themselves around other people that exude excellence? I have a very practical piece of advice, and almost no one will take it, but that is to go to the most competent person in the profession that you want to be in and to either volunteer or work for them as their executive assistant or their chief of staff. It's extremely humbling, but the closest you could get to that excellence where you're literally observing it on a day-to-day basis. Again, that is the most predictable path to actually succeeding in that craft. It reminds me of sort of the classic stereotype of if you're trying to get a job at an elite organization, be willing to be the janitor or be willing to do literally anything just to get your foot in the door because as much as it is about your job, your day-to-day tasks, yes, that's part of it, but just being around excellence, I think is the other part of it and kind of why that mantra sticks. There's such a gravitational pull that's pulling everybody away from excellence towards the norm. So if you think about what is excellence, excellence is, let's define it, the top 5% in a given field. So you want to be an excellent investment banker, you have to be top 5%. You want to be an excellent private equity executive, you want to be top 5%. It also means that you are doing something dramatically different than the average person. What does that mean? That means that people are always going to be seeing you as weird and as different. And they're not going to like that. If you think about Steve Jobs, everybody today worships him. At the time, a lot of people hated Steve Jobs, especially before he had the brand, because they didn't understand why he worked so hard. They didn't understand why he was so obsessive. Almost to an extreme. There's famously Steve Jobs didn't put on his license plate on his car. He would always get fines because he was so meticulously focused on the craft and not damaging his car. He saw it as a masterpiece. You need that level of craziness and you need to have that level of commitment. And in order to do that, one big hack is you want to be in an organization that embraces that. So you might be odd when you're at Thanksgiving with your cousins and with your uncles and they might be thinking, well, David, why are you working on Thanksgiving? It's Thanksgiving, I would take it easy. But within your organization, it's normative behavior. So that's why it's so important to be within an organization because it gives you the space and the time to build that muscle of excellence. This is an underappreciated point, this concept of social norms. Yes, it's important to be around people that have high IQs that are very smart, that may be well studied in a certain field. But just getting around certain cultural norms is very important because to your point, we're all humans. We all have emotions and these other things. And so standing out from the group that you're in is challenging. People look at you weird. They question, why are you doing this? So if you get yourself into a culture where maybe working longer hours or being obsessive about product or whatever it is, is the norm, then it's much easier to do those things. You sort of get the implicit or explicit permission to work harder, pursue excellence, do these things that you would otherwise face social frictions if you were in another setting or another organization. Social friction, not IQ, is the thing that keeps most people from being successful. I'll give you one example. A lot of people reach out to me and they say, I want to be a better podcaster. I always give them the same piece of advice. Wear makeup. Why? Because I want to see whether they're actually committed to being a great podcaster. And of course, they say, well, I don't want to wear makeup, but I'll do anything else. And that's the point. The point is that most people don't have what it takes to sacrifice to be the best in their craft. And yes, you could do it solo, you could try to figure it out yourself. But if you could be within an organization that embraces that, that's so much more powerful. If you think about investment banking, is it odd that on Friday night at 11 o'clock, when your friends are texting you to go out as a 24 year old that you tell them that you're working on investment making? No, in fact, there's an entire culture that makes this behavior normative. That's why these systems are so effective in getting the very best out of them. Same with the military. Is it odd that you can't go drinking because you're now deployed into a war? No, that's completely normal behavior versus the person that wants to work on themselves and wants to build a business. That's very not normal for them to say that, to say, I can't go out because I need to work on my business. It reminds me of a story that Alex Ramozzi told us when we had him in the studio last year. He had an employee, I believe, who was saying, I really, I'll do anything to improve. I want to get a promotion or there was a pay increase or something he was seeking and basically saying he would do anything. And Alex finally gave in and said, okay, let's have a meeting to talk about your performance and what you can do to get to the next level. And then the person was late to that meeting. So it's this funny thing where people will say, oh, I'll do anything. But then even the simplest thing, like being on time to the performance review, sometimes those execution steps fall through the cracks. People will do anything, quote unquote, but they won't do the simplest things if it's not normative. In other words, they're completely short term in their approach. They won't do anything that hurts in the short term and that leads to success in the long term. So we talked a bit about the compounding of brand, the compounding of information, the importance of being around great cultures and excellence. But let's talk a little bit about relationships. What are the importance of relationships in a career? Across almost all 400 episodes, I always ask, what is one piece of advice that you wish you'd give a younger self before you start your career? and by a wide range people say i wish i had focused more on the compounding of relationships and everybody says that and yet when you go out in the business world it's extremely rare to find somebody that's truly focused on the compounding of relationships and people fail to truly internalize this belief i think one of the reasons that it's difficult to internalize that belief is like anything that compounds, all the returns are on the back end. When you start your career or start anything or pursue anything in life and you start building relationships, sometimes it can be many years before you really start to see that what I like to call positive relationship equity coming back and bearing fruit in other ways. I do think that's one reason why practically it's easier to appreciate when you're further in your career and you've started to see those things paying off. And then in hindsight, you say, well, now that the garden is blooming, I wish I had planted more seeds. Do you agree with that perspective? Yes and no. Like any compounding, you're going to see most results happen over long periods of time. But I believe that people are so short-term greedy that if they were even what I would call midterm greedy, they would be far more successful. Let me give you a specific example. Rahul McDoll, two-time podcast guest, has raised more capital than anybody that I'm aware of, over $100 billion across his career. And he tells a story where University of Virginia invested into his fund $3 million. Three years later, they invested $400 million because of the work that he and his fund did. That's three years. That's not 30 years. That's not 10 years. It came back in three years. A lot of opportunities that we've been involved in, me and you as business partners, sometimes we'll see if you treat somebody well, even for three to six months, it ricochets back. And yet people are still so focused on this optimization of the short term that it's highly detrimental to the compounding of what at least they claim is their most valuable asset. I actually have a theory on why many people are very short-term oriented. But before I give mine, why do you think people in general are so short-term oriented? It's a bit of a paradox. Because if you look at the people that run the biggest financial organizations, they're oftentimes extremely long-term greedy and not short-term greedy at all And then you think about well then why is it that 95 by my estimates probably more are short greedy And that I believe as a result of the incentives of the financial system So in order to become successful from analyst to associate to VP, requires a very different skill set, an analytical skill set, which requires you to be good at spreadsheets, analysis, just grinding, doesn't require any social skills, doesn't require any relationship skills. So for somebody that's extremely relationship focused and not as analytical, in theory, one could be great at both, but it's a rare person that's great at both. So for somebody that's on the relationship side, they're not going to be able to stomach the five years in the traditional finance route that takes to get out of that birth canal into the other side for them to be extremely successful. So yes, 95% in lower level positions are short-term greedy. When you look at the people running the organizations, I would say at least 75% are long-term greedy. I agree with elements of what you're saying. And it's actually, I think, it's a paradox in both direction. You have the problem where a certain set of skills is needed to be successful at the beginning of your career and a very different set of skills are needed to be successful in the latter part of your career. And the people that have maybe not the skills to be successful in the early part never make it in or never make it to the later part. But then the inverse is true as well. Those that have the skills at the junior level that do get in sometimes have a hard time sort of getting over the hump of being in those more relationship-oriented positions and roles, and it's a skill set they have to develop over time. And if they don't, then they don't always make it. But my theory, it doesn't actually conflict with yours, but it's maybe another layer on top of the cake. I think it's easy to talk about time objectively. A year is a year is a year, or two years or five years, but actually time is relative to one's life experience. So when you say three years, there's a specific example you gave with Rahul. It doesn't sound like a long time, but if you're 30 years old, that's 10% of your entire life. And if you take away the first 10 years of your life, which you're not really doing that much, you're still very formative, it's an even greater percentage of your life. So why three years may objectively sound like not that long of a period of time, And maybe if you're 60, it's not because relative to your entire life, it's a much lower percentage. But when you're young, three years actually can be a meaningful portion of your life. Expert calls have always been one of the most powerful ways to build conviction. But today, investors are asked to cover more companies, move faster, and do it with leaner teams. With AlphaSense AI-led expert calls, their TGIS call service team sources experts based on your research criteria and lets the AI interviewer get to work. The magic is in the AI interviewer. purpose-built and knowledgeable-based information to conduct high-quality context-stretched conversations on your behalf, acting as a trusted extension of your team. Then they take it one step further. Your call transcripts flow natively into your AlphaSense experience and become querible, searchable, and comparable, so your primary insights plug directly into earnings prep, digital work streams, and pitch books with zero tool switching. And with AlphaSense Expert Call Services, the AI-led expert calls are just one option because we know the importance of a hybrid expert research approach. AI for coverage and efficiency. Humans for complexity and conviction. It's the institutional edge that scales research without scaling headcount. For hedge funds, that means validating thesis assumptions across dozens of experts before earnings instead of a handful. For private equity, it means faster pre-IOI scans and deeper commercial diligence. For investment banks and asset managers, it means pulling real operator perspectives straight into models and sector positioning without disconnected tools or manual handoffs. All of it lives inside the AlphaSense platform, trusted by 75% of the world's top hedge funds alongside filings, broker research, news, and more than 240,000 expert call transcripts, turning raw conversations into comparable, auditable insight. Take advantage of AlphaSense AI-led expert calls now. The first to see wins, the rest follow. Learn more at alpha-sense.com slash how I invest. Another reason is the system, at least in the short term, rewards short-termism over long-termism, almost by definition. Instead of giving you an example, I'm going to give you a counterexample. Dan Federer, University of Michigan, one of the top allocators in the endowment space. When I was talking to him and I asked him, what kind of fees do you get from first-time fund managers? What kind of fee savings? He oftentimes likes to come in early. And first-time fund managers are, in their most desperate time, they really need LPs. they need all the credibility. And he interrupted me and he said, it's not fees that I'm looking for. I'm looking for the relationships. I want to support them in the most vulnerable time so that I could build that relationships over many decades. You kind of stop back and think, well, that's kind of a nice thing. That sounds like a nice thing to do. What are the second order effects of that? And the second order effects is it's publicly disclosed. University of Michigan has a $2 billion position in open AI. And how did they get that $2 billion position in OpenAI? Do you think other people wouldn't want to invest on it, co-invest at the time? Even in the early stages, that was a great investment. And the answer was because he got the first call. And why did he get the first call? And the answer is he was a good partner. And what's crazy about these incentive systems is let's say that he didn't get the first call on OpenAI. And let's say he got it at the fourth or fifth best company in the space. And let's say he beat them down on fees. So instead of paying $200,000, he paid $100,000. Now he could go to a CIO and said, look, I saved us $100,000 in co-invest fees. Now the CIO could go to the board and say, I saved us $100,000 on co-invest. And everybody's patting each other on the back. Little do they know that they lost a $2 billion opportunity. And what's crazy about that is they may never know because it's opportunity costs. And this is why incentives at the organizational level are so important. It's not just the long-termism or long-term relationship orientation of the individual. It's at the organization level as well. Because if an organization in this example really prioritizes fee savings, as we know some LPs do, a lot of the pension funds do, they may make the wrong decisions. They may create an incentive system where, to your point, their relationship managers or their investors or allocators are trying to save on fees, may be missing on the opportunity cost of some of these other investments that they never see because they're so focused on minimizing fees that they're not the first call when the great co-investment opportunities arise. This is why I say, despite the most common answer on the interview of the one thing they regret, everybody says, I wish I realized the compounding of relationships sooner. I think probably more than 50%, probably close to 60, 70% of people say the same thing. And yet they don't internalize it. What does that mean? They don't build systems around this belief. Said another way, they don't truly believe it or else they would act differently. As I started to truly believe this, I changed my behavior in both obvious and non-obvious ways. I'll just give you one example. I had a banker reach out to me, fine banker, very transactional, very effective at doing deals. It's a deal that I could have made a couple million dollars on. And it would take work, it would take opportunity costs, but I had done business with this person, and I'm sure I could have gotten a couple million dollars. At the same time, I had Danielle Polly from Oak Tree reach out and said that she was in town if I wanted to meet up with her. It's unclear what business I could do in the next year, in the next three years, in the next five years, or ever. But I know that if I was ever to do something with Danielle, it would be significantly bigger and it would be something that compounds. I also know that I want Danielle in my life for the next 10, 20, 30 years. She's that kind of person. This banker, the best case is we do this deal, we make a couple million dollars. And then a couple of years later, we do another deal where we make a couple of million dollars. Because of the transactional nature of this banker, he's not compounding his relationships. And as a second order effect of that, I can't compound the deal size and the relationships with this person. With Danielle, she's constantly compounding her relationships with the most important people in the world. And I know that second order effect of that, at one point, there's some business to do. And even beyond that, even if there wasn't business to do it, she's just somebody that I want to spend more time with. There's an embedded point here, which I think is worth highlighting. And we've touched it lightly so far, but I want to double click on it, which is opportunity cost and the other hidden costs that exist. One is within relationships. I think you already mentioned this. You don't see what you don't see. So by definition, it's a hidden cost. If you have a weak relationship and you don't get the open AI co-investment call, you may never know that you missed that opportunity. But also with relationship, the time you spend, there's opportunity cost and the energy that it takes to do something, meet with someone, because all these things are finite. Time, energy, maybe talk a little bit about that. Famous number, Dunbar's number, the amount of relationships you can manage in your life at a single time. It's 150 people. So another way, if you put somebody in this roster of 150 people, you have to kick somebody out. Now you could bury your head in the sand and pretend that's not a thing, but it's been proven across multiple studies. So second order to the compounding of relationships is a very practical question, which is, which relationships do you want to manage in your life that will lead to this compounding? In other words, you can't be about the compounding of relationships in the abstract. You have to apply it to a certain subset of people. And whether you explicitly think of these 150 people, or whether you pretend like there's no such thing as 150 people, you're still under the same constraint of 150 people that'll determine whether your career is successful or not. It's a really great point. And it's hard to internalize because in the moment, you don't necessarily see the roster of your relationships flicker in the back of your mind and have to make a conscious choice. Everyone's meeting new people, trying to build new relationships. And so I think it really does take a lot of discipline to always be thinking. And frankly, it can sound a little transactional. Should I invest in this relationship? Should I invest in this person? Is it worthwhile? Or should I pursue a relationship with somebody else? It may sound transactional. I would call it mechanical. In other words, if you have 150 people that you interact with, the subset of opportunities is going to be a subset of those 150 people. It's just mechanical. You could call it transactional. What's more important is to think about the criteria of those 150 people. Let's look at it on a business lens versus a personal lens. What do you want from these 150 people? One is going back to the Rahul Muqdala example. One of the non-obvious takeaways is that you want to take small checks from very important people. A lot of people think about this thought experiment, which somebody invests $100,000, and then 10 years later, they invest $10 million. Well, in this case, there's a real example. University of Virginia invested $3 million. Three years later, they invested $400 million. What's the tradeoff of that? Perhaps it's a high net worth person that today is willing to write you a $5 million check, but might have a net worth of $100, $200 million. And that $5 million check will never turn into a $20 million check or $100 million check. That's one layer of it. The second layer of that is network centrality. We talk about wanting to be ourselves nodes in the network. You also want to partner with other people that are nodes in the network. Good friends of the pod like Jeremy here, one of the most connected people in the endowment world. Jeremy is one of these people that if you know Jeremy, you now know 400, 500 people in the industry. So being around nodes, sometimes it's not the person with the largest check or the person with the largest check capacity. Another factor is information. If you think about access to information is the thing that compounds. Who has the best source of information? Through the podcast, we've created ourselves as a node of information. I've talked to over a thousand LPs today about their best practices, what they're doing. So a lot of LPs, even though they don't want to go on the podcast, they reach out to me and they want to talk about best practices. This is how I got to know Dan Federer. He still hasn't been on the podcast, but he wants to trade notes. So having other people in your network that also are nodes and access to information is also really critical. I completely agree with that. And I think many people listening to this conversation will agree with a lot of what's been said. Relationships are important and they compound. Brand is important. Access to information is important. All of these things. But one question that we haven't really answered is why is it the case that these relationships compound over time? There's two reasons they compound and both make a lot of sense once you think about it. The first is, why do University of Virginia go from a $3 million check to a $400 million check? And the answer is extremely rational for LPs to test relationships. If you think about endowment, you could only write a check once. Once you write that check, especially in a blind pool fund, it's pretty much gone. It's extremely rational to make small relationship bets and to see how somebody behaves after you give them money. Everybody says, I'm going to be the best investor. I'm going to work hard. goes back to the Harmosi thing, which is, I'm willing to do whatever it takes to be successful. Everybody says that. How do you actually know whether they're going to do what you want them to do? There's only really one way to find out, and that's to be an investor. It's a Stanley Drunken Miller. Invest and investigate. So it's extremely rational for LPs to write small checks, to start that relationship, and then to write large checks. And by the way, even to be one of these relationship checks takes a lot of effort and time just to even have them track you as one of their 150 relationships. So if you think about it from the LP side, they also have 150 GPs that they can manage. The second aspect to this, and we've seen this already in three years of doing the podcast, is if you follow the very top talent, the market becomes very efficient. This top talent ends up being in the very best positions. If you follow somebody that's extremely good at their craft. Eventually, the market figures this out, the market becomes efficient. And now they could go from running a billion dollar family office to running a hundred billion dollar institutional portfolio. So if you pick your relationships well, they themselves will compound their career. And because you're compounding the relationship with them, you're now in a position to benefit. That makes complete sense And on this topic of long and all the other things that we talked about it makes me think of someone who we recently had on the podcast Eric Becker who wrote a book called The Long Game where he explores why some companies survive for 100 plus years When you think about this question of what leads to companies, organizations enduring for the long term, what elements of what we've talked about already or maybe what have we not yet talked about that plays into building enduring organizations? Eric Becker, after he sold his previous company and before starting what is now one of the five largest RAs in the country, he traveled all across the world and interviewed companies that have been around for hundreds of years. He traveled to Italy. He had a couple of companies in Baltimore. And he asked him the same question, which is, how in the world did you guys make it to 300 years through all these generations with all these frictions? Much of the S&P 500 doesn't even make it through 50 years. And what he figured out is that the only thing that really endures through generation to generation is culture. In other words, if you zoom out and you look at a company, the only competitive advantage over time is people. And what's upstream of people is culture, having the right culture that attracts and incentivizes people in the right way. And how do people build cultures that actually last? Is it about the types of things that they say, the processes they have, the incentives they set? what is it that actually creates cultures that last? What's tricky about creating cultures that last is that it can't be done in a vacuum. They have to have a comparative advantage. We always joke about this in finance. Nobody thinks of a venture capital firm, of a private equity firm as a business. They think of all their portfolio companies as a business, but themselves as a business. And few people are willing to look in the mirror and ask themselves, what is my right to exist? venture capital is famous. Every merchant manager has the same pedigree. They're ex-Uber. They add product managers. They have a bunch of relationships in the space. None of these are differentiated. So you have to think about it from a comparative advantage standpoint. I'll give you a couple examples. Andreessen Horowitz, I got to pitch to Mark Andreessen when I was 25 years old. Andreessen Horowitz revolutionized venture capital by saying, we're going to be founder friendly. We're going to give people feedback. We're going to treat them with respect because we're building this compounding asset that even if that person's not successful in that company, we want them to come back. And true to their word, they treated me extremely well. I was 25 years old. I didn't really know what I was doing, but I got feedback. I got a response, all these things that now I'm indebted to the firm for many years. And I've still retained a great relationship with them. For our firm, we're backing GP's top opportunities. We thought of a similar thought experiment, which is it's now five years from now. It's the next Anthropic or OpenAI. As you know, we invested in the Series C for Anthropic. We got that first call. So now it's five years from now and a manager could call three people for their best opportunity. How do we become one of those first three calls, that first call alpha, what I talked about with Dan Federer and University of Michigan? And the answer is how you treated them the previous five years, meaning were you responsive when they had other opportunities? Did you treat them right economically? Were you generous with how you shared track record? Were you a good partner over five years? That's how you earned that first call. One of our big insights in starting Weisberg Pierce was that despite everyone saying that relationships compound in finance, no one had actually built an organization that aligns with this belief. And that's what we're building. But it would only work because the rest of the industry has a different belief. And we believe that that's a sustainable advantage over many decades. Why? Because going back to what we talked about, that's birth canal. finance does not select for relationship-driven people finance selects for the people that are very much in their spreadsheets that are focused on their numbers that make it through that five years of finance boot camp not by being relationship oriented but by getting their spreadsheets and their powerpoints done so we believe that that's a sustainable competitive advantage. The other key insight is that although many people and many organizations would espouse many of the things that we've discussed around the importance of relationships and building those relationships over long periods of time, I can't really think of any organizations that actually incentivize that behavior at the organizational level. individuals can take it upon themselves to build relationships over time but i can't think of any incentive systems at the institutional level that actually incentivize individuals to build long-term relationships one of the most underappreciated aspects of culture as a competitive advantage is that the human capital markets start to reorganize themselves in ways that play to their strengths. In other words, if you're known as a place that values relationships, the top relationship people in the industry will coalesce and want to work for you. Why? Because it's in their nature. Why are people relationship oriented? It's not necessarily because they woke up and thought that was the most Pareto optimal strategy in the capital markets. because that's naturally how they are. So human beings reorient themselves around their strengths, the smart ones. So you're able to build this cultural moat and you see this across different spaces, which is why when you ask, how do you build a culture? You can't just answer in terms of a great culture has these three factors. It's all comparative. Airbnb famously was one of the first design-driven organization to value design over engineering. So all the top designers went to Airbnb. be. Facebook, you could argue, was the exact opposite. They were extremely data-driven, so all the top data scientists went to Facebook. SpaceX was a place for this crazy culture of responsible engineer. I call SpaceX the operationalization of the Ernest Shackleton trip to Antarctica. Ernest Shackleton famously wrote a newspaper ad saying that he was looking for people to go on this grueling journey where they're likely going to die, but they're going to get glory. This is kind of the SpaceX of today, where it gets people that want that crazy culture, similar to investment banking, and attracts people that are willing to make that two-year sacrifice. There's certainly traits that are consistent across great cultures like excellence, but most of the traits of the really great cultures have trade-offs versus some of the other players in the space. Said another way, there's no one correct culture to rule them all. there are cultures that can do well relative to whatever their unique advantage is that's contextual both to themselves the group itself and the organization they're building and maybe even the product or service that they're delivering to their customers there's also cultures that build around specific market opportunities and there's also cultures that build around something much more human for example I'm thinking about renaissance technology the top quant trader in the world. They just brought in the very top PhDs across the world, and they've been able to sustain, I think at some point, 40% compounding returns for over 30 years. Some people think because they had the secret sauce algorithm, but really that algorithm was constantly evolving with the world's greatest thinkers and greatest PhDs. So in other words, they were amalgamating talent. Think about SpaceX. SpaceX amalgamates talent. Think about even open AI versus Anthropic. It's an interesting two organizations where Anthropic is really amalgamating people that truly care about AI and responsible AI. It doesn't mean that every top engineer cares about it, but that's their right to win in terms of the highly competitive capital markets. The best companies not only compound around a specific market opportunity, but something extremely human that allows them to attract the very best people that invariably build out and create that moat for that business. In some ways, I think you could think about that as a specialization of culture. You build an organization for someone who has a specific shared set of beliefs and values. You're not necessarily trying to build something that fits for all people. Do you think that that's a correct way to think about the framing? Absolutely. Mike Maples, one of the top 10 greatest seed investors of all time. He went on the podcast and he said something quite astounding, which is he doesn't invest in companies, he invests in movements. He looks for movements that care about a specific thing and then build a business around that. His example, he was early in Airbnb. They believed in that local culture should be experienced by meeting locals. That was the original premise of the business. If you look at Uber and Lyft, the disruption of the taxi market and being able to be more mobile. The best opportunities are not actually around business models or not driven by MBAs putting up spreadsheets. It's based on some fundamental belief and some fundamental hole in the market that a small dedicated group of people can solve and then build a business around. another thing that Mike Maples talks about which I really like is when he thinks about the types of investors and LPs that he partners with he doesn't just look for someone that he can convince what he's doing will generate great returns he talks about his LPs as co-conspirators who believe in the same future state of the world that he believes in and want to positively conspire with him to achieve that future state of the world. And I think that's a really, really good perspective. And maybe he takes it a touch too far, and I'm paraphrasing, but he says something along the lines that he won't even accept LP Capital from an investor that he met during the fundraising process. It's only people that he's been able to build relationships with over time so that he can find these true co-conspirators. You're touching on something extremely subtle. This is what the greatest salespeople do, especially when they're building enduring organizations, is they vet the customers as much as the customers are vetting them. And why is that important? It's extremely important as a management because like all market cycles, they go from bull markets to bear markets. And oftentimes the returns are driven in what a firm does during bear markets. And by having limited partners that believe in that general partner and believe in that business model, they're able to almost borrow conviction from their limited partners and get the support of limited partners during difficult times to not only not make really bad decisions, which behaviorally a lot of investors during times of crisis sell at the absolute bottom, but oftentimes the top GPs actually use that time to partner with LPs to buy into the dip and own more great assets by virtue of their relationship base. It's extremely subtle, and I believe the GP's role is to sell to the LP up until the LP understands the vision and can articulate the GP's right to win and then kind of sit back and see if that LP is aligned with that mission and that vision or whether the LP has a different worldview. This is actually something you and I have talked about many times, which is this concept of conviction and rootedness. And one way I would rephrase what you're saying is those LPs that truly understand and truly believe in the fund, the strategy, the people deploying the strategy, they will avoid maybe some of the behavioral mistakes or some of the things that may be counterproductive, like exiting the strategy at the exact wrong time. But the opposite is also true. If you have strong conviction and rootedness and believe in a certain version of the future, then you won't be as susceptible to those pitfalls. One example that you and I have talked about is pick any asset that's appreciated massively in the last five or 10 years. I think Bitcoin's one we talk about occasionally. If you had been an early investor and it had gone up 5 or 10x, and you weren't truly rooted in the thesis, you didn't truly understand what it was or what version of the future that included it, you would probably sell after 5 or 10x return. But then you probably left another 950x return on the table due to that conviction. This also can apply to some of the great power law outcomes in venture. Look at SpaceX as an example. There are many opportunities where firms, individuals, employees, others did or could have sold when now with perfect hindsight, the correct decision was always to continue to hold. SpaceX is one of the most extraordinary examples of this. As the SpaceX S1 came out, it was revealed that Antonio Gracias had invested 30 times into the company. and even on his face, it sounds very impressive. I had previously thought that conviction was investing three, four times into a company. I was very proud to do this three, four times in some great companies, but he had invested 30 times. The more I started thinking about what that meant, the more I became amazed by it. To give you an example, let's say he invested at a $500 million valuation the first time and now went up to $2 billion. So his first investment is up 4x. So, of course, he doesn't sell. He invests again at 2 billion. Now he invests at 500 million and 2 billion. Now it goes up to 5 billion. Now his original investment is up 10x. Does he sell the original investment? No. Does he sell the second investment? No. He invests a third time, and now a fourth time, and a fifth time, and a sixth time, and a seventh time, up to 30 times without ever selling. And when I asked one of his friends, Ron Viscardi, about this very point, He said, yes, and Antonio understood the mechanics and the operations of SpaceX better than almost anybody on the cap table. Said another way, he wasn't just going crazy. He wasn't on the roulette wheel just constantly doubling and tripling up. And you could argue he wasn't even necessarily lucky, although, of course, there's many things that could have gone wrong and it could have all went to zero. But he had just such a fundamental conviction on that business. And this was a result of the amount of work and effort he put into understanding the company There is no free launch If you want to build that kind of conviction whether you investing in a company or whether you investing in a manager you have to really understand that position better than anybody else In other words true conviction versus bravado comes from knowledge not comes from just thumping up your chest and saying, I know better than everybody else. the other important thing though in that example is the fact that his lps supported him in all 30 of those investments so yes he had the conviction but he also had the relationships which i'm sure he compounded over many years he had the status the brand the access to information to your point he knew the business better than anyone else he had each of the elements that we've discussed throughout this conversation today. And the culmination of all of those allowed him to do this incredible once-in-a-generation investment 30 times and do what is now one of the largest companies in the world and maybe someday will be the largest company in the world. And so I think that's a really nice encapsulation of all the things we've discussed in one kind of perfect example. Such a good point. His conviction was not in a vacuum. If he had the wrong LPs, they would have influenced him to sell. even if he didn't want to. And certainly they would keep him from investing 30 times. There's actually a point here, which we've also discussed in the past, which is LP capture. Which sounds kind of funny, but it is true. Your LPs can influence you both positively and negatively. So when you're selecting partners, when you're selecting where you should invest your time, your energy, all these things we've talked about, it actually is so critical because had he had the wrong LPs or the wrong relationships or wrong partnerships, they could have influenced him either not to invest additional capital, either to sell prematurely or do other things that would have been adverse to the outcome. And picking the right LPs, kind of like the compounding of relationships, is a very non-controversial thing to talk about. In fact, I've never met a GP that wouldn't say that they want to pick the right LPs. But again, it's not internalized. and what's internalized is how long it takes to do that fundraise for the 10-year fund. So all things being equal, GPs want to go and fundraise for six months versus 12 months or 18 months, which of course is rational. But what if fundraising for another six months allowed you to date the LPs better, to get to know whether they truly believe in your vision, or perhaps to have so much demand that you could choose which LPs you wanted into your fund, who truly aligned with vision. But again, it goes back to the short-termism, which is people want to go out in the market, raise in six months, get the headline, tell everybody that they raised in six months, and lo and behold, they don't realize they signed up to a minimum 10-year relationship, really a 20-year relationship, three times the length of the average U.S. marriage, because they were so focused on closing the fund in six months. it's an excellent point on the topic of spacex and other venture-backed companies let's pivot to the venture asset class what are the first principles of getting exposure to the venture asset class today i've had more venture lps than anybody on the planet on podcasts the last couple years and interestingly enough there's one theme that LPs are repeating over and over, and specifically the very top LPs, which is venture has changed dramatically in the last year. And many of the beliefs that they had before, they're now re-underwriting. What are those beliefs? There's a famous graph that came out from Thomas LaFont from Code 2. And in it, he showed that the odds of going from a DECA unicorn, a $10 billion company, to a $100 billion company, was higher than going from a $1 billion company to a $10 billion company. And the odds of going from a $100 billion company to a trillion dollar company were even higher than going from a $10 billion to a $100 billion company. What does that mean? That means that the world of venture is becoming extremely consensus at the later stage. We believe internally that this is the Series B and beyond. That at the time of the Series B, it's no longer a secret who the best companies are. Said another way, every single investor in the world wants to get in the same several hundred Series B, Series C companies every single year. We believe that to be the case, and we believe that to become more and more the case because now there's so many venture firms. There's no longer this company that no one had met in private equity. You still have hundreds and hundreds of thousands of small businesses in private equity, so you still have that there. But in venture capital, pretty much everything is now. said another way there's no billion dollar venture-backed company that comes out of nowhere so if you take that to be true question becomes access one of the other themes on the podcast that's come up is it's all about access access access venture capital is not an asset class it's an access class if you get into top 25 percent historically over the last 50 years 50 percent of those funds have again become top quartile and more than 75 percent are then the next top 50% firm. So it's all about access. So we believe that you could gain that access by getting the first call. And we believe that you could get that first call by sharing economics with GPs. So we built an entire model by getting the first call with hundreds of emerging managers that look for us to be the capital for their best opportunities. But maybe even taking a slight step back, if you're advising an LP that is just getting exposure to the venture asset class, or maybe already has some exposure, but is growing that exposure over time. What first principle insights from all your conversations would you share on how to approach that problem set of gaining access to these best companies, consensus winners, or whatever other advice you would have for them to get exposure in venture? Professor Steve Kaplan, previous guest on the podcast, did this famous study about venture capital and the persistence of return. Venture capital, more than any asset class in the history of the world, persists in its returns. Meaning if you get in the top quartile, as I mentioned, you have a 50% chance to be in the top quartile. Again, you have a more than 75% chance to be in the top 50%. So every LP is trying to get access to top quartile funds. The problem is 95% of those funds, it's impossible to get into because every LP wants to do the same thing and they have existing LPs as well. So the question becomes, and this is a difficult question, what should LPs do that can't access top quartile? Now, some LPs might think, well, let's go to the second quartile. But if you look at venture capital, the returns dramatically go down in the second quartile. And there's an argument that if you go after the second quartile returns, you might as well be in lower middle market, which has similar returns with less volatility than second quartile VC. But when you say second quartile, what you really mean is a manager that has not previously had a top quartile fund. So obviously some LPs would say, well, I'm really great at picking managers and this manager will have a top quartile fund in the future. But what you're really saying is this is just the subset of managers that have not already had a historically top quartile fund. Well, there's a meme that every venture capital is a top quartile fund. And when somebody asks me, what is your definition of a second quartile fund? It's, are they top quartile? Are they one of these 15 firms? If they're not, they're second quartile. This is highly controversial, but that's just the reality of the situation. Now, there are some free lunches, especially if you do your work. As you know, I love spin outs, spin outs from top firms. We had Nico Bonazos, who spun out of General Catalyst, was there for 15 years, built out their seed practice. people like that as they spin out create amazing opportunities but those are few and far between and those require you to go into first of vintages which a lot of LPs are not willing to do the other historical solution to this has been going into emerging managers the problem with that is no one has ever shown me a data set that shows that on average emerging managers I perform even second quartile VC So on average, emerging managers do not do well. Now there's clearly really good emerging managers, but there's thousands and thousands of them. And you have to build out pretty large teams in order to go after that market. Said another way, you really have to be managing a minimum of $10 billion to effectively cover emerging managers. So that becomes not really workable for a lot of people. You've talked about basically three ways you can get access to the venture asset class. One is investing behind the tier one name brand consistently top quartile firms, the Sequoias, the Benchmarks, the Andreessen's, Excels of the World. Another approach is to back the GPs that have been at those firms that are now leaving to pursue either solo GP or smaller firms with fund ones or early stage funds. a third bucket is these sort of rising star emerging managers that maybe didn't necessarily come out of the tier one firms but have some unique edge and right to win and that obviously takes a lot of manpower because there's two plus thousand of these emerging manager funds out there that you have to sift through and then you have to be really really good at picking because there's no clear data that shows on average they're going to outperform in fact the inverse they underperform on average. The one other way that we haven't discussed is the concept of direct investing. When you think about direct investing, what are some of the pitfalls that people often run into? I've talked to multiple Ivy League endowments, and I was very surprised by this. All things being equal, they no longer want to invest into blind pool funds. In other words, they see blind pool funds as liabilities on their balance sheet. And they only want to do it if they're already in a top quartile fund, or they want to build relationships for direct investing. We built our business around that. Our firm view is that by the series B, these opportunities are consensus. So we're able to access these opportunities and we partner with institutional investors in order to access these opportunities. And we believe a basket of companies backed by top quartile funds will on average return and actually beat the top quartile index. And the reason for that is because of the fee savings today. The average top quartile fund is 2.5 and 30. And there's a world where top quartile funds continue to persist on a net basis. They're actually second quartile returns. We solve that issue through having lower fee structure. And anyone listening to this may be thinking, that sounds nice, but the number one question on their mind should be adverse selection and avoiding adverse selection. How do you think about adverse selection? So adverse selection is the most important question in venture capital, much more so in private equity. Private equity, a lot of the co-invest opportunities come when the manager is investing for the first time and you're co-investing with them. In venture capital, it's not always the case. Oftentimes you have a fund that invests at the Series A and now they're offering the Series D as a co-invest. It's the most common case for large co-invest. For us, we limit our adverse selection through multiple things. One is we only partner with emerging managers that have very high conviction in their existing portfolio. In other words, where we've applied the Peter Druckenmiller Invest and Investigate, we're leveraging the relationships and the insider information of cap table members in order to access their best assets. Two is we only invest when Top Quartile Fund is investing for the first time. This is really critical. There's a trade-off there. We miss opportunities where they might be investing for a second time. Sometimes those are great opportunities. Famously, Sequoia backed WhatsApp in every single round and made phenomenal returns. And then three, of course, we're diligencing the company themselves. But most of these opportunities, although you can never predict which opportunities are going to be the next SpaceX, the next OpenAI, the next Anthropic. If you have the right portfolio construction, you could design a portfolio in such a way that you are capturing those winners. Bringing everything together, what's one lesson from now 400 episodes of How I Invest that you hope our own firm never forgets? You get status in asset management by being a good partner. and I've gotten to interview a lot of the top firm founders in the space and they still keep this ethos but when you talk to people within the firm as you gain status as you get more assets under management oftentimes the firms lose the essence of what made them special that is because good partnerships lead to status but status doesn't always lead to good partnerships As we grow the organization, I think it's extremely important for us to continue to recruit people that truly believe in the compounding of relationships and perhaps most importantly, incentivize them to execute on this vision of the compounding of relationships. We're now at seven people. We've been able to manage that today. I think that's going to become one of the challenges as we scale. and what's one thing you believe about investing relationships or firm building that you think is true today and will also be true in 100 years if you want to predict the future you look at the past you look at eric becker in his book the long game markets will always fluctuate you have bull markets you have bear markets you have global financial crises you have COVID. And the only competitive advantage zooming out over many decades is people. And the moment that you stop recruiting the very best people, you start a timer on the half-life of the organization. Some organizations make it 10 years. Some organizations make it 20 years. And once in a while, you have organizations that make it 100 years. In those cases, these incentives are codified in the very governance of the organization, and they're passed down from generation to generation. For someone listening to this conversation, if they can only remember and take away one key thing, what should that be? Get as close as humanly possible to excellence in your field as quickly as possible, and that will compound your career better than any other factor could. couldn't agree more David thank you so much really enjoyed the conversation and looking forward to being again soon and thank you for yourself being so excellent for being such a great partner