20VC: From $8BN to $19BN: Inside WashU's Endowment Fund | SpaceX Made Up 20% of Our AUM | Why Europe and China Has So Much Opportunity | The Reckoning That is Coming for AI Companies with Scott Wilson

Anthropic

Across the shows: 108 speakers in other episodes, 135 bullish and 92 bearish calls, past 30 days

• Scott Wilson · Washington University Investment Management Company (WashU)Bearish

  Anthropic could raise privately above $2T but public markets may not give it the same valuation.

  Scott says he does not know when Anthropic will go public, but it is clear it could have raised private capital at more than $2T if it stayed private. He is not convinced public markets will give it the same valuation. He cites OpenAI's attempt to go public and Cerebras trading poorly since its IPO, arguing private valuations carry a premium that public investors may not pay. WashU holds Anthropic exposure through a few of its partners.

  “it's clear to me they could have raised capital in the private markets if they stayed in the private markets at north of 2,000,000,000,000, if they wanted to. I don't, I'm not convinced that the public market's gonna give them that same valuation”at 26:50

Space Exploration Technologies

Across the shows: 50 speakers in other episodes, 70 bullish and 28 bearish calls, past 30 days

• Scott Wilson · Washington University Investment Management Company (WashU)Bullish

  SpaceX still has a ton of upside over five to ten years, so WashU holds while trimming risk.

  SpaceX grew to over 20% of WashU's portfolio. The team had many chances to take liquidity but advocated holding and letting it compound, using continuation vehicles to hold through the IPO. Scott says SpaceX still has a ton of potential upside over five to ten years. Because of the size of the position, WashU is taking some chips off the table for fiduciary risk management and will sell down gradually over several years.

  “For something like SpaceX or a really big position that we think still has, like, a ton of potential upside over the next five, ten years, like, we'll, you know, try and be as thoughtful as we can.”at 32:05

Sequoia Capital

• Scott Wilson · Washington University Investment Management Company (WashU)Bearish

  Sequoia's evergreen structure was detrimental to LPs and the firm will degrade over time.

  WashU walked away from Sequoia because the switch to an evergreen structure did not fit WashU's co-investment model. Scott says the structure change was probably detrimental to some LPs. He adds that WashU has not followed the firm closely since, and expects it to degrade over long periods. He acknowledges Sequoia has made LPs a lot of money over long periods.

  “Didn't fit super well into our kind of co investment model. So they weren't great partners for us at that point in time. And, you know, it was probably detrimental to some LPs when they switched that structure.”at 32:47

Cerebras Systems

Across the shows: 1 speaker in other episodes, 1 bullish and 0 bearish calls, past 30 days

• Scott Wilson · Washington University Investment Management Company (WashU)Bearish

  Cerebras is a great company, but its valuation is hard to justify on current KPIs; WashU is trimming and hedging.

  WashU held a large position at the IPO and took some chips off the table and put hedges on before distribution. Scott says that measured against expectations for the next four or five years, the business's current KPIs make the valuation tough to justify, and that the valuation is effectively a bet on future results. He calls the company clearly great and has confidence in its CEO over a decade, so WashU keeps some exposure. The company has a lot to prove.

  “it's tough to justify the valuation, even at [$253 billion], wherever it's at today, based on what they've done the last twelve months, you're, you're betting on the, the come, so to speak”at 38:40

Venture capital & startups

• Scott Wilson · Washington University Investment Management Company (WashU)

  Per-fund concentration limits of around 10% are mostly artificial and hurt venture returns.

  Scott argues that concentration limits should be judged across the full life of several funds, not per fund. A 10% per-fund cap makes little sense when WashU itself holds funds with mandates of two or three stocks. At the portfolio level, a 1% or 2% allocation with a 50% position is only about 100 basis points of exposure, so the risk is contained. He says these limits inhibit great venture returns.

  “I do. They're mostly artificial. You know? If you think over the course of, like, say, you're gonna do five funds, that's, you know, x amount of capital. And and to have a 10% concentration limit in any individual fund, I don't think it makes sense.”at 14:27

• Scott Wilson · Washington University Investment Management Company (WashU)

  Mega funds struggle to match historic venture multiples because doubling fund size forces bigger checks at higher valuations.

  WashU's model does not fit mega funds, which do not need its capital. Scott argues that if you double fund size, you either double your check size into each company at the same valuation, which he says does not happen since bigger checks come with higher valuations, so multiples fall. Or you must make twice as many investments, and the 50th-best bet is worse than the top 10. He concedes that $1T+ outcomes can still produce venture returns in mega funds, but expects historic multiples to be harder to generate than in much smaller funds.

  “if you just think about the dynamics when you double your fund size, right? You either have to double your check size in every company at the same valuation. And we know that doesn't happen”at 21:38

• Scott Wilson · Washington University Investment Management Company (WashU)

  Too much private capital chases late-stage companies at inflated valuations, which explains the lack of DPI.

  Scott points to SpaceX trading back near its IPO price as evidence that late-stage private valuations are stretched. He argues that too much capital is chasing a small set of late-stage champions in private markets, pushing valuations up. He thinks this is why the industry is not returning distributions (DPI) to LPs, not because public markets are closed.

  “There's just too much capital chasing these kind of late stage champions in the private markets and the valuations are, I think that's why there's no DPI.”at 27:18

• Scott Wilson · Washington University Investment Management Company (WashU)

  Smaller VC funds are better: a small check in a billion-dollar fund can drive a fund returner.

  Scott says WashU has a bias for smaller funds. He would rather back a $1 billion fund that raises and returns capital every 18 months than a $10 billion fund that returns every three years. His reasoning is that writing a small check into a venture portfolio can be a super meaningful outcome for the whole portfolio, and that a fund-returning outcome is much easier in a $1 billion or smaller fund than in a $10 billion one. WashU looks through funds to aggregate its underlying exposures, such as SpaceX, Cerebras and Anthropic.

  “We have a bias for smaller funds. Like we'd much rather have someone who raises, you know, a billion dollar fund when they could raise 4,000,000,000 and comes back every eighteen months than someone who raises 10,000,000,000 and comes back every three years.”at 36:53

• Scott Wilson · Washington University Investment Management Company (WashU)

  The 2020-21 venture market was a short-term bubble, and WashU should have sold its LP stakes earlier.

  WashU put a large LP interest into the secondary market in mid-2020 and held off selling because it expected big write-ups in the December quarter. Scott says that was a short-term bubble in venture markets, and that WashU was essentially being greedy. Its portfolio was up about 65% in 2021 and WashU later wrote much of that back down. He estimates it could have sold at around 80-90 cents on the dollar, and says they were pretty sure the bubble would not last forever and should have taken chips off the table.

  “that was a short term bubble in venture markets. So we were just essentially being greedy and we had the chance to sell it really good prices and we we didn't take it”at 44:52

Private equity

• Scott Wilson · Washington University Investment Management Company (WashU)

  Private assets compounded in the low-to-mid twenties over a decade versus about 10% for public equities.

  Scott explains WashU's shift to a privates-heavy allocation by its returns. Over the last decade WashU's private portfolio compounded in the low-to-mid twenties, while public equities compounded around 10%. He attributes this to markets being less efficient in private markets, where investments are less picked over and alpha is easier to find than in public markets.

  “over the last decade, we've probably compounded our privates by in the low to mid twenties and we've compounded, you know, our public equities at 10%.”at 10:08

• Scott Wilson · Washington University Investment Management Company (WashU)

  Direct co-investments drive WashU's outperformance; a fund-only program would have matched the peer average.

  WashU spends roughly 80-90% of its time meeting individual companies rather than managers, and about half its private book is in co-investments and directs. Scott says that without any direct or co-investments, WashU would have been right at the average of its peer group over the last decade. Its outperformance therefore comes from the direct side, which he argues is a skill most LPs do not build.

  “if we didn't have any direct or co investments, we would have been right at the average of our peer group, you know, as it is, I think we're we're at the top”at 12:16

AI bubble & tech valuations

• Scott Wilson · Washington University Investment Management Company (WashU)

  Half of today's AI companies will vanish within ten years; current AI valuations repeat past bubble mistakes.

  Scott argues private markets repeat the same stupidity as the dot-com bubble, the GFC, 2021 and crypto, with less sophisticated investors every five years. He thinks probably half of today's AI companies will not exist in ten years. He says it is not clear how many have defensible moats or what the ultimate profit pools look like for them.

  “probably half of these companies don't exist ten years from now. And it's not clear how many have like a defensible moat around their business. It's not clear to me what the ultimate profit pools look like for these companies.”at 28:49

• Scott Wilson · Washington University Investment Management Company (WashU)

  A shakeout in AI is coming; hot sectors' high multiples will compress as cyclical businesses revert.

  Scott expects a shakeout in AI and the industries that have had massive runs but does not know the timing. His argument is that these industries were historically poor businesses that barely earned their cost of capital, and they will revert to that. Near term, the price spike is excess profit falling to the bottom line: a chip or memory product that sold for $3 now sells for $30. He says investors buy such cyclicals at rich multiples and sell them at low multiples, and that the length of the current cycle is anybody's guess.

  “Well, I think there will be a shakeout. I don't know what the timeline of that is. Like some of these industries that have just had massive runs, historically, they were not great businesses... at some point they'll go back to being not great businesses”at 39:51

IPOs, M&A & deal activity

• Scott Wilson · Washington University Investment Management Company (WashU)

  Private valuations exceed what public markets will pay, so companies stay private despite open public markets.

  Scott argues the IPO window is not shut: public markets are near all-time highs. The problem is that companies cannot list at the valuations private markets pay. He points to SpaceX's roughly $85B IPO as hard to replicate, since sovereign wealth funds, big pensions and SoftBank can only write so many cheques, and public markets, though much deeper, depend on those same finite sources of capital.

  “It's not because the public markets aren't open. The public markets are pretty close to all time highs. It's just you can't go out public at the valuation that the private markets will get.”at 27:31

Frontier AI labs & model race

• Scott Wilson · Washington University Investment Management Company (WashU)

  Frontier models are commoditising, so model providers' pricing power and profit pools are weak.

  Scott says the top five large language models all look and feel the same for 99% of tasks, so users could not tell which model they are using. Customers start with the frontier model because it is the default, then ramp up spend. They then realise most tasks do not need a frontier model. With a free alternative, customers' willingness to pay drops very quickly, so the current business models of model providers look weak.

  “when there's a free alternative customer willingness to pay drops, very, very quickly. And I think everybody starts with the frontier model.”at 29:49

International equities

• Scott Wilson · Washington University Investment Management Company (WashU)

  European companies are much cheaper than US peers of the same quality, so WashU is investing there.

  Scott says WashU has done a lot in Europe recently and finds good companies, including non-tech ones, because the market as a whole has struggled. For the same quality of asset, with the same growth and unit economics, a US company would trade at huge revenue multiples while the European one trades at small earnings multiples. He separates price from value: buying something worth 300 for 100 is a much better investment than buying a US company at five times earnings that compounds at the same rate. Over a decade, a cheaper entry multiple with the same growth should produce much better returns.

  “for the same quality of asset, and there are good companies over there just because, like, the market as a whole has struggled... if they were based in The US and had the same kind of KPIs, growth, and unit economics, they would trade at huge revenue multiples. And in in Europe, they trade at, you know, small earnings multiples.”at 46:44

China's economy

• Scott Wilson · Washington University Investment Management Company (WashU)

  China is a huge market and a good place to invest, despite geopolitical risk, if navigated on the ground.

  WashU has an office in Shanghai with two people permanently based there, and it has more China exposure than its peers. It has been active since Jamie Dimon called China uninvestable, and has added a decent amount of capital. Scott says geopolitical risk is always there, so one has to be rational and look for companies that are under the radar or supported by the broader political parties, and that return capital to shareholders. He argues dollar-denominated Chinese funds still give access to good companies because entrepreneurs in VIE structures prefer dollar capital, though there are some agency problems. He says investors must invest through local partners and navigate China on the ground, and that WashU has done more co-investments and one-off deals in China over the last five years.

  “We probably have more than our peers in China, and we've been active, you know, since Jamie Dimon said China's uninvestable. We've added a decent amount of capital.”at 48:25

Europe's economy

• Scott Wilson · Washington University Investment Management Company (WashU)

  UK's tax hike on offshore energy to 75% confiscates half of companies, worse than China's risk.

  Asked why he invests in China despite its risks, Scott argues that developed markets have shown worse behaviour. He cites the UK, where the government raised the tax rate on offshore oil and other energy assets from 25% to 75%, which he calls basically confiscating half the company. He says he has never seen that behaviour in China, and that Norway did something similar with certain asset types. In his view, this kind of retroactive government overreach in developed markets is a bigger risk than China's.

  “we've seen worse behavior in very developed markets like in The UK... they took the tax rate from 25% to 75%. I mean, that's basically confiscating half the company. I've never seen that behavior in China.”at 49:26