Alexa Binns 00:02
Alex, welcome to swimming with alligators. The VC podcast from the LP perspective, with your host, Alexa bins and Ernest. You ready? Let’s dive in.

Earnest Sweat 00:13
Charlotte, we’re glad to have you swimming with allocators. Thanks for joining us.

Charlotte Zhang 00:18
Of course

Earnest Sweat 00:29
When starting this podcast almost, I guess a little over two years ago, one person that I’ve always thought about having was Charlotte.

Charlotte Zhang 00:56

Earnest Sweat 01:12
so the audience can understand why you’re such a bad ass. Could you just walk us through how you got to this point, jumping into this weird world of allocating

Charlotte Zhang 01:27
Sure thing. So I like to joke that I don’t think anyone grows up dreaming of becoming an allocator when they’re a kid. There’s just way too much, I think, obfuscation about what this role actually entails, and it’s certainly not something you’re going to see in the media, right? So how I eventually wound up here was this actually happenstance. So I had done technology investment banking as my first role out of college, and a colleague that I had worked with there had gone on to work for medley partners, which is Jim Simons private markets arm, and asked me, you know, oh, so what are you thinking about doing and going to the buy side? And I said, Well, probably, you know, some technology growth equity strategy, given those tend to be the client organizations that I’ve worked with on the transactions at the investment bank. And he asked a really good question. He was like, Okay, so, but how do you know the difference or differentiation and edge between someone like a summit or an IVP or Ameritech. I said, Oh, well, I suppose you know, you get a sense of like the people that you’ve had interactions with. You look at the company’s website and see the types of companies that they’re interested in investing in. And he said, well, but if you’re going to commit your career to doing this, wouldn’t you want to know, wouldn’t you want to know exactly how good they are in terms of, you know, their track record, of returns, how they actually think about competitive positioning. And you know, if you were to sit on the LP side at an organization like ours, you could actually have like agenda,

Speaker 1 03:30
sounds like a perfected pitch.

Charlotte Zhang 03:35
So needless to say, his logic was extremely credible. And so I said to myself, Okay, well, why don’t I give it a try? And so I joined them. But, you know, long story short, it’s been well over a decade, and still here on the allocator side,

Speaker 2 04:46
Did you ever want to go back? I mean, this is that there was supposed to be a stop on the train.

Charlotte Zhang 04:54
It was so I would say that I didn’t appreciate how much it was. Would enjoy the allocator seat, because it’s truly you have such a wide variety of learning opportunities day to day, right? Especially since here at a time, we’re structured as a generalist program. And so, you know, one day I could be spending time looking at Brazilian long, lonely strategies, and then the next day, I’m looking at, you know, seed stage venture strategies in the US focused on AI, and perhaps the day after that, it’s European real estate. That sort of mental stimulation you get from having broad exposure to a wide variety of ideas, I think is something that really works for me and keeps me excited. However, I think, right, what would make an exceptional GP investor is that obsession to go really deep, a mile deep, right in an inch wide, on something. And I also have appreciation for that commitment as well. But it’s a trade off, if you will.

Earnest Sweat 06:03
Since you brought it up, could you provide, you know, more information on how a tie started, and its focus areas and who it’s looking to serve?

Charlotte Zhang 06:16
Of course, yes. So in a tie is a 501, C for philanthropy that is seeking to really transform the balance of power to ensure equity and racial justice across Washington state. So in 2021 we actually formed an anti investment management company that then invests and manages capital on behalf of the Foundation as well as other aligned organizations. So the goal right is to generate long term sustainable returns while also advancing racial justice and equity work. So we try to think of our goal as prioritizing people over profit and making investment decisions that are based not just on the potential to make out size returns, but also the potential to improve the lives of the people and communities that we and our partners serve. I think that’s probably a key distinction in terms of how we choose to invest,

Earnest Sweat 07:24
There’s a clear focus on the organizations, who they’re looking to serve and the benefactors of the foundation. When developing or executing on this investment strategy, are there any kind of constraints or kind of guiding principles that limit or expand where you can invest in fund managers, or is it kind of like things are all free, fair?

Charlotte Zhang 07:59
Sure, yes. So I would say that, in general, you can think of our investment strategy as following the endowment model, right? So we have a 50 year vision that ensures we’re trying to invest according to a long term time horizon. Have a diversified portfolio that includes alternative assets, and then our approach is trying to be rooted in a commitment to long term sustainability, strategic diversification, and then a dedication to our organizational values and mission. When you look at our investment theses, they tend to focus on inefficiency, innovation and impact, we like talking about acronyms. So those are your three. It is so in inefficient markets, right? Allows us to purchase assets at, hopefully below intrinsic value. So for example, you know, we’ll invest in early stage ventures and emerging markets. Investing behind innovation allows us to participate at the right point along a growth curve. So we’ll invest in industries that have significant growth potential, like technology, life sciences. And then finally, we believe that investments that have a positive impact just have a longer duration. So perhaps one way in which we differ from other institutional investors is that we don’t have asset class buckets or restricting investment styles to these predefined boxes. We recognize that asset classes, investment strategies, styles, regions, sectors, all of these things, exist on a continuum spectrum of risk and return. So the critical factor is actually trying to determine your institutional risk tolerance, so both your ability and then willingness to take risk, and then from there, determining the kind of the overall surface area you can. Allocating that still ensures the risk of the portfolio aligns with or falls below the inherent risk of the standard policy portfolio, which for us is a 70% allocation to equities and a 30% allocation to bonds. So as a result, if we just aggregate all of the equity beta of all our funds, right? That total number should be around 0.7 or less. So in terms of guidelines, I’d say that that is one of our broad guidelines that we adhere to, and

Alexa Binns 10:33
It’s an interesting story arc that you are now also managing other foundations’ capital. What’s that experience been like, and has that changed your operations or your approach?

Charlotte Zhang 10:48
I would say that, you know, it’s been expansive in the sense that when we seek to partner with GPS, a lot of the times we try and select for GPS that actually resonate with this idea of you select partners in concert with the legacy and impact that you want to generate with your returns, right? And that inherently actually serves as a sense of motivation for why your team will push even harder to generate best in class returns. So I’d say, of course, we have an amazing mission that we serve, but in bringing along additional capital partners, it just diversifies even more great causes on behalf of which the GPs are able to fund through the returns that they generate. From an operational perspective, we actually haven’t added any head count with regards to expanding our capabilities there, as an OCIO, we are able to have full discretion, and so you know, what we are invested in is also what our Capital Partners are invested in.

Earnest Sweat 12:33
one question I did have was around you’re jumping in so many different asset classes. We have a lot of younger folks who are just jumping into being allocators, or people who are, you know, making career switches into being an allocator. If you have a multi asset class strategy, how do you take in all the information and use it to your your your best ability when you’re jumping around and not feel inundated with so much and feel, you know, like you can’t do anything,

Charlotte Zhang 13:26
I would say that you know, when it comes to organizing our workflows, right, there are a couple of key elements of the process to help us keep organized and prioritize what we are focused on in any given year. So one of course, we have a forward calendar that highlights from a bottom up perspective, right those managers that are existing reps that we’ll need to evaluate, as well as the target Wish List folks that we’ve been spending time with and we’ll need to make a decision on as well. So that’s from a bottom up perspective, from a top down perspective, then, and this is where being a generalist really improves our ability to dive deep and learn about different interesting market opportunities. We tend to take thematic research sprints, right? So any given year, we pick areas that seem again, tying back to the three is right where there’s either massive inefficiencies that could be exploited or tremendous growth to participate in. And we’ll pick so. For example, in the past, I’ve spent, you know, time assessing the market opportunity in Southeast Asia, or crypto and blockchain technologies, and most recently, I’ve actually been looking at Latin America. But the idea is that asset classes, right, are simply a vehicle by which you can own. An underlying exposure to a certain type of company, but you should decide, right, what type of company it is that you fundamentally want the access to, and so that’s why the asset class, it doesn’t need to be organized by asset class, right? Like, for example, I’ll even give a different example, which is, for example, if you were to spend time in an area like biotech, right? You could think of it as, oh, okay, so from the three perspectives, right? There are, of course, massive inefficiencies to exploit, because it takes billions of dollars and less than, you know, 1% success rate in terms of going from pre clinical to a fully commercialized drug, and, of course, addressing the growth and unmet medical needs of large populations. So this is probably an interesting area to invest in. Once you spend some additional time you learn, okay, well, you know, in terms of the value capture, right? It seems like you know if you had to choose between a single asset versus a platform asset. A platform asset tends to accrete a larger amount of enterprise value over time, right? Because it doesn’t generate just one drug there’s opportunities for multiple shots on goal, okay? So if you’re going to target platform assets, then, how would you do so, right at what stage? And we’ve actually spent a ton of time on this and found that, for example, you know, historically, I had backed some early stage incubation venture funds to create these platforms from scratch. However, I noticed that the nature of the fund, life of a private markets fund is that usually it takes about 10 years, which is the end of the fun life, for the company to go public, but at that point, right? They actually haven’t proven kind of that they are a full on platform, because perhaps only the leading asset has achieved a point, clinical, you know, sufficient clinical proof points, and so they’re still valued as though they are a single asset company. So okay, so then that informs you, perhaps that’s not the right way to capture that

Alexa Binns 18:44
we’ve also heard you

Speaker 2 19:02
talk about four P’s.

Alexa Binns 19:06
Do you mind sharing with us? Is there a P you think is overlooked? This is people philosophy process,

Charlotte Zhang 19:15
of course. So if you think about the four P’s, the truth is, at the end of the day, they actually all technically come from one and probably not surprising, it’s the P of people. So right, you’re trying to pick the people who have developed the nuanced investment philosophy that captures some sort of like under-appreciated market opportunity, and then have thoughtfully constructed a process that they can then consistently execute upon to generate the out performance. I find that in terms of the people element of GPS right probably high integrity and learning agility are the most highly correlated with. Sustain success, and I think that’s because they tend to build firm cultures that value dissenting opinions and avoiding group think, while also embracing humility in the sense of admitting to and then refining their approach from past mistakes. The integrity part is also so important because I feel like it serves as a magnet to attract a density of high caliber talent to partner with, whether that’s founders, operators in the ecosystem, or LPs.

Earnest Sweat 20:37
This speaking of the P of people I was talking to recently to a friend who’s an emerging manager, and they spoke about the nuances and difficulties with connecting with foundations and those CIOs. And so I had a question, from your view, what is it that fund managers might get wrong about how to interact with an organization like yours,

Charlotte Zhang 21:07
of course, and I’d like to say that we’re actually quite easy to interact with once you understand the rules of engagement.

Alexa Binns 23:40
focusing specifically on venture managers. Are there any just quick and easy qualifiers, like we are looking for X track record, or we are not interested in generalists, or, you know, things that help people know whether they should try to be banging down your door or look elsewhere,

Charlotte Zhang 24:17
Well, you know, hustle and eagerness is definitely a factor that I think makes for successful VCs. So we would not be too turned off by having someone bang down our doors. Okay, I think so. As it pertains to our particular observations and perhaps biases, I’d say that we probably have more of a bias towards liking some form of specialization, right, just because, if you think about especially here in the US, how competitive the landscape of venture capital is, the ability to actually. Earn your place on a cap table, and for you to occupy mindshare with the best and most compelling founders that have options, right? I think it means you have to exceed expectations on some capability. And so specialization could be, I mean, it could be specialization with regards to geography, right? You know how to navigate the local markets and ecosystem in a more efficient way. You have much more in-built context as to who’s truly exceptional, where are the hotbeds of talent, and how to perhaps communicate with them in a way that really resonates with the types of businesses that they’re interested in building. It could be from a sector perspective, right? You simply are studying the emerging trends and therefore have a nuanced perspective as to what makes for a more compelling solution, as opposed to one that may have been tried recently or even a decade ago and still won’t work today. And then finally, perhaps, like value add, right? So one particular thesis I’ve spent a lot of time on is when you talk to any founders and ask them, oh, like, what are your top three most recurring problems you’re constantly trying to solve? And one of them is always, oh, I need to hire better engineers all the time, every day. And so, you know, I think that if there is a venture strategy that is able to provide meaningful sort of talent placement that could certainly be a fulcrum for getting exceptional access to founders, because this is addressing what they articulate as their biggest need. So yes, those would be some of the attributes, I guess I could highlight in terms of how you would differentiate. I would also say that a lot of venture has to do with your network centrality and ability to be that first call right the earlier that you can invest, obviously, the lower your cost basis, the higher the chance that this actually turns into a power law outcome that drives your fund returns. So having an emphasis and just focusing on the early stage is definitely also something that we really value.

Earnest Sweat 27:34
This concept of differentiation has always come up in our interviews, as well as something like a GP building in public, I constantly think about it as well, and a lot of times it is put on the fund manager as it should, right? It’s their firm, all those things. But in conversations, I’ve also seen interesting ways. Allocators have been able to uncover differentiation through questions or diligence, because something happens where, like a lot of investors, especially great investors, do different things really well, but once it gets through the pitch of the deck consulting firm, or, like, all the things they’ve heard from their other fellow VCs, all the pitches start to send have the sameness. So I’ve tried to ask, like, LPs, like, what are ways in which you’ve been able to uncover real differentiation, whether it’s be specific questions or ways you do diligence?

Charlotte Zhang 28:43
Yes, no, that’s, that’s a great question. Well, you know, there are probably corollaries in the way in which you spend time with a company that we spend time with, all right? And so I think it starts off as so you’re trying to find a venture strategy that’s inherently a product serving an unmet need today, right? So the question, then, that I end up spending a lot of time on is essentially around, how well do they understand the market, right? Where are the gaps? Why do these gaps exist? Why will they persist? And then, how have they built their strategy in particular to service the gaps and in a way that will be sustainable and have sort of, I guess, proof points of positive results, right? So one of my pet peeves is when I ask a GP, oh, okay, so give me a sense of you know, who do you tend to compete with? What other strategies may look similar on the surface, but if they do, how are you different? Right? And when a GP says. To me, oh, you know it’s just a blank canvas out there. It’s just me, and then everyone else is over here. To me, that signals two things. It’s either one, you haven’t obsessively studied this competitive landscape to know exactly who you’re up against, which right naive tee is not going to prepare you for the true competition. Or two, you actually don’t have the confidence to tell me who’s rather similar to you, because you might not think that I’ll pick you over them. Yeah, neither.

Alexa Binns 33:17
There are so many things similar about them to many of the other investors out there that it can be hard to figure out your differentiation, but what, what is the strategy that you are uniquely serving is really helpful?

Earnest Sweat 33:31
Yeah, that’s why, like, you have to talk to other people that are maybe outside of what you do. So they can say, Oh, that’s interesting or friendly. LP has helped, or, like, I’ve helped other emerging managers who have shared things that they were thought were just like, Oh, everybody does that. And I’m like, actually, nobody does that, and you should talk about that more. So I think it’s having that open mind of, just because you do it and thought of it doesn’t mean it’s actually table stakes and quick story time. We might cut this, but whatever your this is, this made me think of Alexa talking about, like, you know, you’re like, I’m not an astronaut. I don’t know if you like it. So back in 2012 when I was in business school, we did this awful thing where consulting firms, or whoever was recruiting on campus would be like, Oh my God, we have to do this. So let’s just interview two of you coffee chats at a time, right? And I won’t name the organization, but it’s a management consulting firm, and it has three letters in it. But I’m sitting with one of my classmates, Dan, cringing. I’m and so we might cut this, but who knows, we might keep it, whatever and so I’m sending my classmate Dan, and he fought, and he was like a leader and fought in the. Um, in Iraq, right? And they asked, the guy asked both of us. He’s like, Hey, can you give us an example of leadership? And so Dan starts, and he tells this story about, like a plane coming down and saving somebody, and then they come to me, and so earnest, what is yours? I’m like, follow that up. You want to talk about how a spreadsheet didn’t work. Next question, please. I have a really bad joke that I’ll tell after I’m offline. But yeah, I was just like, this is I’m not set up to win here.

Speaker 2 35:35

Earnest Sweat 35:42
What’s your thought on the allocator ecosystem today, and how I could change for the better? I think that

Charlotte Zhang 36:21
there still tends to be well, and this isn’t just straight unique to the allocator ecosystem, but I think that this is pretty consistent across just the societal context that we live in today. It feels like we’re highly polarized, and then there are pockets of sort of, oh gosh. Why am I blanking on the word? There are pockets of thought, echo chambers, right? Where, if you have certain affinities, you tend to just repeatedly chat with the same people, repeatedly back the same types of strategies, and you very rarely venture outside of those built in patterns of behavior. And I think that so much of what we value in terms of the GPS and strategies that we seek to back is intellectual curiosity, right, and the ability to really try and get to objective truth. So I think as LPs, we should have the patience and the authenticity to engage with people who have differing beliefs, and maybe take a look at investment approaches that are contrary to what we typically back right. Like, for example, I’ll say that historically, I’ve tended to back highly concentrated venture strategies, but I love spending time with Steve Kim and Vertice, who only does really diversified strategies, right? And in doing so, it’s, it’s actually pushed, kind of my own frameworks of understanding as to, maybe it’s not so much a dichotomy, but rather, right, what types of outcomes you’re trying to optimize for and in what context and stage of assets you’re looking to back right? I’d say, if we were more genuinely curious, actually tried to ask questions that help unearth underlying assumptions and then share with each other what we’ve seen in terms of what informs our frameworks and best practices, I think this opens up the dialog and enhances our ability to learn from one another, and perhaps, yeah, you do change some hearts and minds along the way, if we want to collectively achieve progress in The ecosystem, I don’t think you do that by essentially shutting those who have different ideas right. Perhaps that feels idealistically safe at times, but real progress only comes from bringing people into the fold right of a concept or vision that they can actually understand and align with

Alexa Binns 39:21
your your point about people not sort of recognizing their competition makes me also want to hear how you’re viewing venture compared to all these other assets that you’re looking at, so that both the GPS and LPS listening can sort of see what what’s venture doing, what’s your perspective on venture right now, and sort of what is it doing in your portfolio moving forward? Yes.

Charlotte Zhang 39:52
Now this is a very timely topic, as we actually just spent some time discussing it at our board meeting. But so if I were to start with, we did this quantitative analysis, right where we looked, so top quartile Burgess venture returns going all the way back to 1990 through now, right? Many types of different economic environments, all sorts of shocks, tailwinds, capital dynamics. And compared it to rolling 12 year NASDAQ returns, right? Because 12 years is kind of the timeline of a fun life. So, you know, call it. There’s like, The Rolling windows. There’s like, you know, over 270 windows or so. So about 60% of the time you are actually better off holding, as opposed to doing top quartile venture,

Charlotte Zhang 41:11
but that’s surprising, right? I don’t, I don’t know that. Perhaps we don’t always, you know, consistently kind of refresh our analysis of certain asset classes and I think it’s also because being a generalist, right, you’re forced to kind of think outside the box as to rather than having a siloed approach. And so right? This was something that we did just to kind of understand opportunity cost, if you will. So then what it did point to was, at least at this point, it feels like what you actually need to be aiming for to generate enough of an illiquidity premium in venture is you probably have to be going after top decile strategies, right? But I have some good news for you, which is, if you then study the constituents right of who have been amongst the top decile performers, it’s a lot of small, early stage strategies and emerging managers. So that inherent kind of initial alignment, fund size, structure and real urgency to prove out your thesis and reason to exist, right, does generate some real outsize returns that certainly are worth backing. But those are just some thoughts that I would offer up in terms of venture as an asset class overall,

Earnest Sweat 42:47
That’s, that’s good to know for us, or we were going to have to, like, this was going to be our last episode.

Charlotte Zhang 42:54
Oh, wait no, I have another. I have another. Another, sort of, another sort of point, though, also unlike sort of portfolio construction, which is, we always talk about how venture returns are driven by power power law outcomes in terms of the underlying portfolio companies, right? But then your Venture Program returns are actually also driven by power law outcomes of vintages, yes. And so right, the practicality of having a successful venture allocation. You cannot pick and choose which years right you lean into, especially if you’re trying to preserve allocation and consistency of relationships with the most elite VCs, you have to be willing to allocate on a pretty consistent pacing basis. And so that is something else that I will point out, which is that, you know, perhaps this analysis right doesn’t take into the context of it is to be expected that in many years, he will now outperform the passive index. But the years in which you do that’s where the 8020 comes in

Earnest Sweat 44:12
for my last question. Typically, I like to end on something that’s like a nice little bow. But since I have someone whose friend and a deep thinker, I actually end on something that’s kind of big and that people can at least want more probably. So I wanted to know we’ve talked a lot about your perspective and professional background, but what in your personal background has shaped your investment lens? I lands,

Charlotte Zhang 44:44
okay? Well, I think I have to point to my pretty modest beginnings. So my parents actually came here to escape communism in China. They. Had about $40 in their pocket, two suitcases in hand, and then this nebulous idea of what the American dream could be for their family and their kids. So in those early days in this country, we actually completely relied on welfare to survive. And because of these humble origins. I think I empathize with underdogs, right? I have this poignant appreciation for just how far hustle and grit can get you, and perhaps just more willingness to stick my own neck out to expand access to opportunities for some underserved demographics. I think it’s this ethos which is why I’m so passionate about generating returns for charitable organizations like in a tie, but also the reason why I have the conviction to evaluate and back emerging managers. So within our portfolio, we actually began investing in fund one or fund two with 14 of our GPS.