Earnest Sweat 00:03
Welcome to Swimming with Allocators the VC podcast from the LP perspective, with your host, Alexa bins and earnest. Are you ready? Let’s dive in.

Alexa Binns 00:15
Today. We are so thrilled to have Roy Swan and Christine Looney inaugural head and Deputy Director of the Ford Foundation’s mission investments program on the podcast for those who don’t know, the Ford Foundation made a billion dollar commitment to impact investing, the largest effort among foundation endowments at the time. And so our speakers today are sought after investors and advisors and board members across the board, and they’re going to share with us how the fund performance is doing to date, and how other LPs can join in to align their mission and financial goals. Thank you so Roy, maybe we jump in with you as the boss. The Ford Foundation is one of the largest private foundations in the US, with a $16 billion endowment. Can you give us some context of where the mission, investment piece sits in your full organization. Yes, we are thankful again. Really pleased to be here with you all.

Roy Swan 01:12
We have a really thoughtful organizational structure that was put in place at the time the foundation led by the courageous one of a kind charismatic leader Derek Walker, made the decision To do something more with that other 95% of of endowments that have historically fallen within the kind of joke line which I’ve said, and you may have heard before. Did you hear the one about the lung cancer prevention Foundation? They made a killing in tobacco stocks and said that that dilemma was first noted by Clara Miller when she went to the F, B Herron foundation and and I always say, leave it to women to lead. And she convinced her board of trustees to look at that. At that other 95% and consider how a foundation can use all its resources in a way that aligns with this mission. The Ford Foundation, until recently, had the largest mission related investment or impact investing, commitment of all US foundations, until recently, were overtaken by the California Endowment. We’re so proud of the California Endowment. Christine and I had opportunities to speak with them over the years as they were making that decision. So they’re going 100% with their 4 billion plus endowment. We have a billion. It was 8% of the endowment at the time it was created. The Ford Foundation is a very traditional foundation. It’s been around since 1936 and Christine and I, we huddled together, and we basically said, you know, how do we make the most of this billion dollars? And we realized that, and I think a lot of people realize that it’s not just the capital, it’s your voice. And so the influence strategy, as we call it, is a very important element of what we do, and that’s why we appreciate you all so much for giving us another opportunity to speak. It’s mutual.

Earnest Sweat 03:43
And so, you know, I think one thing to dedicate the capital to, it’s another thing to execute on that initiative, right? And so one thing I wanted to just get a clarity on is how to even come up with the criteria and definition of what mission related investments or impact investing would be to the Ford Foundation. I’m going to step aside and let the brains of this operation take over, because Christine, I always thank Christine, because she created my job essentially at Darren. Darren gave her the task, her and one of our colleagues at Briggs, but Christine, why don’t you talk about that year or a year and a half process you led the foundation through? Yeah, I’m happy to and as Roy shared, we’re thrilled to be here, and I was so excited to see a lot of our investment partners had previously been on the pod, which is always amazing to see.

Christine Looney 04:40
Yeah, as already said, it was a, it was a 15 month process. And Ford is a traditional philanthropy, and so allocating a billion dollars of our endowment to something new, it definitely took some time for everyone to think about. And, you know, I think there were questions around what financial return they made for them. Of sense for this portfolio, but on the flip side of that coin, what was the impact we wanted to achieve? And Ford is a foundation that is trying to use all of its resources to tackle a very large problem facing the world today, which is inequality. And so the task in front of us was, how could we use a billion dollars responsibly to do just that? And our approach, in many ways, was looking at a variety of sectors that we could invest in, or strategies we could pursue that we felt could both generate a really strong financial return and really strong mission outcomes for the Ford Foundation. And so we reviewed over 30 different sectors, really, and used almost a funnel approach of, where could we advance the Ford Foundation’s mission, what sectors were really investable? Could we generate the kinds of return we needed to on a risk adjusted basis, and where as a team, did we have the network’s expertise to kind of get going right, and now we’ve expanded from there. We started with two thematic strategies, one in the United States, one in the Global South, which for us is Africa, South and Southeast Asia and Latin America. And I’ve since expanded to three more categories that we’re investing in, and unlike a traditional endowment, prioritize the private markets. And we did that strategically because we felt that’s where we could advance impact the greatest and so we’ve made some strategic choices, prioritizing impact because of that. And I think, as you know, when we talk about results, we’ve been really pleased with the results and the bets we’ve made and the strategies we’re pursuing. We really feel like we have been able to deliver on these double bottom line objectives. The third prong for us is really making an impact on diversity, equity, inclusion, as another kind of impact that we want this portfolio to achieve, as a foundation taking on inequality. Can you share any of those results? I think you’re maybe seven years in, we’re seven years in, I’d say, you know, when we started this, when we started this portfolio, we had two social objectives in mind. One, one obvious, I guess, to use the investment capital to achieve outcomes that align with Ford’s mission. The second, maybe not so obvious, was that the board really wanted us to be an example, and as Roy said, Use influence and engagement to encourage others to allocate their capital more responsibly. And a way to do that, of course, is for us to be transparent about what we’re doing. We have been from the get go in terms of the strategies we’re pursuing, the problems we’re trying to solve with capital at the five year mark. We published the returns that we were able to achieve at that five year mark, as well as the income impact outcomes we were able to achieve. And we noted, of course, two things. One, this is an endowment. This is a strategy, unlike a traditional one, in that we were heavily allocated to private markets, and so benefited from that during the time period through which we invested. And secondly, it’s really early. So while we received a billion dollars, we’ve been investing that over time. And so we have only a very small number of managers who are even in year six plus of their own investment track record. So we remain investors for the long term. We remain really, really thrilled with, I think, the results we’re getting, importantly on both outcomes, financial and social returns. So yeah, anything I don’t know, Roy, anything more to add on that. But yeah, let me a little more, because I want to go back to what Christine was saying earlier about the whole process of

Roy Swan 09:10
designing the program. There’s, there’s a couple of things that are important, I think, for allocators, particularly, to understand. And I ran into this when I was at Morgan Stanley. Unlike Morgan, unlike Ford, which has a billion that’s being allocated for 10 years, in my last year, Morgan Stanley we committed a billion and a half of Morgan Stanley balance sheet. And similar, it was sort of the US alone version of impact investing that’s under the Community Reinvestment Act. And one thing I’ll say is impact investing is complex, very difficult, because it’s traditional investing plus, and that plus is. The complexity of understanding negative and positive externalities, and in the economic sense, and trying to maximize positive externalities and minimize or eliminate negative externalities, and that makes it harder. And I when I was in Morgan Stanley, in my community reinvestment act world, we were doing impact investing, lows, investments as LP and certain things people assume with Community Reinvestment Act, community development, they assumed we were breaking even at best, and they were shocked to find out that we were exceeding by far the firm wide targets. And that’s because, in order to understand impact investing, it means having a 360 degree view of what’s happening in the world around you, including, importantly, the power of I’ll call it blended finance, but specifically government incentives. And the government exists to advance the quality of life of its citizens, and it does so by making investments in society. Some of those investments come in the form of actual capital subsidy, and some come in the form of tax waivers or exemptions, and some come through waivers of codes, et cetera. And in order to be an effective impact investor, you need to understand all that. So that’s an important thing. The next thing I’ll say is, it’s important to have a bias for action, but hasten slowly, and those seem to be across purposes. But if you sit around and try, if you sit around and allow perfect to be the enemy is good because you’re trying to get the perfect impact investment. Keep in mind that when you’re investing just for the maximization of profits, without a mind for the negative consequences of your profit making, you’re not allowing the externalities to slow you down. You’re just investing. Similarly, when you’re impact investing, you want to take the time to understand the externalities, because that’s the whole point. And so hence I say bias for action. Don’t get caught up in the cottage industry of metrics. Have metrics that are important, but don’t get caught up in that. The other thing I’ll say is, as I just mentioned, impact investing involves traditional investing, which is a bit unconventional. That’s in the spirit of David Swenson and the great book that he wrote that I read about three or four times pioneering. Was a pioneering portfolio management, an unconventional approach. And one of the points he makes is that people get caught up in short term measurements as a driver for behavior. And so if one, one example he gives, I think he gives in the book, or maybe talks about it is, theoretically, you could be looking at your returns once every 100 years, if you’re a perpetual Foundation, because you’re going to live forever. And similarly, we’ve decided to release our results infrequently because we don’t want people caught up in results, we are way too early. We won’t really know our full capabilities until year 25 because you think about the way we’re investing and the full maturity of all our initial investments, it doesn’t happen until roughly year 25 but we expect that we may be disclosing every five years or so, just because it’s important to have that proof point out there our first five years, uh, show 28% return. Well, people thought we’d be losing money or breaking even at best. Well, we’re 28% now. Christine and I aren’t sort of peacock feather strutting about that, because we know it certainly but the point is to put the information out there as a data point, because we want to excite people about the world of possibilities, right? I love that, and I love the

Earnest Sweat 14:31
both you and Christine, the intentionality that you’ve put in the plan and understanding and the onus of like we want to influence the entire sector of allocators and foundations. This question is for both of you, were there any anecdotes that you can think of from the first kind of couple years, first of five years that have really been.

Roy Swan 15:00
Uh, that you would say are critical for foundations who know they want to do this, but they need the right I, you know, they need the right ingredients to to actually succeed, and even, you know, making it to year seven and on to year 25 I, you know, there’s this quote that I use sometimes. Christie has heard me say, I can’t remember whether it was a high school coach or I saw it in a sports center or something. But anyway, it was, any plan that can’t be changed is a bad plan, and a plan that was changed in my very first MRI committee of the Ford Foundation Board meeting was when one of our trustees at the time was a person we referred to as Mr. Mercy. He’s the co-founder of Infosys, the big India based IT services company, and the mandate was to have a single impact investing theme in the US and a single theme in the Global South. And Mr. Murthy says, Well, why? Why not water? And I’m thinking to myself, you know, okay, we were told, affordable multi family, affordable housing, us, financial inclusion, Global South, and you’re asking us about this new area. And I immediately smiled and just embraced his living point that any plan that can’t be changed is a bad plan. And he apparently saw my entry into the organization as an opportunity to double check about is this the best way to approach things. And from that point, Christina and I went back into our laboratory, and we came up with a couple of other areas that we thought would be additive, but not dilute our ability to have impact. So I’m gonna, I’ll stop with that. Christine, you have a,

Christine Looney 16:57
yeah, that’s a great one.

Alexa Binns 17:00
I’d say generally, why not water? I’m gonna, I just feel like a bumper sticker where you’re like, we could exactly, why not water? We still have not added water, but we won’t.

Christine Looney 17:15
We will others, other allocators have. So I know it’s on the attention of many. I yeah, I think this being flexible and and that applies to both, you know, the strategies, and constantly being willing to kind of pivot with the market, because this market is rapidly changing too. It is one second. Roy said, like, don’t let perfection be the enemy of the good. I think it’s really important in this center that people want we’ve taken the approach of, let’s identify some big social problems that we feel can be contributed to with capital. But we’re not trying to boil the ocean and we’re not trying to prove that, you know, longitudinal studies for the families impacted by our capital. I’d love to be at that point. We’re not at that point, so I think not getting too caught up in that, in learning and being open to adjusting when things aren’t working well, and because at the end of the day, most of what we’re doing is betting on people and their ideas, and you just want to find those really, really strong partners who are aligned with you from like the changes you want to see over time. If we can do that well, and I feel like even if we make some maybe less optimal choices along the way, we can kind of correct them, right?

Roy Swan 18:46
I love that. Chris. Can I add? I want to add one more because Christine will forgive me because she knows I had this, one of these thoughts on my life, I can’t shut up about it. One thing we do is we, we also try to help create solutions to problems that we see that are unaddressed. And we have to do that with both our endowment pool of capital, which has the fiduciary obligations around it, and the other pool of foundation capital, which is called program related investment. And we can, we’re under law, we’re allowed to make market rate returns. But that is not the primary purpose. It’s a catalytic capital. So one, one example of creating a solution is when we partnered with Morgan Stanley, my old team, and worked with a non profit CDFI, and we created one a private equity firm at that non profit. It’s called a true fund. And one of the things about our work is we have gotten recognized by Harvard Business School. Our work has been featured already in three Harvard Business School case studies that are used to teach them. Students, and one of them is the impact developers fund. And what we did the gap was diverse, multi family, affordable rental housing developers had great difficulty attracting capital for their enterprises. Forget about the projects, the actual enterprise. So we created a private equity fund with Creative Capital tools to serve those needs. And so that’s one example. The other example fits into the both and category of work that we also embrace, and we try to think about both and rather than either or, but our quality jobs impact investing themes which basically what’s the problem there? The problem is the deterioration of the quality of most working families in America for any number of reasons, downward pressure on wages, the emergence of Right to Work states that actually mean the exact opposite of what sounds like. So that’s kind of the erosion of worker rights versus corporate corporate power. We thought we could accomplish some good objectives through private equity. But the problem with private equity and this quality jobs theme, which basically says superior operational design and superior human capital investment can generate superior financial returns. The problem with that is that that basically is saying great culture will deliver great operating results. Private equity is not incentivized to create great corporate culture. It’s an antithesis. Time is the enemy of IRR Internal rate return. So while we know that there are some players out there, I mean one of our LP partners, or GPS is APIs and heritage, they have a great ESOP program. There’s KKR. You’ve got Pete Stavros, co head of their private equity there. He and Brandon Brom have a fund called ascendant, which is dedicated to broad based employee ownership, and that gets you to quality jobs. We’ve decided to come up with a new concept that is to create the Berkshire Hathaway of quality jobs. And that is the recognition that the corporate structure where you’re not buying, selling, flipping, etc, is the best vehicle for the type of long term commitment to great corporate culture that can unleash the value and power of worker engagement. I don’t know if you all are aware, but studies show that as much as 80% of the global workforce is disengaged. Estimated cost of that annually, 9 trillion on a global basis, 600 billion in the US. If you apply an S and P valuation multiple to that, it comes well over 10 trillion in unleashed market cap. If you are able to improve worker engagement, that’s just good culture, and good culture equals great engagement, which leads to greater innovation, greater productivity, greater profitability. That’s our kind of new dream we’re chasing, and we’re very patient. We work our way down the field inch by inch. So stay tuned on more there. This is very helpful to understand why you broadened your investment themes to include quality jobs. I

Alexa Binns 24:00
I’ll be applying for the next Berkshire Hathaway, and also, can I put in a request that we don’t have to select now. We’re going to take a quick break to speak with our sponsor on the show. Today. We have a friend and industry expert, Nick Talwar, factional CTO for both VCs and their port cos, his agency, Bottega, trains, and custom AI models for financial institutions like yours. Welcome, Nick. So you’ve talked about how boards are hiring you to turn around their promising yet struggling, Ugly Children. Can you walk us through the process of what it’s like working with you as a fractional CTO for the port codes, sure, yeah. You know, basically we start with first developing a collegial relationship. You know, at times it can be hard to navigate a process like this with the startup executive team. So really work hard too.

Nick Talwar 25:00
I ingratiate myself and let them know that like you know, I was in their shoes, so I know what that feels like. And so we start there, we build that relationship. And we usually just write a proposal and make it collaborative based upon understanding their industry and their market needs. I usually write a very clear proposal right out to the board, and the CEO of the company sees it, and we try to figure out, like, what is the best sort of, you know, eight week timeline to really make appreciable results and move the needle on some business impact segments or help them with a complex transition that they may not have context for. A lot of times it’s like, you know, the this, the executive team has been working the startup for like, six years or so, or seven years and, and AI just came in as a freight train. And so a lot of that is about like, think of thinking like AI first and and in this pivot. And so we support them with that process, and then we check in and usually report out to the board and kind of broker and work together on a solution that helps everyone, and I know it’s working well, and because about half of our engagements result in the CEO Keeping me or us on as, like, a longer term advisor. So that’s really hilarious. We try that so I wouldn’t want to lose that, like, access to that red phone is like, Nick, yeah, exactly, any results you can share on the ROI of work you’ve done for some of these port codes, awesome, yeah. For one VC firm, we streamlined their due diligence process and added, like, long tail data and sophistication and some nuance around AI. Helped them develop, like, a technology perspective surrounding AI tailored to their industry and it helped them decide on whether they should follow on funding for report CO and or whether or not to lead around. And that’s like, a really important, nuanced decision. And so you’re, you’re, you’re a hitch and wagons for a while, right? Brand to brand. So, that was really impactful. Another is like, for a VC firm, of course, we worked with their port codes that were struggling, and we helped a series D company with the technical code audit across mobile, web back end. We refined the product and engineering strategy for growth and profitability, and then we went through a platform product design process like that. I learned, you know, from, you know, at Microsoft, and Microsoft Windows basically like the creator of platform product strategies. And so that was like being beaten over the head with us when we worked, when I worked there. So we overhauled the team around this new vision and pivot to boost innovation. And we deployed AI to lower content creation and CMS operational costs by 40% like I wasn’t surprised. And then we lowered engineering costs by about 30 and then after we left. After we left, they had a profitable month in June, and they were struggling for the last few years before then. So this was like a series D company, so much sort of more involved engagement, and that all happened over the course of about a quarter. Oh, man, and so, but your fractional CTO work ends up giving them their first profit of the ball corner. Yes, it did happen. I, you know, we were ecstatic about that so incredible. And what’s a contract look like with one of these port codes? That’s your question. Like, we’ve learned over time that hourly, is it fun for us and it’s also not fun for our clients to be like, you know, going back and forth, counting pickles of hours, like, here, there, and sorting them. So we operate on a sprint based model tied to outcomes and deliverables, like, basically what I would want to see. You know, when I was a CEO, when I hired a consultant, quote, unquote, I personally wrote every pitch and proposal for folks. We do an in tech call, and then, like, a follow up, when we have, like, rubrics and templates and ask all these questions to really understand their business and their industry and what their thesis is, or what the problems are that they’re seeing with their port codes, if it’s a if it’s a port CO and then you know about half our work is repeat business and a tight network for referral. So this is best for our brand to, like, tell you what we’re gonna ship and actually do it. And so that way we, you know, everyone’s happy. And, I mean, we came to this, it evolved. It took 12 years to figure this out, to kind of figure out, like, where we where we stand on all of this, and I think it’s helpful for everybody.

Alexa Binns 29:41
And final question for investors listening, what advice do you have on how they can guide their founders on where to focus their AI efforts?

Nick Talwar 29:53
So to answer this question, I’ll split it into two buckets. Let’s do short term bucket and then long term bucket and. The short term bucket we talked about a little bit earlier is operations. Everyone thinks AI is just a chat bot. Is the most potent operational automation tool we’ve ever seen. It can automatically refine accuracy in a lot of ways and across processes, and give you that long tail context you need. And it can drive efficiencies, and it can suggest efficiencies, which is even cooler. Agent frameworks help in this regard, because you want to use a lot of people who think about just using one AI or one LLM model across everything that’s not want to, like using two or three with different contexts, different teams using them. So that’s really important. And you can streamline op, ex, right? And if this really helps us to, like, really focus on that with our clients, and then, so that’s like the short term bucket. You can do that in a month and have appreciable results long term now. And you really need to think about first, kind of rethink, first principles around your business model, pricing and new Greenfield product lines with AI as a thought partner, the juggernaut of change is like, kind of bearing down on us. This freight train of AI and executives need to be ready to answer to their board, their customers, their partners, the public, if they’re looking to IPO these threats to the business, like, what are they doing to address this head on. And this is like a longer term question, and it’s evolving, but the core principles of strategies are based on a technology vector, which is AI that you have to understand kind of well. So investing in learning and design. Learning, design is really important. Learning Development, sorry, and, and so that’s why we created an AI executive curriculum, because we’re getting the same question. Frankly, I just got tired eventually, the same questions all the time. And so I just, like, wrote it down and posted a LinkedIn in the LinkedIn series. And that series became like, you know, executive curriculum and things like that. So people hit me up if you’d like to take a look at that and get and tailor it to your industry, and it’s like a one day intensive. We realize that works best. It’s really hard to get executives’ time and leaders’ time, you know, once a week or twice a week, for many, many weeks. It’s actually easier just to do one full intensive day, like six weeks from now, just we’ll make it happen for you. I And I think in this interview, you’ve proved it’s definitely gonna be worth your time, yeah, hopefully, yes. And, you know, we’re all learning, but yeah, I dedicated a ton of time towards this effort. And it was like, you know, for me, it was like a eureka moment when chat p 3.5 took the world by storm. Was it November 2022, or something. And so suddenly all of this disparate AI thinking rooted in things like machine learning, etc., from many years ago, neural networks, learnings from college, all that came to the fore. And even prior to that, there were industries like law, for example. It is so, so document based that actually used chat GPT three, and we worked on projects with them and so AI has been disrupting for a while, and so, but yes, it became part of the public Zeitgeist. Yeah, with chat GPT 3.5 so it’s been great to see it all coming to the fore today. Suddenly, people appreciated everything you were doing all this time. Yeah, you know our day in the sun, yeah, like data science nerds, or something like that, whatever you want to call us data science, or AI engineer, that’s the new term, right? Oh, yeah, that’s exactly, if somebody is calling themselves an AI engineer, is that? Is that a red flag that you’re like? This person may be new to the scene, or maybe, no, it’s not a red flag. But if they can’t find the sort of tongue in cheek humor in it, it is the red flag, if they come forth, like, I’m an AI engineer, I’ve been doing this for 10 plus years, like, I like, but if they come forth, and it’s like, a little cheeky about an AI engineer, but you know, it’s been, we’re all working, but you know, about a year or two of, like, real experience with L and you know, that’s like something, but there, there are folks who’ve, you know, a handful of folks that do have long standing experience. And, you know, worked at open AI, like 20, like, nearly a decade ago, or worked at Google near a decade ago, with a lot of deep core tech AI model building and sort of experience and deep learning. So you know, pick your flavor.

Alexa Binns 34:37
Absolutely awesome. Thank you so much, Nick. If you are looking for help implementing AI at your fund or across your portfolio, you can please go to Bottega eight.com. Backslash swimming. That’s B, O, T, T, E, G, A, eight, as in the number.com. Backslash swimming, we appreciate you giving this the credit. So please use the URL and now back to our LP interview there. There was another new theme, Roy, that I think you deserve credit for also putting capital to diverse fund managers.

Roy Swan 35:14
Yeah, that was an easy one. It’s multi sector, and it addresses the devastatingly destructive consequences of severe imbalance of access to capital, and the famous statistic is of the 80 plus trillion in assets under management in the US, 1.4% of that is controlled by firms owned by women and people of color. Women and people of color make up 70% of the US population in a capitalist system when you don’t have access to capital, what you have is a problem, and studies show so much of what we do is based on research. Yes, it’s less our opinions. We have opinions about the best way to address things, but we start with the research, and what we find is that the imbalance of capital, let me change this, the racial unfairness in access to capital, for example, and access to the capitalist participation in the capitalist system, estimates indicate that it has cost the US over $50 trillion since 1990 alone. That is just race. Wow, imagine if you included gender, because we know that women also face issues around access and pay parity, access to capital and pay per access to upward mobility within corporations. And we know that within a few short years, trillions, estimated 5 trillion or more, could be added to the US economy. And this is all this research comes from very reputable mainstream institutions. So for us, that was a no brainer, particularly when you add to that the research that shows that diverse fund managers, as women and people of color have more diverse portfolio decisions, and they invest in more diverse founders. And there’s other research that shows greater diversity, and founders, C, suites, boards, leads to higher profitability. So the statistics are, are impenetrable for pure economic analysis, but here’s, here’s the challenge that we also are aware of, and I’ve come up, I tried to simplify big challenges into phrases I can remember, and that is, psychology eats economics for breakfast. So the challenge that we face is, one of the challenges is that a Nobel Prize winning economist, Gary Becker did research and found that in the US, and this is in the US, the power elite is really defined as white men, the power elite. At the time, it was research, and I think that continues, they’re willing to pay or suffer economic costs to maintain the social psychological hierarchy of superiority. So you have to understand the facts to know what you’re dealing with. Because my view is, every man’s got his price and what bribery? How much value do we need to show that will pay the price of the ticket to generate fairness? We had to deal with the world as it is, and I’m not going to pretend that people are economically rational. I mean, Daniel Kahneman and the tvrsky guy proved that right. That’s how you got behavioral economics, and rational actor economics has been discredited. They also won a Nobel Prize, or, I should say, Kahneman did, but so, so that’s when Christine and I are thinking about things we often lead with psychology, because that’s, that’s, the driver of all human behavior.

Christine Looney 39:44
So Jeremy, just to add, it’s why we’ve also kind of used the pool of resources we have available to make some bets on the role the media is playing. We made an investment, our first direct investment, in a film. Ava DuVernay, amazing film. Origin. We’ve also invested in a couple of other media companies, macro one community because, because we really do believe that we can make some changes here if people have different narratives and stories to tell. But we’re also making decisions as allocators by supporting a lot of emerging talent. We’re advancing this across asset classes, which I think is really important venture, is probably the area where there’s the most diverse representation, but there are definitely huge opportunities in the other areas we’re investing in, and I think it’s really important that we have that kind of diversity reflected across the portfolio, too.

Roy Swan 40:39
And I should make a confession and hear it right here in public. You heard it first here that is notwithstanding our values and our objectives. White men are over represented in our portfolio, and that’s just from a pure This is not a judgment base. This is not this is just pure math our portfolio, while it’s true, it’s higher than that, 1.4% I but it’s not the 70% we are at 60% that’s that’s a very strong showing. And I also want to point out we’re not, we don’t have a quota. And I throw that word out because it’s one of those words that was weaponized as a bad thing. You know when, when President Nixon said that black people who face so much oppression by America, they deserve a leg up, not just a fair chance, but a leg up. And the legislative wisdom was that you can’t trust people to be fair, so therefore, let’s create quotas. Quotas were demonized and weaponized, similar to the way die and ESG is so something that the government, which is in place to protect people and advance shared prosperity, who understood that by including more of more Americans, more people living in America, including More in the capitalist system, will strengthen the capitalist system and the social fabric. However, it was weaponized, and it sort of went away. It’s still under attack. I mean, it’s, it’s, it’s diminished almost to a de minimis level. But it’s so triggering, and we understand the psychology. I mean, I read the book white fragility by a white woman psychologist Robin Daniel. It was so enlightening for me that I became very aware of the fragility of words and how they can trigger, yeah, resentment, fear, anxiety, the fallacy of zero sum. It amazes me how intellect, intellectual people, highly educated, highly aware, can believe in the possibility of economic growth and yet talk about zero sum, you can’t have economic growth in a zero sum world. It’s impossible. It’s completely illogical. It’s oxymoronic, and yet again, psychology, there are opportunists out there who would prefer individual selfish gain at the expense of society, and we have to understand that. We have to accept it, and our challenge for all of us that care about society is to figure out how we can work within the constraints. And every one of us has the opportunity to make things better in our own way, and for people who doubt the ability of one person, I mean, I can’t remember Margaret Mead or somebody said, Never doubt the ability of one person to bring about change in a big way. In fact, that’s usually how it happens, is that one person who doesn’t give up. So we got a whole team of one person. Yeah, that’s grammatically incorrect, but you got what I’m saying.

Earnest Sweat 44:51
I love that. Roy, I’ll say just as a response first, didn’t know that quote by Nixon. It’s not even in the top 20 coats that I know of him. So that was interesting. And then also how you all like to be led by psychology, I think, even in our industry of venture capital, where we’re literally supposed to be looking to the future, how there’s economic growth, anything could happen. A lot of decisions are made with investments or personnel that seem very short sighted and zero sum okay? And so even like the Mavericks of the asset class of private equity, have the same problem. So we’re working on it ourselves. One question I wanted to ask was kind of to that end of psychology, anytime you bring in any kind of diverse fund managers, diversity at all, the immediate capitalist, you know, I’m using that in quotes. The approach is we don’t want to lower the bar. So I was curious if you all have received any or even heard murmurings as you have this influence or have you had trouble finding the kind of market you know rate returns for your investments in these types of fund managers are just overall in the mission.

Christine Looney 46:24
I mean, I guess the short answer is, No, we don’t believe backing diverse fund managers is a concessional strategy, nor have we experienced that in terms of our results to date, and yet, and Roy is better at quoting the research than I am, the research shows in some in most cases, it doesn’t even matter, right? I mean, I know Stanford and others have done research where they’ve kind of had a group of allocators look at the performance of a black fund manager and a white fund manager, and the black fund manager is over performing, and yet they still back the white fund manager, and it’s because they think that was a fluke, right? Like it won’t be repeated. And so I think, to the psychology of this work, we just got to keep allocating, and people are going to come along and for different reasons at different times and and we need to just keep, I think, talking about this and our own experience and giving our portfolio of managers as most as much exposure to others that We can

Roy Swan 47:37
with time and cheerful persistence and message. Morgan Stanley, Wealth Management, I think it did a huge study where allocators felt an overwhelming majority of allocators felt that diversity was important in their fund, but also an overwhelming majority thought that it would hurt returns. And the reason why I say I’m optimistic is because the values that are signaled by the input by them recognize the importance of the critical piece, the fact piece can be conveyed over time. And I understand that even when you have the facts, sometimes you might find it’s a challenge. But for your listeners, I’m going to give a couple of references to help them understand how we as humans are strengths and frailties. Robert Sapolsky, who’s a neuroscientist at Stanford University, is a highly accomplished author focused on human behavior. He started out with baboons and gorillas and moved to humans, and then Sheldon Solomon and they all talk about the reality of human biochemistry that gives us the sense of tribalism and instinctive reactions that aren’t necessarily good for the modern world. In fact, many are not. The most important thing is to understand that these things exist. We all have these instincts, and once you know you have them, the hard work that our ancestors have put in is how to suppress the instincts that were important for a hunter gatherer, very tribal existence to the existence we have today, where we’re better together and cities were created for a reason, and that’s because we. Are social beings. At the core, we like being around each other. We have discovered and enjoy the collision of ideas and innovation that happens when we just bump into each other and we all without knowing it. Sometimes we do know it. We can suppress our instinctual behaviors or tribal behaviors, in order to embrace the types of behaviors that make us all better off. And I’ve, I’ve, I feel greatly enriched by having spent a significant amount of time understanding human behavior, because the economics part is easy, the statistics tell the story. Diverse fund managers, black fund managers, are more likely to outperform in the top decile. Now mathematically, one reason for that could be the law of large and small numbers, typically you have smaller funds because you got less capital, and it’s easier to outperform when you have smaller pools of capital. It’s just that’s just the way things work. So I believe that over time, with cheerful persistence and engagement and exposure, and because once people come together and studies have been shown, you show a pick, a pick on black men, because I’m a black man. You show a black man in a hoodie in San Francisco. You show a black man in a San Francisco Giants cap. A completely different reaction, one, one is feared, one is embraced, and that’s what our hard work is. How do we turn this pot into a brew of stones and water to an actual melting pot? Because that’s when we will all rise together.

Alexa Binns 52:02
Are there any practical pieces of advice, of things you all have done to either produce that bias or even just welcome hearing about more managers. You know, what are the things that other LPs can do to follow in your lead.

Christine Looney 52:24
I mean, a couple of things to just throw out there when one we have an open kind of proposal inbox. So I think for many allocators, they kind of seek opportunities, and it’s more closed on how you can kind of get in. And so that’s one way we try to establish an open playing field. So you don’t really have to know any of us to make that connection. And we’ll review the opportunity to, I mean, we really do benefit from having a diverse team with diverse networks themselves, and that’s both from like age, ethnicity, geography, and it’s a good check for us too, as we look at opportunities to say, Are we all feeling the same way for the same reason about this opportunity? And I think that’s really healthy debate, and ensures that we’re constantly looking at everything we should and then we’ve been explicit from pretty much the very beginning that this is important to us and have a clear kind of remit and strategy. So I think it creates an open kind of opportunity for people to kind of come to us and have been really open about our commitment to this area. So I think that’s helped. It doesn’t mean we see everything, and you can always do more, but on a Roy, what else

Roy Swan 53:47
We spend quite a bit of time helping guide people. And one thing I learned: I was really fortunate to have one of my law school classes, literally just one class from a semester with a guest lecturer, Charlie Munger. And I’ve written about this. Charlie Munger spent the whole class just doing an informal Q and A. This was 1991 and one of the things we talked about was, how do you get people to do things that they couldn’t normally do? And one of the things Charlie said that stuck with me is, don’t nudge, don’t badger, don’t criticize, don’t finger wag, appeal to their sense of greatness. And what we try to do is we try to help people understand that they have a chance for greatness through leadership. And sometimes when you’re doing the right thing, even when there is a business case. Yes, you may be alone as a person who chooses a path, but you might be alone, but you might be that moral beacon and a sea of darkness that people are just looking for leadership. And we try to appeal to that sense. And in fact, I spent a lot of time reading history. And one of the things that I like to point out to people who get stuck on the notion of the invisible hand and oh, well, Marcus, take care of things. Well, I said, Well, you’re getting that notion from what you know about Adam Smith, but I’m going to guess that what you know about Adam Smith, who’s the God of capitalism, I’m going to guess that you you know the half hasn’t been told in the classes that you’ve sat in. So I encourage people to read, as I did, the original sacred text of capitalism, and there’s two books, The Wealth of Nations, but there’s also the Theory of Moral Sentiments. And what you’ll find is that the person who uttered the term invisible hand once or maybe twice in that 1300 pages used the term impartial spectator over 50 times. The impartial spectator is that little angel that sits on your shoulder and tells you, you know that’s not the right thing to do, or you know you should really do that. And what Adam Smith said is, you know you can have no sustainable economic system without morality, without progressive taxation, without appropriate regulation and without taking care of your community that got excised from the notion of capitalism that was set forth by people I refer to as free marketeering opportunists. So common sense for those of us that are steeped in normal Western moral norms, common sense tells you you know the golden rule, and that’s true in capitalism, and we know that from engagement, engagement is basically fairness morality, which underpins the business case. So that’s a lot, but we try to walk people through in ways that will give them the information the awareness that will make them more confident leaders aspiring for a sense of greatness,

Earnest Sweat 57:55
That’s beautiful, and I’m always in for anyone. Any of our guests are like people who should read more. That’s like, that’s my thing. I think we’ve been talking and speaking to one half of our audience a lot today, the allocators, which have a lot of influence. But I want to end by asking both of you a question for or parting thoughts for all of our fund managers. So, you know, in venture and across, I feel like all asset classes, it feels like we’re at an inflection point of diversity within these you know, Roy, you mentioned the number of, like, only one, 2% of all capital managed. What advice do you give to those fund managers, those diverse fund managers in venture and in other asset classes, of how to weather the storm. I mean, look, it’s a really tough environment, and

Christine Looney 58:53
got to be in it for the long term. And I think that leaning into relationship building, while exhausting, kind of pays off. And it may not be for this fund, but it may be for a Future Fund. I think the allocator community is over allocated to venture. That’s where we see a lot of these people raising right now. It’s like, so we’re kind of in a conundrum for a couple of reasons, like leaning in a potential like smaller fund or bridge, kind of fund during this period, I wouldn’t look down. I would, you know, think that was the rational decision based on market conditions, and can kind of keep the team incented and keep you going. And I guess look for as much as this is also a market where people may be taking an opportunity or advantage of these managers. And I think be cautious of. That you know, whether it’s trying to take too much ownership or control in exchange for making some bets. I think I’ve been watching that go on and something I’ve just got my eye on, and maybe for the last while, I know it’s not something anyone wants to hear about being open to some merger, consolidation opportunities. There are a lot of amazing platforms right now, and it’s tricky, for sure, to find the right partners at the right time to make that work, but if you can, I think there’s some great economies of scale to be had, and it has the potential to expand your LP base in a way you wouldn’t be able to achieve otherwise. Those are a couple of thoughts. Roy, what do you know?

Roy Swan 1:00:45
So I got three main thoughts. One is, I recently went to a convening where a very successful black male private equity investor said something that many black people, certainly of my age and maybe a little younger, have experience, and that is good parents. Good black parents will tell their black children, you have to work twice as hard to get half as far. Now, what was fun about this private equity manager who now has over 10 billion in assets under management? He said the reality is you got to work in the assets under management, business, investment, business. You have to work three times as hard to get 25% as far. So I can’t tell you the number of people of color and women of any race who come to our offices and say they’re going to raise, I’m making up a two, $50 million fund in a year. I’m like, and why do you think that? Oh, that’s what everyone’s telling me. And who are the people that are telling you? And I’ll get precise, or what are the demographics? Oh, you know, they’ll main you know, Bob Smith, whatever is, bunch of white guys. I’m like, Listen, I love white men. Love them, but you have to look at the world as it is. The White Man’s experience is different from your experience. So that’s number one. Number two, the best partners are relational, not transactional, and the best partners like GPS, who are relational, not transactional. So that’s the other thing. A lot of GPS will come in. They’ll do a pitch or two pages, will think, okay, where’s our money? There are some people who will do that, who will, you know, be transactional, but that’s probably not the partners that you want for a number of reasons. And the third thing I’m going to say is make sure you understand what your objectives are. I mean, just be crystal clear, transparent with yourself, even if you’re not transparent, honest with anyone else. If your goal is to be an investor that makes money really quickly, your best bet is hedge funds. That’s the structure of the business. If you want to make a lot of money, but you want to do it safer, not quite as is interesting, probably a little boring, because you’re looking at, maybe at mature cash out businesses, that’s private equity. Lamps are us coming your way? Hey, hey, that’s and then, if you want one among the most, first of all, anything can be interesting if you really are engaged. But the thing about VC is you’re talking about new technologies, new products that’s super interesting and fulfilling. So if you want life fulfillment from an engaging the brain and unique new opportunities, but venture capital, but it has the lowest opportunity to make money, and it takes forever to make it. So a lot of people, and I’ve seen, you know, I’m old enough to have seen several of these cycles, people make a few personal investments in new companies. They make some money. They think they’re really sharp. They’re swimming out there with the best of them, and as Warren Buffet and Charlie Munger say, when the tide comes in, you can see who’s swimming naked. And the reality is, it’s it’s easy to be successful when the wind is at your back or the tide is rising and your boat is lifted, but when the wind is in your face, you get the tough lessons. So I’ll stop with that.

Alexa Binns 1:04:46
Oh man, we’re we’re actually going to be putting together the Roy Swan recommended reading list exactly longer than what he shared today, exactly your required reading should you be actively per. Doing a career in venture capital. These are your must reads. Thank you Roy and Thank you Christine, so much. Thank you both. Thank you. See you later. Allocator.