Chris Douvos – A Value Investor Lost in the Valley

**Patrick O'Shaughnessy** (0:00)
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Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_2** (0:59)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
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**Patrick O'Shaughnessy** (1:23)
My guest this week is Chris Douvos, a managing partner at Venture Investment Associates, which allocates $1.6 billion on behalf of investors. Chris is the first professional allocator I've spoken with who focuses specifically on venture capital funds. So I had a ton of questions for him on how to build a portfolio in an asset class known for uncertain but often enormous outcomes. We discussed the major recent changes in the asset class and where things might be going. I saw Chris out because while this is an investment style that is full of creativity and hope, I've always felt it could use a healthy dose of skepticism and a value investor's mindset. He delivers in spades as we try to separate the real from the ideal.
We didn't record it but Chris' tour of Palo Alto was one of the most interesting and entertaining hours I've spent. He is a student of markets and of history and I look forward to learning more from him in the future. Please enjoy our conversation on venture capital investing.
So Chris, I'm going to start with a question that is antithetical to most venture investing by forcing you to play a little game, which is if you had to build a quant model where all you got to select venture firms was four factors that have to be objectively measurable. So for example, assets under management could be one factor that you could use in your way of screening or track record or something like this. What four factors, knowing fully that this is a silly place to start, do you think are most positively related to future success for venture firms?

**Chris Douvos** (2:51)
Well, I didn't go to law school, but all my friends who went to law school said, professors always say don't fight the hypo, but I'm going to fight the hypothesis here a little bit because I almost think that if you found four factors, I'm not sure they would necessarily correlate with success, although they might, but they would certainly correlate with volatility.
And I think you can positively skew volatility.
And so one thing I would actually say, and this is my bias, and there are a lot of people on the opposite side of this trade, my bias is portfolio concentration is number one. On the margin, I believe that people who are more concentrated will have more success because each win has much more impact. Now the reality of it is then you have to step back and say like, are they choosing well enough? This isn't monkeys throwing darts at a dartboard, because in that scenario, actually, portfolio diversification would 50, 60, 70 companies of fund would probably give you a better chance of hitting the winner. But if you can apply, you know, kind of thoughtfulness to the problem and have a portfolio of 12 to 20, you could really make a structural alpha, I believe. So that's one. Another, and this is actually an interesting question, how can you quantify this?
And I'll say maybe it's a qualifier thing, not a quantifier. But one thing that I focus a lot on, I know you talk a lot about is repeatability.
And I believe that process drives repeatability. People who have thoughtful processes around building hypotheses and testing those hypotheses and executing against those hypotheses, that's a really powerful and I'll say the poster child for that is Union Square. They spent a lot of time talking about process driving repeatability. And I think that you look at the first round guys and they've built a big infrastructure, the true guys, a bunch of folks who've built process for driving deal flow and driving decision making, building that investment. And I think that's another one. A third factor, I think quite frankly, if done well, just being early, this is completely exposing my bias. Early stage investors I think are kind of structurally advantaged versus late stage investors just because they have a better cost basis.