RenTec Vet Who Mastered Venture Talks Wealth and Why Quants Rule

(Bloomberg) -- Howard Morgan got a doctorate from Cornell, taught at Wharton, helped lead Renaissance Technologies, pocketed a bunch of money -- and that was just Act 1. Morgan made another splash co-founding First Round Capital. The venture firm was one of the earliest investors in Uber and has nurtured Square and Warby Parker, burnishing Morgan’s reputation.

Now 72, Morgan remains restless: His foundation looks for groups like Math for America to back; his family office has a mission not to lose the money he made so his kids can carry on his philanthropic work, and he’s pursuing another cutting-edge investment theme. What happens when you mix big data and disease?

His comments in this Q&A have been edited and condensed.

How do you invest your own money?

I’m so heavily in technology as a venture capitalist through First Round Capital and B Capital, I try not to do liquid tech stock investing. Because of my background at Renaissance, I do a lot of quantitative hedge funds and I’m trying to create a portfolio where they invest across different time horizons. Like Warren Buffett, I largely don’t believe in active managers. There are outliers but so few that it’s hard to find them.

What has you so down on active managers?

Well, there’s the fees. You have to overcome the fees and not many people can do that. With quant funds, you have to get over fees as well. They’re expensive. But the thing about quant funds is that they have no intuition and no emotion. By their nature they invest on intellect and facts and no emotion. That’s why I believe they can beat the averages.

Are you still an investor in RenTec?

I’m not an investor in Renaissance’s Medallion funds. They gave everyone their profits and their capital back and everyone should have been very happy. I’ve made a lot of money along the way. My kids’ trusts and stuff like that have some of the other funds.

So you don’t own much in the way of stocks?

Almost none. I have a tiny IRA which has maybe 2 to 3 percent of my portfolio which I play with. But really that’s focused in one area, which is water. I’ve been investing in the water space since 2003 or so. That’s been up 18 or 20 percent IRR. It’s just been water distribution, water technologies -- because water is the scarce resource. I mean, oil we can do without because we get sunlight and can create electricity. You can’t do without water to stay alive.

What are you excited about right now?

Genomics and personalized medicine. That’s going to change the world as much as the internet did. First Round was an investor in Flat Iron Health, which just sold to Roche for $2 billion. Flat Iron uses big data to try and figure out what cancer cure therapies work for what kind of people in what kinds of situations.

Are you worried about lofty valuations in tech?

I’m always worried about valuations. We told our limited partners at First Round a few years back that entry prices were going up because there’s so much money splashing around the Valley and that all these new investors were investing at too high a price. You have to be very sensitive to valuations. Some investors are going for the giants and they don’t think it matters whether they make a 500x or a 1,000x return. I don’t mind a 3x or a 5x return, but if it’s a 3x and I invest at too high a price, then it’s a 1x, and I do mind.

How did you think about investing after RenTec?

At RenTec you don’t want to think about investing in anything else because returns are so good. You want to put everything you can into Medallion. We did do venture capital at RenTec. Then when I left Renaissance I started doing a lot more because that’s what I love to do. I was investing my own money and taking companies public because in the 90s you could take companies public very easily.

How do you make use of family office service providers?

I work with private wealth folks at Goldman Sachs -- where my daughter is treasurer -- and they’ve been very helpful particularly when I look at some of the trusts set up for my grandchildren where I don’t want to be as aggressive as I am in my personal portfolio. I think they offer very good advice on asset allocation. Some of those assets I have in my family office fund, the Morgan Family Common Investments Fund, where I invest in hedge funds and quant funds and venture funds and some private ventures.

Why did you get involved in Tiger 21?

To discuss issues like how much do you leave to your children and grandchildren. We’ve had a couple of members say, "I want each of my kids or grandkids to have X. Should that X be $10 million? $100 million? Should it just be their fraction of the family?" There are a lot of interesting discussions around things like that, which I’ve benefited from at Tiger.

What do you see as the legacy of your family office?

Well, I don’t know that I can control things from beyond the grave. We have presentations at Tiger 21 about perpetual trusts -- and should you create a dynasty trust where you can make your wishes hold for generations. Personally, I don’t think that’s particularly good. I don’t think that’s adaptable to the changes that will happen in the world and the financial world over that period.

What values do you want to instill in your kids?

We want philanthropy to be important. First off, we want them to have a good work ethic, so that they actually do something and work. So far that’s worked out just fine. But the other thing is that we want them to understand that they should have a sense of how they want to help others. It shouldn’t all be about them; it should be about making and keeping the world a better place.

Would you organize your philanthropy around one mission?

No, that’s not me. That is a lot of people I know -- Nat Simons, Jim Simons’s son, is focused on climate change. I think that’s great. There are people who had a relative die of a particular disease and they’re focused on that disease. They absolutely get a lot done. I have never been a very focused person in my life. I like to do a lot of different things and learn new things. That’s the way I live.

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