Ali Hamed – Creative Investing - [Invest Like the Best, EP.71]

I have a special request this week: share this episode with every curious person in your life. The conversation, with a 26-year old investor named Ali Hamed, serves as an example of what’s possible when you think creatively. Ali views the world with a fresh set of eyes, and has already become an expert at identifying new investment opportunities where others have not. As the second prodigy 26 year old in as many weeks on the podcast, these young guns are making me feel like an ancient 32 year old. We talk a lot about “alpha” in our world, earning returns better than the market. But the key word in that last sentence isn’t alpha, it’s earning. Hopefully you, like me, will use this conversation as a reminder of what it takes to earn differentiated returns. It’s not just the hard work, but also the mindset. We explore many examples of how to create new investment opportunities, from rolling up Instagram accounts, to financing perishable fruit like watermelons, to heavy machinery software. Please enjoy this special conversation with Ali Hamed. Follow him and his partners. And then go figure out how to earn success yourself in whatever it is you do by helping other people solve problems with empathy. For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag Books Referenced The Big Short: Inside the Doomsday Machine Links Referenced Sheel Tyle Podcast Seed Investing is a B2C Business, While Growth Stage investing is a B2B Business Ira Judelson podcast Free Content and Digital Media Are Increasing Socio-Economic Disparity Show Notes 2:24 - (First Question) Ali’s investment philosophy 3:33 – History of Coventure and its unique structure 6:30 – The story of how Coventure was seeded 12:29 – What makes cost of capital such an interesting topic for Ali 14:13 – Exploring fee structures and the expectations for return in the current environment 17:02 – The current state of the VC world 21:42 – Ali’s investment process on the VC side 25:32 – What other requirements are there for Ali to make a VC investment 28:00 – Understanding the difference between judgement and empathy in founders 28:20 – The Big Short: Inside the Doomsday Machine 29:47 – Dealing with LP’s 32:47 – Sheel Tyle Podcast 33:39 – At one point did Ali feel the most personally at risk in his career 37:55 – Why did they get involved in cryptocurrency 43:30 – What excites Ali most about crypto 46:09 – Lending as an alternative way to invest in businesses 48:09 – An overview of their lending business 50:21 – How does deal flow and sourcing work in these arrangements 52:54 – How much encroachment will Ali face from competitors 54:28 – Exploring the idea of valuing and buying digital accounts 59:36 – How Ali thinks about marketing for his own firm and the ones he invests in 1:00:06 – Seed Investing is a B2C Business, While Growth Stage investing is a B2B Business 1:03:59 – Longer term aspirations for Ali and industries that he would avoid 1:04:25 – Ira Judelson podcast 1:08:05 – Ali’s view on the potential negative impact of free content 1:08:19 - Free Content and Digital Media Are Increasing Socio-Economic Disparity 1:12:48 – Kindest thing anyone has done for Ali Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 0:32Patrick O'Shaughnessy?

  This podcast is sponsored by CFA Institute, the global association of investment professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals, working to build an investment industry where investors' interests come first, financial markets function at their best and economies grow. The Chartered Financial Analyst credential is the most respected and recognized investment management designation in the world. The views expressed in this podcast do not necessarily represent the views of CFA Institute. Hello and welcome everyone. I'm Patrick O'Neal and this is Invest Like the Best.

• 1:15Patrick O'Shaughnessy?

  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.

• 1:31Speaker 02

  Patrick O'Neal is a Principal and Portfolio Manager at O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 1:54Patrick O'Shaughnessy?

  I have a special request this week, which is to share this episode with every curious person in your life. The conversation with a 26-year-old investor named Ali Hamed serves as an example of what's possible when you think creatively. Ali views the world with a fresh set of eyes and has already become an expert at identifying new investment opportunities where others have not. As the second prodigy 26-year-old in this many weeks on the podcast, these young guns are making me feel like an ancient 32-year-old. We talk a lot about alpha in our world, earning returns better than the market. But the key word in that last sentence isn't alpha, it's earning. Hopefully you, like me, will use this conversation as a reminder of what it takes to earn differentiated returns. It's not just the hard work, but also the mindset. We explore many examples of how to create new investment

• 2:37Patrick O'Shaughnessy?

  opportunities, from rolling up Instagram accounts to financing perishable fruit like watermelons to heavy machinery software. Please enjoy this special conversation with Ali Hamed. Follow him and his partners, and then go figure out how to earn success yourself in whatever it is you do by helping others solve problems with empathy. So Ali, I'm going to start with a question that, as I'm thinking about it, I don't think I've ever actually asked anyone on this podcast, which is for you to describe your investment philosophy overall.

• 3:06Speaker 03

  I think that our investment philosophy has been, how do we, we go into every single investment saying, is this a trade or is it a business? And if we think it's going to be a one-off trade, we probably won't do it. We look at every new investment opportunity, whether it's something we, within a current fund or a new potential fund, as can we get an unfair advantage? Can we build a sustainable advantage where we understand why our team is uniquely positioned to get an outsized return? Do we think that we could do this a bunch of times over and over again? And do we think that the more times we do it, the greater advantage we'll have over our other competitors? An example of something we wouldn't want to do is say, hey, we've discovered this thing, and now that we're doing this thing, everyone else is going to be, realize it's also a good idea. And I would be nervous to get on this podcast and talk about it. The minute I'm nervous

• 3:51Speaker 03

  to get on this podcast and talk about one of our investments, it means it's not defensible enough. And I'm not, I never want to be the guy who's like winning because I have a secret and God forbid anyone else finds out about the secret. So I guess that would be some of the-

• 4:03Patrick O'Shaughnessy?

  The checklist.

• 4:04Speaker 03

  Some of the checklist.

• 4:05Patrick O'Shaughnessy?

  With that in mind, can you describe the history of Coventure and kind of its unique structure in the way that it's, it seems to kind of organically grown into an investment firm that's quite different. It doesn't fit into a single bucket. So maybe describe the firm and as it looks today.

• 4:20Speaker 03

  Coventure is a firm. Our focus is we build funds in what we call sort of new and emerging asset classes that are propped up by new technology. So we look for things where technology helped us create a new asset class and then build a fund around it. And the way we got started was first in venture capital. So we thought venture capital was, and continues to be sort of a little ridiculous of an asset class. So the way the venture capital model works is you find a couple of people, they put $50 million together, and then they give a million dollars at a time to either a couple of kids who can code, or a couple of people who can't code but might know the industry. And like, that just always felt ridiculous. And I was like, oh wow, seed investing isn't really working. Like, of course not. How is that a good strategy? And so what we did is we said, okay, so what are sort of the main reasons seed companies don't get to a Series A?

• 5:05Speaker 03

  And one of the reasons is they never build their software, they never get to market. And so we said, okay, so we're going to actually help the companies we invest in build software to make sure they actually get out to market. And the second reason is they don't find customers. These are not very complicated reasons, but those are the two main ones. And one of the reasons that these companies don't get to their customers is the founders don't often know anything about the industry they're going into. So if you look at a tech startup that's going after the elderly care space, how often are the founders actually from the elderly care industry? If you're looking at companies that are building businesses in financial services, what percent of those tech companies or tech startups are actually founded by founders who've worked in financial services? And God forbid they ever are, the likelihood they ever build the software is low.

• 5:47Speaker 03

  So we said, we're going to just find founders with domain expertise who work in those industries, build software for those companies and help them get to market, and then help them recruit their internal team. And that was the first business. And it's gone incredibly well.

• 5:59Patrick O'Shaughnessy?

  How would that work? So what was the specific trade that was being made?

• 6:02Speaker 03

  You know a lot about financial services, about asset management. If you came to us and said, I want to start a company in the healthcare space, we'd say, no way. But if you're like, look, I've got this tech-enabled solution for the asset management world, and I believe I'm the right person to build it. Here's, by the way, 10 people who are going to be my customers. Four of them have been on my podcast already. Feel free to call them. We'd say, great. What do you want to build? Let's work with you to figure out what you need to build to prove product-market fit. And then for anywhere between 5% to 7% of the company, we'll build your initial product and then help you recruit a technology team. And if I said, hey, who do you think your first technical hire needs to be? You might not know. If you go to a VC firm, they'll say, well, you should really have a technical co-founder. What does that mean?

• 6:43Speaker 03

  Is that a CTO, a VP of Engineering, a head of product, a project manager, a project administrator, a lead engineer? And so we want to help our companies, A, get to market and figure out, B, what type of team they should really have. And then we'll also invest anywhere between $25,000, $50,000, $200,000 of cash. And then if you need more than that, help you put together the round.

• 7:03Patrick O'Shaughnessy?

  And how did that all start? So you started ridiculously young. So maybe tell that quick story about how this was seeded itself.

• 7:09Speaker 03

  So I had done a startup my freshman year in college. And after that, I was doing consulting. And really, the consulting was anytime anyone needed anything, I told them that I was an expert at it. And then I'd go hire people who were and subcontract up the work. So it was very, very fancy. Actually, the first time I landed a contract with a big company, I got fired after two weeks after I sent my first billing. Because I was billing like $100 an hour. I was like, wow, this is amazing. And they're like, that's way too low. And then they were like, wait, he's 20? And so that was not so good. But eventually, I made enough money where I could start making these really, really tiny angel investments. And I'd go to founders, and I'd say, hey, here's $20,000. And they'd say, that's great. I'll give you like a quarter percent of my company for that. By the way, do you know anyone who could build the actual app? Or could you build the app for me?

• 7:51Speaker 03

  And so I realized that it was actually easier to raise capital than it was to find someone to help them build the product. And their only other options were give 30% of the company to somebody they just met at a meetup, hire a development firm that had completely misaligned interests, or raise enough money where they could pay someone a ridiculous amount to be their CTO, and they also often didn't know what a CTO was. So that was really how we got started, is we hired a bunch of engineers, we started building software for Equity. And then, right after that, we approached two guys. So one's a guy named Thatcher Bell, and Thatcher had spoken in one of my classes at Cornell. And Thatcher was one of those alumni who would come back to school and all the undergrads would be like, "Oh, man, I want to be like him one day." And the other guy was Mike Beller, and Mike was actually my best friend's dad. And he was like one of those people that I always go to and ask for advice.

• 8:34Speaker 03

  And I went to both of them, I said, "Look, you know, we've known each other for a while. I'd love if you both worked with us a day a week. And I'll pay you each a day a week, because I can't afford to pay more than that. But after a year, if it goes well, you guys should both join, and we'll go raise a fund." And I didn't have the resume or the background to raise a fund, but both of them did. Thatcher was a real VC, Mike had taken a company public, they were real guys. So after a year, Thatcher kind of recruited Mike, Mike kind of recruited Thatcher, and I was just a lucky guy in the middle. Which is fine, for me. And we raised a few million dollars. And the way we raised the, only three, but the way we raised it is, we went to a guy who was sort of a famous venture capitalist, and I said, "Hey, if we raise 2.975 million, will you be our last $25,000 check?" And he said, "Sure."

• 9:19Speaker 03

  I was like, "Great, you're in." So then I used his name to go get everyone else, and it was awesome. And so that's how we kind of got into venture. Then we invested in this company called Produce Pay. And Produce Pay was founded by a guy named Pablo Borquez, and Pablo's a fourth-generation farmer from Mexico. And he realized that his family, and many other families who had farms, had this huge cash bottleneck during the harvest. And the reason is his family would literally go from like 300 full-time employees to 2,400 during the harvest. The whole harvest was 45 days and the first revenues they got were on day 50. And so what used to happen is the distributor he worked with in the US would send him advances when they received the produce, but even that would take 15 to 20 days. So it wasn't a real solution.

• 10:00Speaker 03

  He came to us, he said, "Look, if I build inventory technology, I'll allow a farmer to go into the website and say, 'I have $100 of grapes and I just sent it to a big distributor in the US.' As soon as the distributor says they've received it, I can buy it for 40% of its market value and then take a commission when it's sold." And we built the initial technology, we invested capital, and then he said, "Hey, can you provide me debt financing so I could actually fund these asset pools?" And so we went out to our LPs and we said, "Look, we think this is a great piece of paper, we think we can get a high yield on it, and we don't think it's riskier than anything else, we just think it's new and different." Two and a half years later, I think we financed hundreds of millions of dollars of produce. Produce pay probably is one of the most important businesses in the agricultural world, which is absurd.

• 10:45Speaker 03

  I never thought I'd own tens of millions of dollars of watermelons in any given year, but that's what my life's like now. And it turned us into a lending business. So, okay, so this story's been coming along. So we had a venture capital business and a lending business, and we looked at ourselves and said, "What are we?" And we realized that what we really love to do is find asset classes that we could get a really good return because they were just new and hadn't really existed before. So no one really had perishable produce financing before, but that was why we were getting a high yield. And we said, "There's so many cool assets out there that no one really knows how to value. How do you value an Airbnb account? How do you put a multiple on that? How do you value the reviews? That person has really good reviews, there's barriers to entry, they have a really great picture. How do you do that? How do you value an Instagram account? How much is an Instagram account worth?

• 11:29Speaker 03

  How much value do you put on a like or an impression?" These aren't overly complicated, but they're probably mispriced because no one's tried it and it hasn't gotten to the mean yet. And so where we are now in co-ventures, we have three businesses. We have venture capital. We have lending and we also have a cryptocurrency index fund. We felt like based on the firm's DNA, we had to have one. It's a new asset class built on the back of technology. We think it's interesting for a million reasons that are probably already been on this podcast and reasons you've heard, and I'm happy to go into it. And that really became just an index fund. And we said, look, you know, I really couldn't tell you why Ripple's on a tear this week. Rumors that it might be on Coinbase or the SBI deal that they had, but I think it's really hard for anyone to say that they know what the future is. And so we said, look, it's just going to be an index fund. It's going to be a

• 12:11Speaker 03

  basket of the top 15, market cap weighted, and we balanced every two weeks. And so that's sort of all of co-venture in a nutshell.

• 12:18Patrick O'Shaughnessy?

  It sounds like it's something that's going to change a lot in coming years as new technology enables new opportunities.

• 12:23Speaker 03

  Yeah, totally. Right? Like, and I think that our goal is to continue to add one or two asset classes a year. And again, we're going to go through the same analysis around our investment philosophy, which is, okay, so why does this newly exist? Do we understand why no one knows how to price it? Do we think that our team's DNA being sort of in between technology and finance allow us to underwrite it differently than anyone else can? We have a really amazing LP base that allows us to be flexible and do these weird niche, interesting things because they like that we're getting a really high return because it's a little smaller in the beginning and different and notice how to do it. And then does it build barriers to entry over time? And if it checks off those boxes, we'll probably get into it.

• 13:02Patrick O'Shaughnessy?

  One of the things that you've written a bit about that I was most interested in reading, reading your stuff on the train on the way into the city today, was this big philosophical discussion of cost of capital, risk, how good we are via technology at underwriting price and risk. So maybe if you could begin to sketch out what that framework is, why you wrote about it, and why you're so interested in cost of capital as a topic.

• 13:26Speaker 03

  There's a lot of reasons I'm interested in cost of capital. One, it depends on how much I can originate. I'll give you one way to, one place to start, which is I think the cost of capital in venture capital is ridiculous. I think it's absurd that we were supposed to return 3X our capital in 2007, 3X our capital in 2010, 3X our capital in 2013, 3X our capital now, when the markets have been different in each of those years. But no matter what, we're always supposed to return 3X. That sort of sounds absurd. The other thing that sounds absurd to me is that every VC fund has the same cost of capital. Which like if first round capital said, Ali, I'll let you be an LP. I'm going to give you 2X your money. And then some like firm I've never heard of said, Ali, I'm going to let you be an LP and I'm going to return 4X your money.

• 14:08Speaker 03

  I'd still give it to first round because like the likelihood I get 2X my money back is pretty high. Yet everyone says they all need to return 3X. It's just this crazy thing. And what's also crazy to me is I think there's firms out there who everyone yells at them for investing at really high valuations. They just built a better product. They just have a lower cost of capital. If I convinced my LP base that all I had to do was return 1.5X their money on my VC fund. I would have an unfair product because I would be able to go to a company, invest at a higher valuation than all the other competitors. And still do what I needed to do to raise my next fund. That's like a differentiated product. That's really cool.

• 14:45Patrick O'Shaughnessy?

  One of the things you wrote quite a bit about is, and we were talking before we started recording just now, is that it's kind of wild how similar the fee structures are for asset managers, for venture capitalists, given the dispersion of skill. And that maybe that that should change. That's one way of thinking about it. The other thing you wrote about is this idea of kind of the relationship between return and risk where the harder it is to know, the more uncertainty there is, the more risk there is, the higher the the higher the return should be for investors to compensate them for that. But that as a species, we're just getting better and better at predicting the future, at underwriting risk, at quantifying risk.

• 15:26Patrick O'Shaughnessy?

  And therefore, maybe the returns that we should expect from every asset class should be ratcheted down accordingly.

• 15:32Speaker 03

  Yeah, I mean, if you were to take like a really sort of the world's perfect and this, you know, everything's linear view, you would say you have fund A and fund A starts in the year null. And so they should have the highest cost of capital that year. Then in year one, they should have a lower cost of capital. And year two, they should have a lower cost of capital still. And then, and so you could say, okay, so that's obvious because like every single year, they're going to get better and better at predicting how they should make investments, which makes them less risky. And then their cost of capital should come down. So the fact that Sequoia would ever have the same cost of capital as a new incumbent, or sorry, a new entrant makes no sense. Sequoia should just have a lower cost of capital because it's less risky to give them money. I think you also see that in lending. Like I think. Right now, one of the biggest struggles we have when making investments in our lending

• 16:16Speaker 03

  business is we'll go to a platform that's originating new cool loans. We think it's a great risk profile. But one, the founder went online and read in the Wall Street Journal that people are getting 7% to 8% yield and like that's really good. And so now they think they're going to be able to get that. The second thing is like they don't really appreciate the unknown unknowns. And so I think that it's, one of the things that really blows our mind is you'll have either funds that go to them and say, wow, you know, I think that like you're new, but I'm willing to give you a cheap cost of capital because I think over time we're going to figure this out. And like, I think I'm going to get paid in warrants. And so that'll be like my new interesting way of getting paid for having taken the risk. I think that's a fallacy. The reason I think that's a fallacy is often the debt and the equity are inversely interesting. So if the debt is interesting, it means it's probably going to stay interesting because the yield will stay higher over time

• 16:58Speaker 03

  because the loan book doesn't get so big that it takes in entrants with low cost of capital like the Apollos and the Black Suns of the world, et cetera. However, if that happens, if the debt stays interesting, the equity will never appreciate in value. If the equity ever appreciates in value, the loan book's going to get so big that that cost of capital that you were charging, you're still going to get refinanced out of. And do the warrants really make up for it? I don't know what coverage they're charging or, you know, what warrant coverage they're getting, but it's probably not enough to like sort of make up for it. So I think that it's crazy that cost of capital always stays static. And then they say, okay, so I'm going to make you a three-year loan and the price of your debt each year will be the same, even though on year three, it probably should be like, I don't know.

• 17:35Patrick O'Shaughnessy?

  So let's tackle each of these buckets, maybe probably spending the least time on crypto, but we'll touch on that as well. We'll start with VC. So if VC was a country and you were the president and you're giving a State of Union address about VC, you've made some key points already. But more specifically to the spot that we sit in today at the beginning of 2018, thinking about things like the opportunity set, the supply and the demand of capital, the valuations that are being paid, those sorts of things. How would you sum up kind of from your view, meeting with early-stage entrepreneurs, where we are relative, just absolute and relative to, you know, recent past?

• 18:12Speaker 03

  I'd start with, I think, a few key issues that we need to resolve in the next year. The first is, there's two comments that everyone agrees with, but the two comments don't agree with each other. One of the comments is, you should really stick to your knitting. If you're a seed-stage fund, you should be really good at seed. Don't grow too quickly, like get really good at that, and don't do things outside your core competency. If you're a Series A fund, the same. If you're a Series B fund, the same. The second thing that people say that everyone agrees with is, the only way to make money is to have a contrarian view that is correct. So to believe in something that no one else believes in, but it turns out you are right. Now, if you're a seed fund, that's sticking to your knitting, and you shouldn't do any other stage, but you're also investing in contrarian things, who's going to follow on to that round? Because you can't.

• 18:56Speaker 03

  So now, the game is called, have a contrarian view, that it turns out you're right about, and then within 12 months convince all the Series A funds that they should change their view and fund the company. That's sort of weird. And so what it turns into is, every seed fund listens to all the Series A funds and says, "Oh, wow, so that's what you're invested in now?" Or like, "Oh, you all like AI, or you all like elderly care, or like whatever, insurance tech, whatever themes that have been in the past? Okay, now we're going to go, we're your scout team. So we're going to go find those companies and then send them to you, so you can like make all the good stuff happen." I think that's a really big problem. You know, and I think the other problem that probably people have talked a lot about is, you know, the terminology of all these rounds is probably wrong. Because what happened was, you had a bunch of seed funds, and the seed funds were either

• 19:40Speaker 03

  bad and disappeared, or they were good, and the manager went out to the LPs and said, "Now I want to raise a bigger fund." And the LP said, "Good, I'm willing to give you more money, but you have to keep doing the same thing you were doing, because I already underwrote that." And then the GP was like, "Yeah, I promise." And then they had like more money, and so they had to write bigger checks. And so, of course, they kind of moved up the stack. And so if you were to like do a, like write a list on, you know, Excel or something, of all the rounds that were done in New York that were under a million dollars in size, but led by an institutional VC fund, like a seed fund, I bet you it would be an incredibly short list. Because all those seed funds do what Series A was supposed to do. The other is they've all, you know, all these VCs accidentally subscribed to Mattermark

• 20:22Speaker 03

  and saw a couple bloggers write, "I think that you need a $20,000 monthly recurring revenue and 15% month-over-month growth to raise a round." And they all said, "Okay, that's what you need to raise a round. We're only going to invest in companies that do that," not realizing that every company should be underwritten differently. And I think we need a new framework for thinking about how all the different rounds have to happen. When we do what's now called a pre-seed round, we say, "Look, we're going to give you money, and the only thing you're supposed to do with this money is figure out if you're creating customer value." People often think revenue means customer value, but I'll give you a reason of why that's not true. If you and I went to lunch and we had a really crappy lunch, we would still pay the bill. I would. I don't know if you would, but like, that'd be a dick move if you didn't. So I'd pay the bill. It doesn't mean there was customer value created. The KPI to track is, did we finish everything on our plates? Did we take a box home?

• 21:07Speaker 03

  Did we come back? So we say, "Look, prove customer value, because that'll give you some indication of what your LTV is going to be, your customer lifetime value is going to be." What's crazy is that seed funds expect those businesses to already be growing, which implies they've been using their money to acquire customers. If you don't have a hypothesis of what your lifetime value of the customer is going to be, how are you supposed to know how to acquire them? If you don't, if your customer ends up being worth $100,000 to you, you can hire a sales team. If they're worth $2,000, you have to do marketing and ad campaigns. Why would you try that until you know your available menu of cost-effective options? You know, so I think that that's when you do a seed round, and then the Series A is to see if any of those cost of customer acquisition channels scale. I think we all have to get on the same page on that.

• 21:49Patrick O'Shaughnessy?

  Is it fair to summarize what you just said as sort of, I've heard this from a few, like Andy Radcliffe's one that comes to mind, where the first thing is the value hypothesis, so this would be kind of your qualified version of a value hypothesis, and then the growth hypothesis is, is something else that we can come back to. Is that a fair distinction?

• 22:05Speaker 03

  Yeah, I think you should know what round you are in and decide which hypothesis you're trying to solve for, and not take the two or three blogs that everyone uses to figure out if they should be funding a company that seriously.

• 22:15Patrick O'Shaughnessy?

  So how, describe a little bit your actual process, your investment process on the VC side specifically. So is it all pre-seed? Which stages do you get involved in? And then let's get into like how you evaluate opportunities and industries and addressable markets.

• 22:31Speaker 03

  So primarily pre-seed on the venture side, although we do equity investments and lending, and I'll explain how we think about those in a second. And the way we do the diligence is, one, are you a founder who knows everything about your space? We don't want to back some like really smart HBS kid who like read a study about the space and now is going to start a company in it. We want someone who actually knows the customers, has sold into it, et cetera.

• 22:50Patrick O'Shaughnessy?

  Can you give a recent example of somebody like that and what the industry was?

• 22:54Speaker 03

  Yeah, so we're investing in a company called Gallium based out of Georgia. And the woman is a Stanford PhD, her name's Gail. And she realized that, and she was doing consulting for heavy equipment dealerships. And she realized that heavy equipment dealerships are terrible at claiming warranties because what they usually do is they send some individual out into the field and they write down like the 16-character serial number of a Caterpillar tractor and then like 14 other things on a piece of paper, take a picture of it, email it to somebody. Bottom line, the warranty almost always gets denied. So she's built an app that helps them better capture that data and she saves like $300,000 a year per dealership. That's just a person who's solving a problem that no one in Silicon Valley gives a rat's ass about, right? But she just knows the customer and she can go in with her stupid effing iOS app and like sell the shit out of it.

• 23:39Speaker 03

  That's the type of business and person we love to back. So someone like that comes in and we say, that seems great, you're the right type of founder, we understand that what you want to build will help prove customer value. And if customer value is there, it'll be there for a lot of people. And then what we do is we try to sell the product ourselves. And I'm probably a little narcissistic in saying this, but I'm kind of convinced that I'll be better than the 20th employee that every one of our companies hires. And if the founder can't teach me how to sell the product, or if I can't sell the product to somebody, it means their 20th employee won't be able to either. Either because the founder can't teach me how to do it, or no one wants it. And so if I, in the process, cannot help land a sale... Unless I know something like maybe farm lending, like I don't happen to have a bunch of farmers on my Rolodex,

• 24:23Speaker 03

  but I know someone at Rabobank, right? And they do, right? So like, I'm sure I could figure it out. And that's part of the process that I think a lot of other people don't run. The other part is because we build products with the founders, we make follow-on decisions better. So, you know, a lot of VCs will say, I make follow-on decisions well because I'm on the board and I get information rights. I mean, you've worked at a company, like the employees of a company just know different stuff than the board does. And our team working hand in hand with the founder just gives us certain insights.

• 24:48Patrick O'Shaughnessy?

  Do you still do, is it still that software component is a key part of?

• 24:51Speaker 03

  Of the venture business, absolutely.

• 24:53Patrick O'Shaughnessy?

  Yeah. Is it in every case?

• 24:54Speaker 03

  Almost every case. There's two companies that we've invested in where it wasn't. One, the founder had sold a business for a hundred million dollars that we had backed before and we were like, we'll do anything he does. The other is a company in the, you know, I haven't made a lot of companies in the sort of blockchain space, but it was a crypto company that now is a top 15 crypto and we can't believe that happened. And I have no idea if it should be that valuable, but it is. And so it's great.

• 25:18Patrick O'Shaughnessy?

  How does that development effort actually work? Do you have like a full-time staff of developers somewhere?

• 25:23Speaker 03

  Yeah. So we have engineers in both New York and Canada, but we have an office in Ottawa. And I think Ottawa is like one of the best places you can recruit engineers, partly because you have University of Ottawa and Carleton there, and partly because you just don't have the same companies recruiting the best ones. Like when I recruit someone in New York, I gotta convince them they shouldn't work at Palantir or Facebook or Twitter or Google. But the other thing is we actually have a really good time recruiting engineers because think about like what the job application is. Hey, you can either go work at a big tech company and work on the same thing for a year, or you can come to co-venture and co-found a company every six months. And if you happen to like the company, just go join as a co-founder. It's a pretty cool job for an engineer.

• 25:57Patrick O'Shaughnessy?

  Very.

• 25:58Speaker 03

  And so I think that's why we're able to attract really good talent. But yeah, so that's where the software development's done and it's been like a really good experience.

• 26:05Patrick O'Shaughnessy?

  So back to the process again. So any other, you had a really interesting checklist at the beginning for the investment philosophy, sort of things that you're looking for really in an asset class that will make it a sustainable, somewhere you can have a sustainable edge. Are there other like checklist-like items other than somebody, the one I love is someone with deep domain expertise in an industry that's maybe less interesting to Silicon Valley VCs? Other things that you look for in the early-stage diligence process that are must haves or close to must haves?

• 26:35Speaker 03

  I think high-velocity founders is really important.

• 26:37Patrick O'Shaughnessy?

  What does that mean?

• 26:38Speaker 03

  So, the type of person who they're making progress during the diligence process. There's nothing that gets us more excited than when we're talking to a company and say, "By the way, I landed this sale. By the way, I did this." The other thing is founders who set expectations of what success is early on. There's a guy named Jordan Betman, who's got his own VC fund now, and he gave me this advice, which is, he said, "Every time I invest in a founder, the very next board meeting, we write a deck for what the next round's deck is going to be. And that becomes like what we have to get to with this capital. We look for founders who are very focused on, 'What do I have to do to get to the next inflection point? Am I resourced to get there? And is there some sort of validation that we believe the business is more valuable because they've gotten to that next inflection point?'" There's all the other things, like barriers to entry, and are they building moats?

• 27:23Speaker 03

  And do they have pricing power? But I think at the end of the day, it really just comes to, is this a company that's outside of the obvious sort of solutions of Silicon Valley? And are we able to build a business that's sustainable because of that? You know, I do think, and again, probably most of my best friends live in San Francisco and the Bay Area, so they're all going to text me after this and say I'm an idiot. But I think that the tech world has this problem where we go out and we say, "We all think that we're really smart, and we think the rest of the world's really dumb, and so why don't we just build apps to make their lives more like ours?" And it's like, sort of crazy. And what you end up doing is you end up building products at the end that are sort of built with judgment at their core. And when you build product, or you find founders that are building products for themselves and their friends, you end up building products with empathy at their core instead.

• 28:07Speaker 03

  And that empathy ends up translating into features and functions that understand the seemingly unpragmatic nuances of a given industry. You know, you and I would look at how a hospital works and be like, "God, what a bunch of idiots." They're probably not a bunch of idiots. Most of them went to med school, they're genuinely smart, sure not everything's perfect, but they're more or less doing their best. You have to understand why the hospital's built the way it is. And I think that just being a couple of really smart kids who went to an Ivy League school and studied CS, you don't understand how a hospital works.

• 28:33Patrick O'Shaughnessy?

  When you say judgment versus empathy at the core of a product, maybe just describe that in a little bit more detail. It's an interesting framework.

• 28:40Speaker 03

  Yeah, you know, judgment is like, you know, hey.

• 28:43Patrick O'Shaughnessy?

  I know how to do this better than you.

• 28:44Speaker 03

  Hey, wow, you know, I think that the rating agencies are stupid because they're hired by the person who's underwriting the loans that are originating. Like, of course, that's dumb. And like, I read The Big Short and like, I'm a good fast reader. And so I read it twice. And so like, now I know how it works. I'm going to build like a company that solves that. Okay, that's really tricky. And you would look at some kid in Silicon Valley being like, okay, I'm going to solve this obviously stupid problem. Or like, by the way, remittances. Okay, this is a great, great example. Everyone's like, okay, the blockchain is going to solve the remittance problem. Maybe. You still have two governments talking to each other. You still have this like crazy process of trying to clear payments. Everyone in Silicon Valley thought, okay, we have a technology solution. Of course, that's going to solve this really slow and expensive process. I think someone from financial services who are or who had worked at a bank was like,

• 29:29Speaker 03

  whoa, there's like politics involved. And like, this isn't just a technology problem. This is a switching cost problem. This is like a political problem. This is a people are going to lose their jobs problem. I think that understanding sort of those extra complications takes empathy.

• 29:43Patrick O'Shaughnessy?

  Got it. So empathy is more solving one's own problem or one's friend's problem where you're back to the industry domain expertise. Like, you're intimately familiar with what the problem actually is and how things work.

• 29:53Speaker 03

  I want to be really annoying with my nomenclature. I think that's sympathy. Empathy is imagining yourself in the other person's shoes and understanding that problem as a first party even, not just like having heard about it or read about it and saying I can list the problems. By the way, when you're talking to someone who does asset management, you just know because you like, you and I were talking like, okay, it's the beginning of the year, we got to like, make sure all of our LPs know what's going on. Like, I empathize with that. That is brutal. Not because you don't love your LPs, but you're like, I want to make sure I'm getting all the right information.

• 30:20Patrick O'Shaughnessy?

  So let's talk about LPs for a second. You started.

• 30:22Speaker 03

  I love all of them.

• 30:24Patrick O'Shaughnessy?

  You started very young and very small. I think you said you had 396,000. Maybe describe that.

• 30:29Speaker 03

  We went out and raised any dollar we could. We raised $396,000. We were trying to raise 395, we raised 396 because my little and my fraternity gave me $1,000 on Venmo. And I ended up giving him his first distribution back on Venmo. And I was like, crap, how do I put this in the books? And now he works at CoVenture, by the way. So it's pretty awesome. So he worked at an investment bank. And this was an investment bank that when I was in college, I didn't even get an interview for. But he said that now when they go back to universities on their sly like exit opportunities after the investment bank, they have our logo. Like, I was like, you can go into venture capital after the bank. And I'm like, man, that's like the best thing that ever happened to CoVenture. That's our career highlight.

• 31:03Patrick O'Shaughnessy?

  So you've dealt with a lot of LPs because you had many of them early on. And I know you still have a ton of LPs out there. What have you learned about two things? How to best interact with those LPs? And also, for venture capital specifically, this is something that I've struggled with thinking about. Who should and should not be a venture capital investor? If you've had negative experiences generically, what have been the reasons for that? And maybe reasons you might avoid similar LPs in the future?

• 31:32Speaker 03

  So we've gotten really lucky. We've actually had an incredible LP base. So any answer I give you on what makes someone not a good LP would be sort of what I can imagine. We don't deserve the LPs we have. And what we've done is, so we have about 180 either individuals, fund of funds, or something other across our various funds. They've become a huge source of deal flow. Because a lot of them are from the tech world. They've either started companies, they've started VC firms, some of them have been presidents of banks, some of them have run private, like large private equity firms. So out of 180 people, you know, we probably get 1,000 deals a year just from them. And then we've actually built communities within our LPs. So about every two months, we have one of our LPs give a talk to the rest of them about a new topic. How to buy a sports team, like introduction to the blockchain.

• 32:14Speaker 03

  You know, what is, what was the financial crisis like from the executive committee of a bank? Like, and so, and so we've created this cool community that keeps us top of mind. A lot of it is just being incredibly, playing offense all the time with information. Hey, here's a company, it just had this announcement, here's ways you can help. Make those asks really, really specific. In terms of the people who shouldn't be invested in venture, probably most of the world, like it's a liquid, it's scary. We have a crypto fund, and we happen to think everyone should have 25 to 100 bips of their assets in crypto. Maybe that's right, maybe it's wrong. But the minute you're putting more than that in, like any speculative asset is scary. And if you aren't prepared to lose it, also if you are taking a swing where you think, this is going to be the only fund I'm going to invest in,

• 32:58Speaker 03

  that's probably not the right way to think about being an LP in a fund. So the worst thing you can do for a VC firm, or a VC manager, is say, I'm going to give you capital, you have to deploy this capital within three years, and I have to get 3X my money back, or I'll never invest with you again. And the reason I say that is like some years it just sucks to be a VC and some years it's gonna be hard to find deals. And I think you had Shil on the last week's podcast, like he said something really good, which is like, I might just take a really long time to deploy the capital and you guys have to be okay with that. I think having that steady capital base that says, look, we're gonna bet on you for three funds and in 10 years, you're gonna hit a homerun. Don't do anything stupid just because this is like the fund that you feel like is gonna be make or break. Imagine if you were a baseball coach and you told this kid who was on your team, you said, look, all the scouts are

• 33:42Speaker 03

  here. You have to have a game. They're only gonna see you for one game. You have to have such an amazing game that they're gonna draft you in the MLB. You have like, most kids go up there and like, try to hit three home runs in the game and not do very well. If they said, look, you're gonna be the starter for this whole season, they're gonna be, the scouts are gonna be at every single game that you play for 30 games, just be you. You're gonna have a great season. You have to sort of put someone with a capital base to succeed where they're not like, every bet is all or nothing, and if I don't return 5X, I won't get my capital back. So it's sort of building a long-term relationship with the LPs.

• 34:12Patrick O'Shaughnessy?

  Couple more questions before we leave venture capital and talk for a bit about lending, which is something we really haven't talked about at all on this podcast. So I'm excited to spend some time on that. The first is a question I've always, I'll close with my usual question, which is what's the kindest thing that anyone's ever done for you? But I want to try to introduce a couple other questions that I ask everybody and we'll try a few out and see if they work or not. So the one I'm gonna try for the first time with you is to ask what time or what point in your career or just life, you felt like you've put the most personally at risk? So you talked about risk earlier as this really important part of the investing equation. We always talk about, like in my world, in the public markets, risk is this like, over quantified, you know, standard deviation,

• 34:55Patrick O'Shaughnessy?

  right? Which is this kind of a silly measure of risk. So what is the, what is the point in your career or life that you've, you have felt the most at risk or exposed yourself?

• 35:05Speaker 03

  Every single day, I get, I am exposed to more risk because my opportunity cost grows more. So on day null, there's less risk because you have almost no opportunity cost. I didn't have a fund, so my worst-case scenario is I didn't have a fund the next day. So I can take some amount of risk. By the way, when you're underwriting a manager, you should try to figure out how much personal risk they have. And one way people do that is, oh, how much is the GP committed to the fund? I hope it's one to two to three percent of the fund. That's part of it, but it's also like, how much do they have to lose from their reputation? So I would say, you know, we've now built a firm where, look, we've, we've made money for people. The returns, I think, have been good enough where we're having people stay with us and grow with us. So every day thereafter, we have greater risk and I personally have

• 35:48Speaker 03

  greater risk because I'm getting more and more to lose. I think that's actually a competitive advantage to newer entrants. It's just like when in like a large company, won't go into a new space because they have more to lose. Microsoft can't just suddenly embrace the blockchain because they have a business that they might hinder. That allows a startup with nothing to lose to go after it. The larger the startup becomes, all of a sudden becomes a big company, now they have a lot to lose. So I would say that, you know, by the, later today, I'll be incurring more risk than I will right now and tomorrow, more risk than today.

• 36:16Patrick O'Shaughnessy?

  What about emotionally? You said empathy versus sympathy before. Surely there must be a time before today as the point of highest risk for you, like almost formulaically or objectively, where subjectively and emotionally, you felt, I keep using this word exposed, because that's the word, I was having a conversation with my, my friend Bill about this, and that's the word, when he used that word to me, that actually got the good answers out of me, was when I felt the most kind of nervous or exposed. What about that way of thinking about it more from an emotional standpoint?

• 36:44Speaker 03

  I think when we put our name behind a thesis and venture that was like really weird, you know, I think that when we first started, everyone wanted to find the next sort of app developer who was sort of obsessed with the design and had this like single page scroll website. It was like, all right, these like app kids are going to like build every company that changes the world. And we were like the curmudgeons who were like, yeah, we actually don't think you have to have a technical founder and we're going to put our name behind that and we're going to go like back people who like, God forbid, they're not in their twenties and like app developers. We're going to go back to people in like their late 30s who've been industry executives before and we're going to build a tech company. There were VCs who were like, were angry with us and wouldn't meet with us. It was really scary

• 37:27Speaker 03

  to have my name associated with that because they were like, Ali Hamed in my inbox for stupid idea. Next. Never want to talk to that guy again. It was really scary to get those intros and try to introduce something that I knew like 20% of people were going to think was awesome and 80% of people are going to think is idiots. The other part that I felt most exposed was when we started our crypto fund, honestly. Because you have to understand, at least half of our LPs have made money with us doing asset-backed lending. So I went from explaining why a low LTV, over-collateralized loan with great covenant packages, all the assets were trapped, it's like, hey, so that's the first 30 minutes, I'm gonna get you like 13, 14, 15 net. So have you ever heard of Ether?

• 38:10Speaker 03

  That is a weird conversation to switch to. And they were like, I trusted you. We had few people redeem, because we're doing crypto, they're like, I can't trust you to do lending if you're also gonna do this Bitcoin thing. Larry Fink thinks it's like, an index on the bad people. You know, I'm like, oh god. So those are probably the main two.

• 38:27Patrick O'Shaughnessy?

  So just because of the answer, let's just touch on crypto for a minute, and then we'll get to lending. So why? So that seems like a reasonable objection from LPs, it's, I sort of feel that way about crypto on half the days. So why? Why the need to do crypto?

• 38:42Speaker 03

  We really believe in it as an asset class. And I think that people are probably more euphoric than they really should be right now. So let me start with a couple bear cases. The first bear case, and my partner 70 talks about this all the time, he goes, look, it's really ironic and kind of sad that the blockchain was supposed to disintermediate the banking system, but the first company we all think about when we think about Bitcoin is Coinbase, and that's like, an intermediary that charges a point and a half in and a point and a half out. So that didn't work. The other thing is like, people say things like, oh man, the government couldn't shut it down. If the US government tells me it's illegal to own Bitcoin, I'm probably not gonna own it. And like, that comes from a guy who's got a business in it. Jail sounds like it blows, and I just don't want to go to jail. And I think that's actually a powerful concept. And it's probably not gonna be a currency. It is just stupid for a government to allow somebody to compete with its own currency.

• 39:26Speaker 03

  If I wanted to think of like, one way to revolt against the government, it would be to debase its currency. Like, I think governments like, kind of have a clue. But there are a couple of things that are incredibly interesting about it. You know, the first is, we think about this trustless system. And people often think about like, the US dollar and banks in the US and say, it really sucks that Bank of America like, has all my money and I have to trust them, but I'm willing to deal with it. I use Bank of America, and I think it's great, it's a good fine business. And if I give them a thousand bucks, and I go back the next day, they'll probably say I have a thousand dollars. But if you're like, in Libya, so I have half my family in Libya. If you're in Libya and you're going to like, the regional bank at Tripoli, and you give the regional bank at Tripoli a thousand dollars, and you go back the next day and say, no, you gave me 990, who do you complain to? That's actually really tricky. So that was one thing that I thought was interesting about the sort of the system.

• 40:10Speaker 03

  The other is, if you think about Bitcoin as a store value, it's probably a pretty good one. So like, if you were to go down a list of what makes something good store value, you know, it's volatility and Bitcoin sucks at volatility. It's portability. I think Bitcoin crushes gold at portability. I've never tried crossing a border with $10,000 of gold in my pocket, but it's a guy named Ali Hamed. I can't imagine that's like a super fun experience. So like, and if I was like a Syrian refugee, I'd probably rather be traveling with my private key than like a pack of gold. So like, and so if you keep going down the list, like acceptability, the restaurant that we didn't pay the bill at because we didn't like the food, like they're going to accept Bitcoin before they accept gold. Right? Can you imagine taking out like a piece of gold and saying like, here's my scale, I'm going to just like shave off a sliver of it. I'm going to put on the scale and I promise my scale is not rigged.

• 40:52Speaker 03

  Like, so, so we're really bullish that Bitcoin could be a real store value.

• 40:56Patrick O'Shaughnessy?

  Have you ever seen an actual story, like a story that you can corroborate of that kind of use case? Because everyone talks about this. Everyone talks about Syrian refugees or Venezuelan citizens or hyperinflationary domiciled citizens who could use this to mitigate that problem. I have not gone looking hard, but I've never actually talked to anyone that knows anyone that's done any of this.

• 41:20Speaker 03

  I think most of the people that you're talking to don't live in Japan and South Korea.

• 41:22Patrick O'Shaughnessy?

  Totally true, but I have talked to the people in those areas. There's really small examples of this. So I mentioned on the podcast one time, I know a guy, a Chinese national, who uses it all the time for a very real use case. But the amounts are very small relative to the, you know, the very speculative value of the, of the total cryptocurrency market cap.

• 41:41Speaker 03

  Yeah. So look, I completely agree with that point, which is we're probably at a place where everyone's sort of like, all right, we think it's going to be a big deal. And the amount people think it's going to be a big deal compared to the big deal it is right now is like, probably out of access. So I totally agree. You know, I think that there's probably people like in South Korea who, who do that more. I don't think like, I think we love talking about Venezuela because it's in the news all the time. Like, I don't think there's a lot of people in Venezuela being like, oh, thank God I have Bitcoin. So I sort of agree with that. And I think the places where you're going to need it the most is going to be the places that it's hardest to get. So completely agree. I think that's like in the bear case column, which is the utility of it just isn't there compared to the speculation. I have no idea what's going to happen in 2018 or 19. I just think like by 2025,

• 42:25Speaker 03

  it's going to be better. And I do think that the use case will catch up.

• 42:28Patrick O'Shaughnessy?

  In terms of your own, back to your investment philosophy checklist, the reasons why you think it's a, it's a good place for you personally to be, you and your firm personally to be versus just generically, the bull case generically, what are those reasons?

• 42:42Speaker 03

  The way we think about our firm's core competency is we build funds in emerging asset classes built on the back of new technology. And we have to be amazing at doing that. And if we were to think about what skillset is required to manage a crypto fund, we think it's engineering, you had to understand sort of the technology and underwrite the technology. I think you had to take like sort of a venture-ish view of, do I believe it'll get the network effects? Do I believe it'll build barriers to entry? Do I believe that it'll be adoption? One of the guys on our investment committee used to run a trading desk at Goldman. Can you actually trade this stuff? So I think it takes this cross-disciplinary approach of being able to actually trade it, understand it and invest it. And we felt like there was a good place. The other thing is when we got started, you know, frankly, we just didn't think there were a lot of professional money managers managing the capital.

• 43:25Speaker 03

  The first LPAs I got for some of these funds had like European waterfall. They looked like venture fund docs, but were trading crypto. And I was like, do you have side pockets for forks? Like, how do you like, what if someone wants to redeem and some of it's a liquid? Have you thought about that? They're like, oh, well, no one's redeeming right now. I'm like, okay. That's sort of weird. So I can redeem my whole NAV and you're in an ICO? So that was like, so like, there were like really small things where it's like, all right, we're better than that.

• 43:53Patrick O'Shaughnessy?

  Just bring professionalism to the space.

• 43:54Speaker 03

  Bring professionalism, right? Like know how to write a freaking hedge fund doc. Know that there's a difference. Know how to mark your NAV professionally, like stuff like that.

• 44:02Patrick O'Shaughnessy?

  Is there anything in particular that excites you most? So you mentioned that you're 2025 or some longer dated period when crypto will have improved a lot and be really having a big impact. Is, is there a use case or a specific currency or an idea that has you most intrigued or excited about?

• 44:16Speaker 03

  It's probably still store value. I have a hard time getting excited about store value because for store value to be more meaningful means something that bad in the world probably happened. So it's a little bit weird to be optimistic about it. If I had to come up with a utility token, so there's a company called Blockstack. And basically, the whole idea behind Blockstack is you can build applications without building a backend or a database where you're storing people's information in a central place. And I blog on Medium, as you know. I think it's crazy that, God forbid, Medium went out of business. I would actually lose all my blogs. That sucks. And I don't think Facebook's going out of business, but, oh, my God, if Facebook shut down, I lost every picture it had. So it is crazy that data is centrally stored. I think what they're doing in terms of saying, look, we're actually going to decentralize data. We're going to allow you to store it wherever you want.

• 45:00Speaker 03

  You can put your data on Google Drive or Dropbox or on your local computer. And the web application that you're accessing, it just queries wherever you want it to query from. I think that's interesting. So of the utilities for tokens, I think that's cool. The other one, and it's going to be analogy, that you can break down 50 different ways. And so anyone who's listening is going to be like, that's a stupid idea. But I think it illustrates what could be. So let's imagine in 2000, Amazon created Amazon tokens. And they said, OK, so the only way to purchase a book on Amazon is with an Amazon token. And we're going to issue a million of them. And he went on Amazon, and he said, you read a lot. So he said, look, the books are cheaper there. I'm willing to go through the hassle of turning my US dollar into an Amazon token and using that token to buy a book. And everyone started doing this.

• 45:44Speaker 03

  And so in the year 2016, I think Amazon did $130 billion of revenue, something like that. And still, the only way to purchase on Amazon was with tokens. If there were only a million still, each token would be worth more than a dollar. I don't know what the velocity would be on Amazon, but let's say they were worth $10 billion in total. And Amazon wanted to raise capital. And they said, well, it's hard to raise equity, and it's hard to raise debt right now. What if I just issued 1% more tokens? Would anyone be pissed? And all of a sudden, they just raised $100 million with no dilution. So you had equity to raise capital and debt to raise capital. And then a token financing, a real token financing, not just an ICO with a white paper and a couple of engineers who said, this is going to be cool, I promise. That's like a third asset class. That's like really powerful. Now, what you should say back is, okay, you'd never use a token because

• 46:29Speaker 03

  A, the volatility of the tokens would make it hard to purchase the books, and there's going to be speculation, like the hassle going from the dollar to the token would reduce revenues. There's a million reasons that might not work, but there's like hypothetical situations where like, oh, wait, that might be huge.

• 46:42Patrick O'Shaughnessy?

  Let's talk about lending now. And there was a great story in there. You mentioned the story about Watermelon at the beginning, but another story about a firm raising money, kind of talking about the relative merits of like a bridge round versus a series A round. And the solution was, well, why wouldn't I just like factor your receivables? You give up less of the company, you spend less cash, like everybody wins. I get a great rate of return. Maybe tell that story as a bridge, sorry to use that word, into debt and lending.

• 47:09Speaker 03

  I do like most venture capitalists. Like, I do like the asset class. But I do like talking trash about it. So this company came to us, and they were doing a million dollars of revenue a month. And they were about breaking, I think they were like slightly profitable. And the guy said, hey, I need to raise $3 million really quickly. And I'm raising it on a capped note. It's a convertible note with a $50 million cap. And I looked at the business and said, well, you have $2 million and change of receivables. How about I just factor the receivables and you go find a million dollars from someone else? I like your business, but it's going to take me a while to underwrite it. I don't really have to underwrite the receivables in the same way. I still underwrite them, I promise, but not in the same way. So what I'll do is I'll factor them for some absurd rate. I'm going to charge like 5% warrant coverage, so I feel like I have some upside in case this business ever goes well.

• 47:52Speaker 03

  And I just saved you like, what, if you were going to sell 6% of your company now, you only have to sell 2.2, 2.1% of your company? I just saved you like 3.8% of your business. What can that buy you? That can buy you a COO, a VP of sales, like, I don't know. And he goes, no, no, I'm just trying to raise a convertible note. I don't think my VCs are going to be comfortable with me doing factoring yet. Like, factoring seems like it's addictive, and like, I don't want to get on the factor. And I'm like, Holy moly, like this is absurd. Like you are not understanding that this is way, way better for you and way, way better for me. And it was one of the first times that we said, wow, like venture capital is really uncreative. And I wonder if you went into Silicon Valley and said, hey, guys, like, what if you didn't fund a company with venture capital? How would you do it? And they'd be like, oh, venture debt. Like, that's their only other solution to venture capital.

• 48:34Speaker 03

  The world's bootstrapping with money from another venture capital-backed company, venture capital and venture debt. And like, there was no other solutions. That, to me, felt weird.

• 48:42Patrick O'Shaughnessy?

  And so, obviously, you have found a huge opportunity in this space of lending. So, maybe give an overview of this segment of your business and the different kinds of places that it touches today.

• 48:54Speaker 03

  Our lending business, what we do is we look for companies. So, we look for alternative lending platforms that are using their technology to invent new types of credit. So, we're not looking for companies that are basically taking loans that banks used to make offline and putting them online, like unsecured consumer loans or SMB term loans. We're looking for companies that are actually inventing new types of credit. So, Produce Pay was a great example. So, when we were doing diligence, we called Rabobank. We said, hey, are you guys ever going to do this? And they said, no way. Like, we could never underwrite perishable, lend against perishable produce. So, they were using technology to actually track this stuff in real time and invent a new type of product where we could finance it at a really, really attractive yield without taking any extra risk. There's another company that we invested in.

• 49:36Speaker 03

  What they do is they built scheduling software for large companies. Let's just pretend it's not a real customer, but let's pretend McDonald's was a customer. So, they go to McDonald's and they say, how do you figure out when your employees are going to come work? And they say, well, we use a piece of paper in the back room or an app called When to Work or something like that. We said, use this app instead. And then, don't pay your employees every two weeks, instead pay us. We then tell the employee, you can now take your paycheck any day of the week you want instead of on the biweekly pay cycle. And so, if your rent was due Wednesday, but your paycheck wasn't till Friday, you don't have to take a payday loan out anymore. You can just take your paycheck early for like a dollar fifty. And now, we're getting like a twenty-something percent return on McDonald's credit. That's a new type of product that hasn't ever existed before, which by the way,

• 50:19Speaker 03

  has switching costs. And the reason a company like McDonald's would want to use that is if you were thinking about working at McDonald's or Starbucks and one would pay you any day of the week you wanted and one would make you wait two weeks, for a lot of those people, cash flow is a huge, huge issue. And they'll pick McDonald's, maybe even if it's for a little bit less money. And so that's another example of finding companies that are in, I don't know what to call it, is it payroll finance? Like, I don't know, there's probably a word that will one day be a thing, once it's an established asset class. But that's the type of stuff we love, where we can get a mid teens to low twenties return, not by taking a ton of risk, but by just finding something that no one's done before.

• 50:54Patrick O'Shaughnessy?

  The part of this that would seem most difficult to me, and maybe I'm wrong, but is deal flow and sourcing of this stuff. So what does that process look like?

• 51:01Speaker 03

  It's been probably our competitive advantage. So we see about 200 deals a month, which is really overwhelming. We don't, that's by the way, a total vanity metric, right? Like, most of the stuff sucks. But every once in a while, you see something that checks a lot of the boxes. And one of the processes we go through, by the way, is we never try to ask a company a question in person that we could have asked online or over email. So if you and I are talking, and I ask you who your competitors are, I've wasted both of our time. That's incredibly disrespectful, right? Because I could have asked it over email. If I'm asking about market size, all you're going to do is give me a big number and say I'll follow up with an Excel sheet later where I broke it out. By the time we're meeting you in person, all that stuff has to be figured out. That way, we're using each other's time efficiently, and that way, you can do really deep diligence on the companies

• 51:46Speaker 03

  that you're getting close with. And not just sort of the trivial stuff. And how we see deals, so we're seeing deals from seed. Like, having a venture capital business allows us to build networks in the venture capital community. And every single time, one of our friends in the seed world says, hey, I found this cool lending deal. I can't do the equity without somebody else doing the debt, because I don't want them to use equity capital to make these loans, or beyond a few hundred thousand dollars of these loans. We get the call and allows us to get in really, really early into these deals. And we're built as a firm to figure out how to structure facilities with companies that don't have a lot of capital on their balance sheet. So we funded a company that was lending against the title of some asset. And it was a startup. And they wanted to, we wanted to lend to them directly.

• 52:29Speaker 03

  And everyone else would have said you had to put that in an ABL facility. You have to take the title, put it into an SPE, lend against the SPE, it's bankruptcy remote, et cetera, et cetera. The problem is, every single state has different rules. And the cost of transferring titles was high enough where it would have knocked off like 500 basis points for the loan. Like, there's no way you could have put that into an ABL facility. There's no way that could have fit within the box of the traditional lenders that you're thinking of, who are like the massive firms of today. This company needed a unique facility where we could make a loan, trap all the assets, make sure they weren't issuing dividends, make sure they weren't selling off assets, make sure all their subsidiaries were co-borrowers in the loan, so you couldn't have like a first lien on a subsidiary where we actually didn't have perfected security interests. Like, there's ways to do it, but you have to be structured as a firm that says, "Look,

• 53:13Speaker 03

  this is a new company. They don't have the ability to do diligence on the laws of every single state if they want to set up an SPE in every single state. They can't incur all that." So, we're going to find the right solution for them.

• 53:26Patrick O'Shaughnessy?

  It seems that you're the, you're certainly the only person I've spoken with that's doing something like this, that also lives in the venture capital world. How much do you think encroachment there will be from competitors? Um, so you talked earlier about, you want to do, you want to get into an asset class if you feel that each time you do a deal, you're widening your moat versus kind of new entrants? How do you think about new people coming in and starting to do this? As overall returns, like everyone, if you read anyone that smarts commentary, prospective returns are lower than the past, and maybe this is a way of getting higher returns.

• 53:58Speaker 03

  A couple of different ways. So, in that, in that business specifically, the way we build moats is, if you do a deal with us, to do a deal with an early-stage company with a completely new asset, you want like a 20% return. If you've been our LP for three years, four years, five years, and we've been doing it for a while, and all of a sudden we can do 12, 13, 14, you'll do it. And so now we're competing with a different product than everyone else is competing because it's cheaper. So I actually have a structural advantage by having done it earlier. On the podcast, we were saying, I would give my money to First Round for a 2X return and like a random VC fund, I would require a 5X. First Round, for having done that for a long time, has just built a different product. They could actually invest at higher valuations than other seed firms and still survive because they have a more loyal LP base. That's a

• 54:43Speaker 03

  different product. They also have their brand. And so I think it's probably going to be a combination of those two things, where the longer we've been doing it, the more trust we build with our LPs, the more track record we've built, the more expertise we have in structuring a bunch of really weird, different things that are sort of the right fit for those companies, and we can build a differentiated product because of it.

• 55:01Patrick O'Shaughnessy?

  You mentioned two really interesting ideas at the beginning, which is this idea of acquiring Airbnb accounts or acquiring Instagram accounts. It sounds a little, almost tongue in cheek, but probably isn't. Talk about how you would approach something like that, which is radically a new, a new idea. I'm sure something that no one's rolled those things up.

• 55:18Speaker 03

  Yeah, no, look, we love looking at stuff that's just sort of, okay, this is a new thing. How do you buy it? Instagram's new. There's a lot of famous accounts. At the end of each day, I have friends who have like sent me sort of the funny posts. And like, those are now really famous influential accounts. And they're starting to make money. The famous Instagram handles will like go out to like some sponsor and say, hey, I've got all these followers. You should really sponsor this. What if you like rolled all of them up and then built a sales team and helped them scale? Like, I think there's a lot of service providers in that space that are helping, like, they're sort of consultants to these famous Instagram handles and helping them monetize. I do think there's an opportunity to buy all those up as assets and then build a sales team around them and like, sort of, like, what if people bought up all the best podcasts?

• 55:59Patrick O'Shaughnessy?

  Yeah, I was just thinking the same thing.

• 56:01Speaker 03

  Patrick, you've built equity value in this podcast. Your readership or viewership or whatever you want to call it, is probably high net worth individuals. It's probably people who work in financial services. I bet you people would have a really hard time figuring out how to value it. Because they have no idea how much they could monetize it for. They probably would try to value it on like some value per listener, some value per downloads. But no matter what they do, it's wrong. It's just whether or not they're wrong on the wrong side or the better side. I think Airbnb accounts could be really valuable. If you're the best Airbnb host in LA, you probably have a lot of reviews. Your pictures are probably great. You probably have a lot of people who've stayed there. That's a competitive advantage. There's some asset there. I don't know what that asset's worth, but there's a way to buy it. And I think that there's a lot of these digital assets that people haven't figured out how

• 56:46Speaker 03

  to purchase yet that, you know, maybe one day will go after. I don't know. I think there's a million things. There's digital stuff. I think, by the way, like, one of my dreams, if I'm ever done sort of investing in Only Tech, is doing a tattoo parlor rollout. Like, I don't know if you can ever, if you can name one brand in the tattoo space.

• 57:02Patrick O'Shaughnessy?

  Nope.

• 57:03Speaker 03

  Right, but there's Claire's for earrings.

• 57:04Patrick O'Shaughnessy?

  Yeah.

• 57:05Speaker 03

  Right, why isn't there Claire's for tattoos? Tattoos are growing this ridiculous kegger, by the way. So I'm totally bullish on the tattoo thing.

• 57:10Patrick O'Shaughnessy?

  Can you say anything more about that? How did you, how did you come across that idea?

• 57:14Speaker 03

  So I couldn't name you the, so I have a few tattoos, and I couldn't name you the first name of the guy who gave me two of them. That's crazy. These things are on my body forever, and I couldn't name you the guy's name. That's sad. You know, I mean, maybe that's like a reflection on me. But I bet you that if you ask most people with tattoos, they'd say the same thing. And like, the brand, there's no brand affinity. The best way to discover tattoo artists is on Instagram. You should really follow some of these guys. They are incredible. Maybe they'll buy their handles on it, right? Like, I really do think there's an opportunity to take some sort of prestigious tattoo parlor and then roll out the brand to a bunch of others.

• 57:46Patrick O'Shaughnessy?

  So it's a good example. We'll roll with the Instagram one, because it's a good way to see how you think. So, let's go through that process. So let's say you figure out the least wrong way of valuing an Instagram account, whether it's likes or whatever, and you want to go acquire some famous account.

• 58:01Speaker 03

  Yeah.

• 58:02Patrick O'Shaughnessy?

  And you do so. And you agree on evaluation, the seller agrees on evaluation. How would you structure that to ensure continued alignment with the producer that's created the asset? Because obviously, this is not, in most cases, in that case, this is not somewhere you can hire a new manager. You need that person to continue.

• 58:21Speaker 03

  Maybe. You need them to...

• 58:23Patrick O'Shaughnessy?

  I guess that's if it's like a person where they're in the picture a lot, or something.

• 58:26Speaker 03

  Yeah, so I'm trying to figure out what I'm allowed to say on the podcast or not. So...

• 58:31Speaker 03

  So the Airbnb world is really interesting, right? Like, you have the people who own the properties, you have the people who leased properties to then manage and rent out to other people. So the people who own the accounts aren't often the people who own the real estate, which is sort of interesting. I think it's important to differentiate the two. And you might have people who have-

• 58:46Patrick O'Shaughnessy?

  That's why I chose Instagram, not Airbnb, by the way.

• 58:49Speaker 03

  Oh, Instagram, oh, sorry. Okay, Instagram. So Instagram, well, I'll finish Airbnb and then I'll go to Instagram. So the way I'd probably think about Airbnb is I'd say, okay, well, the account is probably more valuable than this person's incredible expertise on taking pictures. I think a lot of that stuff you could probably repeat yourself. I think you could make sure there was clean towels. And I think that the Airbnb ecosystem will end up being similar to the hotel ecosystem, whereas the management company and the property owner and the brand, and I think you'll end up differentiating those. And I think there's a time, Patrick, where you're gonna go to an Airbnb and you're gonna see a towel with a logo and you're gonna recognize that logo from another Airbnb. And you're like, holy shit, there's service providers in this ecosystem. Instagram, I think that's tricky because I do think that it's harder to repeat the magic of that Instagram handle.

• 59:34Speaker 03

  And I think it's probably less about buying majority ownership. It's probably saying, it's probably like funding the GP of a fund where you have some sort of compensation committee and you say, look, you can't take all the revenues of the business, like, there's gotta be some sort of governance. So I think you probably have minority economics, but majority governance is probably how I'd think about that. And by the way, I hate that people always marry economics and governance. And the way they don't, they say, oh, well, we have protective provisions. That's our way of disentangling the two. I think that you could go beyond protective provisions when trying to disentangle them.

• 1:00:05Patrick O'Shaughnessy?

  Can we talk about sales and marketing a little bit? You wrote something that piqued my interest about the importance of, let's say, a seed stage venture firm, marketing itself and its partners versus a later stage firm. That's what made me get onto the topic. I'm not just interested in that observation, but more generally speaking, how you think about marketing your own firm, how important it is, marketing and sales at the firms where you're an investor. I'm fascinated by this topic.

• 1:00:30Speaker 03

  So the blog post I wrote was that seed stage investing and series A investing are two different businesses. One's a B to B business and one's a B to C business. The reason seed stage investing is a B2C business is you're basically going out and finding people who are going to start companies. And what that takes is brand awareness. You kind of need people to come to you because it's hard to know about something that doesn't even exist yet. In some cases, you can figure it out by knowing a lot of people and having a lot of impressive friends who will one day start a company, et cetera. But it really is a marketing business. Series A investing is a B2B business because you're investing in a company that's already a company. So it's almost like a sales process. The hard part, or sort of the problem with that, is marketing is more expensive in many cases than sales. So you have a seed fund with a smaller fund and less management fees doing something

• 1:01:13Speaker 03

  more expensive than what a Series A fund can do. And so with our firm, what we've done is we've really tried to turn ourselves into a B2B business by going, saying, we want our deal flow not to come because everyone knows the name co-venture. We hope that happens one day, but until then, we want to just have great relationships with other seed stage firms and solve their problem, which is a founder goes to a VC firm, says, hey, you should fund me. The VC firm used to say, go find a technical co-founder. And instead, what we want them to say is, you should go talk to co-venture and launch the product, and then we can invest. For lending, we've done the same thing. It's the same sort of B2B model where we say, you want to invest in a lending company? We'll let you do that because we'll provide the debt financing for it and de-risk your equity investment. And starting a company, the hardest part of starting a technology company used to be

• 1:01:58Speaker 03

  building the product, and now the hardest part of building a company was acquiring your first customers. And I think that that's part of sort of our investment model, why we focus on finding founders who are most equipped to go find those customers. I also think the fact that technology has made it easier to build businesses, and I'm going to say something sort of unoriginal because other people have said it, but I do think it's true, which is it's less and less expensive now to start a company, but more and more expensive to scale a company. Because like, so we're invested in a few consumer companies. No matter what consumer company we're invested in, there will be competitors. There will be other people who are trying to do it. When the technology was hard, you actually might have been the only person in your space. And so getting the application up and running was expensive, but then, once you had it,

• 1:02:43Speaker 03

  you could kind of scale quickly because there was no other markets. You could buy ads on Google really inexpensively, et cetera. So I do think that you kind of have to find really interesting distribution channels now, and you probably have to invest a lot of money. A lot of founders come to us and they say, this is the last round I'm ever going to raise, because then I'm going to be profitable. And we tell them, that's not true. Because raising cap, you're going to have to raise capital to create defensibility. You're going to have to go get markets before anyone else is there, and create a presence where it would be uneconomical to even compete with you. Because you're already at scale, and it takes away the value of building a business. One sort of thing I'll add to that, because I think it relates to how people think about raising following rounds of capital. I think when it comes to acquiring company or acquiring customers, it's just way more expensive now than it used to be.

• 1:03:28Speaker 03

  I think that raising capital can do two things. It can make your company less risky by having more runway and buying all those customers. It can also make it more risky. The reason raising more, and VCs love to say, oh, you shouldn't raise too much capital. Because it makes you spend more money, and you have to grow faster and all these different things. And I think there are a lot of things that are self fulfilling, or sort of in the best interests of VCs to say that. I think that like, we have a portfolio company that is thinking about raising a large Series B right now. And we told them, look, you know, you've raised, let's call it $10 million to date. If you raised like $25 million in the Series B, if you don't sell your company for $35 million or above, you will make $0, because you're going to have preferred equity on top of you. If you raise like a $7 million round,

• 1:04:13Speaker 03

  if you sell that business for $35 million, you still made $10 million. You're actually still a wealthy individual. So putting that much preferred equity on top of you, I think is really scary. I think people spend a lot of time optimizing for valuation, and don't think as much about structure. Like, preferred equity is kind of like debt. And I think that people probably don't think that much about it.

• 1:04:32Patrick O'Shaughnessy?

  You mentioned tattoo parlors, and I would love if there to hear any other interesting, longer term aspirations that you have. While you think about that one, I also like to think about it negatively. So if there are industries or types of businesses that structurally you just find uninteresting, and likely would never play?

• 1:04:52Speaker 03

  I'll start with things I like because I'm an optimist. Yet another guy on the podcast who was talking about bail bonds. I think bail bonds are still a place that should probably be cleaned up. You know, the way a bail bond works is average bail is about 25 grand. So let's say your kid goes, gets arrested. Most people don't have $25,000 on them, so they'll go to a bail bondsman. And he or she will say, great, give me 10% of the money. I'll put up the bail for you. And as long as your kid shows up to court, I'll get my money back. And by the way, if your kid doesn't show up to court, I'm going to send about $800 to go get them. And I might also put a lien on your home. So it's like a 300% APR product that's secured. And by the way, there's no discriminatory law. That's bad and good. It's bad because you could like be racist and do all these horrible things that there's reasons there's, you can't profile when you're making loans.

• 1:05:36Speaker 03

  But for whatever reason, bail bonds aren't like that. The reason it's good is you don't have to do hard crimes. If you ever built a bail bond business, you could say, look, I'm not going to do anyone who did any hard crimes, anything that like I'm morally against. I think that A, it's a social justice. Like I think the bail bond system is totally messed up. If someone can't afford bail, they're in jail for 30 days. They lose their job, they lose their apartment, their life is ruined. I think there's a way to create a fair product in that space. So that's like, you know, I could probably tick off like a number of things that I think are interesting. I'm just trying to figure out what's reasonable and won't get me yelled at at the office. Cause they get more and more bizarre the longer I go.

• 1:06:09Patrick O'Shaughnessy?

  Do the unreasonable ones. We'll give you a free pass from the office.

• 1:06:14Speaker 03

  Let me go to ones that I disagree with a little bit. I think a lot of the worst ideas that we see are not bad ideas because they're bad ideas, but bad ideas because everyone thinks they're like, they're just overpriced. You know, like everyone says, hey, I'm going to invest in blockchain companies. I've heard a lot of people talk crap about Bitcoin, but I haven't heard a lot of people talk crap about the blockchain. I think like every bank executive has been explained to them by their PR firm that they're supposed to say that they like the blockchain, even if they don't like Bitcoin. And so it's like really hard to find reasonably priced business in the space. I think insurance companies and lending companies are built similarly. So like, if you think about insurance companies often start as customer acquisition businesses, then they get better at underwriting, then they become the carrier. Lending companies are the same, right? Like most of the first wave of lending companies were customer acquisition businesses.

• 1:06:58Speaker 03

  Hey, let's just do this online instead of in a bank. Then they got better at underwriting and eventually they'll actually figure out a unique way to access capital, which would be bad for my business. But insurance companies are just so expensive to build that it just doesn't make sense for the venture capital model. And so I think that people were like, oh man, insurance tech is cool. Warren Buffett likes insurance and like other people in finance seem to like Warren Buffett. So like I kind of am a techie, but now I can talk about insurance.

• 1:07:19Patrick O'Shaughnessy?

  Like float financing.

• 1:07:20Speaker 03

  Yeah, yeah.

• 1:07:20Patrick O'Shaughnessy?

  I don't blame them.

• 1:07:21Speaker 03

  They heard the word float financing and they were like, wow, I finally get finance. You know, and finance, sorry. And, and I don't know. And if you look at it like Metro Mile is an amazing idea. Metro Mile basically says, we're going to underwrite your insurance, your auto insurance based on how much you drive.

• 1:07:38Patrick O'Shaughnessy?

  Great idea, yeah.

• 1:07:39Speaker 03

  I still wouldn't want to be in the seed round because I probably own like 0.0001% of that company now because they've raised so much. I just don't think insurance really makes sense for the venture space. You know, so I think it's more like just trend lines. By the way, like you see a big round, like Sequoia does a big round of a company and then every seed firm suddenly is like, all right, I'm going to find the next one that Andreessen Horowitz can do. You know, so those are sort of the themes that we try to stay away from.

• 1:08:01Patrick O'Shaughnessy?

  Back to the unreasonable ones.

• 1:08:02Speaker 03

  Employers lending to their employees. So there's a large company that I kind of got to know and they have a bunch of truck drivers and the truck drivers can't afford to buy trucks. So they lend to the truck drivers and then give them the work. So they're lending and then making sure the loan gets paid back by then giving their own employees work. I think employers are really good at underwriting their own employees. I can't believe that some of these really, really well-established businesses, as soon as they hire someone out of college, they say, by the way, I'm going to lend you money to get your apartment. And I don't know, I'm surprised it's not financial products offered to the employees at larger companies.

• 1:08:38Patrick O'Shaughnessy?

  Just a couple of closing questions. The first one is your view on the potential negative impact of free content. You wrote kind of an interesting write-up about why this seems great, but might actually be driving a really horrible trend. So could you summarize that, that line of thinking?

• 1:08:56Speaker 03

  So I think that people looked at, by the way, this is more interesting when I first published it than now because I think that like this is before the term fake news. But I think that people looked at digital media and Twitter as this great tool to democratize the minority voice. And they said, okay, this is really great. All of a sudden, people who are often not heard because of agenda setting or because CNN doesn't want to publish it could never get their view told. Now we have John Oliver, but you know, at the time. And so, but the reality is. Free media is completely misaligned with its readers because the readers are not the customer. The customer is the advertisers who are publishing ads on those posts. And so really, if you're a media company whose model is to get free viewers, that viewership is your product.

• 1:09:38Speaker 03

  And the way you make that product is you write articles that you know that product is going to be attracted to. So writing the articles almost becomes your marketing tool. It's just a marketing engine. It's why we have listicles. It's why we have crazy headlines. It's why we have these sensationalist things because all you're trying to do is say, I need to find women between the age of 20 and 28 who like X, Y, and Z product, and I'm going to write posts about that product to aggregate them so that I can then go to Sephora and say I'm going to market to them. Or I'm going to find men between the ages of 45 and 60 who like bowling or whatever, and I'm going to write just a bunch of posts about bowling, and I don't care if they're true or not. I just need to aggregate that audience and then go sell ads to advertisers. However, paid media is completely aligned.

• 1:10:23Speaker 03

  All of a sudden, your customer is your reader. When I read the Financial Times, I'm paying a stupid amount to read something that's actually meant for me. So the odds that it's actually correct, the odds that it's high quality are incredibly, incredibly important. So what ends up happening is the people who are poor continue to listen, watch, or read free media not meant for them and productizing them. Whereas the people who are wealthy are going to continue to get correct information because they're paying for content that was actually meant for them.

• 1:10:50Patrick O'Shaughnessy?

  And that might actually just, that gap might widen and get worse.

• 1:10:53Speaker 03

  Yeah, and I think that's really sad. We wonder why people are getting false information because the information was never meant for them. And we're frustrated by it. We should be. I don't know how to solve it, but I think paid media is really important. I think it's really important that we pay for content. One of the things I get excited about, though, within media and stuff that we do pay for, I love the idea of Netflix and HBO. And I think that what Netflix and HBO will do are do what books did for Shakespeare. So I grew up going to school, reading Shakespeare, and thinking, wow, this is like the worst stuff ever. And I know that I'm supposed to like Shakespeare because I think you're sophisticated if you say that you like it because it's classic. But really, it's like, you know, these sonnets, and there's a certain amount of syllables on each line. I think it's 10. And you have to figure out how to tell a story within that structure. Eventually, someone said, "Well, it would be better if you just loosened up the structure

• 1:11:36Speaker 03

  and you wrote books." And books became more and more flexible. And all of a sudden, you had 500-page books and 200-page books, and there were sentences that started with the word "and." And you had paragraphs that were different lengths and chapters that were different lengths. I think the two-hour movie is like the sonnet. And I think that my kids will probably never watch a two-hour movie, except in their classroom, as this is how people used to watch film. And the reason is, Harry Potter should have been an HBO series. And every book should have its own season, and every Horcrux its own episode. We got gypped by the fact that they were two-hour movies. Big Little Lies, I thought was a cool show. I thought it was fine. But that's movie star-level talent on a TV show. And that story was told in

• 1:12:20Speaker 03

  the right amount of time. I think this thing that HBO and Netflix still get wrong is every single show is told in the same amount of time. Every chapter is in 10 pages. So why is it that every episode's always 40 minutes, or 60 minutes, or 30 minutes? Every subplot should be told in its own amount of time. I think we're going to get there. But that's proof that the reason structure built the stories was because of ads. Because cable had to fit. You were not the audience. The content wasn't made for you. It was content just good enough to get you to watch it so they could serve you ads. Netflix, you're paying for theoretically, or your friends' friends' friends paying for it. So it's actually meant for you.

• 1:12:53Patrick O'Shaughnessy?

  Before I ask the closing question that I always ask, I just want to say thank you. I will really remember this conversation probably more than most, to be honest, because you have this incredibly unique way of looking at things as they should be or could be versus how they are, and approaching things with a very open mindset. And I'm blown away by it, honestly. I'm really impressed, and I appreciate all this time. The last question you know is coming, because I ask everybody, which is what the kindest thing that anyone's done for you is.

• 1:13:24Speaker 03

  My first job didn't work out. And so my second job was working at a company called Chloe's Soft-Server Fruit Company. And Chloe's Soft-Server Fruit Company sells soft-serve fruit. So it is not frozen yogurt. It's actually made of only three ingredients: fruit, water, and a touch of organic cane sugar. And there's only 80 calories a small, 16 grams of sugar. There's no dairy, no It's kosher parv. And I know all this because my second job was passing out flyers on the corner of 17th and Broadway. If you want to meet the meanest people in the world, it's the people who are in that area trying to ignore a person passing a flyer into their hand. But the guy who owned the business turned out to be a guy named Michael Sloan. And Michael was the CFO of a private equity firm. He was secret shopping. And I made like a web analytics joke to him. He goes, how do you know about web analytics?

• 1:14:10Speaker 03

  I was like, well, it's sort of interesting. I used to be the president of this tech startup and now I'm not. And now I work for you for probably $2 less an hour than I should be making. But if you want to raise my pay, that'd be great. And he goes, I want to, you know, we started talking, he's like, I went to Cornell as well. You should come to my office. So I went up to his office in Midtown and this office was like bigger than my parents apartment. This was like, I was like Florida. I'd never seen Marvel Florida. Like this is cool. And I was wearing my best khakis. And he goes, look, like, I think this is cool that you came to work for me. It's cool that you try to do a startup and I started a company as well. You should go to school and keep taking risks. And no matter what, you can always work for me. And that was when I got to be able to continue to take risks. I didn't have to go down the traditional banking path. I didn't have to go down the traditional consulting path or one of these sort of paths.

• 1:14:54Speaker 03

  Because this was a guy who said, look, you worked your ass off passing out flyers. And by the way, I was really good at passing out flyers. Like I had lines coming in. It was awesome. I'd do and say anything to get people in. You know, he said, you worked really hard. I sort of think that I've always wanted to sort of help somebody sort of at your place in life. So you can always work for me, keep taking risks. And then he ended up becoming my first investor in co-venture. I still love Chloe Soft Sir Fruit Company. It's still in our freezer every single day. And if you haven't had a popsicle, you can get them at Whole Foods or all these different places. And he's the CEO that I most admire. And he's, that was the nicest thing anyone's ever done for me.

• 1:15:29Patrick O'Shaughnessy?

  What was your best tactic for getting people to take a flyer?

• 1:15:33Speaker 03

  So people would walk by. I said, you like yoga? And they'd say, yeah, I love yoga. I was like, I love yoga too. You know what? People who love yoga, love Chloe Soft Sir Fruit Company. And that was, that was probably the number one.

• 1:15:47Patrick O'Shaughnessy?

  Commitment bias. I love it.

• 1:15:49Speaker 03

  I can't, I can't say the others.

• 1:15:51Patrick O'Shaughnessy?

  Well, this has been a blast. Thank you so much for doing it. I hope that, given that I think you're in New York pretty often, that we can do this with some regularity. This was a blast.

• 1:15:59Speaker 03

  Thank you very much. I really appreciate having you on the show.

• 1:16:03Speaker 04

  Hey everyone, Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away, and then three to four suggestions of new books every month. You can also follow me on Twitter @Patrick_OShag, O-S-H-A-G. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.