[REPLAY] Ali Hamed – Novel Venture Investing at CoVenture, Venture is Eating the Investment World 5 (Capital Allocators, EP.233)

Ali Hamed is the Founder of CoVenture a $2 billion investor across the capital stack of technology start-ups reinventing the economy of the future. Ali first appeared on the show three years ago when CoVenture's assets were around $100 million. That conversation is replayed in the feed. Our second conversation starts with an update on CoVenture's growth and dives into Crossbeam Venture Partners, CoVenture's venture business. We discuss Crossbeam's sweet spot, sourcing, due diligence, deal dynamics, ownership, and decision-making for follow-on rounds. We then turn to examples in fintech and platforms, and close with how CoVenture's taste for novel assets fits into the venture ecosystem. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com https://thepodcastconsultant.com/)

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

• 0:01Ted Seides?

  Capital Allocators is brought to you by AlphaSense. Every allocator sits at their desk for hours preparing the work around investment decisions, getting up to speed on a new theme, prepping for the next investment committee meeting, and tracking what changes across an entire portfolio. AlphaSense just launched something built to help. It's called SuperAnalyst, an always-on agent that works like a power user on your behalf. It draws on over 500 million premium sources, including broker research, expert transcripts, company filings, and earnings calls, and keeps working long after you've gone home for the day. Point SuperAnalyst at a theme, company, or market, and it learns the coverage universe

• 0:46Ted Seides?

  so you can easily turn new insights into the briefs, models, and memos you'd otherwise build by hand. It was designed to work like an extension of your team, so it remembers your projects, follows your templates and processes, and links every output to its source so you can see where each conclusion came from. The best way to judge its quality is to give it a whirl. Pick the research task on your desk before your next committee meeting and hand it to SuperAnalyst. Start a free trial at alphasense.com/capital and see what it has ready for you. Capital Allocators is also brought to you by RidgeLine, the investment management platform

• 1:29Ted Seides?

  built for firms who are rethinking how work gets done. You're at your desk looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. RidgeLine is built to change that line's trajectory, to be the inflection point that takes your growth from incremental to accelerated with the team you already have in place. RidgeLine is the only AI-native investment management platform that brings together the front, middle, and back office with one set of data and powerful AI agents that automate away

• 2:12Ted Seides?

  operational drudgery, so your talent can shift from managing old technology to materializing new ideas. RidgeLine helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai/trajectory. If you file Form ADV, your firm is already there. Then talk to RidgeLine about how you can do more with the team you already have. Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable

• 2:57Ted Seides?

  relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations, and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible, so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com/capitalallocators.

• 3:32Ted Seides?

  Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.

• 3:59Speaker 01

  All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.

• 4:18Ted Seides?

  Marc Andreessen from A16Z famously proclaimed a decade ago that software is eating the world. His prophecy has proved prescient. Cloud computing enabled the rapid, cost-effective deployment of software, startups flourished, and venture capital returns have been phenomenal. Venture capital is a fascinating investment area whose many days in the sun shine brightest this year. Institutional portfolios with large venture allocations soared to their best year in history. And yet, parts of venture are unique in being both efficient and unactionable. Many believe that Sequoia or Benchmark will produce returns at the top of the pack,

• 4:59Ted Seides?

  but there's not much action anyone can take to participate. This mini-series explores the industry, focusing on some favorites of institutional investors who are still investable to those in the loop. Each has a great differentiated story to share and something to prove. That said, this field moves quickly, so as the disclaimer goes, past accessibility is not a guarantee of future capacity. My guest on the fifth episode of Venture is Eating the Investment World is Ali Hamed, the founder of CoVenture, a $2 billion investor across the capital stack of technology startups reinventing the economy of the future. Ali first appeared on the show three years ago when CoVenture's assets were around $100

• 5:44Ted Seides?

  million, and that conversation is replayed in the feed. Our second conversation starts with an update on CoVenture's growth and dives into Crossbeam Venture Partners, CoVenture's venture business. We discuss Crossbeam's sweet spot, sourcing, due diligence, deal dynamics, ownership, and decision-making for follow-on rounds. We then turn to examples in fintech and platforms, and close with how CoVenture's taste for novel assets fits into the venture ecosystem. Please enjoy my conversation with Ali Hamed in the fifth episode of Venture is Eating the Investment World.

• 6:22Ted Seides?

  Ali, great to see you.

• 6:23Speaker 02

  Thank you so much for having me.

• 6:25Ted Seides?

  I know a lot has changed on your end from when you were last on the show. So why don't you walk me through what's happened with Coventure over the last couple of years?

• 6:33Speaker 02

  I wouldn't be surprised if last time we spoke, we had something like called 100 million of AUM. I think now we're probably investing closer to $100 million a month. It's certainly been a much different experience this year than it was back then. And just to back up and remind you, when we started the business, we started my senior year in college. I just in a startup, I caught the bug. I wanted to be in venture capital. We had this crazy idea to build software for equity and non-technical founders. And it really taught us investing and how to think about businesses. We had to pick and choose which companies we're going to build software for. And it was a tremendous experience for myself and for our team, because it was a way to kind of leg into venture capital. And a lot of the companies that we did this for, they were lending companies and they need debt capital. And so initially, we had this whole marketing story that we tell about, we had this great thesis in asset-backed lending

• 7:17Speaker 02

  and how all these asset classes were going to explode. Like a lot of things, our first investments really taught us what a thesis was going to be. We had this early company produce pay that was financing perishable produce that had never been done before. And so we started setting up as a fundless sponsor, just SPVs to finance the debt of each deal. And whereas it took us a really long time to decide if we were any good at venture capital, credit has much quicker feedback loops and we ended up building that business a lot more quickly. And so there, while we were still doing angel investments and SPVs and all these different formats of venture capital initially, in credit, we were able to institutionalize the business quite quickly. We were able to write bigger checks, 2,500 million dollar checks into these companies. And we really, in our opinion, kind of defined a type of credit that we do, which is tech-enabled asset-backed credit, where we're helping institutionalize new asset classes,

• 7:59Speaker 02

  which today has become this really amazing thesis because priced so perfectly to perfection. People become so convinced that they know so much about auto or so much about resi mortgages or so much that they price them to perfection. We go into these new asset classes, assuming that we know very little because they're new. And we priced them with humility and we structured them with humility, which means that they have, in our opinion, more structural protections. And so whereas we went into building our firm, thinking that we were going to be venture capitalists, we accidentally became credit investors first. It was just this incredible experience. I think it actually taught us investing in a way that venture capital might not always teach. Venture capital often becomes More of a sales and business development asset class than it does an investing asset class. It's very rare that in venture, you're crunching a bunch of data, whereas in credit, you're just relying on the data.

• 8:40Speaker 02

  And so that's really how we started. We had this software for equity business and this credit business, the credit business institutionalized. And in March 2020, we finally had the capability of going out and raising our first institutional venture business. And so today, where we sit is we have a venture business called Crossbeam, where we do early-stage venture capital investing. And we have our credit business called CoVenture, where we continue to invest behind technology companies that are institutionalizing new asset classes. And it's an incredible ride and incredible journey.

• 9:07Ted Seides?

  How have you built your team up to support those two endeavors?

• 9:11Speaker 02

  We go back and forth because on one hand, it's really seductive to have this idea of having cross-disciplinary, cross-asset class investors. Because we often talk about the fact that it's really good to recognize one venture capital deal as being better than another. But do you know if you should be in venture capital at all? In credit, it's really good to know if like one auto lending deal is better than another, but should you be doing auto lending? Or should you be doing consumer credit? Or should you be doing small business funding? So we love the idea initially of having everybody do a little bit of everything. But over time, as we became more institutional, we actually broke the businesses apart. The team is still really small relative to the amount of capital that we're investing and the pace that we're going at. But having such a tight-knit group of people that we get to work with every day ends up making communication easier.

• 9:53Speaker 02

  It makes knowledge transfer easier. It gets rid of a lot of bureaucracy. There's no politics and it's just been incredible to see the amount of horsepower that the team's been able to put together.

• 10:03Ted Seides?

  So after you set aside software for equity and then the credit business explodes, now you're back into the venture business with Crossbeam. So what approach did you take when it came time to start investing in venture again?

• 10:16Speaker 02

  There were a bunch of thoughts that we had to go through. The first was, do we want to look like everybody else? And it's really hard to try to do something new in venture because we and everyone else idolizes the people who've done it the best. I spent a lot of time idolizing Benchmark and First Round and Sequoia and a lot of these amazing firms. And there were many years I kind of tried to spend all of our time figuring out how we're going to look just like them one day. And then I realized that that was probably going to be a false endeavor. We'll probably just be. Make money our own way and do it a little differently. And on one hand, I kept telling the story of trying to like cram this complicated firm that we had built into why we were going to be very simple and look like every other VC fund. And then one day we had this aha moment that we shouldn't. We just wanted to be in the business of making money. And it turned out, one of the ways we wanted to make money was investing in early-stage venture capital deals.

• 11:00Speaker 02

  As goofy as this sounds, the best way I ever heard it was explained by like this documentary series on Netflix called Explain. And they have one on chess and they talk about like all the different eras of chess. And there's like one like dark era where everyone was trying to win beautifully. They were all trying to win with style and they became actually worse chess players. And this new batch came along that didn't care about the style, they just cared about winning. And when I think about a lot of VC funds and a lot of the people who try to build these funds, everyone spends all their time trying to like learn and lean into the mythology of venture capital and how the firms that were built before us operate. And I think what I realized one day is like, we don't win beautifully. We just try to win. And so first off, we said, okay, well, we don't really care how other people have been built. We're just going to build ourselves our way. You know, a lot of LPs even that you talk to say, well, you need a certain amount of ownership. You need to do a certain amount of deals per partner.

• 11:43Speaker 02

  You need to have a certain amount of partners. You need to make sure that they only do certain things. So we scrapped all that. And instead we said, well, what are we really good at? And we thought that we were really good at four key areas. One area was pure fintech, which is software companies that sell into financial services businesses. One is lending companies or financing businesses because whereas most venture capitalists don't really know how to think about what lending companies will be valuable and which ones won't be valuable. We think we actually can figure that out. We really started leaning into what we call the reemerging middle class or platform economies. What I mean by that is people think, oh my gosh, you know, Main Street's dead, socioeconomic disparity is going to tear the country apart. But I think we're a lot more optimistic than most people are, not just on capitalism in general, but how capitalism actually is going to rebirth the middle class. And there's like the two memes of tech takes away jobs or tech creates new ones.

• 12:27Speaker 02

  We've stopped wondering what those new jobs are. New jobs are the people who sell on Amazon, the YouTubers, the podcasters, the people who run Spotify playlists, the Airbnb hosts. So we got really excited because on the credit side, we've been financing a lot of those businesses. Why not do it on the venture side? And then finally, the fourth area we started spending a lot of time on was the decay of network effects, which is a little counterintuitive to most venture capitalists. A lot of VCs think, gosh, network effects are the end all be all. And network effects still do matter. We just think they matter less now than they used to. I'll give you an example. Social media is no longer social. It turns out that when you go to YouTube, you're not watching your friends' videos. When you go to Instagram, you're just looking at meme accounts. Because of that, YouTube is no better or no worse for you if I'm on it or not. Because you're not watching my videos. So it means they're just media companies. And there's more of them than there ever used to be. So those media companies have less leverage on the people on them.

• 13:13Speaker 02

  So the value will start to shift to the people on those platforms as opposed to the platform itself. So we said, well, gosh, you know, we've been investing in those ecosystems either as angel investors or as credit investors for a long time. Now it was finally time to institutionalize that. We also thought, well, you know, should we be doing only seed deals? And trying to make sure we own at least eight or 12 or 15% of every company we invested in? Should we be more full stack investors? And I think we made the decision that we just are going to look at every single deal independently and decided we can make enough money for the risk we're taking. And really loose venture math is often something like you need a 30 to 50x return if you do a seed deal, you need a 10 to 20x if you're going to do a series A deal and about a 10x if you're going to do a series B deal, deduced by how many of the companies you do at that stage that end up missing what you thought. And I think we took the point of view of it's just easier to evaluate every single deal and

• 13:56Speaker 02

  figure out how to fit in their box than try to make sure those companies can fit in ours. But we really kind of took a bottoms up approach and figure out what was the firm we were going to build and then how would we go staffing? And so that was the approach we took when building out our first VC fund.

• 14:08Ted Seides?

  I want to walk through a little bit of what your investment process looks like. So let's just start at the top of the funnel where, where do these ideas come from?

• 14:16Speaker 02

  What we often talk about is that it takes 50Bs to recognize an A in a certain asset type. We don't go from financing an Amazon seller to trying to go back some vertical SaaS AI business and construction. The path to different deals ends up actually being a little bit more obvious than you might imagine. So, you know, one of our earliest investments was in a company called ClearBank and that's now called Clearco. And that taught us a lot about paid acquisition and taught us a lot about e-commerce. And that made it a lot easier for us to go finance Amazon third-party sellers. Amazon third-party sellers taught us a lot more about e-commerce even more so. And so it let us invest in e-commerce enablers. Amazon also taught us a lot about platform economies. It gave us a whole framework of what makes a platform investable and what makes a platform not investable. It also taught us the value of shifting from the platform to the people on the platform.

• 15:00Speaker 02

  So what happens is we take the deal. That we've done, we try to see as many of the deals in that same space as possible so that we can recognize a B from an A. And then once we get really smart on that idea or that space, we try to find adjacencies. And we start telling people about the adjacencies. We often talk about being sonar learners, which means you say something to somebody, you hear their feedback, you kind of debate with them. And out of that debate comes an insight. So then we just start sonar learning with everybody that we can find. Can you build a big company to platform? Ninety percent of the people we talked to tell us no. Yet we've now managed to back a bunch of companies that have, but it got us smarter, it kind of sharpened our pencils. And then, once we start deciding we're going to be in a platform, we just talk about it a lot, not just within people that we know well, but we blog about it, we tell our founders about it.

• 15:42Speaker 02

  Across all the different pools of capital I've been a part of, probably interact with about 550 different limited partners. That's 550 people who have like a vested interest in making sure that we end up doing a pretty good job. And so we get deal flow from them. I've backed probably over 70 different companies in the last seven years. That's a lot of operators. That's a lot of employees of those operators, however many board members I've interacted with there. You know, that's another hundred or so people. We actually have a list of 211 VCs that we cover. We have covered groups, so we have certain VCs or high fidelity VCs, and we are in touch with them four times a year. We have lower fidelity VCs that we're in touch with one to two times a year. We do events, we do anything we can just to try to generate that inbound deal flow.

• 16:18Ted Seides?

  So once that deal flow comes in, where do you focus on the continuum of wanting to back a great business or wanting to back a great founder?

• 16:28Speaker 02

  People often try to force rank them and say, oh, what's more important, the founder, the market, the business model, whatever. I always think of them as factors of zero. So if any of them are off, we just don't do it. So you have to back a good enough founder and often you don't know how good a founder is going to be because the job of a founder and the job of a CEO are often different things. And by the way, you know, startups generally have the problem of overtitling people. I always had this like mythology that if I ever did a startup, I wouldn't even call myself a CEO in the beginning. I'd call myself the head of sales and then try to get promoted to CEO if I earned it. CTOs are the same thing. You're usually hiring a software developer who's like your lead engineer, who may graduate to a VP of engineer or a CTO or a head of product, but you don't really know. In the beginning, it's very rare that you find someone who's going to be a great CTO, who's also willing to like go build the first application and be the lead engineer and do everything from scratch.

• 17:12Speaker 02

  In our own business, we look for what we consider full stack employees. We look for the same thing in founders. The inverse, by the way, that would be what we call an iPad employee. So iPad employees are people who walk around iPads and they edit everyone else's work. And they're very good at managing a team, but they don't actually do anything themselves. And we look for founders who have the strategic insights of an iPad employee. You know, iPad employees, by the way, usually have big resumes. They have a lot of success. They're usually telling you about a story that they were successful in, in like 2011, 2012 or something. And they're still, by the way, that was still their biggest success. We look for people who have the vision, strategy and insights of an iPad employee, but with the hustle and the rigor and the do workness of a 23 year old who's still an analyst at a bank or a 24 year old who's an engineer at Palantir. So we're still looking for that greatness of a founding team,

• 17:56Speaker 02

  but it also has to be an idea that we could figure out point A to point B to point C. And then it's the market and the market's got to be big where it's got to have a point of view that it'll be big. We have to understand why the market's different now than it used to, but those are sort of some of the tenants.

• 18:08Ted Seides?

  And what does the diligence process look like from there?

• 18:11Speaker 02

  So often, a lot of our diligence process is trying to help the company as if we were already invested and see if they can use our help well. Let's introduce them to a customer. Can they close that customer? Let's introduce them to a potential hire. Can they close that hire? Let's introduce them to a strategic angel who might be part of the round. Does that angel investor get excited about it? One of the other things that we're looking for is velocity during the diligence process. We just invested in a company that when we met them eight weeks ago, they were doing 400,000 a monthly GMV, then 500,000 a month after, and then 800 a month after. And it just got to the point where we just had this like FOMO experience where we thought, gosh, the longer we wait, it's just going to be a higher priced round and they're already making progress while we're talking to them. I mean, this founder was just incredible. Every week he would send us updates from customers, customer reviews.

• 18:54Speaker 02

  Hey, we just did this project and it did amazing. And this is the ROI in the project. And then we also talked to the people he used to work with. And we talked to a lot of off list references. The on list references aren't particularly helpful. And we talked to people in the space. We had talked to Few companies in the space, you know, happens to be a business of the balance sheet. We use the credit team at CoVenture to decide is this a credit that we could actually finance? And we started introducing other people that helped them. And so in that business in particular, we knew the founder. We knew the people who we used to work with the founder. It was an intake call, then they talked to a few of the other partners. Then we had them talk to other people who are industry experts. One of the industry experts ended up wanting to invest in the round. That was a good thing. We saw them increase sales during the process and it just became super obvious to us.

• 19:31Ted Seides?

  What are you finding the environments like when you've done your work? You're excited about a company and you want to get in the deal?

• 19:37Speaker 02

  It's hard. Venture capital in many ways, it is a sales business. I have a lot of friends ask like, oh, how should I think about investing in a VC fund? One of the points that we've often made is when you talk to venture capitalists, would you ever wonder? Do you want them on your board? Is this the person you try to go take money from? And we try to be that for the founder, even before we know we're going to invest. And a lot of VCs, they answer this question. We have big networks, we can introduce you to a lot of people. We just do it. We show up prepared, we move really fast. We're texting with the founder, we're emailing the founder. We try to be as fast responding to them as they are to us. The earliest days, like if it's taken us more than a couple of hours to get back to somebody, either we're thinking really, really hard about something or we're not moving fast enough. Or maybe we're just not that interested. So I think it's a combination of speed. How much can we help the company during the process? Do we reference well? And we expect that all of our founders reference us when they talk to us.

• 20:22Speaker 02

  And luckily, we have enough founders who tell people that we're the ones who helped them land their biggest customer. We're the most important one. We're the one who gets back to them quickest. And so I think a lot of it is just winning with actions instead of winning with words.

• 20:32Ted Seides?

  And once you have a company in your portfolio, how do you try to help them out?

• 20:36Speaker 02

  So it's really bespoke company to company. To back up, a lot of VCs, especially early VCs, oversell what you're offering. They talk about strategy, they talk about vision, they talk about helping you with future financings. In the beginning, the company needs to make something and sell it. And there's like not a ton of strategic vision in those first 365 days. There might be product decisions that you can help with. But our number one job in the beginning is to help them hire people, help them find their first large customers. And importantly, by investing, give validation to the company so that customers want to work with them. Employees want to work for them and other investors want to invest. You know, in venture capital, people often talk about it as a contrarian business.

• 21:16Speaker 02

  It's sort of a contrarian business, but what it really is, it's a contrarian business that you're really working hard to turn into a consensus business. If you invested a company and 12 months later it's still contrarian, the company's going to run out of money unless you can keep funding it. The term that most people in venture capital wouldn't want me to use is that we're sort of merchant bankers. We run around, we invest some of our own capital, and then our job is to tell the rest of the market that they should invest at a higher price. And so that is the number one job, that is the number one thing that we're supposed to help a company do is because we invested, the rest of the market gives them the benefit of the doubt. And after we invest, we help them raise an optimal round of capital and we're aligned with the founder. And then as the company gets more and more mature, our role as either a board member, a board observer, or an early investor in the business is to be the board member that's kind of most aligned with the founder.

• 21:59Speaker 02

  The earliest investor will come in with the most similar cost basis to the founder and end up being aligned with them in a lot of ways. A growth investor wants to put structure on around. We'll fight it as hard as the founder will. Should they exit at a certain price, we're likely in the same seat as the founder and thinking about what the outcome would look like, or at least closer than the other investors. You know, one of the things that we often talk about is being the offensive tackle to the founder. You know, the offensive tackle is the lineman that basically protects the quarterback from being sacked. You know, a lot of board members just get in the way of the founder all the time, especially new board members who haven't been on many boards before. You can tell a new board member because either they think too much about everything or they don't think enough about anything. And mature board members are people who've done it a lot of times, know when to care and when not to care. We often spend a lot of our time helping the other board members know when to care or not to care,

• 22:43Speaker 02

  or at least like hold them at bay so the founder can do what they need to do. Or let the founder know the other board members are right. They have a point and you're actually in the wrong. And it takes years of earning trust with that founder so that by the time we tell them they're wrong, it's a conversation that they're ready for and making sure they know who the corp dev officers are at the other platforms, making sure we can help recruit people to their team, making sure they understand how playbooks work. If there's drama within the company, helping them understand how to deal with the drama, helping them understand how to deal with PR communications. It's a long, long list.

• 23:11Ted Seides?

  And so as a company progresses under your ownership, how do you think about your positioning and providing of capital at different milestones and different stages and later rounds?

• 23:23Speaker 02

  So we often think about a company as inflection points of risk. A lot of venture capitalists and investors generally make the mistake of thinking, well, you know, a deal that's doing a few hundred thousand annualized revenue is a seed deal. A company that hits the million dollar annualized revenue run rate is a Series A deal. Five to 10 is a Series B deal and so on. We often think about what are all the things that we need to believe for this company to exist in the world in an enduring, lasting way? And if there's like 15 to 20 important things, we often find that the hardest passes are the ones where we're 90% sure of 15 things, but 0.9 to the 15th power is a really, really low number. So what we're looking for is to use our diligence process to figure out of the 15 things, what are the 12 that we're like 99% sure on? And then what are the three long pulls in the 10?

• 24:05Speaker 02

  And what we're trying to do with a founder is before we invest is we say, this is what we think you need to achieve before we want to invest again. You need to prove that somebody other than you can make a sale. You need to prove that the data you're gathering will actually lead to insights that let you improve your product. You need to prove that your first nine customers are all going to have a positive ROI and resubscribe. The other lesson we learned is from Jordan Betman at Radiant. He has this wonderful practice with his founders where the day after they close, they ask, do an outline of your debt for your next round? And then let's make sure that every board meeting, we revisit that to make sure we're still on track or we adjusted, so we know where our north star is. We've tried to adopt that practice as much as we can of saying, what is success? And success is related to revenue. Revenue does prove things. It proves that you can sell, it proves a killer one to pay, whatever.

• 24:48Speaker 02

  But it's a byproduct, one of the inflection points of risk that we're really trying to model out. Historically, what we've always done is we've tried to put some money in the beginning and as they've limited these inflection points of risk, pile in more. It's a market today that's made it harder to follow on than it used to be. Historically, we used to think, gosh, you know, every time we invest a dollar, we probably want to hold two in reserve. If you were to ask a private equity professional, for example, at least a rational one, what should you do in an overvalued market? They would say, well, I want to be a net seller. How do you do that as a venture capitalist? You're a minority owner, you can't force a sale. In our view, maybe the way to be a net seller is to take less prorata than you might intuitively think. You know, one of the hallmarks of venture capital is buy a bunch of cheap options and lean into your winners. We actually are the point of view that during a market like this, we're actually loading up more of our checks into the initial

• 25:31Speaker 02

  rounds and then doing less into the follow-on rounds, especially for our best companies. A lot of our dry powder now is to bridge a company through a moment where we think they can get to that inflection point, buy up, get ownership at a good price. But what we're not doing is saying, wow, this round, this company just raised at a $700 million valuation or a $500 million valuation. There wasn't a lot of diligence done. It's just a market that those have become less interesting to us on balance.

• 25:55Ted Seides?

  We're going to take a quick break in the action to tell you about Brookfield. Brookfield invests in the thing behind the thing behind the next big thing. Their focus across infrastructure, energy, real estate, private equity, and credit is helping to build the backbone of the global economy. Brookfield combines deep operational expertise with disciplined, long-term investing, uncovering value, and partnering alongside clients to shape tomorrow's economy today. Invest in the businesses that shape tomorrow. Learn how you can own what's next at Brookfield.com/own.

• 26:33Speaker 02

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 26:38Ted Seides?

  And now, back to the show.

• 26:42Ted Seides?

  I want to turn to these four categories of the investments you'd like to learn and dive in a little bit more. So you started with fintech. What aspect of fintech is most interesting?

• 26:51Speaker 02

  Today, we're most focused on financing businesses. We've done a handful of consumer application businesses, and we've gotten more excited about international fintech than we expected ourselves to. I'll give a theme that we think is really incredible, which is the international buy now, pay later thesis. International buy now, pay later is so powerful, maybe even more powerful than in a domestic buy now, pay later, because you're actually creating a credit profile for a consumer that's never had credit before. And what it does is it gives you a relationship with that borrower that's an order of magnitude better than anything anyone else can provide. That's different than a domestic buy now, pay later that might have incrementally better data points, but at the end of the day, they're still incremental. You can lend $10,000 instead of the borrower being able to get $9,000. Internationally, you can lend $500 to somebody who was previously only

• 27:36Speaker 02

  able to get $50. And in the playbook, you know, and this is across multiple companies is as follows. You basically advertise to a bunch of consumers and you make loans to all of them. Some people pay you back and some people don't. The people who don't, you leave alone. The people who pay you back, you make another loan to. And you make a bigger loan, and then you make a bigger loan, and a bigger loan, and so on and so forth. To the point where you end up having this borrower base of 95% amazing borrowers and 5% crappy borrowers. And you're the only one in the world that can lend the amount you can lend that 95% of good borrowers at the rates that you can lend to them to. It's almost like they're invisible to the rest of the world. What's so amazing about that is that you can lend at high margins to a repeatable customer base. And then you can distribute, whether it's through merchants, other e-commerce companies, or however you might want to, with a 10x better product.

• 28:19Speaker 02

  And I think one of the things that's attracted us so much to fintech compared to other asset types is, one, we think we understand it, and, two, we think most BCS don't. And one of the most wonderful things about fintech companies is most of them are pretty bad businesses. And we spend a lot of time trying to actually discern which fintech companies are good companies to begin with, and which fintech companies are just never going to have enduring moats, high margins, compounding moats, et cetera. And if you juxtapose that to something like SaaS, SaaS companies are kind of checklist businesses. You know, it turns out that all SaaS companies are good business models. They have high margins, they have switching costs, they don't take a lot of money to invest. If you run them through 15 different KPIs, whether it's CAC, LTV, payback period, et cetera, everyone can kind of get to the same valuation. If you have a really good brand, you pay a low multiple. And if you have a bad brand, you pay a really high multiple.

• 29:04Speaker 02

  In fintech, you have to go back to the basics and decide, like, is this even a good company? So those are some of the reasons we like fintech. And a lot of financing businesses to us today are examples of that. The other is software companies that didn't realize they were fintech companies until recently, or realized they will become a fintech company eventually. People don't borrow money from lenders anymore. They borrow money from their software providers, and these software providers have, one, they're in the flow of funds of what they do, they have intimate relationship with the customers, they can use that relationship to get data about the customers that nobody else has, and finance in a way that nobody else can. So those are some of the aspects of fintech that we really like.

• 29:37Ted Seides?

  So you didn't mention anything about crypto in that. And a lot of what we hear about in the fintech space, in the whole DeFi world, comes out of the crypto ecosystem. So how are you thinking about crypto as it relates to all these lending strategies?

• 29:50Speaker 02

  Crypto has been hard to get excited about a lot of things for us. You know, I think we're crypto curious and we've gotten very bullish in certain businesses. So QuickNode is an example of a company that we've invested in. It's a node as a service business. If you're trying to run a node, it's hard. If you're trying to run a node and do a lot of transactions at scale, it's even harder. And trying to build that infrastructure yourself without something like the equivalent of an AWS for the blockchain is really, really hard. And QuickNode had a real use case and business case for a lot of companies that shouldn't be doing this themselves. And we understood the business model. It was a way for us to make a picks and shovels investment in the NFT space. We thought the founding team was incredible, but it wasn't a, hey, here's a token. And if you think really, really, really hard and hope a bunch of people speculate on one day, it'll eventually be valuable. This was a blockchain company that we understood the customers were.

• 30:35Speaker 02

  We understood why they couldn't do this themselves and we understood why QuickNode was best in class for what they do. The other thing that we're spending some time thinking about is a lot of these guilds that invest in metaverses. You've probably heard a lot about Axie Infinity or YGG or some of these others. These guilds, basically what they do is they run around, they buy NFTs, they buy assets within these metaverses. A metaverse basically is a virtual world that people play games in or interact in. And they're really interesting because a lot of these metaverses have limited amount of assets in them. And what a company like a YGG would do or some other guild is they'd run around, they basically, for no better explanation, buy the real estate or own the real estate or own the NFTs within that game. And then lease them out or rent them out to the players of those games. And to us, that feels like an analog to a lot of the other stuff we do. We like providing liquidity to platform economies.

• 31:19Speaker 02

  That is almost the exact same thing as providing liquidity to a platform economy. If you think of these metaverses as a platform. If you listen to Gabby, the founder of YGG, he talks about his competitor set being Uber. Because Uber is trying to find drivers and he's trying to find gamers. He's literally enabling hundreds and hundreds of thousands of people to earn full-time livings through these play to earn games. Where YGG is like the landlord of a lot of these communities. And that to us really, really resonates. The things that don't resonate are here's digital art. And if you look really closely, you'll understand how wonderful and beautiful it is. I don't have good taste and I don't think I'm about to start having good taste, especially not consumer taste. I've never been somebody who like did well in life because he was like a thought leader in what other people are gonna want later. I've been wearing the same sneakers. Same jeans, the same T-shirt since I was 14. I'm just not a consumer. So I'll never understand that.

• 32:04Speaker 02

  Even in my history of doing credit investing, we don't ever do a good job lending on an LTV basis. We're more cash flow lenders. So the tokens and the crypto businesses that we understand why there might be future cash flows for, or where there's a real business model will pile into, and we're very excited about it, but we're not going to be speculators.

• 32:20Ted Seides?

  So you mentioned earlier, when you talked about platforms as one of the four key areas you look, that some platforms are investable and others aren't. What do you mean by that?

• 32:31Speaker 02

  So we run these platforms. So all kinds of characteristics that we think are important, and I'll give you a few examples. Does it drive traffic to you or not? In Amazon, it does. An Amazon seller who's ranked highly in a category doesn't need to spend much money on marketing and ads, because the traffic will come to them for free. It's almost like you're in a mall without paying for the rent for foot traffic. In Shopify, that's not true. In Shopify, you wake up every day, you spend money on ads, hoping that people eventually come to your website. So that would be one example. Does it drive traffic to you or not? Is there a compounding mode? Take Amazon again. You know, every time you you sell something, you might get a review. So you get ranked higher. So you get another review. So you get ranked higher. So you'd have another review. So you get ranked higher. In Shopify, you don't have that same compounding mode. In Instagram, the more followers you have, the easier it is to get more followers. In Twitter, the more followers you have, the easier it is to get more followers. Those are examples of compounding modes.

• 33:16Speaker 02

  Is the platform predictable? You know, I think Google search has been reasonably unpredictable. Facebook timeline has been reasonably unpredictable. TikTok is really unpredictable. What posts are going to get seen? And which posts aren't going to get seen? There's a lot of agencies that promote music through TikTok. It's just guess and check. They try 90 different challenges, 40 different videos, whatever, and they just spend tons and tons of money making a bunch of videos and they hope one goes viral. That's a really, really hard machine to build. I'll keep picking on Amazon because we're so bullish on it. It's not that hard to figure out what will be ranked highly. If you have a lot of reviews, the reviews are really good, and you sell for a competitive price and you don't run out of inventory, you haven't done anything messed up, like break the terms of service on Amazon, you're gonna be ranked highly. It's not like this big black box of wondering what it takes.

• 33:57Speaker 02

  So we're looking for platforms that aren't black boxy, and then we're looking for platforms that have been good to the people on the platforms. So you can keep going down the list further and further, but those would be some of the examples. I'll give you one last one because I think it's an important one. Does it monetize on your behalf? YouTube does an incredible job monetizing for creators. If a creator ends up having a lot of views consistently and puts up good content, YouTube will do all the work selling ads against your content and you can actually earn a living. By the way, it's why YouTube content is so good. YouTube content is good because YouTubers make money. They use that money to reinvest in production and you have people like Mr. Beast producing incredible stuff. Instagram is so hard to make money on because Instagram doesn't roll out programmatic ads at scale and share those economics with creators. What that means is creators aren't making money, so all they can do is post memes.

• 34:42Speaker 02

  The reason Instagram was just a memes page is because memes are really cheap to make and nobody's making enough money to produce anything better than a meme. And I don't know about you, but I'm incredibly tired of seeing memes. And so we're really, really nervous about Instagram and we think Instagram is really at risk of going away because the creators on Instagram aren't making enough money to actually make good content. And again, you're not going to Instagram anymore for your friends. You're going there for the creators, you're going for them, they're there for the professionals. You turn on a cable network because it has good content, not because your friends are watching. And so Instagram is going to really, really struggle because they can't lean on network effects anymore like they used to. So those would be some examples of the characteristics we look for.

• 35:18Ted Seides?

  Okay, there's this other category, which is the one we probably talked most about last time. This whole area of novel assets and you mentioned network decay. And you've talked about Amazon and Instagram as if they were the platform. I know most of your investing has been underneath that in those ecosystems. I'd love to hear more about these sort of novel assets in new media.

• 35:36Speaker 02

  I'll use Amazon as a case study of a new asset type or new asset class and why we think it's so much more interesting than investing in an old asset class or old asset type. If you're investing in something that's mature, whether it's residential mortgages or auto loans or consumer loans or other asset classes that I keep picking on. At the end of the day, there's a lot of people who know how to do it and regulators are comfortable with it. And you can finance them, you can eventually get them rated if you have about three years of data. And then insurance companies can buy them, banks can lend money secured against them and tell regulators like, hey, look, we have 50 years of data on consumer loans. I'm lending at a certain advance rate. This is obviously a good advance rate based on the asset class. And I can show you all these different data points and peak default rates and everything else. And then regulators will bless it as tier one capital, whatever it might be.

• 36:17Speaker 02

  The problem we see there generally is we think the next 50 years are going to look a lot different than the 50 years prior. And so would I rather have 50 years of data than not have 50 years of data? Yes. But I don't think it's as comforting as most credit investors will give it credit for. We don't think it's like the end all be all or the blessing. If you think about music royalties as an example, music royalties trade at 15 to 20 times revenues. Think about how much the music industry has changed over the last 20 years. I understand that it's an uncorrelated asset. I understand you can do asset management. I understand that streaming is making the streaming world better. But there's a lot of questions that we don't know about music. We don't know if there's going to be so much more supply of artists, that the big artists are going to be more diluted. And sure, music might make more money, but that artist might make less.

• 37:00Speaker 02

  So what we look for is asset types that people walk into, knowing that they don't know everything, so that you can structure them in a way that's a little bit more humble. Amazon is a great example. So basically, the Amazon third-party seller ecosystem is a bunch of people who sell stuff on Amazon. There's resellers who sell things like Kleenex or Colgate toothpaste. They basically just operate at very, very thin margins because they're selling a commoditized product. But most of them are actually selling a micro innovation. They're just small businesses. And instead of paying for rent, Main Street in your local town or on Park Avenue, they're paying Amazon FBA fees. And there's nothing explicit about the traffic that they're paying for in the traffic, but it's sort of implied that one of the main reasons you're paying Amazon FBA is because you're getting traffic from it, which is pretty good. All they are is small businesses with cash flow and EBITDA.

• 37:42Speaker 02

  But you can buy them at reasonably low multiples for a whole bunch of different reasons. The direct lending world is not ready to finance this ecosystem. Why? Because the direct lending world is already now an LTV ecosystem. Direct lenders would have a really hard time explaining why their stuff is so safe if they had to point to debt to income. People are financing stuff at such high multiples now. You're buying something at eight times and you're financing it at 70%. That's 5.6 times debt to income. So every direct lender runs around talking about how good the equity sponsors they work with are, and how low their LTVs are. The Amazon ecosystem and the flip side is financed at a much higher advance rate, 80, 90% advance rates. But because you're buying things at three to four times, you're looking at something like a 2.7 to a 3.6 times debt to income. So it's just a different type of underwriting.

• 38:27Speaker 02

  You're financing the cash flows, not the loan to value. And as we just talked about a moment ago, I'm much better at financing cash flows than I am at just basic loan to values. And it's going to stay that way for a while. It's going to take a really long time for these assets to hit ABS markets or get rated or anything similar. So cost of capital is going to not come down for a bit because the regulated institutions can't get in, the direct lenders, it would break their business model being LTV lenders. And all it is, is just financing businesses with predictable cash flows. So that would be an example of why we love new asset types in general, as opposed to just trying to be a little more perfect than everyone else is, that same stuff everyone else started doing.

• 39:00Ted Seides?

  What are some of the newer new asset types that you're looking at?

• 39:03Speaker 02

  So some of the spaces that we're spending time on that might not be institutional yet, but could be in the future. One is we're looking at yield farming. And the way yield farming works is you have a decentralized exchange, like a Uniswap or a Sushi swap. And unlike a centralized exchange that holds inventory, a decentralized exchange doesn't. So what they do is they rely on the inventory from other knuckleheads like me, when I do it personally, of just lending my Ethereum or Bitcoin or whatever to a liquidity pool. And what happens is Ted, you come to Uniswap, you want to buy Bitcoin. Because I'm lending my Bitcoin to Uniswap, like it has inventory, can make the trade. And in exchange for me providing that liquidity to them in this pool of Bitcoin and Ethereum, where it might be, the pool ends up getting commissions off of it. Another space that we're spending a lot of time on is user generated games. So anything that sits in Roblox or Minecraft or Fortnite, we're investing in a company

• 39:48Speaker 02

  called Infinite Canvas, that's essentially quasi game publisher of user generated games. And what will that one day look like? If you think about what the music publishers are, they're essentially financiers and musicians. I bet you that the future of game publishing is not spending years and years coming up with a game and trying to distribute it in metal CDs, through metal boxes at people's homes, it's these user generated games. And so what will a publisher, what will a financier look like in that ecosystem? You talked a little about these guilds that sit in metaverses where they're essentially the landlords of the metaverse. And these metaverses are places that kids spend like hours and hours and hours of their weekend. So they really are places and you really do want to get access to them and they really are unique. You know, one of the challenges with metaverses though is the supply of games is infinite. More and more people can come with more and more games and we don't quite know yet if

• 40:32Speaker 02

  it'll be Power Law and that Axie Infinity will just get bigger and bigger. And bigger forever, or it'll end up being there's 90 different Axie infinities and nobody really cares about being where their friends are. Cause I was just making the argument against network effects. So that would be another spot that we're spending time on. International buy now, pay later. Obviously I gave a thesis there. That's one that we're spending a lot of time on. It might be a bit more actionable. And the other theme that we spend a lot of our time talking about is what is an example of a company where you can lend money? And get paid by one person, but you're actually taking the credit risk of somebody else. You produce pays an example of that where you're basically lending and getting paid as if you're lending to a farmer in Mexico or Latin America who doesn't have as much of a credit profile. But the credit risk where you're really taking is you the US-based distributor that they're working with. Reverse factoring is the same sort of concept. There's a lot of software companies that are starting to finance their customers.

• 41:17Speaker 02

  Where the credit risk you're taking is different than what you're getting paid for. Because you're getting paid by the person receiving the capital, but you're taking the credit risk of somebody else. Those are all themes and theses that we're spending a lot of our time on right now.

• 41:28Ted Seides?

  I'm curious, as you're looking at all of these novel assets across these different strategies. How does that play out in the competitive environment to venture capital? If other people aren't as in tuned to looking at some of the things that you do.

• 41:44Speaker 02

  So I think venture capitalists generally struggle, one, to figure out which financing businesses are valuable and which ones aren't. And we kind of talked a little bit about the framework that we use to think about that. But two, I think a lot of people in venture capital get mixed up between what it means to be capital efficient and what it means to be equity efficient. And what I mean by that is in the Amazon ecosystem, especially a lot of VCs that thought, ah, like not for me. It's a roll up. It's profitability. They can't figure out why it doesn't make sense for them, but they know it doesn't because they turned the word roll up. And it sounds like it's private equity and they were told not to do private equity. By the way, a lot of our companies that we invest in end up being profitable. This is a crazy stat that I just realized in the first fund we did at a crossbeam. Nine of the 25 companies we backed are over $20 billion of revenue run rate and profitable, which is just insane for venture capital.

• 42:27Speaker 02

  But it's because these financings often allow these companies to be super equity efficient. Even if they're using a lot of debt to finance cash flow and asset in the Amazon ecosystem, as mentioned, normal private equity. You finance acquisitions with about 65, 70% advance rate debt, maybe lower than that and often lower than that. And you wouldn't really go higher than that. And for two reasons. The first reason is you want to make sure that if the company ends up becoming less valuable than it thought it would, there's some cushion underneath you. The second reason is you want to be aligned with the private equity firm that's buying the company. If the private equity fund put none of the money up, they don't really care how it's going to go. In Amazon, as mentioned, it's the opposite. You can finance them at 90, 95, 85% advance rates. One, because you don't care about the alignment anymore. You're their whole facility. You're the only financier. So if they scrub that facility, they're toast.

• 43:12Speaker 02

  There's alignment. The second is because these acquisitions are happening at such low multiples, you can rely on the debt to income, not the advance rate for your margin of safety. If your debt service is two times, you can watch this company lose a lot of its EBITDA and still know you can amortize off the debt. You're not relying on a game of musical chairs where you're looking for refinancing. You're relying on amortization. And because unlike normal LBOs, where the leverage is only 65 or 70%, the leverage here is much higher, it doesn't take that much equity to get these companies to a lot of scale. I mean, we've seen companies go from being worth less than $20 million to a few hundred million dollars, literally in a year. We've joked with our VCs, if you get a 20x on a deal, I don't care if it's a VC deal or not. I just want the 20x. So maybe I'm not a VC. I don't know. But I think

• 43:55Speaker 02

  that's what sets us apart compared to others, who immediately when they hear EBITDA, immediately when they hear cash flow, immediately when they hear how much capital is required for a deal, they shy away from it because they don't understand capital markets or capital stack.

• 44:07Ted Seides?

  So if they're shying away in the early rounds, I imagine they may also be shying away in later rounds. I'm curious how follow-on financings work in some of these businesses.

• 44:17Speaker 02

  It's a lot of marketing, and it's hard. If we have a vertical SaaS company in our portfolio that's growing 15% to 20% month over month, that's got reasonable margins, got a reasonable payback rate that's under a year, it's in a big enough market, and the founder doesn't trip all over herself or himself, it'll get funded by basically anyone, and it's just about what price. If it's a company with a balance sheet, a lot of venture capitalists and growth equity firms really struggle to figure out, will it be enduring? Will it take a lot of capital? Will it be dilutive? Is it right for their firm? And we spend a lot of time educating the market. I would actually argue that right now, in the Amazon ecosystem, the worst place to be is between $10 and $20 million EBITDA. Because at 10 and 20 million of EBITDA, it's too big for a family office or a high net worth individual or a group of angel investors to finance it.

• 45:01Speaker 02

  And it's not a big enough where it's obviously a breakout. It's not as big as some of these other businesses that have raised these massive rounds. So a lot of the growth equity firms, because they're really struggling to figure out what's different between one and the next and should they be financing them or should they not? They're all sort of sitting on sidelines. And so you have to raise money from a lot of alternative types of capital, a lot of alternative types of investors. I mean, the market is really cheap relative to the fact these companies are often growing 25, 50% quarter for quarter. They have high margins. They have compounding moats, variable cost P and Ls. They have diversified revenue streams. There's no concentration in them. We've never seen a company that's profitable and growing its EBITDA 50% quarter for quarter, raise at such low multiples and have so much trouble raising because so many people say, oh, just we haven't figured out the market yet. And I think that's not unique just to Amazon.

• 45:45Speaker 02

  We've dealt with that in other ecosystems before. So we spend hours and hours and hours of our weeks going into the rooms of other venture capitalists, going to the rooms of private equity firms, growth equity firms, and just educating them on the market, putting out posts, doing podcasts, whatever it takes to prepare people so that by the time we come into a deal, they know that we've looked at the market a lot and this must be one of the deals they should do.

• 46:07Ted Seides?

  So I want to take a step back and ask you about what you've experienced in these different iterations of having a venture capital fund and particularly in an environment where you're doing something that's a little bit different, but there's robust interest in venture capital. What have you found as you've gone out into the market?

• 46:25Speaker 02

  One of my biggest learnings is when we started the business, we tried to be really contrarian. And we thought, oh, my God, we found a diamond in the rough. This is going to be amazing. The founder can't really tell their story. We'll be able to tell the story for them. We're the only ones who understand the complexity of the business. And gosh, aren't we so smart to see something that nobody else can? And we forgot that we didn't have a signal either because we were so new. What we found is we needed to work a lot harder on marketing ourselves and marketing why we like a space before we were going to invest in a space that didn't already have a lot of interest. If you're Union Square Ventures, if you're Sequoia, the fact that you did the deal is the reason it's no longer contrarian. And because we haven't been around for as long as them. We had to take more of a block and intac and approach.

• 47:06Speaker 02

  We knew that if we were going to back a company that would not be in a space that everybody had been in before, we would need to do 50 phone calls to prepare them. So we finally brought it to them. They knew what made it different and why the thesis was interesting. And we had to know that if we had 20 of those calls and all we were getting was blank stares, no matter how cool we thought the space was, we just wouldn't be able to finance it because we're not a multi-stage fund. That was a really, really important learning for us where we realized that our customers are threefold. Our customers are the founders, the other VCs that'll follow on to our deals, and our LPs who we're trying to make money for. And if we don't get all three of those right, no matter how smart we think we are, no matter how stubborn we can be, we're not going to win. The second point was the identity crisis where it was very painful to realize that we would have to build a firm that didn't mirror our idols.

• 47:51Speaker 02

  And I know that sounds really goofy, but when I was in college, all I ever wanted to be was a venture capitalist at one of these firms that we all know about. And realizing that our firm was going to just look different and make money differently, took a long time for me to really appreciate. The aha moment was when we realized that venture capital today is just such a different business than it used to be. We can't keep doing the same thing that all those firms we really loved and looked up to have been doing. And because they're already good at it, there doesn't need to be another firm doing the exact same thing that they're all doing. I think also as a firm, it's really important to be self-aware of what you are and what you aren't. If you're a really prestigious firm, you can kind of have sharper elbows and ask for a certain minimum ownership and you're going to get it. And you can tell the existing investors that they don't get their prorata, decide that you don't want to deal with hairy situations. That wasn't us. We realized that we were new. We would have to deal with stuff other people weren't going to be willing to deal with. We'd have to be more collaborative.

• 48:35Speaker 02

  One other crazy stat about the first fund, we had multiple companies going into the deals where we had to do recapitalizations. We had multiple companies going through litigation when we financed them. We had a company where I had to call all their payables and negotiate their payables down before financing them to make sure that they weren't insolvent the day we funded. And by the way, these deals are now worth well than nine figures. I mean, these are really, really high quality businesses now. We did things that I think the average firm wouldn't have done, not because we wanted to, but because we had to.

• 49:04Ted Seides?

  What did you find the tipping point was from that third group, the LP community?

• 49:09Speaker 02

  A few different components. The first is, on a personal basis, I had proved to people that I could make money. We invest institutional-sized capital in our credit business, and we've been making money for people for enough years, where I was able to have a conversation with institutional investors who very much understood credit, where I could have a sophisticated, rational conversation with them about credit. And then after having that, start telling them about venture, and they believed me because I had first built trust with them in credit. The second is time. It just took a really long time to have our first exits, to have realizations, to have a lot of those markets bear fruit. And the people who came into our firm are different pools of capital and the different strategies we had known for years. The average check that we've ever gotten from an LP

• 49:54Speaker 02

  took us 26 months of knowing the person to get it. It's a long sales process. And I think, you know, a lot of people, when I talk to them, they say, "Well, I want to start a VC fund." And I often tell them, "I can help you figure out how to do that in three years." But I don't know how to help you figure out how to start a fund within six months. Because it takes two, three years of helping people introduce them to managers. I mean, a lot of the people who are invested with us, I introduced them to other firms that they invested in before they invested in us. I bet you some of them invested in us as a favor for introducing them to the other firms. I think it's turned out incredibly well for them, but it took time. I mentioned 550 different groups or individuals or institutions that have invested with us. Over all the things that I've been a part of, it's probably out of 3,000 groups that we've known and talked to. It's the quarterly letters, it's explain the rationales, the investment memos. It's find a term what venture is, is usually a black box,

• 50:38Speaker 02

  and try to elucidate thinking deal by deal. It's trying to not use generalizations, like saying things like, "We have big networks," or "We have proprietary deal flow." And instead giving case studies that, "Here's the deal we did. Here's why we did the deal. Here's how we found it. Here's how we won the deal." And then also, we spent a lot of time talking about the quality of our returns. We have certain companies in our portfolio that have done tremendously well for reasons that we didn't predict. Those are not high-quality returns. We're very happy that they happened. And I think in venture capital, people talk about pivots and this and that. Yeah, but if somebody pivoted into an idea that we didn't underwrite, or happy it happened, and sure, we were good at picking a good founder, who is nimble and could change your idea and whatever. But it's not how we're trying to make money. We're trying to make money because we had a point of view on a market, a thesis. Generally how they were going to approach it and they got it right.

• 51:21Speaker 02

  And so I think being able to have those rational conversations and turn a black box into a bit more of a machine ended up helping us a lot. The proof was, you know, in our last fundraise, our past fundraises fundraises used to take three, six, 12 months. The last one happened in three weeks. I often joke, we kind of raised it in three weeks, but what we really did is we raised it in two years. Cause the entire time we were raising the fund prior to it, we were telling people we were doing, we were sending the quarterly letters. We were explaining the rationale. So by the time we put up our flag and everyone knew when we were going to put over flag, it was done. And it was the craziest experience I've ever seen. It was amazing.

• 51:53Ted Seides?

  So Leaf, you look out a couple of years from now, what's on the horizon for co-venture?

• 51:59Speaker 02

  It depends on what's on the horizon for the market. We know that in the next 30 to 50 years, we want to build one of the great new asset managers. Whatever that ends up meaning, it might not be tons and tons of AUM, or it might. But I think it's just going to depend on the opportunity set that we have in front of us. We know that today, there are a lot of financing businesses that most of the venture market doesn't understand. And that's a really important thing. And we're going to build a firm built around knowing how to back those companies. We also know that today, the economy is just going to be built differently in the next 10 years than it was in the last 10 years. Because people aren't starting any new dry cleaner businesses. They're not starting new drugstores. Instead, they're being built within these ecosystems. And we know that there's a lot of technology companies that are going to invent new jobs for the average American. We want to go finance those.

• 52:44Speaker 02

  We will build whatever it takes to go get ready to finance those. You know, I've often joked that the best comparison to our vision of the future is almost like playing that computer game Red Alert 2, where you walk around like in like 10 feet in front of you is completely hazy and black. And the more you walk forward, the more you learn about the new field that you're walking into. Maybe it's a totally bearish comment on us as a firm that we don't know what the next five years is going to look like. But it's just a really unpredictable time. So to make some big, bold proclamation about what we're going to look like in five years, I think would be not right of us. Often we've had investors of ours ask, how are we going to size our next fund? We've always told them, we don't know. We know the methodology. We're going to look at all the deals that we saw in the current one. We're going to decide how much allocation we could have gotten. And if we had the perfect sized fund, what would it have looked like? And then we'll go raise that size and it might be smaller, it might be bigger, it might be anything.

• 53:28Speaker 02

  In Crosby One, it was a $25 million fund. We co-invested with $100 million and we invested too quickly. All I needed a bigger fund. I don't know what's going to happen in the future. So I guess I'm better at talking about the process than what it'll look like.

• 53:40Ted Seides?

  Well, Ali, I want to make sure it takes some time to turn to some closing questions I didn't ask you the last time around. So what is your favorite hobby or activity outside of work and family?

• 53:49Speaker 02

  This is going to be an answer that'll give me a hard time. Right now, the hobbies work. You know, at a point in my life, and we're in a point in the market where I don't think anyone who's worked in tech that I've talked to has seen something quite like this and seen the amount of activity and deal activity and everything else. And I think work-life balance is a really important thing. I don't have it right now. Honestly, like, I'm not that embarrassed about it. We are working our butts off because we are in a once-in-a-lifetime moment. We wake up at 7:00 and we work till about 11:00. And there's gonna be a lot of people who think, gosh, what a terrible firm, or that's not a good example, or whatever. That's fine. Like, I don't need other people to do the same thing we do. I don't have hobbies right now. I just work a lot.

• 54:23Ted Seides?

  All right. What's your most important daily habit?

• 54:26Speaker 02

  The two and a half hours I have in the morning before I start meetings. And it's when I actually get to read things deeply. It's when I get to solve hard problems, when I get to get ahead of things that are gonna stress me out. If anyone's gotten an email from me that's generally frustrating, it usually comes out 7:00 to 8:00 a.m. when I have the mental fortitude to take on something that might not be an easy conversation. So I would say waking up early is my most important daily habit.

• 54:51Ted Seides?

  What's your biggest personal pet peeve?

• 54:54Speaker 02

  Hyperbole. In venture capital, the example, and Savneet, one of my partners will talk about this a lot, is people get lunch with someone twice, and they're like, oh, they're my best friends. We spend a lot of time trying to rein things back. We talk about being reasonably sure. We talk about humility. Like, I think hubris is the most dangerous thing in the world, in credit. You need hubris to start a business. In fact, maybe you need an irrational amount of hubris, but you need to have the humility to know how confident, overly confident you're probably actually being. So, hyperbole, and when people rely too heavily on signal. There's always the type of person who listens to the tone of how you say something as opposed to what you said, and that really bothers me.

• 55:26Ted Seides?

  Which two people have had the biggest impact on your professional life?

• 55:30Speaker 02

  So I'll pick the two earliest major impactors, which are Michael Sloan, who's the founder of Chloe Software Proof Company, which is the job I had before starting CoVenture early. And he was the one who encouraged me to go back to school. He was my first investor. He was, in many ways, the reason we were able to start our business. And then Savneet Singh, who you know. You know, Savneet's now the CEO of Par. He's one of my co-founders in CoVenture. He's the one who taught me investing. Amongst other people, I promise, if you're listening to this and you're one of the other people who have, I know that you have, I'll pick those two for the spirit of having to only pick two.

• 56:00Ted Seides?

  What's the biggest mistake you've made and what did you learn from it?

• 56:03Speaker 02

  Hiring too quickly. One of the most important things that I've ever told about building an investment firm is that managing a $1 billion AUM firm is a really good business to be in unless you used to manage a $6 billion AUM firm. And the challenge is it's really hard to go backwards in asset management. It's hard for morale. People want to make more and more money each year. In a startup, it's okay to overbuild and try to hypergrowth and whatever. When we think about hiring, we always think, when are we stretched just a little too thin and let's then add that next person? So I think today, we're a little more slow in hiring. We're a little more methodical and we don't try to overbuild because it's really, really, really hard to go backwards.

• 56:40Ted Seides?

  All right. Last one, Ali. What life lesson have you learned that you wish you knew a lot earlier in your life?

• 56:46Speaker 02

  It's cliche, but I don't think a lot of people practice it, but it's a lot of overpromising, having a realistic point of view of what you can actually deliver. In fact, I'd probably overcorrect now. I think a lot of people get frustrated when I don't commit to something, but I'm really, really, really terrified now of saying that we're going to do something that we don't end up doing. And so we put a lot of preambles in everything we say. I think trying to surprise to the upside. And that goes both commercially and socially. You know, I just gave this comment of not having hobbies. I mean, the best way to lose friends is start a business. And I think one of the things that I'm trying to work on is how do I have a conversation with people who are really dear to me and who I love and say, hey, look, it's just, it's just going to be like this for a year. It's going to be like this for a few years, maybe. And, you know, I love you and I'm here for you. And if you call out, you need something, I'm here. But I think I

• 57:29Speaker 02

  could have done a much better job framing that early. So it's not just overpromising commercially, but it's overpromising socially as well and trying to make sure that the people who matter know that they matter more often.

• 57:38Ted Seides?

  Ali, thanks so much for taking the time. It's fascinating.

• 57:41Speaker 02

  Thanks so much. I really appreciate it.

• 57:44Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.