Invest Like the Best with Patrick O'Shaughnessy - Ali Hamed – Creative Investing - [Invest Like the Best, EP.71]

Episode Date: January 9, 2018

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

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'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com. Patrick O'Shaunisey is a principal and portfolio manager at O'Shaunicee Asset Management. opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect

the opinion of Oshamously Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Oshawness the asset management may maintain positions in the securities discussed in this podcast. 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 Hamid 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 one. 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 Ahmed. Follow him and his partners, and then go figure out how to earn success yourself and 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? 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 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 will have over our other competitors. An example is 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 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 to get on this podcast and talk about one of our investments, it means it's not defensible enough, and I'm 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...

The checklist. Some of the checklist. With that in mind, can you describe the history of co-venture and kind of its unique structure in the way that 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. Co-Venture's 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 people, they put $50 million dollars together, and then they give a million dollars at a time to either

a couple kids who can code or a couple 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. I'm like, no, 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? And one of the reasons is they never build their software.

They never get to market. And 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 and 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. So he 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.

How would that work? So what was the specific trade that was being made? 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 approved product market fit. And then for anywhere between 5% to 7% of the company, we'll build your initial product and then help your 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? Is that a CTO, a VP of engineering? a 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, $200,000 of cash. And then if you need more than that, help you put together the round. And how did that all start? So you started ridiculously young. So maybe tell that quick story

about how this was seated itself. 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 subcontracted at 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, this is 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? 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 percent of the company to somebody they just met at a meetup,

higher 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, 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, like, alumni who would come back to school and all the undergrads, be like, oh, man, I want to be like him one day. And the other guy was Mike Bellar, 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. And I went to both and 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. Just 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 raised $2.975 million, will you be our last $25,000 check? And he said, sure, 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 is 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 U.S. 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.

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 U.S. 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 it 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 agriculture world, which is absurd. I never thought I'd own tens of millions 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 becoming long. 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. How much value do you put on a like or an impression? These aren't

overly complicated, but they're probably misprice 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 have 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 basque of the top 15. Market cap weighted and rebalanced every two weeks. And so that's sort of all of co-venture in a nutshell. It sounds like it's something that's going to change a lot in coming years as new technology enables new opportunities. Yeah, totally, right? 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 known as 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. One of the things that you've written a bit about that I was most interested in 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. 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 and venture capital is ridiculous. I think it's absurd that we were supposed to return three X our capital in 2007, 3X are capital in 2010, 3XR capital in 2013, three X or extra 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, and I'm going to give you two extra 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 four extra money. I'd still give it to first round, because like the likelihood I get two X my money back is pretty high. Yet everyone says they all need to return three X. 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 one and a half X 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. One of the things you wrote quite a bit about is, we were talking before we started recording just now, was 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 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 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, and therefore maybe the returns that we should expect from every asset class should be ratcheted down accordingly. 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. In year two, they should have a lower cost of capital still. And then so you could say, okay, so that's obvious because like every single year they're going to get better at 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 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 that's really good. And so now they think they're going to be able to get that. The second thing is 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 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 high over time because the loan book doesn't get so big that it takes in entrance with low cost of capital like the Apollos and the blacks and the world, etc. 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 are 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 stay 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.

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 recent past? I'd start with, I think, a few key issues that we need to resolve in the next year. The first is, 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 steed, 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. So now the game is called have a contrarian view that it turns out you're right about, and then within 12 months convinced it to 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 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 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 LPs 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 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 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

and saw a couple bloggers, right, 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, and 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 that would 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? 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 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 the series A is to see if any of this cost of customer acquisition channel scale. I think we all have to get on the same page on that.

Is it fair to summarize what you just said as sort of, I've heard this from a few like Andy Rackliff'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 something else that we can come back to. Is that a fair distinction? Yeah. I think you should know what round you are in and decide which hypothesis you're trying to. to solve for and not take the two or three blogs that everyone uses to figure out they should be funny in a company that seriously. So how describe a little bit your actual process, your investment process

on the VC side specifically? So is it all precede? You know, which stages do you get involved in? And then let's get into like how you evaluate opportunities and industries and addressable markets. So primarily precede on the venture side, although we do equity investments in 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 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 that sold into it, et cetera. Can you give a recent example of somebody like that and what the industry was? Yeah. So we're invested in a company called Gallium based out of Georgia. And the woman

is the Stanford PhD. Her name's Gail. And she realized that, and she's 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 this 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 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 the rats ass about, right? But she just knows the customer, and she can go in with her stupid Fee and iOS app, and like sell the shit out of it. 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, but I know someone at Robbo Bank, 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 a lot of VCs will say I make following 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 the company just know different stuff than the board does. And our team working hand in hand with the founder just gives us certain insights. Do you still do, is it still that software component is a key part of the venture business? Absolutely. Yeah. Is it in every case? Almost every case. There's two companies that we've invested in where it wasn't.

One, the founder had sold a business for $100 million that we had back 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. How does that development effort actually work? Do you have a full-time staff of developers somewhere? Yeah. So we have engineers in both New York and Canada, where 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 Carlton there,

and partly because you just don't have the same companies recruiting the best. one's like when I recruit someone in New York, I got to 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-founded a company every six months. And if you happen to like the company, just go join as the co-founder. It's a pretty cool job for an engineer. Very. And so I think that's why we're able to track really good talent. But yeah, so that's

where the software development's done. And it's been like a really good experience. 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? Are there other things that you look for in the early stage diligence process that are must haves or close to must tabs? I think high velocity founders is really important. What does that mean? 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 Bettman, 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 and my resource 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 and do they have pricing power. But I think at the end of the day, you know, 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 sustainable because of that? You know, I do think, and again, like probably most of my best friends live in San Francisco in the Bay Area, so they're all going to text me after this and say I'm an idiot. But I think 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? You know, 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. 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 had to understand why the hospital's built the way it is. And I think that just being a couple really smart kids who went to an Ivy League school and studied CS, you don't understand how a hospital works. 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. Yeah, you know, judgment is like, you know, hey, wow. I know how to do this better than you. Hey, wow, you know, I think that the rating agencies are stupid because they're hired by the person who's underwriting the loans 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 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 or who worked at a bank was like, 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.

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. I'm going 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 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 and I were talking like, okay, at the beginning of the year, we got to make sure all of our LPs know what's going on.

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. So let's talk about LPs for a second. I love all of them. You started very young and very small. I think you said you had $396,000. Maybe describe that. 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 Coventry, 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 slide 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 never having to co-venture that's our career highlight 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? 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 large private equity firms. So out of 180 people, you know, we probably get a thousand deals a year just from them.

And then we've actually built communities within our LPU. 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. You know, what is what was the financial crisis like from the executive committee of a bank. 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 bibs. So they're 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, 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 just sucks to be. be a VC and some years this can be hard to find deals. And I think you had Shiel 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 going to bet on you for three funds. And in 10 years, you're going to hit a home run. Don't do anything stupid just because this is like the fun that you feel like is going to 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 here. You have to have a game. They're only going to see you for one game. You have to have such an amazing game that they're going to draft you to 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 going to be the starter for this whole season, they're going to be at every, the scouts are going to be at every single game that you play for 30 games. Just be you. You 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 long-term relationship with the LPs. A couple more questions before you leave Venture Capital. and talk for a bit about lending, which is something we really haven't talked about at all in 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 going to 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, right? Which is this kind of a silly measure of risk. So what is the point in your career or life that you've, you have felt the most at risk or exposed yourself? 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. 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 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 greater risk, because I'm getting more and more to lose. I think that's actually a competitive advantage to newer entrance. It's just like when 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, later today I'll be incurring more risks than I will right now and tomorrow and more risk than today. 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 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? 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 cremudgeons 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 back people who, like, God forbid, they're not in their 20s and, like, app developers. We're going to go back people in, like, their late 30s who have 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 to have my name associated with that, because they were like, Ali Hamid, in my inbox for a stupid idea. Next.

Never want to talk to that guy again. It was really scary to get this. those intros and try to introduce something that I knew like 20% of people were going to think was awesome and 80% of the 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 going to get you like 13, 14, 15 net.

So have you ever heard of Ether? You know, like, that is a weird conversation to switch to. And they were like, I trusted you. Like, we had two people redeem because we're doing crypto. They're like, I can't trust you do lending if you're also going to 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. 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?

We really believe in 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 of bear cases. The first bear case and my partner, 70, talks for 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 in a half in and a point in 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 U.S. government tells me it's illegal to own Bitcoin, I'm probably not going to 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 going to be a currency. It is just stupid for a government to allow something to compete with its own currency.

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 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 U.S. dollar and banks in the U.S. 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 like a fine business. And if I give them a thousand bucks and I go back the next day, they'll probably say I have $1,000. 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 of Tripoli, and you give the regional bank of Tripoli $1,000 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. 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 as a guy named Ali Ham, 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, then 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's not rigged. So,

so we're really bullish that Bitcoin could be a real store value. 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. I think most of the people that you're talking to don't live in Japan and South Korea. Totally true, but I have talked to people in those areas. There's really small examples of this. So I mentioned on the podcast one time I know a guy at 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 total cryptocurrency market cap. Yes. 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 do that more. I don't think, like, I think we love talking about Venezuela because this is 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's hardest to get. So completely agree. I think that's like in the bare 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, it's going to be better. And I do think that the use case will catch up. In terms of your own, back to your investment philosophy, checklist, the reasons why you think it's a good place for you personally to be, you and your firm personally to be versus just generically, the bulk case generically, what are those reasons? 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 skill set is required to manage a crypto fund, we think it's

engineering. We had to understand sort of the technology and underwrite the technology. I think you have 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 there'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. The first LPAs I got for some of these funds had like European waterfall. look like venture fund docs, but we're trading crypto. And I'm 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 ICU. So that was like, so, like, there were like really small things where I was like, all right, we're better than that. Just bring professionalism to the space. Bring professionalism, right? Like, know how to write

a freaking hedge fund doc. Know that there's a difference. Know how to, you know how to. to mark your nav profession, like stuff like that. Is there anything in particular that excites you most? So you mentioned the year 2025 or some longer dated period when crypto will have improved a lot and be really having a big impact. Is there a use case or a specific currency or an idea that has you most intrigued or excited about? It's probably still store value.

I have a hard time getting excited about store value because for store value to be more meaningful, it 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 with like 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, you know, I don't think Facebook's going to do our business, but oh my God, if Facebook shut down,

I lost like every picture it had, you know. 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. 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 like sort of queries wherever you want it to query from.

Like, 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 an analogy that you can break down 50 different ways. And so anyone who's listening to this is going to be like, that's a stupid idea. But I think it illustrates sort of what could be. So let's imagine 2000 Amazon created Amazon tokens. And I said, okay, so the only way to do it. 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 you said, look, the books are cheaper there. I'm willing to go through the hassle of turning my U.S. dollar into an Amazon token and using that token to buy a book. And everyone started doing this. And so in the year 2016, I think Amazon did like $130 billion revenue or 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 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 like a token financing, like a real token financing, not just an I seeo 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, A, the volatility of the tokens would make it hard to purchase the books, and there's 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 were like, oh, wait, that might be huge. 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, so already use that word, into debt and lending. I do like most venture capitalists. Like, I do like the asset class. But I do like talking, you know, 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 three million dollars really quickly. I mean, I'm raising it on a cap's note. It's a convertible note with a $50 million cap. And I looked at the business and said, well, you have two million and change of receivables.

How would I just fact 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 fact 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. 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 C.O. A VP of sales. Like, I don't know. And he goes, no, no, I'm just trying to raise a control 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 factory. 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. The world's bootstrapping with money from another venture capital back company, venture capital and venture debt. And like, there was no other solutions. That, to me, felt weird.

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? 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 S&B 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 Robo Bank. We said, hey, are you guys ever going to do this? And they said, no way. We could never underwrite 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. 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 with 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 I 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 until Friday, you don't have to take a payday loan out anymore. You can just take your paycheck early for like $1.50. And now we're getting like a 20-something percent return on McDonald's credit. that's a new type of product that hasn't ever existed before, which, by the way, 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. 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 20s return, not by taking a ton of risk, but by just finding something that no one's done before. 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?

It's been probably our competitive advantage. So we see about 200 deals a month, which is really overwhelming. That's, by the way, a total vanity metric, right? Like most of this stuff sucks. But every once in a while, you see something that checks a lot of the boxes. is, 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. do really deep diligence on the companies 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 front. 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 also 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 the balance sheet. So we funded a company that was lending against the title of some asset. And it was a startup.

And we wanted to lend to them directly. 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 from 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

they weren't selling off assets, make sure they're all their subsidiaries or co-barrows in the loan. So you couldn't have like a first lien on a subsidiary where we actually didn't have perfected security interest. Like there's way to. There's way. to do it, but you have to be structured as a firm that says, look, 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. It seems that 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? So you talked earlier about you want to do, you want to do, you 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 entrance. 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. A couple different ways. So 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 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 two-x 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 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 tracker 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. 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 tugging cheek, but probably isn't. Talk about how you would approach something like that, which is radically a new idea. I'm sure something that no one's rolled those things up. 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 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 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? Just think of the same thing. 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 of that better side. I think Airbnb accounts could be really valuable. If you're the best Airbnb host in L.A., you probably have a lot of reviews. Your pictures are probably great. You probably have a lot of people who have 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 to purchase yet that maybe one day we'll 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 name one brand in the tattoo space. Nope. Right, but there's clairs for earrings.

Yeah. Why isn't there clairs for tattoos? Tattoes are growing this ridiculous Kager, by the way. So I'm totally bullish on the tattoo thing. Can you say anything more about that? How did you come across that idea? So I couldn't name you the... So I have a few tattoos,

and I couldn't name me 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 artist is on Instagram. you should really follow some of these guys. They are incredible. Maybe you'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. So it's a good example. We'll roll out 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. And you do so. And you agree on evaluation. The seller agrees on a 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. Maybe.

You need them to. I guess that's if it's like a person where they're in the picture a lot or something. Yeah. So I'm trying to figure out what I'm allowed to say on the podcast or not. So the Airbnb world is really interesting, right? Like you have the people who own the properties. you have the people who lease, you know, lease 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 built up. That's why I chose Instagram, not Airbnb, by the way. Oh, sorry. Okay, Instagram. So Instagram, well, I'll finish Airbnb and 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. Like, I think a lot of that stuff you could probably repeat yourself.

I think you could make sure there was clean towels. And, like, I think that the Airbnb ecosystem will end up being similar to the hotel ecosystem, whereas it's 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 going to go to an Airbnb and you're going to see a towel with a logo and you're going to 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. And I think it's probably less about Biden 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, like you can't take all the revenues of the business. Like there's got to be some sort of governance. So I think you probably have minority economics, but majority governance is probably how I 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, like, you could go beyond protective provisions when trying to disentangle them. 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. So the blog post I wrote was that seed stage investing in Series A investing are two different businesses. One's a B2B business and one's a B2C 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 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 saying we want our deal flow not to come because everyone knows the name Coventure. 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 B-to-B 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. In starting a company, the hardest part of starting technology company used to be 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. Right? 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, you could kind of scale quickly because there's no other markets. You could buy, you know, 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.

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 of 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 customers, it's just way more expensive now than it used to be. 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 interest 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 raise 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,

if you sell that business for $35 million, you still meet $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. Preferred equity is kind of like debt. And I think that people probably don't think that much about it. You mentioned tattoo parlors. And I would love if they're 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.

I'll start with the things I like because I'm an optimist. You had 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 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 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 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 you can't profile when you're making loans. 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 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. Because they get more and more bizarre the longer down. Do the unreasonable ones. We'll give you a free pass from the office.

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 just overpriced. You know, like everyone says, hey, are you 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, and then they become the carrier. Lending companies are the same, right? Like, most of the first wave of lending companies were customer acquisition businesses, 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 to insurance and like other people in financing, like Warren Buffett. So like I kind of am a techie, but now I can talk about insurance. Like float financing. Yeah, yeah. I don't believe them. They heard the word float financing and they were like, wow, I finally get finance. You know, and finance, sorry.

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 auto insurance based on how much you drive. Genius. Great idea, yeah. 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 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. Back to the unreasonable ones. Employers lending to their employees. So there's a large company that I kind of got to now. 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' larger companies. 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 line of thinking? 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 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. 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 a product. 45 and 60 who like bullying or whatever, you know, and I'm going to write just a bunch of posts about bullying, 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. 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 is actually correct, the odds that is high quality are incredibly, incredibly important. So what ends up happening is the people, 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. And that might actually just, that gap might widen and get worse. 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, like, 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, like, 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. And then eventually someone said, well,

You know, it would be better if you just sort of loosened up the structure 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 sentences that started with the word 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 like Harry Potter should have been an HBO series.

and every book should have been its own season and every horrocks its own episode. We got jipped by the fact that they were two-hour movies. Big little lies, I thought it was a cool show. You know, I thought it was fine, but that's movie star-level talent on a TV show. And that story was told in 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 isn't 10 pages. So why is it that every episode is 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 friend, friend, friends pain for it. So it's actually meant for you. 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. My first sergeant worked out. And so my second job was working at a company called Chloe's Soft Serve Fruit Company. And Chloe Softs Ser Fruit Company sells softer 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 and small. 16 grams of sugar. There's no dairy, no allergens. It's kosher parv. And I know all this because my second job was passing out flyers on the corner of 17th and Broadway. And 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? And I was like, well, it's sort of interesting. I used to be the president of this tech startup. Now I'm not. 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 would be great. And he goes, I went to, you know, when 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 had never seen Marvel floor. 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 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 work 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's soft serve 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 that was the nicest thing anyone's ever done for me. What was your best tactic for getting people to take a flyer? So people would walk by. And I said, do 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 Softs or Fruit Company. And that was probably the number one. Commitment bias. I love it. I can't say the others. 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.

Thank you very much. I really appreciate having him on the show. Hey, everyone. Patrick here again. To find more episodes of Invest like the best, go to investorfieldguide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com forward slash book club. 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 at Patrick underscore 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.