Investing Billions - E51: How $1B+ Family Offices Generate Alpha in Venture Capital - Ron Diamond

Starting point is 00:00:00 A lot of these firms, a lot of the private equity firms, not all, but many, and a lot of the venture capital firms are too big. It's become an AUM game. So as a result of that, they're investing in investments that maybe because they've got so much money, they have to make investments, but they might not normally do it. So I'll give you a perfect example. I had a good friend who did a roll-up of logistics companies. He needed $150 million. Great track record. Placement agent in New York got him 500 million. He said, terrific, I just need 150. Let's get started. Placement agent comes to his house in New York and writes down on paper in a very condescending way, 2% of 500 million equals X, 2% of 150 equals Y. What am I missing? And so

Starting point is 00:00:34 what my friend who was a bit incredulous said is, what you're missing is if I do what you want me to do, there won't be a fund too. For more ideas on how to raise venture capital in this market, make sure to subscribe below. Ron, welcome to the 10X Capital Podcast. Thank you to Cody Meltzer of Family Office World Media for connecting us. Welcome on. Glad to be here. Glad to have you. Ron, you have one of the most unique ways to access deal flow of anyone I've ever talked to. Tell me about how you've been able to get into the very top funds. What we do is we invest alongside about 100 single family offices. These are families anywhere between 250 million up to 30 billion. And we kind of act as a funnel or a point person.

Starting point is 00:01:10 I'll put in a couple million per deal. We don't charge anything, but I'm not doing it for self list purpose. I do it self-ishly because without their 50 to 100 million dollars, I wouldn't be the first call. So what I do is I call it first call alpha. First call alpha. What do you mean by that? If there's an attractive deal or something, a very unique situation, usually the wealthiest person is called. I'm not that person. Now I am.

Starting point is 00:01:34 What are the other variables that makes an LPL attractive outside of optimal wealth? The ability to add value. You don't want to just have people who have money. You want to have people who can strategically add value. If we're going to do a deal with in real estate, I might talk to Tim Callahan, who is Sam Zell's former partner. If we do a venture capital deal, I chaired the Disruptive Technology Center for the advisory board at Stanford University. I've got a whole plethora of professors at Stanford who are

Starting point is 00:01:58 much smarter than me in venture. If it's private equity, I might go to a Paul Carbone from Pritzker family office and talk to him about it. Why would a $30 billion family office want to go invest with you? It's a great question. Deal flow. Basically, they're not looking at me for the vast majority or even the minority of their deals, but we may have a special situation. If somebody's looking to sell a sports team, if there's a one-off deal, they like to see what it is. This is interesting. Let's dig in. So let's say somebody sends you a venture fund. Tell me about the process, how you get to deciding that you want to invest. Walk us through that. I surround myself with people that are smarter than me in various areas. So we only invest in

Starting point is 00:02:30 private markets. There's private equity, venture capital, real estate, and credit. I know you're an expert in venture capital. So for venture capital, I'll rely on the people at Stanford to kind of help me vet these deals. We typically don't like to invest in funds. We do invest in funds if we have to, in order to get the direct deals. But so what we typically do is we'll come in and let's say somebody's looking to raise a hundred million dollars. We might come in and say, we'll take the whole thing or we'll take $50 million. Because we do that, we're able to take part of the GP, get better economics for it. And I'm able to leverage the assets that we're using. So it's a win-win for the investors. And I benefit because I'm

Starting point is 00:03:06 basically aggregating everything with the different investors. My friends say from a business standpoint, it's called stupid, but in short term, it is, it is myopic. But I think that, you know, in medium term, maybe it makes sense. Everything I do, I look at how's this going to impact me in 10, 20 years, not two months or three months. So I try to take a long-term perspective. The returns actually, when there is a real alpha do accrue to the LPs, not the GPs. What do you think about that? What you're saying is technically correct, but I do believe that a lot of these firms, a lot of the private equity firms, not all, but many, and a lot of the venture capital firms are

Starting point is 00:03:36 too big. It's become an AUM game. So as a result of that, they're investing in investments that maybe because they've got so much money, they have to make investments, but they might not normally do it. So I'll give you a perfect example. I had a good friend who did a roll-up of logistics companies. He needed $150 million. Great track record. Placement agent in New York got him $500 million. He said, terrific, I just need $150 million. Let's get started. Placement agent comes to his house in New York and writes down on paper in a very condescending way, 2% of 500 million equals X, 2% of 150 equals Y, what am I missing? And so what my friend who was a bit incredulous said is, what you're missing is if I do what you want me to do, there won't be a fund too. Because I'm

Starting point is 00:04:14 smart enough to know that I make more money. And I think that as private equity and venture capital have disrupted the public markets in the mid 80s, private equity will never replace, but it's going to slowly disrupt private equity and venture capital because it's got patient capital. Family offices will essentially disrupt private equity. What do you mean by that? The private equity firm is incented to hold that for three to five years. They're not incented to hold it for 25 years. They're incented to hold it for three to five years. And so what happens in the market is they'll hold it for three to five years, hopefully make a profit, and then they'll sell it, but they'll sell it to a second private equity firm. So a smart private equity firm is selling,

Starting point is 00:04:48 another smart private equity firm is buying, and they'll sometimes sell it and they'll try to hold it for three to five years, and then they'll sell it perhaps to a third private equity firm. So over the course of a 20-year period, you could see one firm change hands four to five times. If you look at the friction, the taxes, and the disruption in business, to do that versus a family office who will buy it, hold it for 20 years, compound everything, it's not even close. The problem is that there's very few family offices that can do this. Some can, and those that can, it is a better model, but only if you can. And we're only in the second or third inning in the evolution of family offices.

Starting point is 00:05:27 The counterargument to that has been private equity returns, though not venture capital, have sustained over many decades. So let me preface this by saying private equity has been an incredibly lucrative asset class. I personally invest in a lot of private equity funds and direct deals. So I'm a believer in private equity. All that I'm saying is that what's happened is that many of these firms, not all, but many of them have bastardized the business and it has become an AUM game. And if you could be a $300 million fund or you could be a $3 billion fund, oftentimes many of the private equity firms opt for the larger one.

Starting point is 00:06:03 If you're getting 2% of $3 billion every single year as an annuity, that's a lot of money. So there are several instances right before COVID happened where we were going to buy companies. I put together a syndicate of 10, 20 families, and we loved the company and we were going to pay X. And then a private equity firm came in and paid 2X or 3X. And why do they do that? Well, if they raise the money, they've got two options. They could deploy it or they could return it. They'll never return it. They'll always deploy it. So that forces them in certain markets to buy companies and overpay. Let's go to the crime scene. At some point in the last decade, venture has followed the private equity kind of

Starting point is 00:06:41 asset amalgamation model. What was the driver behind that? SoftBank's a perfect example. You can't deploy that kind of capital in venture. Objectively, you can't. So they were way overpaying for companies because they had a certain amount of capital, they had to do it. And I think that in general, this has morphed more into an AUM model. And if you look at the people who run the private equity and venture capital firms, there are some phenomenal venture capital firms. And I know you do a phenomenal job with your companies. And there's some great private equity firms. But most of the people on private equity and venture capital, not all, but most are finance guys. They're not operators. In order to create alpha, true alpha, you need to operate. I can strip a company and basically financially engineer a company

Starting point is 00:07:25 and make a profit. That's not that hard. But to create true profit over the medium and long term, you need to operate. In terms of family offices, I think one of their biggest advantage, if not their biggest advantage, is their flexibility. What is the most sophisticated or most interesting structures that family offices could bring into the venture space? We're at an inflection point. So post-crash, pre-COVID, a lot of family offices did direct deals. And their thought process was as follows. I can make money. I don't have to pay fees. Why should I pay somebody like you or 220 if I can make money? And during that period of time when interest rates were zero, and during post-crash pre-COVID, everything went up. Private equity,

Starting point is 00:08:03 venture capital, real estate, credit, Bitcoin, the stock market, whatever you invest. So many family offices went to the model, just why pay fees? And they were right until they were wrong. There's a skill set to doing what venture capitalists do, a huge skill set. And about 18 months ago, when they started raising interest rates, a lot of these family offices not not only we're not making money, they're actually losing money. And if they did these direct deals, Carter did a study where some of these Series B investments were down 50%, Series C were down 75%. Venture's a great asset, class if you do it full-time and if you can pick the right top quartile or top decile. If you don't do this full-time, you should never do venture. You should just outsource it yourself.

Starting point is 00:08:42 But a lot of families did, and there's a lot of pain right now. The fascinating thing about this world that I'm in, and it's changing in real time, is over the next 20 years, we're about to experience the largest transfer of wealth in history. There's $84.4 trillion that's moving downstream from the baby boomers to the next gen in the next 20 years. So it'll get bigger and bigger and bigger. And family offices right now, just to put it in perspective, hedge funds globally are 6.5 trillion. Family offices are 10 trillion. After the wealth transfer, family offices will be larger than private equity and venture capital combined. So it's a massive, massive market. And I think what's happening is you're seeing more and more people come in and wanting to start family offices. But if you do the math, a single family office,

Starting point is 00:09:25 if you're going to pay your own accountant, you're going to pay your own lawyer, you're going to pay your own admin, you're going to pay your own staff, you're going to pay your own executive assistant versus a multifamily office, which was created for people typically worth 10 million to 200 million, where you just share all of those costs. So what's happened is people have a liquidity event. They can sell their company for $30 million. It's a lot of money. And I make no judgment. It's just not enough money to have a family office. I would also argue today that 80, 85% of the family offices that exist should not exist the way they do. Only 25% of families make it to the second generation and 10 make it to the third and five make it to the fourth. So we have to fix that. What does a minimum viable family

Starting point is 00:10:02 office have in terms of staff and resources? Great question. And it completely depends. So there are some families that like to invest primarily in public markets. They don't need the bandwidth. They don't need the staff. They don't need the people to vet the venture, private equity, direct deals. There are some families that the founder made their money in tech. They love venture. They love private equity. They like to do direct deals. They're going to need a much bigger staff. One exception is we've done a lot of work with the Pritzkers. Paul Carbone from the Pritzker family office, they've got a team of 65 people who work under him. They've institutionalized it. They've got a large asset base.

Starting point is 00:10:33 You don't need that much. But what happens is so often I see a company, somebody, they sell their company for half a billion or a billion dollars. And they'll call me up and they'll say, Ronnie, I'm looking to hire my son-in-law, straight A student from Indiana University. And I'm looking to hire him and say, yeah, what do you think? I'm like, well, what's he done afterwards? No, no, he just graduated. Well, I think it's stupid. So right now, a family office, if they're going to hire a kid out of Stanford or Wharton, and they pay him $250,000, typically, they look at that as a cost. In other words, I sold my company, I'm going to pay you, you're a smart kid, $250,000. Typically, they look at that as a cost. In other words, I sold my company, I'm going to pay you, you're a smart kid, $250,000, it cost me. If Blackstone or Carlyle or KKR

Starting point is 00:11:11 hire somebody at $250,000, they look at that kid as a potential $20 million profit center. So it's nuanced. It's not a cost, it's a potential profit center. So family office are not grasping that. Thanks for listening to the audio version of this podcast. Come on over to 10xCabell podcast on YouTube by typing in 10xCabell podcast into youtube.com and clicking the subscribe button. On the YouTube version of this podcast, you could see the graphs, visuals, and key takeaways that accompany every episode. You did a pretty gritty thing. You create an entire conference. You said the conference that you wish existed. Tell me about that. I keynote a lot of family office conferences.

Starting point is 00:11:47 I was chairing the Disruptive Technology Center, the advisory board of Stanford University. A lot of the families that I invest with, they'll say, which conference should I go to? My answer is none. There's a couple that I think are pretty good, but in general, I wouldn't go. And the problem is they're pay to play.

Starting point is 00:12:00 So if you're speaking, you might be smart, you might be an idiot, but I know you spent 25 grand to speak and that's not why I should be listening to you. So what's happened to the conferences in general is it's a pay-to-play model. It's service providers pitching to other service providers. When I was at Stanford, I said, let's put together a family office conference that I would go to.

Starting point is 00:12:17 So I went to Kirkland Ellis and I went to EY and I said, look, I don't want to run a conference. I don't have the skillset to do that. What I want to do, you guys back it, but what I want to do is I'll pick the speakers and I'll pick the content and you guys do everything else. So what I was trying to create is a conference that I would tell people, you should absolutely go to this conference. And then I would say, I would love to go to. So a couple examples, we had Paul Carbone from the Pritzker family office, who's a good friend, was speaking on due diligence. He wasn't pitching a fund.

Starting point is 00:12:45 He was just saying, this is how I diligence deals. Tim Callahan, who has worked with Sam Zell, this was during COVID. He wasn't trying to raise money for a fund two or fund three. He was just talking about where he thinks office market's going to be in the next three to five years because it was during COVID. We'll continue our interview in a moment after a word from our sponsor. Most businesses use up to 16 tools to hire, manage, and pay their workforce, but there's one platform that's replaced them all.

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Starting point is 00:13:42 And then lastly, we had Denise Illich, who was another speaker, who helped to rebuild Detroit. She was from Little Caesars. She wasn't saying donate to my philanthropy. She's just saying, if you're going to be philanthropic and charitable, here's how you might want to think about it. So everything was educational.

Starting point is 00:13:56 We had 880 families from six continents. There's a huge demand for content, and that didn't exist. We're going to be announcing it shortly, but there's another university, one of the top ones in the world that we're creating a family office initiative to. It'll be out in public in the next 60 days, but that's what we're trying to do. We're trying to create. So when it comes to Paul, Tim, Denise, what is their motivation to speak on these topics? It's a great question. And it's not just them. I mean, look, I was at a conference,

Starting point is 00:14:21 at a family office conference. I was with a guy that I knew fairly well, and he was looking to raise money for a fund. It was a venture fund. I see somebody else that I know, a conference, at a family office conference. I was with a guy that I knew fairly well, and he was looking to raise money for a fund. It was a venture fund. I see somebody else that I know, good guy, and I wanted to talk to somebody else. I'm like, oh, you guys should talk. I thought they would like each other. They talk. The guy comes back to me in five minutes.

Starting point is 00:14:34 He goes, why did you introduce me to them? I'm like, what are you talking about? He goes, he's not going to invest with me. And I'm like, well, I didn't really come to this conference for the sole purpose of trying to find people to invest money for you. So people look at it as they're always trying to take rather than give. And I think that a lot of times it's a myopic way to look at the world. And I think when I was younger, I probably would have looked at it more from that standpoint. But I think the answer to your question is people want to give back. People want to help. I'll give you another perfect example. I was at Northwestern University.

Starting point is 00:15:05 I wanted to do an internship, which means I wasn't getting paid. And I called one of my dad's friends. I cold called him and just said, I'd be interested in doing an internship. I'm going to call him Mr. M. Mr. M made me feel like this tall. All I wanted to do is work for him for no pay. And he made me feel like, how dare you have the audacity to call me? And I just said, I would never under any circumstance ever make anybody feel that way. So we all started somewhere. Nobody starts at the top and you just have to pay it forward.

Starting point is 00:15:34 And I think a lot of people who do that, people like Tim Callahan, people like Denise Illich, they give back, they're givers. And it's counterintuitive, but there's a book called The Go-Giver, which is one of my favorite books. The more you give, the more you get. It makes no logical sense, but it works. Tell me more.

Starting point is 00:15:49 Let's say I'm going to go to lunch with you, and I think you have the ability to put in $5 million. I'm not going to really enjoy that lunch. My goal of that lunch is to basically close the deal and knowing what time I'm going to ask you for the $5 million to invest. I'm looking at that from the standpoint of how much do I think you can afford to invest and when can I do it? I'm looking at it from a myopic standpoint. I think that if you come in from the standpoint of educating and not everything has to be a sale, everything has to be a transaction, good things just happen.

Starting point is 00:16:21 And the more stressed and pressured you feel, they could sense that too. And when I'm first starting out, I was that guy. And then when you become more successful, part of it, it's a self-fulfilling prophecy because you're less stressful. People could see that and it feeds, it's a loop. It's a paradox. I also have a lot of empathy. As I mentioned, I was first generation refugee, my family came over $600. So you grow up, you're definitely hungry. So I have empathy for people at that stage of their life as well i've been running my own social experiment really with this podcast started last july and every single lp that i know or even that i'm building a relationship with i put on the podcast and a lot of people think that's crazy

Starting point is 00:16:57 you're basically diluted diluting your relationships but i don't look at it and the returns have been astronomical both financially and relationship wise. But there's these kind of infinite games that you can play with infinite people, which not only I think works out financially, it's also just a great way to live. My quality of life has significantly improved just being positively inclined towards people. My mentor, Eric Anderson, who I interviewed, calls it pro noia. What if you had a positive belief that people were good? I haven't had the luxury to do that till I was in my late 20s. And I just recently started doing it to the extremes. Most people look at the world like there's a pie and they're gonna do everything they can

Starting point is 00:17:32 to fight for their piece of the pie, rather than just think about have a growth mindset and think it could be exponential, it could grow. You need to live your life, in my opinion, with a growth mindset that there's enough for everybody and just create value, give back, do good and good things happen. Another pro tip, one of the top sales tips I could give anyone in any industry is become the customer. If you're raising from LPs, become an LP and a couple of funds, you'll know very quickly how you want to be treated. You'll know how you want to be sold. It's easier to have empathy with yourself than with any other person. So if you do want to become really good at selling anything, first become a customer of that thing. What would you like

Starting point is 00:18:06 our listenership to know about you, about your family office or anything else you'd like to shine a light on? Well, from the business perspective, which is less important, I've got a newsletter. I've started a media company with, which has a podcast and newsletter and we invest. We've gotten a good enough name in the marketplace right now where, you know, I'm considered kind of a thought leader in the family office space that's on the business i think the main thing is and i talk to entrepreneurs because i taught at stanford i taught in the entrepreneurship program they want to get rich and i'm not saying that when i was younger that that's not what was one of my goals but if there were a direct correlation between wealth and happiness or success however you define

Starting point is 00:18:42 it i'd say just try to get as rich as possible, but there's not. I know a lot of miserable billionaires. So my message basically is one of gratitude. Basically, gratitude to me is the most important thing behind love. You could tell me 10 things offline that really suck about your life. Maybe your mom's sick, or maybe your cousin is sick. It could be anything. We've all got stuff. I've got stuff. You also were a refugee with $600, and you went from there to where you are now. You've got a ton to be grateful for. And I think the way humans are wired, we're not really good at the gratitude. So I think we have to focus more on that.

Starting point is 00:19:17 Why are there so many miserable billionaires? I think that that's how they define it's a game. So there's always somebody richer than you, right? I know a company, he sold his company for $3 billion. And there was another company guy who sold his company for like $10 billion. It wasn't that he was bitter. He just like, yeah, I should have done this. I should have done that.

Starting point is 00:19:36 I could have been like that. If you judge everything by a dollar sign, it's a miserable way to live your life. I'll give you a quick anecdote. My daughter is five years old. She's 20 now, but she's five years old at the time. For her class, she had to do the five most important things. So for her, I worked on it with her. It was being a good listener, being a good sister, being smart, being nice, being popular.

Starting point is 00:19:58 Those are things. Then as only a kid can do, she turned it on me. She goes, what are your five most important things in life? I'm like, well, I don't know. I'll get back to you. And then she kept asking me, she was like, I did it with, I did it. What's yours? And then like every week she would ask me. And so finally I needed to give her an answer. And I came back and I said, all right, here's my five in order, love, gratitude, attitude, balance, and laughter. That's not right. And it's not wrong. Those are my five most important things.

Starting point is 00:20:25 Other people, religion would be in there. Other people, other things would be in there. But for me, love, gratitude, attitude, balance, and laughter, those are my five. And I think that we need to live our lives. You have to be true to yourself and find out who you are. And sometimes it takes 10 years. Sometimes it takes 70 years. But you have to find out who you are, true to yourself and live like that.

Starting point is 00:20:47 And if you follow your principles, I think you're gonna live a happier life. Well, that's a great place to leave it off. Thank you, Ron, for jumping on the podcast. I hope to meet up in Chicago or New York very soon. Thank you. By popular demand, the 10X Capital Podcast

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Investing Billions - E51: How $1B+ Family Offices Generate Alpha in Venture Capital - Ron Diamond

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