The Compound and Friends - My Election Bet With Barry Ritholtz + How To Make Your First Venture Capital Investment

Episode Date: October 23, 2020

This week on the pod, Josh talks to Barry Ritholtz and gets the rules straight for their 2020 election bet - who will win, what will happen afterwards. Plus, venture capital is now a $500 billion asset class, but gaining access to the top VC funds is pretty much impossible for ordinary investors and even most investment professionals. Josh talks to Phil Haslett, the founder of Equity Zen, about how this is changing. There could be a revolution coming, and Phil's firm is likely to be leading it. Here's how you can make your first investments in venture capital without starting at a huge dollar amount. You can listen to the whole thing below, or find it wherever you like to listen to your favorite pods! And be sure to leave a rating and review - they go a long way! Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Oh my God, today's show is awesome. I'm telling you, it's just awesome. We have a lot to get into, but first I just wanted to mention on the YouTube channel right now, my friend Carl Richards unveils 10 of the custom sketches that he did for our new book. And I know I haven't really talked about the book on here yet, but we're getting close. It comes out November 17th. The book is called How I Invest My Money. Pre-orders are live right now. So basically every chapter in the book was written by a professional investor about what they personally, personally do with their own money. Like not what they think you should do or other people should do, but literally they make money at their job. This is what they

do with it and they work in the industry. So I've never seen anything really done on this before. So we did a whole book about it, Brian Portnoy and I. Anyway, Carl Richards, you probably know him from Behavior Gap. He's got a column that he's been doing for the New York Times since 2010. He's got a column that he's been doing for the New York Times since 2010. So he's got 10 years worth of, I guess, columning at the Times. And he just does these amazing illustrations and sketches that explain important investment concepts. So we reached out to Carl and we were like, we want you to do a chapter. He ends up illustrating the whole book. And we were like, we want you to do a chapter.

He ends up illustrating the whole book. And these are all brand new illustrations that are bespoke based on each one of the chapters in the book. So he like read them all and illustrated them. We got really lucky having him as the book's illustrator. So if you want to see the first 10 sketches we're unveiling, it's youtube.com slash the compound RWM. And he tells me the story of how he came up with each of them. And he's a genius. Okay, on today's show, my partner, Barry Ritholtz, who is celebrating his birthday actually today, makes his first appearance.

I have not had Barry on the compound show, we have a bet going about the coming presidential election. And it's a little bit of a weird bet because we kind of both think the same thing, but then there's a very, very big deviation. So I don't want to say too much. We're going to let Barry speak for himself. He's very good at speaking for himself about what he's thinking versus what I'm thinking. speaking for himself about what he's thinking versus what I'm thinking. What should we be expecting for the election? And then what should we expect in the aftermath? So Barry is a gem. You guys are going to have a lot of fun with that. Okay. Then we have Phil Haslett. Phil is the founder and chief revenue officer at EquityZen. EquityZen is a platform that lets shareholders in private venture-backed companies sell their shares on the open market before there's an IPO,

and they can sell them to anyone that buys them. They could sell them to you. So we are going to talk about the, I don't want to say merging. I think I want to say convergence of public and private markets. We're going to talk about why mutual fund companies, big ones, Fidelity, T. Rowe Price, have become some of the largest investors in pre-IPO companies. And then we're going to get into how you can begin building your own portfolio of venture-backed startups. And it might not be for you, but it might be for you. But now you've got access in a way that you never have before. And Phil Haslett and EquityZen have

basically invented it. Over 130,000 people have used EquityZen to complete more than 14,000 of these transactions. The marketplace for venture-backed startups overall is about 500 billion. So it's half a trillion dollars. That's an asset class. And it's an asset class that's been historically impossible for regular investors to access. But Equity Zen is working on changing that. So Phil is great. And you're going to love hearing from him about how people just like yourself are using the platform. So there's a lot going on and you're going to love the show today. And if you do, and if I'm right about that, the only thing I'm going to ask you is to give us a rating and a review on whatever app you use to listen to podcasts, because they really go a long way on iTunes, on Spotify,

whatever app you use to listen. Listener ratings and reviews tell the apps what is a quality show and what isn't. So there's an algorithm. It ranks all of the podcasts in every category. And it says, these are the ones that listeners are telling us are quality. And then the ones that get no ratings and reviews, the algorithm says, all right, there's nothing going on here. So anyway, if you're into the show, that's how you can help. And you know, I very much appreciate it. All right, Duncan, play the thing. Welcome to the Compound Show with downtown Josh Brown.

Josh is the CEO of Ritholtz Wealth Management. All opinions expressed by Josh or any podcast guest are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. I'm here with Barry Ritholtz.

Barry is my partner. Barry is celebrating his birthday today. 36 years old. It's incredible. How do you feel, birthday boy? Better than the alternative, I like to say. So far, so good. What's the alternative?

You have to have birthdays. Not having birthdays. All right. So this got off on a nice footing. All right. So you and I, in September, we were at your house with Michael and Chris, and we made a bet about the election. And we did one in 2016. So maybe this is like a new tradition. But I can't believe you believe what you believe. That's the genesis of the bet is I'm like, what? this is the bet is I'm like, what? It's not so much that I believe it. It's that I love the idea of war gaming out a low probability event and catching people by surprise, if you're right. That's a fun bet. Well, you're not betting on a low probability outcome, though, really.

Not this time. So last time, let's get full disclosure out. Last time you and I made a bet, you and I made a bet, which you won in 2016, I thought that the president, now President Trump, would lose. And arguably, he pulled an inside straight. He just barely won 77,000 votes in the Electoral College in three states. Certainly, the craziness with Comey didn't hurt his chance two weeks before the election. And I've argued, run that scenario a million times, and he probably wins 10 or 15% of the time. Very different as an incumbent. I think that's fair. But when I made that bet with you, people were like, he has no chance. I made that bet in September 16, when I came back from England after Brexit. and they were like, listen, mate,

he's going to win. They were like laying it out for me. There's no possible way that the media understands the phenomenon that drove Brexit and they don't understand the Trump phenomenon. I find that's a little bit of narrative fallacy after the fact. If you remember after he won, there was a run of articles about what a genius- No, I didn't buy into that. Some of his campaign advisors. I didn't buy into that. Yeah. All that stuff was just, hey, sometimes someone beats the odds. Someone's going to win the lottery, but they shouldn't then go on a tour explaining how you can win the odds. Someone's going to win the lottery, but they shouldn't then go on a tour explaining how you can win the lottery. And I kind of felt like that right afterwards.

There was a time- Well, there was one hedge fund that did polling differently than everyone else. Everyone else does polling. They ask you, who are you going to vote for? And there was a hedge fund, I forget what they were called, but they asked people, what do you think your friends or your neighbors are going to vote for? And that's how they got people to be honest and to open up. And, you know, because if you ask somebody, what are you going to do? Like, I don't know you, I'm not telling you the truth. So these guys asked people what they thought people they knew would do, and they knew it was Trump. And I don't know if there was a profitable bet to be made on that, but. I mean, maybe that's some insight or just as likely, you know, the whole Comey situation. And I have, by the way, I have not been a big believer that the Russians did anything other

than sending people to confirm their priors. And, you know, if you're on Facebook looking for Hillary bashing stuff, you're probably not voting for her in the first place. Comey maybe had a small impact. People forget the margin of victory in states like Wisconsin, Michigan, Pennsylvania, and Florida was less than the number of votes that the third party candidates like Gary Johnson got. Literally 77,000 votes, Michigan, Wisconsin, and Pennsylvania. And I believe it was about 1%, maybe a touch less in Florida. Those are huge electoral college. It sounds like you're headed toward relitigating who won that last bet. No, no. Listen, Trump won. I came in the next day, handed you some cash. I gracefully said,

you won. Here's the cash let's do this there's no relitigating it however when we speak probabilistically you have to recognize the tendency of people to draw bad conclusions people as as annie duke said you have to avoid resulting and that's what a lot of people did post-2016. Okay. That's fair. I understand your point. So for 2020, let's just go through because I want to make sure we nail down like specifically what has to happen. Now, we both think Biden wins. That's first things first. So the bet is not Biden versus Trump. Neither one of us think Trump.

We know Trump loses the popular vote. And I think we both agree Biden wins the electoral college, right? Agreed. So he literally wins the election. Now, your bet is that there's a little bit of a skirmish. It resolves maybe in the Supreme Court or in Congress. And Joe Biden is inaugurated on January 20th. Do I have that right? We have that right, but that's not what the bet is. Well, no, that's your bet.

My bet is that Donald Trump is still in the White House post-January 20th. Right. I only need us to get into January 21st with Trump still there to win the bet. Fair? That's a fair description. That's exactly right. Duncan is shaking his head right now. So by the way, my wife is on the same side of the bed as you. She agrees with you. She disagrees with me. And Wendy is smart. She reads human nature. She reads body language. She understands this as well as I think I understand it.

Yeah. Whereas I'm clueless with that sort of stuff. No, but I think you, all right. So I think you have a better grasp of the electoral college, the constitution, all the contingencies. I think you know that better than me, but I know human nature really well. Yeah. And why on earth would he vacate the white house if they're not going to physically make him and you know, they won't, why would he leave? So first of all, first of all, I don you know they won't. Why would he leave? So first of all, I don't know they won't. So let's just do a couple of scenarios where I win and what has to happen for you to win. So one scenario is they call Florida 1030 on November 3rd and the game is over at that point.

Right? So in – I don't understand that. Florida is enough for the game to be over. Yeah. If so, why is Obama in Pennsylvania last night? Well, cause they want to lock down. First of all, Biden has a history in Pennsylvania. Obama has a history in Pennsylvania. They want to lock that down. Michigan is, is the average of the polling is ranging between like eight and 12%. Michigan is done. Wisconsin,

which used to have a Republican governor now has a Democratic governor, a lot of voter suppression in 2016. It's not as much as a sure thing as Michigan, but it's pretty close. It's six to 8%. Pennsylvania is a giant state with very, very different geographies. You have Philadelphia is a giant state with very, very different geographies. Philadelphia is a big city. Pittsburgh is a big city. There's a whole bunch of different areas and then a lot of rural areas, plus the whole fracking question. So Pennsylvania, which has voted for Obama in the previous two elections, but just barely flipped for Trump in 2016. In order for Trump to win, he has to not lose anything that he won and keep either Pennsylvania or Wisconsin and Michigan. He could lose some other states, but if he keeps those three, he's a lock. He could lose Wisconsin or Michigan. And I mean, play with the, go to 270 to win. You could play with the

different electoral college outcomes. So assuming that the polls are fair, are so wide that they're fairly accurate. If Trump loses Wisconsin and Michigan- Let's back up. Assuming the polls are so wide, they're fairly accurate. So you're saying Michigan- Even the 5%- Michigan is out of the margin of error right now. Right. Is Wisconsin?

Three or 4% beyond the margin of error. Okay. So forget those two. Pennsylvania, we think is tighter or not even- One or 2% above the margin of error. Okay. So forget those two. Pennsylvania, we think is tighter or not. One or 2% above the margin of error. All right. That's not much when you consider. Tight. That's why you send the big guns there. That's why Obama goes there.

We think the independents in that state though are probably Biden. So here's the fascinating difference why 2020 is not 2016. And we discussed this on our quarterly client call because it was all any of our clients wanted to talk about. So first, there's no third party candidate. That's a big difference in every state the way there was in 2016. For obvious reasons, Bernie Sanders felt like he was mistreated by Hillary and the Democrats. And as we learned a year after the election, 10% of the Bernie supporters voted for Donald Trump. They were

angry at the cheating or let's just call it the bad behavior that went on between the DNC and Hillary versus Bernie, who admittedly is not a Democrat. But, you know, a lot of young people said, hey, as long as they're going to cheat, I'm going to vote for the other guy. Yeah, they threw in the towel and said, forget it with these two. So you don't have that now. And then lastly, there was a large undecided contingent and the after election polls show that the vast majority of them voted for Trump. This time, it's a much smaller undecided. How could you be undecided right now? You either like this, what's going on, or you don't. What the fuck are we talking about? Let me share one of the most hilarious

things ever written about this. You know who David Sedaris is? Very funny guy. His sister is Amy Sedaris. He writes for the New Yorker and other things. And he describes the undecided, and he wrote this previously, but it's perfectly valid for this election. Imagine you're on a plane and the stewardess comes down the aisle with your dinner choices. And the first choice is a chicken with potato and vegetables. And the second choice is a pile of dog shit with broken glass in it. And the undecided asks, how is the chicken cooked? Right. That's what it's like to be undecided in this election. And I have to admit, it's resonant and funny because, you know, it's kind of true. So there are far, by the way, most elections, there aren't very many undecideds. 2016, you had two historically terrible candidates.

Right. I was going to say, the last time that I was personally undecided, I would say McCain, Obama. I don't know. Was I 31 years old? I was a very different person than I am now, and I didn't know as much. But I just thought John McCain like such an honest guy such you know such an such like an independent person but then he was like um promoting george w bush's economy and it looked more and more ridiculous that fall the fall of 08 it looked absurd uh and then he pulled this campaign because lehman brothers went out of business or something so i was like all right obama should win this like i but i haven't been really that on indecisive since, but it's weird to be undecided now. I supported McCain in 2000, which is kind of funny. That always shocks people when I say that,

but I had had enough of the Clintons and the whole Clinton regime. At a certain point, a little bit of change is good, but between Gore and McCain, I would have gone McCain. But Bush was clearly in over his head, and I voted Gore. So the undecideds is hilarious right now. But they're not in for Trump because they hate Hillary. That's not what's happening in this election. You lose that. All right.

So your bet is straight up Trump loses the popular vote and the electoral college. And then what are your war game scenarios? Because I can't picture them making him leave. So the best scenario for you is that everything stays the same relative to 2016, except Pennsylvania flips, but not Michigan or Wisconsin or Michigan, Wisconsin and Arizona flip. And he ends up with like 276. Right. So it's it's just barely. And Trump now screams.

Oh, wait, I lose. I lose if Trump wins the election. No, no. I mean, if if Biden shows up with 276, just not Trump getting it. And there are a couple of ways you can get to just over 276. By the way, it's theoretically possible that it's a tie. It's 269 to 269, which actually happened in 1800 and it gets thrown to the House of Representatives, which is mind blowing. I don't think this is a tie. Neither one of us win a tie. We both lose.

Well, no, it gets thrown to the states. It gets thrown to the Congress where each state delegation gets one vote. And so it kind of there are 50 votes cast and that's what happens. OK. I think D.C. counts as a delegation in Puerto Rico also. So you may have an odd number of votes once you bring in these territories. But anyway, so the war game scenario that's best for you is Biden barely wins, or it looks like he's leading in Pennsylvania or lagging in Pennsylvania, but the mainland votes start adding up in his favor and he's declared the victor 10 days later and Trump challenges it. That's your victory scenario. And the reason I think that's less

likely is because 2020 is not 2016. There are so many differences that go around. Let's forget Texas and Georgia, which for that to happen, it's like a 400 vote landslide. And that's an outside slim possibility. Oh, I think he leaves in that case. slim possible. I think he leaves in that case. Okay. So that's one scenario. The more realistic fat part, not necessarily the majority outcome, but the plurality outcome, the highest percentage, but still below 50% is that it's a three 40, three 60 Biden, almost a landslide. He takes Florida. He takes North Carolina. He takes the three Midwest states. He takes Arizona. A bunch of other things go his way. It's very hard for the president to credibly claim it was rigged. It was robbed from me. And then the next level that I think people

haven't really thought about is you're starting to see signs not only of people in the Republican Party distancing themselves from Trump. Ben Sasse has been playing both sides for five years. Give me a break. With an op-ed, with a leaked conference call, he is chicken liver. That's exactly right. But you're starting to see more and more people in the military come out. I mean, admirals and generals normally don't- Yeah, they wait till they're out of service. They don't say anything while, all right, I don't want to do this.

It's so debilitating. They come out when they don't need to get votes anymore. Right, right. It's, hey, thanks for joining the bandwagon, but where were you a year ago? So if it's a pretty clear victory for the challenger, I think that people like Mitt Romney and others who want to have a potential future leading the party. Listen, Marco Rubio does not like Donald Trump personally. Ted Cruz does not like Donald Trump. Those guys still want to take a run at the presidency in the future

and they will love the opportunity to stab Caesar when it presents himself. I think the Roman Senate will turn on him so fast. His base is going to be important to all of these people's future endeavors. They're not going to become un-Trumpy the day after he leaves the White House. And if he leaves in a dispute, Barry, if anything, they're going to become more Trumpy. It's like feeding them after midnight. Like right-wing media is going to make it so that they remain incensed

and that the election was stolen from them. So I don't agree with you that these guys are going to abandon Trump and stab him in the back. They can't because they still need the voters. So first of all, I love the gremlins reference. And then second, I think at a certain point, the size of the Trump base has been wildly overstated. The, you know, the Republicans have to decide, are they the... I guess you haven't been to a street fair or an amusement park or seen boats in the water or anything like that. And most people haven't recently, but... What are a hundred boats in the water have to do with... Thousands. got a core base of people who love him. There's no doubt. Let me remind everybody that when Nixon, after resigning, walked out on the White House lawn, gave the peace sign and got onto a Marine

One helicopter and flew away, he had like a 31% approval rating. So there's always going to be some percentage of tribalists who say my guy, as terrible as he is, is better than their guy. Just a quick dip into Nixon. And I wasn't around for this. But in 74, the summer of 74, the stock market was 50% below the 73 high. So we were in the midst of a 2008-esque stock market crash. And at the same time, the midterms were approaching and the Republicans knew they were f***ed, that's when they go to the White House and say, you should leave because we're not going to support you through this impeachment. None of that is the case right now. The stock market's 5% off its highs. We have hundreds of thousands of people dead in this country, but we can't even

agree on science and masks. So no one's really holding him accountable. That wasn't already. So this is not anything at all like the climate in which Nixon walked away. If anything, it's the opposite. They're still appointing judges like right up until the election. So the party is not telling him we're going to abandon you, which is why I don't think he leaves. Why would he? Who's going to make him Mitch McConnell or Bill Barr? Who's going to tell him we're giving up? So here's why I win the bet. So he loses and the Secret Service, basically, his Secret Service contingency say- Yeah, they're big liberals in the Secret Service. The president is coming in. We have to escort you out. If you don't allow us to escort you out, we're going to leave. And then the president's Secret Service will manage you. And whether they shoot you in the head or not is up to them.

But you lose our protection. Time out. Joe Biden is assigned his own Secret Service after he wins the election. He had one as vice president. Once you're the nominee, you get your own Secret Service. And then they are going to square off against trump secret service no of course they're not this would be the best movie i have ever this would be the best they're gonna follow the constitution and say you lost the election

you have to leave and if you don't cooperate and exit the building then we're out and the new you become the new guy's headache can i ask you a question sure you're aware that the secret service is a department of the treasury which is in in the executive branch, which is under Donald Trump. Right. You want to redo any of that fantasy that you have? No, absolutely not. Okay. You sure? Listen, they've seen this guy at close range for four years. There's a reason why the military doesn't like him. There's a reason why the Secret Service sworn to lay their life down to protect him, but they're not a fan of him. Politics is about the art of the trade-off and the deal and consequences for the decision you made. The fear that this guy was going to

pull off some sort of military coup, well, you would need the military on your side. You would need the Secret Service. Listen. You would need the secret service. So this is where you're wrong. He doesn't need the military on his side. All he needs is the military to not know what to do. This is the whole secret of the Trump presidency. It's not rules that are being broken. It's norms. It's things that everyone else throughout history just abided by because they were the thing that the person before them abided by. So all you need is confusion and people unsure of what they're supposed to do in unprecedented circumstances to steamroll your way through all these norms and precedents that it turns out a lot of these things we're just relying on because it's how

it's always been done. There really isn't any mechanism to pull a president out of the Oval Office who doesn't want to leave and who's fomenting confusion on Twitter over the results of an election. It doesn't exist. There's no story where that's had to have happened. So here's where I disagree with that. And one of the really untold stories of this presidency is their nearly unbroken track record of losing everything in court. The big shocker from the Democrats in the House is why they didn't compel his testimony. I don't know why they didn't force that issue. Because the Democrats are weak.

Maybe. I mean, I thought that was a bad decision. They don't know how to do this stuff. But again, Mueller should have done the same thing. And he's a lifelong Republican and a longstanding prosecutor. He should have forced the president's testimony. And you know, anytime this guy gives sworn testimony, you know, it's like perjury is a side dish to whatever the main course is. There's no way he can't but help himself. So I think that was a huge tactical mistake. But everything from immigrants to counting mail-in votes to just go down the whole list. They're something like, I don't want to say they're 0 for 100, but they've lost 95% of the cases.

If he doesn't voluntarily vacate, they go to the local court, and there's an order, and he's out. But I can't imagine. The local court? And I understand the norms. The local court? What do you mean? Like family court in D.C.?

They get an eviction notice. Sorry. They show up with marshals and he gets evicted. So Gore concedes December 13th, 2000 after this eventually finds its way to the Supreme Court. Now, neither Gore nor George W. Bush are incumbents. Like neither one of them is in office. That's what I feel makes this very different. Not to mention Trump's just appointed justices. he has a great deal of respect for the institution. He's much more concerned that the Supreme Court as an institution is going to get damaged. And so I don't think he would

pull the sort of vote that would put that at risk. If it's a close election and it comes down to counting ballots in Pennsylvania and the latest justice goes in, that's his best shot for winning. And in which case, what does that mean? This is a tie. He potentially wins the election. election, if there is no sort of rational person made about it, I just don't see a way that even this norm busting president, and let's be honest, it's more than norms. He's violated laws. He's violated regulations. He's violated the constitution. He's violated all these things, but nobody has held him accountable. I just don't see a path for him staying there. It just doesn't make any sense. Here's the tweet. You have no idea how dirty and bad and rigged this election is. We need to investigate and see what's going on before anything happens. And then he tweets that

and Mitch McConnell gets his marching orders to delay and make sure nothing happens in Congress. And it just goes on and on and on. And in March, we're still fighting over the election. That's what I honestly believe is going to happen. And I don't know what – look, our job is not the political side of it. It's the investing side of it. And I just – I feel that that's the more likely outcome than him calling Joe Biden at any point this year and saying, you know what? Congratulations.

I concede you had a great victory. I wish you all the best of luck. Let's have lunch and I'll show you how the White House works. I cannot in a million years because what has he ever left on good terms? He helicoptered out of Atlantic City as it crumbled to the ground like Pompeii. Into the sea. All of the businesses that have closed have been like lawsuits. Like I just, he's not going to just be like, oh, I lost. Oh, that sucks. Because he also knows he's going to have Cy Vance. He's going to have like attorney generals and district attorneys

all over the place going after him. So why would he ever submit himself to that voluntarily? Because he doesn't have a choice. By the way, good side bet. What do you think the odds are that his Twitter account is suspended post-election? Never going to happen. Let's make a side bet on that. Why would they suspend ex-presidents?

Because he does exactly what you say, urges his followers to take to the streets. Oh, I didn't say he's going to do that. I didn't say he's going to do that. Listen, I think at this point we know he's all about him. Let's be honest. All right. That's fair. We can agree on that. All right. So let's bottom line this, and then I want you to go enjoy your birthday. The bottom line is we both think Biden wins the election fair and square. We both agree it's going to take a while in order for that to be decided. Maybe, maybe not. I think there's a chance it's decided by Florida on November 3rd or 4th. All right. And then you win the bet if Joe Biden is sworn in on January 20th and Trump is not- And he's out of the White House.

Not in the White House. And I win the bet if Trump has not yet left the White House by January 20th and Trump is not out of the White House, not in the White House. And I win the bet if Trump has not yet left the White House by January 20th. So here's the really low probability way I win the bet is that sometime after the election, he resigns so Pence can be president and pardon him. And then he's out. So you would win. But that's a real long shot. In that scenario, you would win. And I can't imagine that either. All right, Barry, happy birthday. You know, we love you so much, man. Thanks for coming on. And we'll see who wins the bet. Okay, I'm here with Phil Haslett. Phil is a founder and the chief revenue officer at EquitiesN. And you may have heard the name EquitiesN. You may not 100% be sure of what it is. We're going to get into that in a minute. And we're going to talk a little bit about some of the biggest trends this year in terms of startups, Silicon Valley, Silicon Alley here in New York, the IPO boom, and where

Phil fits in with all that. So Phil, good to see you, my man. Thanks for having me, Josh. Excited to be here. So you guys are really two companies in one. On the one hand, you're, I don't want to use the word brokerage, maybe it's apt, but you're almost like a clearinghouse where people can buy and sell pre-IPO company stock shares. Do you call it a brokerage? Yeah. So we typically refer to it as a marketplace, basically like an online marketplace, because we are kind of serving two functions, right? We're helping folks that have shares of pre IPO companies. And those people tend to be employees, ex employees, early investors in the company, they want liquidity while the company's still private, because I think as you and a lot of your listeners know, companies are staying private forever now.

And on the other side, we're trying to make this kind of asset class or market accessible to mostly retail investors that want to invest in late stage growing technology companies. But when they search for them in their Fidelity brokerage account or their Robinhood account, find that most of them are private and they can't access them. That's really interesting, right? Because they hear the names of these things before they come public and they know they're going to be big. And it just doesn't occur to, which one of the things I love about this new generation of investors, it doesn't occur to them why they shouldn't be able to buy it. Like, what do you mean I can't buy it yet? Why can't I just have it now? All right. So that's one part of the company. And then the other part of the company is you guys are doing managed funds of startup shares or venture-backed company shares. So you're giving people away if they're not looking to buy or sell one individual company, but they want exposure to pre- pre IPO startups as an asset class.

You guys have built some products and full disclosure, I'm an investor in one of your in one of your funds. But talk to me about that side of the business. Yeah, so when we got started, we were basically connecting buyers with with shareholders that were selling shares of companies that the buyers are familiar with, right? You know, I think there's like this old adage, you know, invest in the products you use, you know, and you're familiar with. And 20 years ago, that was easy, because you'd buy shares of Amazon, you buy shares of Starbucks, you buy shares of IBM. But now if you're, you know, somebody that uses a few years ago, if you're using Lyft to get to work, you're using DocuSign

at work to sign documents, you're like, how am I going to invest in these things? So our first answer was to make those companies available. As we grew, investors started to say, Phil, I love the platform. It's awesome. You're making things accessible. But like, I don't know the difference between this enterprise SaaS company, this cybersecurity company. I've never heard of this one. I'd like to invest in the asset class or like kind of a group of companies, but I don't know how to pick them. So help me out. So in 2015, we launched our first kind of managed fund. And we've done one every year since then. So we've done, you know, six of them 2015 through 2020. And then starting last year, we started offering thematic funds. So basically, in response to what investors wanted to invest in by sector, or by category, we started making that available. So we started with a

artificial intelligence and machine learning company. So you basically put in as little as 10K, get access to five companies in that space that were kind of later stage. We followed that up with a future food fund, a gaming fund. And, you know, we're basically going to continue to launch these, these themes in response to what investors want. But, you know, in my opinion, it's, it's a good way to get into this space because you can put 10 K down, um, you can get access to basically five companies in that fund. So you're putting in like 2 K a pop, which, you know, for an investor and you have to be an accredited investor, um, for better or worse, you know, that's kind of a good

way to get diversified exposure. You're not putting your entire portfolio into this thing. It's, you know, a small part of it that goes into kind of the alternative asset bucket. So pretty excited about it. So the reason I think what you're doing is so cool, there are many reasons, but one of the main reasons is what you just said, where you talk to an investor now, let's say they're a credited investor. They have a $2 million portfolio.

Like the assumption that they have is that for them to get exposure to venture capital, they need to have like $20 million to give to Andreessen Horowitz. I hate the term democratized because I feel like it's cliched, it's overused, but you really are carving out a new pathway toward venture investing that never existed before. So you're providing people access. You're not saying you should have venture capital investments. You're just saying, look, if you want to, you don't need $20 million. You don't need to be best friends with Fred and get know, Union Square Ventures or any of these firms,

like you can literally invest this way and pick the dollar amount. Yeah, exactly. I mean, it's a similar trend you're seeing in other kind of alternative asset classes, right? Real estate, if you couldn't buy the entire property before, it was really hard to invest in it. Now you can get small slices of real estate and commercial real estate, which is great. And that's it. And you have that for our market now. You have that for early stage tech companies now, right? With like a platform like AngelList.

And the way we thought about it was there's within kind of the whole venture capital ecosystem, there's a lot of risk early stage, right? Like, you know, if you talk to people like Jason Calacanis and he says, if you want to build out an angel portfolio, you got to make like 50 investments. And most companies are going to take a minimum check size of like 20 grand. And so you're like, okay, so now I got to put in a million bucks. I got a $2 million portfolio. I'm pretty sure that if I told my wealth manager, Josh, that I was going to put 50% of my portfolio in the early stage companies of a guy, a girl and a dog and a coffee shop, he way. You'd probably say you were absolutely not. Right. But if you could go into the companies that were one, two, three, four years out that had a proven kind of revenue model,

they were past product market fit. When you say, wait, wait, when you say, let's define when you say one, two, three, four years out, out between now and when they're going to do an IPO. Yeah. An IPO or plan for an exit, right? Like one of the benefits of investing in companies that are venture backed where we focus is that, you know, the investor kind of knows, you know, the investor on our platform

knows the answer to the question of, well, is this company ever going to go public? Because the answer is they kind of have to because the money they took from investors, those people have a mandate to return capital to their end, you know, LPs, limited partners. Yeah, it's not open ended. Right. Exactly. Like it isn't like a family owned business where like, hey, if there's cash flow coming in, we're going to continue to, you know, sell cookies for 50 years. Like these companies

have to find an exit because that's kind of how it's structured, which benefits your individual investor who, quite frankly, even through equities and isn't going to have a say on telling, you know, hey, Lyft, you should wait two more years before you go public. Or have you explored a strategic merger with Uber? Like, you're not going to have that say at the table, but you are going to be investing alongside people that do have motivations to make those things happen, which I think is... Phil, what's the universe of pre-IPO companies right now that are within three years of either selling or going public? Yeah, I think the way I would calculate it is I'd look at the universe of unicorn companies,

which is companies worth a billion dollars plus. And I would say, okay, some subset of those probably have a hundred million dollars in revenue or more a year. I use that as like a rough proxy for being IPO ready. So maybe say a couple hundred companies at any given time, you know, in the US are probably in a stage where if they wanted to tap the public markets, they could go through that process. And we try to use, you know, certain screeners and analytical tools on our research team to kind of identify that universe and make those ones available as much as we can. Okay, so you can't do due diligence on 500 companies. So you got to screen out the ones that you think have a

reasonable shot at getting public or a transaction happening with. And for the funds that you're launching, so each year you're launching a new series and you're trying to own what, 10 to 20 stocks in each one of those funds? Yeah. And each year of kind of like our broader fund where you can invest in, it's not a specific sector, it's kind of sector agnostic. We're looking to invest in probably 15 to 25 companies. And the criteria we're using because, you know, EquitySend has done transactions in like over 200 pre-IPO tech companies. Right. So these funds are going to invest in a subset of what that 200 is. We're looking for indications that the company has a path to being a public company in the next few years.

Call it one to four years because that's kind of the time horizon for the funds. Looking for companies that have a proven revenue model, right? They're not still trying to kind of find their footing because we think they're going to need to have some real concrete kind of path to revenue and profitability. And so we're kind of screening for that. And the last thing that we're also doing is we are looking at who the existing institutional investors are in that company. For us, that's a really good leading indicator. Yeah. So we see it as a leading indicator for two ways. One is if you've got TPG, T. Rowe Price, General Atlantic, and you've got these kind of late stage institutional investors, that is probably a good indication that the company has received dollars with a plan to become a public company soon, because that's kind of the mandate of those

late stage investors. And the second part that's really cool is while equities end doesn't get to go in, sit down with management, go through all the documents, go through all their customer analysis, those TPGs and TRO prices definitely do. And so we kind of get to leverage due diligence that gets done by those folks, which is super helpful for our end investors. Yeah, that's such a great point. Like if Fidelity or T-Row price, these are like two of the most respected research oriented active management mutual fund companies.

If they've sent their team into these startups, what are you going to uncover that they haven't? Probably nothing of value. Right. So that's number one. And then number two, this is really a relatively new phenomenon where 1940 Act mutual fund companies have come into startups pre-IPO and they almost had to because historically they would buy these growth companies after they came public, but still early in the story. But now you have companies go public 15 years after they were founded. And a lot of that early stage growth has been harvested by the private market. And then when they come to market,

they're like mature companies. Maybe they still grow, but not at the same rate. And then when they come to market, they're like mature companies. Maybe they still grow, but not at the same rate. So like Fidelity looked at that and said, we got to be there before these things come public. So you're offering people another way to do that also, right? Yeah, exactly. You know, the number of listed public companies on US stock exchanges has dropped by like a half or two thirds over the last 15, 20 years. So I bet there's a document that talks about the mandate for like the horizons fund that's supposed to invest in emerging technology companies. And when they looked at the criteria for what they look at, you know, we look for companies with a hundred

million dollars plus in revenue that we think are growing 30% year over year. They're like, crap, our universe of companies is like tiny now. Yeah, these don't exist anymore. anymore right yeah they're like what are we going to do with this portfolio like we can't like assets are coming in we got to put them somewhere and so you basically have the ipo of 2005 where it was 100 million dollars going into a company that had 60 to 100 million dollars of revenue is basically like a series c funding round for a private company so t-roll price fidelity like we got to get in then and so that, you know, if you pour through like some of the filings for, you know, one of these TRO funds or Fidelity funds, you'll see that within all these publicly traded tech companies, they have, you know, five or 10% of that portfolio is within, you know, pre IPO tech

companies, which is cool, right? I mean, that's definitely the right direction. But if you're an investor, and you're like, I want to invest in these companies, and you buy that, you buy that mutual fund, like 10% of the allocation goes towards this. 90% is you might as well buy the triple Qs. Exactly. Okay. So you're a hedge fund structure on these funds. There's a management fee and there's a performance fee.

Is it 1 in 20 or 1 in 10? How is it set up? It's 1 in 10 for the most part. I should probably know that. I'm sure you looked at it at some point. Management fees are basically between like one and 2% carried interest or which is performance fee is 10%. So it's about half of what you normally get other funds.

I would say the biggest difference structurally though is that we're making this available. Again, if you're an accredited investor, you have to be an accredited investor, but we're making it available at like a 10K a pop, right? And if you were to even get access to venture funds through Morgan Stanley or like a really large wealth manager, even those tickets typically start at a quarter million, half million, a million. And even then, it's not like it's a million dollars to go into Fred Wilson's Union Square

Ventures. Like that guy's fine. He doesn't need any more capital. He doesn't want it. You know, new managers or people, new strategies. with new strategies. So I would say the other thing that got us into the part of the venture capital kind of ecosystem, one of the reasons we got into the secondary space, and we call that because these are basically shares that have already been issued and somebody owns them and they're being sold again. The reason why we like that was that we didn't have to go in and compete with Andreessen, Union Square, Sequoia to try to get this primary allocation from a company. There's a tech company that's going to raise 50 million bucks. It was going to be really hard for EquityZen to come in and say, hey, we're interested in

investing a million dollars. You should take our money over. You don't bring anything to the table. Andreessen, it's like, I'll be on your board. Oh, okay. You're in like, it's harder for equities to do that. Yeah, I get it. Right. Okay. So now, but now you can go on to the, the, the secondary market. It's a private market still. You guys are basically creating the market, but there are employees, let's say like there were employees at Uber, for example, that they just had to sell some stock before the IPO for some reason, or people leaving a company or whatever. So you guys are there to make that market and match buyers and sellers in that specific company. But then you were saying you also can just buy it for one of

your funds. Yeah, exactly. So a true life example we can give, Spotify was a company that had a relatively active kind of pre-IPO or private market where employees and ex-employees were selling shares. What makes a market in a private company active versus not? Is it a function of how many employees there are or how widely spread the comp has been in shares or both? It's a great question. It's kind of a couple of vectors kind of going across each other. The variables are how long the company's been private. So the longer means that there's more need for liquidity, right? If you joined Slack six years ago and you got a wife and you got a kid and you've got a bunch of bills to pay, you might want to sell shares. So that's

one. Number of employees, right? One of the cool things about venture backed companies is they do issue stock to pretty much every person that joins. So you kind of got this big fractured shareholder set, some that want liquidity and some that don't. And then the third part is really up to the company, you know, the company ultimately needs to approve every transaction. So we equities and we'll only we'll only do transactions when the company actually signs off on it. But some companies are still a little hesitant on making this market available for their employees. There's concerns, oh, you know, if our current employees sell their stock, are they really going to be motivated to come to work every day? Oh, like, who is Equities End? Do we really want to have this price discovery out there? I mean, attitudes have changed and evolved over the, like, even the seven years that we've been in business, mainly because companies are staying private so much longer.

It's almost like this kind of not really discussed, but accepted kind of change in the market, which is, hey, look, if we if we hired people in 2013, told them that we were thinking about going public in a few years. And now it's 2020 and we're paying them a salary that they could probably get a higher one at Microsoft, which is a public company. And they've got all this stock. It kind of makes sense that if we want to retain them, we should offer them some form of liquidity. And I think that's kind of the attitude we've seen change. And by the way, most people aren't selling all their stock. They're selling a small portion to take some chips off the table. Kind of similar discussion that you would probably have with a client when they said, hey, I've got a net worth of 2 million bucks. And you'd say, okay, great. What's the competition of the net worth? Well, I got 150K in savings. I got $150,000 IRA. And I've got $1.7 million in a private company

stock. And by the way, I work there. So my entire livelihood is basically stake in this company. You'd probably say, hey, you might want to diversify that a little bit. Yes, that's a really good point. I'm glad you went there. It's a great segue. So I want to talk about the implications of what you guys are doing for the entirety of the wealth management space. So the first thing is, increasingly, as wealth management firms run into new clients and new prospect opportunities, the people are younger and younger, right? So now it's not 100% boomers that you're talking to. Now it's Xers and millennials who are qualifying for true wealth management, right? And as you come into more and more of those cases, you start to realize many, many of these

prospective clients, a lot of their net worth is tied up in company stock, like private company shares, because they work at Uber, and, you know, pre IPO. And, you know, they work at, you know, all the startups that we're always talking about, and they've got shares in these companies, Airbnb is a recent example. So now, if you're a wealth manager, and you have that exact conversation that you were just play acting through like, wow, you have a lot of your net worth tied up in this one asset and this asset has to go right. Equities then becomes a place where a wealth manager can basically say, well, what is the market for this stock? his stock. Let's say, hypothetically, I was going to advise my client to take 5% or 10% of their chips off the table because A, they have an immediate cash need or they're trying to buy real estate or B, they're worried about the industry or whatever. Is there a market that

I can help this client use to diversify? So are you seeing that kind of flow from either wire house broker dealers or RIAs or has that not yet started? It's definitely started. It's come mostly from independent wealth managers, less from the wire houses. We have public partnerships with Adapar, which is a wealth management platform, portfolio management platform for family offices portfolio management platform for family offices and, uh, independent RAs. We've got a partnership with high tower. Um, high tower is basically kind of an aggregator for independent RAs. Um, so we're starting to see that come in and the, you know, what happens is you get it, you get a wealth manager. It says, Hey, I've got this client. They told me they got shares of this company. I don't really know this

space very well. And if I were to help them diversify, I literally have no idea what would, what I'd have to do, right? It's like, how do these shares work? Are they restrictions? Do I tell the company? Who do I talk to the company? And we're working with those RAs more and more to help with liquidity because they're thinking about their clients kind of holistic wealth solution. And they're saying, oh my gosh, this is so concentrated. And it can happen really quickly because of how quickly some of these companies can grow in valuation, right? What started as your $100,000 option grant you got, company's gone up 10X in size, now it's a million dollars. That's a pretty mean nest egg. And a wealth manager can't help much in managing your portfolio if it's all sitting in this one illiquid stock.

Yeah. So I think you're not hearing as much from wirehouses. Maybe you will, but because their mentality is, well, let's do a loan against those shares of stock and let's take a point and a half on the loan. And that's actually that works out better for us than getting you liquidity. than getting you liquidity. Oh, and then the conflict is the investment bankers at their firm are doing the IPO for your clients, for the investor's company. What we found though is that the independent wealth managers are more forward thinking on talking to a client that really actually can't even be a client yet because you can only manage like their 401k or a small pool of discretionary assets, but they have this thing that could be worth a lot two, three, five years

down the road. And what we're seeing is that these independent wealth managers are kind of building like their future book of business by trying to offer these types of solutions and helping out. Definitely. And there's the new generation of financial planner at an RIA. They're becoming more familiar with the terminology around equity-based compensation and stock-based comp. And they're learning to educate their prospective clients because, again, that's where a lot of the wealth is being created. 40 years ago, it was in oil wells. And 20 years ago, it was an oil wells. And 20 years ago, it was in real estate. And right now, the new

gigantic pockets of wealth are being created with public offerings on the NASDAQ and in the run up to that. So I think it's a really good point. You mentioned before that there's like a shortage of publicly traded stocks in the market. And, you know, half the companies that would have existed a couple of decades ago aren't there anymore. I agree with one caveat. A lot of those would have been micro-cap companies, but still companies are waiting to go public. But then you have a year like 2020. I think the NASDAQ did 20 IPOs and the New York Stock Exchange did 100. And that number could be outdated. It could be higher by now. And even

if you pull that all the SPACs, like real operating companies, the type that you guys would have in your fund. So is this a sea change year where all of a sudden, not only do people not want to stay private, they actually are in a rush to go public again, and it's got its cachet back, or not necessarily? I would say it's probably a good indication that we'll see a healthier, more active IPO market over the next few years, especially with interest rates at zero. Because you have a lot of public investor capital

that wants to get deployed. I mean, it's the same reason why SPACs are so popular is that you've got institutional investors sitting on cash saying, I can park it in the same reason why SPACs are so popular is that you've got institutional investors sitting on cash saying, I can park it in 10 year, you know, treasuries for less than a percent. Or I could park it in a SPAC and earn zero percent, but basically have the free option to invest in a company like a pretty meaningful discount. Also, I could think about allocating that towards IPOs. And I think companies are kind of catching up with that idea that maybe now is a good time to talk with investment banks, talk with those institutions

and see if they can find a price that they're willing to take. There's also some interest from investors, sorry, not investors, from companies to tap the public markets before a potentially very turbulent election that comes up in November 3rd. Yeah, I think that definitely played a role. I agree. I agree. But we don't think rates are going up anytime soon. Tax rates probably go up. They probably have to. But right, a lot of the ingredients that have been in place for the last few years probably stick around. I think it's good to have balance, though. I think it's great to have this private market where money can move and people can offset risk by taking some of their chips off the table. I think that's great. And then I also don't want people to hate going public

for selfish reasons. I love the stock market. All right. So what do you say then to this idea? So as a wealth manager, one of the more popular ideas for investing for clients over the last 10 years has been asset allocation. And with an asset allocation, advisors like to talk about factors. And one of the factors advisors like to talk about is the small cap premium. And unfortunately, it's become harder to get the small cap premium that actually pays off because so many of the companies that ordinarily would have been small caps are now private companies. So can you really do small and micro cap part of an asset allocation if you're just using the public markets? Because

the small caps that trade publicly, you look at the Russell 2000 index, there's a lot of banks, publicly, you look at the Russell 2000 index, there's a lot of banks, some small biotech, some small industrial, but that's not what the small caps as an asset class looked like in prior generations. So if we're using that data, Phil, if we're saying like, look what owning small caps has done for you over the last 50 years versus just the S&P, there's a problem. The problem is the types of companies that would have been in that small cap group just aren't there. They're coming public as mid caps. So is allocating to private companies, the solution to that conundrum that financial advisors face?

I would say the answer, obviously talking my book a little bit is yes. Accessing, you know, pre IPO technology companies is a way to kind of fill that void that is now, you know, showing up in the Russell 2000 in the micro cap space. But if you want to really replicate what a micro cap index looked like 20 years ago, I'm guessing you're also going to have to find access to micro cap companies and other sectors outside of tech. And I think that becomes a little bit harder, right? Because manufacturing companies, chemical companies, other things like that, that aren't venture-backed because they're historically not venture-backed type businesses because they're not as technology focused, don't have the same type of active private market that a technology company might have because there are fewer shareholders, right? You've got five executives and you've got two investment funds. So you've got like seven shareholders. And so you can't really have as active of a dialogue or a market to kind of replicate. And so I think it would be hard to

completely reproduce what it looked like 20 years ago, but on the tech side, you certainly can by seeing what's available kind of in private markets like equity design. So do you have any new themes that you're thinking about doing funds for, or what are people at? Because I was thinking like sneakers, like have you make investments in Goat and StockX and maybe even some of the brands themselves like Supreme? Like can you envision a situation where you look at something like that where it's not tech, but there's obviously a ton of enthusiasm and there's probably a market for that. Yeah. So I would say if there are shareholders out there that can sell and can get liquidity, like we as a company and a platform are pretty well positioned to provide that liquidity and make that investment available. So can't talk specifically about the themes that we're planning

to launch, but we usually do it in response to what investors are looking for, right? We launched this gaming fund because investors saw, you know, Epic Games, they saw the Unity Technology IPO, and they said, you know, like, I want to invest in this space, it's growing, like, you know, like, I'm like a traditional sports fan, right? Like, I can't wrap my head around how big esports are as a thing. They don't excite me as much as they excite what seems to be like the rest of the world. But the investors have a similar thesis. They're like, this thing is growing. How do I access it? When I look in the public markets and I search for something that has, you know, the NAICS code for gaming, like I get MGM and I get, you know, like I don't get what I'm looking for. So maybe something available. And we usually do it in a responsible investors want, assuming we can get access to the shares.

And so, you know, it pretty much covers like most sectors. One of the benefits also is that venture capital as an asset class has grown tremendously. And the scope at which what investors are willing to invest in is also like broadened, right? The idea of e-commerce brands being venture backed like 15 years ago was probably like, you know, outside of Amazon, which is more like a platform, but like a specific brand, like that was probably a pretty far fetched idea. But now it's become a little more commonplace. Right. You've got companies like like Stance or, you know, a lot of companies that on their face don't really look like your traditional venture backed technology company, but are actually taking venture capital. And therefore, it means that you've got a bunch of people, employees, ex-employees,

early investors that might want to sell shares over time. So I can envision, you know, a pretty broad range of these of these funds that we're going to plan to launch, probably five or six of them in a year. Probably could do more of them as we grow. So you know what blew me away when I became an investor in one of your funds? That I was able to do it in my IRA, which is like a lot of my liquid capital for investments is in qualified accounts and IRAs. And you're like, no, we could do that.

So I was pretty impressed by that. So where should people go to equityzen.com and read more about the asset class? And if they want to look at some of the companies in the marketplace that have shares that are currently changing hands? I thought that was pretty cool. Yeah. So they can go to equityzen.com. They can register. And what we do is for each of the kind of offerings we have available for a specific company, we have a full write-up, kind of think of it as like a mini prospectus. We look at publicly available research. We look

at the prices paid by the recent investors. We show who the investors are, the business model. We do that for each of the companies. If they're interested in one of the themes, we'll list those as well. We'll talk about the target companies we're going after, our thesis behind it. We'll show historical returns on previous ones. Yeah. And they can take a look at everything right there. Dude, you're awesome. You're doing a lot of innovative stuff. And of course, for people that want to look at the stuff, obviously every disclaimer under the sun applies. We're not marketing hedge funds. We're not marketing venture investing.

Do your homework. Read the prospecti. Be intelligent about the level of investment you make in things that are historically risky. And don't take conversations on a podcast as advice. Probably a pretty good rule of thumb. But Phil, I want to say thank you so much for everything that you're doing. I think it's super innovative and hopefully I can turn some people on that haven't heard of you guys before and they'll go check you out. And we'll have you back on and we'll talk soon. Thanks again, man.

Thanks for listening. Check us out at thecompoundnews.com for daily investing and Thanks again, man.