The Pomp Podcast - #1358 Jihan Bowes-Little | Bitcoin Volatility Signals Opportunity Says Coinbase Investor

Episode Date: May 8, 2024

Jihan Bowes-Little is the Co-Founder & Managing Partner at Bracket Capital, an investment firm focused on special situation opportunities in growth / late-stage private companies. In this conversation, we talk about the similarities and differences investing in Coinbase, SpaceX, Stripe, landscape of private markets, financialization of venture capital, investing trends & sectors, cross-over investment example, market liquidity, bitcoin, and more. ⁠ ======================= Meanwhile is the world’s first licensed and regulated life insurance company built for the Bitcoin economy. Protect your loved ones with sound money built to manage life’s uncertainty and a broken financial system. Their BTC-denominated Whole Life Insurance policies allow HODLers to pass more BTC on to their loved ones and a tax-advantaged way to access BTC for liquidity during their lifetime. Visit their website at ⁠https://meanwhile.bm/⁠ to join the waitlist for a policy and to learn more. ======================= Get the freshest price feeds free for 12 months. Join Supra’s early integration program for zero-cost access to the fastest oracles and dVRF across 50+ blockchains: ⁠⁠⁠⁠⁠⁠⁠https://supra.com/pomp⁠⁠⁠⁠⁠⁠⁠. Earn $1,500 by referring Web3 projects to use Supra services. The projects get the fastest services for free, and you earn $1,500 for every referral. Learn more at the link above. ======================= Pomp writes a daily letter to over 265,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ ======================= View 10k+ open startup jobs: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://dreamstartupjob.com/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Enroll in my Crypto Academy: https://www.thecryptoacademy.io/

What's up, everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Today's episode is with Jahan Bose-Little. He's the co-founder and managing partner at Bracket Capital, an investment firm focused on special situation opportunities in growth and late-stage private companies.

In this conversation, we talk about the similarities and differences between investing in Coinbase, SpaceX, Stripe, and many other companies. We also talk about Bitcoin, the landscape of private markets, financialization of venture capital, how the investing trends and sectors that they're focused on have shaped many of the outcomes, and also crossover investment examples going from the private market to the public market, how they're thinking about market liquidity, and much, much more. I really enjoyed this conversation with Jahan. He's a great friend of mine and someone I've learned a ton from, and I'm excited for you all to listen to our conversation. Here's my episode with Jahan Bose Little. Anthony Pompliano runs Pomp Investments.

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Bang, bang. We got you on here. I thought a great place to start this conversation is you and I both invested in Coinbase. And some of the later days of it being a private company, it went public. You guys made a lot of money. So why did you guys like Coinbase and kind of talk a little bit maybe in terms of like the strategy of entering a company like that with a shorter time horizon to liquidity? Yeah. Yeah. Thanks. Yes. Coinbase was really emblematic of a lot of stuff that we were doing back in that sort of, you know, 2017, 18 time, as in we were really looking for category leading companies. Coinbase was and is, you know, the category leader in that space.

Obviously, we put a lot of thought in that time into whether it made sense to own the equity of a business like Coinbase or whether you would just outperform owning the tokens. You know, we opted for doing both. So, you know, we managed some money in Bitcoin and Ethereum as well at that time. But Coinbase was a great returner. There was a lot of early employees and early investors in that business. If you rewind even 6 to 12 months before the IPO, the business was trading around $6 or $7 billion in value. I think it's roughly $50 now, but it peaked at close to $100 at the time. um and it really wasn't clear to the market you know how big this business could be you know the bear case was it's a brokerage you know brokerages trade on relatively low multiples right the bear case was that it was going to be the center you know the center of gravity in the nucleus for the entire crypto ecosystem right and would expand into many of the areas that it's expanded into now and so we were able to buy some shares from some early investors by the secondary market at around

you know six billion dollars um turned out to be about six months before the ipo right uh you know and it was it it was at 90 in no time so um we've done a lot of stuff on the secondary market um i think coinbase over time you know roughly speaking has been a similar investment to just owning some of the majors um and so it's really just a question of tactics right obviously there's never a chance to to have bitcoin or ethereum trading at a large discount to where the rest of the market would see it or at a large premium and so i think that's sometimes some of the value that equities give when you're thinking about crypto is that you know they can be very richly valued at times or very undervalued um whereas the liquidity of the tokens themselves you know keeps keeps them

you know keeps them much more efficiently priced now you and i've known each other for a while and i think one of the things that i've always appreciated is that you guys are industry agnostic but there does seem to be some kind of core themes and you know there's innovation there's kind of tech infused into this stuff and so coinbase being kind of one great example in the bitcoin and crypto ecosystem but another company like spacex right where you guys it seemed to have this kind of you know medium to long-term view as to that company and kind of being the category creator talk about spacex and kind of how you all got comfortable allocating there yeah spacex has been one of our largest investments and and still is since 2017 when we when we founded

the firm um so you know it's been private over 20 years now uh spacex is i guess the real definition of a category leader in an n of one company right um although coinbase you know is very similar in that respect but you know clearly clearly spacex is is a variable monopoly at this point um i think that what we like to try and do is as you say be open-minded uh to investing in things that have venture-like returns um we you know we find that those things often happen in sort of you know innovative areas it could be somebody with a lead extending that lead it could be somebody doing something like spacex which um you know which the world thought was impossible right and investing at an inflection point when you see some possibility and the market may not be pricing

in that possibility um and so you know with respect to spacex it's been interesting to see the evolution of that business that you know we certainly weren't one of the earliest investors but our first investment was around 20 billion dollars or so you know this is 2017. um and so that was post reusable rockets but uh far before starlink rolled out right and the way we were thinking about the business back then was um there was sort of three pillars of the business there with the rocket launch business which is very stable very predictable it's a much bigger business now it's very modelable right and in a sense that it's a bit like a private equity business these are multi-year contracts um you know they're with counterparties like the us

government and others that have great counterparty risk etc you know the cash flows are going to come in but it's not necessarily the case that you're going to have 100 times more launches one year relatives the next right they grow they execute um they're on pace to have more launches this year than they ever had before but that's like a private equity like business where at the time we thought um that was potentially like a 3x to 5x type business then the second pillar at that time was was starlink which was which was still tbd right that's a relatively unbounded tam right there's over 8 billion people on the planet all of us want great you know uninterrupted internet um you know whether you're in uh you know the you know the kalahari desert or whether in the hills

of los angeles right there's a lot of problems with this they publicly announced you know i believe that they've got you know over two million subscribers already you know i think two and a half is the latest reports that are publicly out there um people paying over a thousand dollars a month so you can see how you can get to billions and tens of billions even perhaps hundreds of billions of dollars of revenue just off that business alone right and so at the time this basex was pricing back in the kind of 2017 era um that was tbd you know we were launching satellites up there there was a question about whether or not um the latency would be okay how would he get the price point down etc um you know all of which he and the team have done really well um and now

you're moving on to the third pillar of it right which is a little bit of i think the the true venture area of spacex which is the what if you know what is the what's the tam of the space sector what does the space sector even mean you have other businesses i think we might even be co-invested in you know things like varta which are doing things which are only possible because the cost of launch and relaunch has fallen, you know, so precipitously, and it's continuing to do so with Starship, etc. And so there's a real right tail to SpaceX that I think, really stokes the imagination, right? And you've got, you know, the greatest entrepreneur of our generation, you know, at the helm. So but that's kind of how we saw it as it, you know, is a

relatively predictable cash flowing business. Now you've got Starlink, which I think has moved into that category but with a much larger market in terms of revenue and then you have lots of other business models that can be you know tied on to the back tied into the back of that so if we then go maybe from coinbase which is you know kind of crypto and i think a lot of people would say like hey this seems like maybe it's going to work maybe it's not it's a whole new industry um but there's not really technology risk as much as like is this an industry or not then you have spacex which really was technology people knew space existed right we've gone to space before but it was like hey, can we do this continuously at lower cost with the reasonable rockets?

Then you've got kind of this like middle ground, a company maybe like Stripe, where, you know, Stripe is kind of serving new use cases, new markets, but it is really kind of technology risk. I'm like, can you make the payment process or just work better and get installed and on these websites, et cetera. And so like, how did you guys think about Stripe as a business to invest in? Yeah, that's a great distinction. You know, I think what all three of those businesses have in common and,

you know what you're often looking for even when you're investing at the growth or later stages private markets versus you know seed stage investing and some of the you know the angel stages that you invest in as well as um you know you're you're underwriting the business at the stages that we're investing but at the end of the day when you have a really one-of-one founder right when you have someone who can really move the needle um you know it's it's important to factor that in as well and i think one of the difficult things and one of the exciting things about investing in venture is that you're investing behind people where you're investing in their business as it currently stands. But you're also buying a bit of a call option. I heard somebody

one time describe investing in Amazon in the early days and say, isn't it amazing that we can get Jeff Bezos to manage money for us? When you think about buying a share of stock like that, you have one of the world's best operators essentially managing your capital for you. I bring that up to say, I think the Stripe founders are... And really the team, the quality of the team at Stripe is really noticeable. I think the quality of the founders, anytime you see them on a pod podcast, et cetera, is really extremely unique. So even though they're operating in a business, which as you say, they haven't reinvented the wheel per se, right?

It's not like a rocket launch business. It's not an entirely new category. They're bringing execution and growth and stewardship to an industry which has existed, but which has tons of room for innovation and optimization. I think what you have to think about was something like Stripe, or at least the way we've thought about it. We've been investing in the business for a few years now is that this is also a business as you say, the technology risk isn't really there. People understand how large the market is.

People understand how talented the founders are. And so I think what you have to do in those types of situations, at least from our perspective, is really try and disentangle a great business from a great investment. Sometimes you can have a great business, but if the market knows it's a great business, it's difficult for it to be a great investment because it's fully in the price. Whereas when you're taking technological risk, if you have a view which is orthogonal to the market you may be able to see around the corner or just have a belief that allows you to take certain element of risk that allows you to generate an outsized return it's harder on a business like stripe because um strikes a silicon valley darling everybody knows how excellent the

business is all right um everybody knows how excellent the founders are and um you know we have been investing in stripe but you know the large market pullback you know that we all saw on, you know, kind of 2021, when fintech businesses in the public market, Adyen and PayPal, et cetera, you know, got hit very hard when all SaaS businesses and technology multiples ratcheted down, you know, in the public markets, anywhere from 40 to 80% for high quality names, that opened up an entry point, you know, for ourselves and also for other investors to combine great business with what we thought was great value, right? And I feel like, you know, that's a business which I fully expect to be running 10, 20, and 30 years into the future. And so you're discounting a

future state of the world, which has much longer duration, I think, than many other businesses, which you feel like may be more of the moment, but aren't necessarily here to stay. I think it's our expectation and a lot of others that Stripe can be a very large public company for a very long time. Yeah, that makes sense. And really what you're talking about is like, there's almost this distortion that happened in markets, right? I think a lot of people point to zero interest trades as being maybe one of, if not the main culprit. But also I think like a lot of investors lost discipline. They kind of didn't care about the discipline and diligence. They just were throwing money around. And so if you see everyone else doing it, then your LP start asking like,

hey, why are you not deploying capital this quickly? Talk a little bit about, you know, kind of how these private markets have transitioned and changed over, you know, maybe like last like four years. It was like a moment of fear in 2020 to like exuberance back down and now it seems like maybe we're somewhere in between yeah um yeah you know narratives are are so powerful right in hindsight it's really easy for for all of us to uh you know to sit in the armchair and look back and see that zerk was the anomaly but at the time right you know in every country around the world right um you know talking about you know negative interest rates in in most developed countries um and obviously in hindsight it was it was incredibly heady and

it was incredibly distorted, you know, and I think it really, it really played into both crypto and venture, you know, these are very long duration asset classes, where you're moving out on the risk curve. And if you're essentially being taxed to have your money not at work, you know, taxed by inflation, whether or not it was showing up in the official numbers, right tax, because the interest rates were so low. And like you say, tax, because you know, you're the assets that you weren't investing in were performing so high, it really did, you know make a lot of sense to people including large institutions at that time to really push themselves out the risk curve but it created distortions um that that i think we're still

seeing the ramifications of today so the way that we see it is um you know the interest rates were incredibly low people allocated extremely heavily to private markets venture in particular um revenue multiples you know regularly were in the high double digits and sometimes even in the triple digits right you know even dot multiples and things like that were uh uh you know were essentially non-existent at the time when you had that incredible retrenchment i think what's most surprising about it is a lot of people maybe who hadn't been around in 2008 were likening that pullback to you know to a bitter pill and a lesson learned and perhaps some mistakes that wouldn't be repeated again anytime soon um and you fast forward you know

not not two to three years later and and like you say i think that now we're in a middle area but but it's very bifurcated. On the one hand, I think you have AI, which is operating in a totally different paradigm, you know, 100 times revenue multiples, billion dollar valuations on businesses, which haven't generated any revenue yet, you know, funding at these kinds of, you know, peak euphoric type valuations based just on team and market opportunity on the one hand. But then you have the median company, you know, high quality businesses in the private markets that have hardly rebounded at all from that huge, you know, I'd call it a 50 to 70% sell-off that a lot of companies experienced in 2021. And so in a sense, I would say AI right now

for private market GPs and private market LPs, the investors behind those funds is sort of a tale of two cities. On the one hand, it's created a huge amount of enthusiasm and there's the potential for a lot of value creation, both for consumers, for the world at large and for investors. But on the other hand, it's also really sucked the oxygen out of the room for lots of other businesses that don't have an up and to the right AI story. And obviously, a lot of them are contorting themselves to try and tell that type of a narrative. But to me, it's very similar to what we're seeing in public markets, where if you look

at the index level, stocks have had a great run. But if you look one level underneath the hood, you have the MAG7, which is on a tear. and then you have the medium businesses or the small medium cap businesses in the public markets that have fared really poorly. And that's what we're seeing in venture as well.

You know, there are the SpaceX's, the Strikes, the Andurals, where the demand is as high as ever, plus, you know, all the AI companies as well. And then you have a lot of other companies, some that are high quality, some that are maybe not so much so,

but none of those are necessarily getting the octane. And so if there was a venture capital index, like a public market index, I think that index would be trading relatively close to the highs um but because people don't invest in venture like that um it's um i think there's still a lot of pain uh you know and a lot of indigestion in the private markets

so as that happens venture capitalists have to decide how to deploy capital into the market right they got to figure out when what part of the market what companies uh when to sell which i think actually is something that you guys have thought a lot about versus most investors who um just buy and hold forever. And I know you've got this theme of like the financialization of venture capital. And it feels like maybe some of these worlds are now colliding or blurring. And so talk a little bit as it like, I would put you guys as one of the pioneers of some of this stuff. But how do you think about the financialization of venture capital? Yeah. Yeah, it's a term, you know, I don't know if we came up with it ourselves. You know, it feels like we do. It's certainly

something we've been thinking about for a long time. I think a lot of it just comes from some combination of the confidence and humility to really try to play to our strengths as much as possible. It's one of the few tenets of investing I feel like I've learned over my 20 plus year career is that there are many different ways to make and lose money. But the surest way to lose money is to be trying to invest in a way which isn't aligned with your personal psychology and your personal edge and your personal skill set. So a lot of venture capitalists have a product and an operating background, right? And our firm is not, it's not like that, you know, and I'm not like that. My background comes from the hedge fund side, you know, where you buy

and you sell, you're highly opportunistic, you're very tactical, you know, you have fundamental, but also tactical, you know, timing, taking profit, these kinds of things are, you know, are the bread and butter of hedge fund investing. But I think that there is a different type of investors, some of whom have been very successful in the venture side, that come from a product orientation and have seen a lot of their wealth creation come from compounding and power law returns in a couple of winters. And I think that's the zeitgeist. That's the narrative that really informs most people that go into venture. We came into it without that background, without that skill set, with a different skill set. And so it wouldn't make sense for us to be investing,

playing somebody else's game. That would be, I think, a recipe for subpar performance. right so if we're trying to do more of what we do better more of what we have experience in the idea for us was um you know was sort of simple we thought um venture as an industry for those of us that live in it you know feels like a large ecosystem but it's a very small fish in a very large pond when compared to bonds you know property uh public market equities you know commodities etc and so a lot of the things which have happened a lot of the financialization that has happened in other asset classes has yet to come to venture you know there's very little structure in venture there are really no options people think of their investments as options but there are no options

per se um there's there's a lot of things you know there's the structure of venture funds is very different than structure of hedge funds etc the idea that you need to be able to recycle and distribute cash to lps in a relatively predictable time frame is something which you know it's a conversation the volume of which has been turned up a lot in recent years but for the prior decade there were very little cash distributions for many venture funds um but it didn't impede their fundraising you know in their ability and obviously that's changing a lot now which is creating a lot more interest in the secondary market and the ability to manufacture a sale prior to the company you know tapping tapping the public markets and so um yeah so we look for areas where we think that

we have a comparative advantage relative to the market. So, you know, a lot of that was secondaries in the early days of bracket. We're focusing a lot, as you say, on this financialization and this structure now. You know, capital has a lot more leverage. Capital is a lot more expensive now than it was in the time observed, obviously. And so, you know, you're seeing term sheets with liquidation preferences. You're seeing warrants, i.e. call options being attached to deals, etc. You know, I think these can be weaponized, or there's a way to approach them in a partnership mentality, you know, which is what we're trying to do. But I think that the evolution of the financialization of venture, because the asset class is getting so much larger, is also bringing in people with other skill sets, in addition to the kind of product-led skill sets that I think have dominated the industry thus far.

When you think of this kind of financialization, I think there's a lot of folks who obviously see the benefit to the venture investors and the LPs and the ability to drive better returns. How do you think about it in terms of the tailwind it provides for some of these companies? Yeah, well, I think one of the biggest points of differentiation is, I would say that there's two. One is which, you know, staying private as a company can really be a luxury and a privilege. I think there's a lot of benefits to going public, and a lot of people have been speaking about this recently in terms of the increased discipline, the fitness that it requires, etc. And I think there's a point in time in which that's helpful, but it also brings a lot of other costs and a lot of other things alongside with it. And so the ability to package your offering as a company in different ways that appeal to different types of investors may give you the flexibility to not just feel like you have a binary, which is you have to be an unprofitable, put to the gas startup or a public company, you know, competing with the mag seven. Right. If you're able to essentially tranche, you know, there are certain investors who want very high risk, very long duration.

They want to put a little bit of money in a seed round, wait 10 or 15 years, and they're happy with a really high failure rate. There are much larger pools of capital that don't need 100x returns, but want a much higher probability of a positive return. Those investors might be looking for 3 to 5x over 3 to 5 years. And so if you only raise money in the exact same way, through priced equity rounds that are highly competitive, that only happen once every couple of years, where you have a bidding more the venture capitalist that pays the highest price or perhaps you know had the biggest brand

times the highest price wins that round that's certainly one way of doing it it's not to say that that's going away but there are lots of other pools of capital and lots of other investors who think about their portfolio in different ways that may want to lend to those businesses they may want to invest off cycle on the rounds right it may be the case that we think company a has hit a great inflection point right now the company may not be raising around right they may not need to raise around they might not raise around for two years but there could be investors in from seven or eight years ago or early employees who are looking for some interim term liquidity so i think the idea for us really is let's try and be dynamic let's try to invest in the companies we

want to invest in when we want to invest in them and ideally let's even see how do we want to invest do we want to have common shares because we think the public market is an inevitability do we want to have some more preference on top because we think that the company is going through a transition and we need to protect our investors with some downside protection um you know i think that the the opportunity we don't do this currently but you know to lend to these businesses that market's growing there are a lot of businesses as you well know we've talked about this raising equity they might want to finance themselves in a more effective way with debt or with some sort of hybrid structure so we're trying to be disciplined in looking for those

types of setups that really appeal to us and play to our strengths but we're trying to be open-minded and not feel like we have to fund these businesses or access these businesses in the exact same ways at the exact same times that has become so common in the industry. When you see these, are there certain types of businesses, whether stage or maybe a sector that really lends itself more so? Obviously, if there's a founder building a fintech company who comes off Wall Street, they just may be more receptive and understanding. And I think a lot of times, whenever we've looked in like the industrial manufacturing sector, one of the hardest parts is if you're doing a deal where you do a lot of deals, but the counterparty, this is the first and only deal they're going to do in their life. Sometimes you literally start with like, you know, what's a board of directors, right?

And like, it's really hard to get deals done because you're just, there's an information gap there that's hard to overcome. So I think like one, there's probably like some, hey, you deal with people who are founders who have a similar background and they understand structure and they understand some of this stuff. but are there sectors or other trends and kind of similarities that you see where you guys are trying to pick up or maybe look for deals? Yeah. Yeah. I think you're right. That can be, you know, that can be an impediment. And I think that's one of the areas where, you know, where I think if you bring too much structure or too much complexity to the

deal, you know, the, the company, the employees that are on the other side of it, you know, or they may not be financial experts, but they're very talented in their own sphere. And they, like we know enough to know when you're on the wrong side of the table with somebody and you don't fully understand um the situation as well as they do you can find yourself you know in a difficult situation right so i think that the sweet spot to your point is is really also having a certain eq or a certain ability to translate to say look what are we both trying to achieve here

right we both want this company to be worth a lot more tomorrow than it is today right you may have an interim liquidity need right there are a variety of different ways to solve that right we have to be able to explain that in a way which is relatively straightforward to ourselves and to them. We don't want to over-optimize for these things. But I think honestly, coming to the table with an idea that there's a win-win solution to create here, a positive sum solution, that's something that venture-backed businesses fundamentally understand because it is a really positive sum mindset versus the kind of typical Wall Street, perhaps credit mentality where, you know, the pie is a certain size, it's a bilateral transaction, there definitionally is

going to be a winner and a loser on this transaction. I don't I think one of the things which is so nice about being in this space, this sort of venture California mentality is that the idea is for the pie to expand, right? And people have seen that pie expand many, many, many times, right? Whether to your point, whether they've gone through it themselves or not, You know, we live in L.A. is kind of liken it to the idea similar to Hollywood here. Right. You know, many parts of the world, if if your waiter or your waitress said they want to be a movie star, you know, it can be greeted with a certain level of skepticism. Right. In L.A., it doesn't mean the odds are necessarily high, but it's happened enough times. Right. That you can't dismiss it outright. Similarly, startups in garages have happened enough time for people that have lived in that ecosystem, let alone work in the ecosystem.

that really being a pessimist is a sort of an irrational point of view, right? Being a skeptic, what do they say, you know, like bulls get rich and, you know, bears get published or something like that, right? You know, it can be intellectually satisfying to be skeptical of all things, but you really have to have a pretty strong reality distortion field to live in California and not believe that a team of hardworking, smart people can create something much bigger tomorrow than exists today. And so I think we try to just come at it with the perspective of, you know, the solution we're aiming at here is a relatively simple one where you get what you need now and our investors get what they need tomorrow.

Right. And for us, tomorrow is three to five years away as opposed to 10 to 15 years away. But like I said, there are opportunities to do that. And to your point, within sectors, I think this is where some of the interesting opportunity is. I think not to say that any one area is more interesting than the other, but to say the more eyeballs that are on a given sector, be that AI or SaaS businesses over the last few years, definitionally, the opportunity set there is going to be more competitive, less unique, right? You're going to have less opportunity to differentiate in terms of returns with your competitive set. If you're looking at manufacturing or businesses which are helping reindustrialization, you'd be thinking about Hadrian or a business like that. there are lots of other businesses where this energy is not focused. And, you know, by definition, I think it makes a lot more sense to be spending more of your time there than in the former.

Yeah. One of the things that you and I have not talked about that I know that you guys did, it'll be interesting maybe to kind of break down is when people hear crossover investor, they historically have thought about public market hedge funds who are crossing over to invest in the private market. And the story has been, we as public market investors can gain information, right? By investing in the private market that can help our public book and vice versa, as we may understand certain things about valuation or businesses and trends for the public market that then can help inform private market investing. You all though have done at least one deal that I know of where as a private market investor, you've crossed over to invest in the

public market and still did it via like a private deal. So maybe talk a little bit as to like almost the reverse of the crossover investing that people are used to hearing about. Yeah. Yeah. Yeah. So, you know, this was a recent investment. It was a 2023 investment out of our latest fund. To be honest, when we raised the fund, it wasn't something that we had specifically contemplated, you know. But what we always contemplate is that the market's dynamic. Things are shifting very quickly now. And when things shift, opportunities present themselves that may not have existed yesterday and so you have to have you know sort of an open mind um and uh and your antenna up what we saw you know and this opportunity came from that is

um we were involved in a few businesses on the private side that had spat you know in in the sort of peak of the market um most specs after a certain amount of time performed relatively poorly right some of them have done gone on to do well businesses like sofa etc um that we were invested in but a lot of the spac market certainly at that trough in the kind of 2021 sell-off many of them were down trading at around a dollar a share and when spacs issue they tend to trade ten dollars some of them have traded up as high as twenty or thirty dollars many of them had come all the way back down to one or two dollars a share and we were discussing on the team here you know we like dislocated opportunities um many of the private companies we invest in are already as large or

larger than their public market counterparts right so we don't really we don't see a huge distinction between a public company and a private company both of them are equity both of them are companies from our perspective um and um we began to develop a thesis that you know many of these specs um were probably not going to make it right many of the ones that were at a dollar a share um may very well end up being worth zero um but the ones that weren't going to zero um were also all being priced at essentially the exact same level as the ones that were worth zero so i think once again if you looked at an index perhaps you could argue that the index was fairly valued but within that there was a lot of bifurcation a lot of those companies should be worth zero and a small number

of those companies should probably be worth five to ten dollars right so we thought there was five to 10x upside on a variety of these businesses that were largely being painted with the same brush right and when you're a small cap company or a post-spat company the market cap is not that high the research coverage isn't that high the market doesn't really know and understand you so i think it takes a lot of hubris to look at a very well-covered public company large public company with millions of eyeballs on it many billions of dollars of capital finding efficiency in the price. Finding a true inefficiency on that kind of a stock is very difficult. You may be right or wrong about it being worth more or less tomorrow. But there's a lot of

efficiency. The markets are very smart and capital is very fast and very smart. It was intriguing to us that a lot of these post-SPAC names were trading single-digit millions of dollars in volume, maybe a couple million dollars a day. Large hedge funds were not in it correcting any price discrepancies wall street wasn't covering the names because there weren't enough people that wanted to you know to read the research and look into it and so by definition we thought that there would be dislocations there in the case of the company you were talking about you ended up leading a private investment round into that business they needed a bit more capital much like a private company did and so instead of just buying common stock we we did a what's called a

pipe but different than a SPAC pipe you know just a private investment into a public equity We led that round and it worked out very well for us, you know, over the next kind of, you know, 12 to 18 months, that company re-rated relatively aggressively. But those are the kinds of anomalies that we do find intriguing and we want to, you know, we want to have a loose enough grip, you know, I would say to make sure that when another dislocation comes up, you know, it could be Zerp, it could be SPACs, you know, the next one is around the corner, TBD, what that will be. But we want to stay open minded. And like I said, you know, we're trying to find great investments alongside great companies and great investments often come from some sort of dislocation in the market. Right. So we want to be reactive to those when we see them. When you're evaluating these types of things, are there aspects of the public markets that actually make it more attractive? Like, you know, liquidity being kind of maybe like the most obvious thing. But, you know, is there just like a blending over time and anybody who gets a decent size in terms of AUM in a single fund and has the ability to make these valuations, like they tend to gravitate towards public markets.

I think about in the early stages, a lot of investors have started to gravitate towards crypto because they're getting liquidity faster. And, you know, one of the maybe lessons learned over the last decade or so investing in these private companies is like, man, these things stay private way longer than a lot of us thought they were going to. right and if you look at um you know i went back and i looked at uh i think it was since 2013 maybe uh qqq it has averaged somewhere in the ballpark of like 13 percent yeah yeah right not bad yeah the average venture fund they claim is about 17 percent right so if you take those numbers face value um 400 basis points of outperformance but you're a liquid for you know a decade plus depending on who you are maybe it's worth it maybe it's not right it's like how do you think about liquidity and allocating capital yeah you know i think this liquidity question um is a really

interesting one i'm actually curious to get your perspective on it as well because i i laughingly or i sort of jokingly said a few years ago to some members of the team um i suspect that it would actually probably be worth it for people to invest in a in a closed-end crypto fund let's say right you know say before the last sell-off where you locked up your money for 10 years right and you were just paying somebody even though you could buy it liquidly right with no transaction costs maybe it was worth it just to outsmart your own personal psychology to make sure that you don't sell into the next bear market right this this total idea is a great one if if you can do it and i sort of feel the same way about venture um and it's a slightly tongue-in-cheek

analysis, but I actually wonder, you know, I think in venture, some of these great returns have come from these very unusual power law outcomes, right? You invested in a business at five pre, it goes on to be worth 10 or 20 or 30 or $40 billion, right? In the public markets, it's very difficult to hold an investment for that long, right? Because in hindsight, the charts look up and to the right, but as you know, from crypto, you know, there's 20 to 30% drawdowns like we're seeing right now, frequently along the way up, right? And so I think liquidity is valuable if you have a mental psychology that allows you to trade around a core position, i.e. buying when there's fear and selling when there's optimism. But if your psychology is

programmed like the majority of investors and certainly the majority of non-professionalized investors, then you're going to be twisting yourselves in the knots because you're going to be over leveraged, selling into the lows, and then scrambling back up to buy higher with FOMO. So I guess the question is, on the face of it, I would say, to your point, assuming those venture returns are accurate, you know, and they could very well be inflated, and they're very much on paper. I think it's hard to argue that 400 basis points for your average investor, for a total lack liquidity that seems like a small premium seems like you would want much higher return than that i guess the question is how many people in accounts outside of their retirement account

right can hold the nasdaq and create that 13 compounded return throughout all those you know kind of peaks and valleys right and so um one of one of the questions i have you know as someone and as a firm who spends a lot of time in the secondary market and feels like we're relatively in touch with what's happening there, is that the market wants liquidity and demands liquidity and liquidity is coming. Secondary market and venture is coming, right? It's getting larger and larger. It will happen. It's not clear to me. I would actually probably take the other side of the bet. I suspect venture returns and early stage venture returns in particular will probably decrease dramatically as liquidity comes online, because as an early stage manager,

you know, it's your one winner that's paying for your nine losers. And that winner really needs to outperform and power law. And, you know, whether it's in crypto, or whether it's in public market investing, it takes it takes a special kind of investor to be able to hold a position that long. It's one of you know, it's one of Berkshire's great sources of edge, right is not just their stock selection but that they're playing at a different duration than the rest of the market right i think you can play much shorter ie citadel right or millennium right or you can play much larger i.e berkshire playing in the middle is tricky right and it can be painful so i think that um i think that the liquidity is coming and we're certainly investing in and around that theme

but i think it's going to be much harder for people to hold their winners i think they're going to going to realize that um the illiquidity was perhaps a feature of private market investing as opposed to a bug yeah what's um what's interesting about this is like uh when you see the bitcoin holder base and you know 70 hasn't sold as it got up and down all the stuff and everything um i can't think of another asset that has anywhere near the volatility where people are holding and if you really think about one of the major drivers is just the story right it's like like hey it's going to be worth way more in the future and so many people believe it you know all this stuff um that's really hard to do in private tech companies because competition is kind of like

the default state and there's always somebody who shows up to the you know to dance you know i go they may be better like yeah right yeah yeah the disruption risk is really high there i mean i even feel the same way you know with bitcoin when you when you show those types of stats to me that's one of the most bullish narratives about bitcoin in particular right is it i suspect there is no other asset class like that perhaps except real estate you know people aren't well if real estate was incredibly liquid people probably losing a lot more money on that as opposed to it being you know probably the single greatest wealth generator you know i would i would imagine over long periods of time in the country um and i feel that way about bitcoin as well right

i think i think if you've been in it long enough and you've been sensitized to it what you've all done what we've all done is you found a position size which makes sense for you right and that position size, at least in my world, is usually one where when it's really ripping to the upside, you're a little bit sad that you don't have more, right? And when it's selling off to the downside, you're slightly concerned, but not overly so and not enough to, you know, to parachute out of it, right? And so, you know, I watched the Bitcoin price very infrequently, right? If it drops 20% today, you know, there's a 0% chance I would sell me and I'm probably

in, you know, a large company. I don't know how many other companies or asset classes or markets in the world where people are operating essentially without a stop loss. Right. I think there's probably a very large portion that would ride Bitcoin, you know, up to 500K or down to a dollar and be buying at that dollar. Right. Which is why it would never get there. Right. Yeah. Because, you know, I do. I do think that's one of the interesting things is like it'll never drop below some number. what you know whether it's a dollar 10 000 whatever because it's just like there are too many people trying to buy it right yeah and also like you just seen it drop so many times like 80 you know what's the difference between 80 and 90 it's kind of like hey you know it went down a lot

um one other aspect of this too that uh i think about when we talk about kind of public and private and destructured deals etc is like when you have liquidity access is default like if i want to go buy bitcoin today i don't need to call up a founder i don't need to do it like all the information is available to me to evaluate it and then i can go on to an exchange or hit you know an otc desk or something i can just buy if i want to invest in whatever you and i deem is you know a great private company it's not that easy no so how do you think about kind of like access and public and private opportunities and then also like access versus like maybe analytical you know decision making like how many deals are just like hey i have access other people don't that

that's you know alpha versus this is a good company to actually invest in yeah yeah it's a it's a great question it's a key question and i think it has um two sides to the argument sort of like the liquidity one on the one hand um it's certainly a strong benefit to insiders to to those of us who are in touch with those founders who can access that type of capital obviously there's a lot of discussion around whether that's unfair accredited versus non-accredited investors etc I don't know too many other markets that I feel like operate in a way where access is so crucial. You know, perhaps something like the fine art market or something like that. Right. Where even if you have the money, you know, you may just not know where to source that artist.

You may not be invited into that sort of members club, et cetera. So in venture, certainly access is incredibly important. I think, you know, from our perspective, from my perspective, you know, I like to sort of question these assumptions. and these unspoken premises, I think that the premise that a lot of people operate under is that if you had access to every private company in the world, right? That investing would be easy, right?

That the impediment to returns is literally just access, right? And I think what public market investing shows you, which is a much more competitive arena, even than private market investing, which is also very competitive, right? But you've got the Stan Druckenmiller's of the world, et cetera, competing against you to some extent

right? In the public markets, because every time a large investor does something, it moves the price, right? So there's so much intelligence and so much information in every price that it's not an obvious decision whether you're supposed to go buy NVIDIA or sell NVIDIA or buy Facebook or sell Facebook, right? These companies are often priced in a way, right? I mean, this is how supply and demand works, that it's not obvious. I think from an armchair perspective, people could look on the outside and say, well, private markets aren't like that, right? I would just buy Stripe and Anduril and SpaceX and OpenAI or whatever the names are. But private markets are much too efficient even for that to be true, right? So certainly you'd rather have the access than not

have it, obviously, right? But even with the access, I think what's been undervalued, and maybe this is the point, less than access being overvalued, is that I think analysis on the private market side is probably undervalued. Even when you talk to investors, you know, a lot of the discussion is around how you source, right? A lot of it is around how you get access to these businesses, which is important. But, you know, the hedge fund industry is many multiples larger, right, than the venture capital industry. And everyone has access to that. And it's incredibly difficult to generate even a 10% return on the hedge fund side, right? And so I think that we try and balance that scale a little bit we spend a lot of time trying to have access also

looking for unique opportunities where things are not as fully valued um but um but certainly you know end of the day investing is a is a picking business right it's an analysis business and the price you pay i mean it sounds very obvious but within venture it's not exactly um the mindset many people have you know the price you pay is incredibly important and directly related to the outcome, right? I mean, it's the simple, most obvious, mundane comment, but there is oftentimes a feeling in venture where people feel like any price I pay for this business because the business is great. And that could be a great business, but it may not be a great investment. Yeah. I think that makes a lot of sense. And it also is just a reminder of like investing is hard, right? It's

supposed to be hard. And when everything just kind of goes up, whether it's venture capital, public markets crypto you know real estate anything uh when everything's just going up and you just kind of throw money in and you know it doubles uh it doesn't feel so hard and like maybe actually a big lesson over the last four years is like be very weary when things seem easy absolutely it's a warning sign right it's a warning sign you start to feel like things are easy um it's it's certainly a warning sign yeah where um where can we send people to find out more about bracket or or follow you if uh if they'd want to get more information yeah um you know we don't we don't have a big social media presence um we have a website you know bracketcapital.com um you know

we're on twitter um jbl at bracketcapital.com um you know mainly they're um you know researching information as opposed to commenting um and uh and producing content something you know i and we should probably do a little bit more of in the future um but um you know occasionally on uh you know on on some of these podcasts on cnbc and stuff like that but generally keeping a pretty low profile. I know you are. I'm going to convince you not to do that anymore. Share all your insight with everybody. All right. Well, I appreciate it very much. I learned today, which is always the goal. And I think other people did too. We'll definitely do it again in the future. Yeah. Thanks, Paul. Appreciate you.