The Pomp Podcast - #265: Ali Hamed on Seeking Value in Today’s Private Credit Market

Episode Date: April 9, 2020

Ali Hamed is the co-founder of Coventure, an asset management firm focused on deploying capital across venture capital and unique credit strategies. In this conversation, Anthony and Ali discuss the private credit market, how borrowers and lenders are treating each other, where the areas of opportunities will be, how founders can respond to the pandemic, and how source data in advertising and e-commerce has given Ali a better sense of the trends in those industries.  =============================== BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. Visit try.blockfi.com/get-50/?ref=pomp50 to get started with BlockFi today and earn up to $50 in BTC when you create an interest account and make a deposit of $250 or more. =============================== Blockset by BRD is your hosted blockchain infrastructure. Blockset enables enterprises and developers around the globe to deliver high-quality blockchain-based applications in a fraction of the time, at a fraction of the cost. Using the services provided by Blockset, businesses can build professional custody solutions, accurate and near real-time portfolio management solutions, auditing platforms, commercial block explorers, and much more: blockset.com ===============================

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Ali Hamed is the co-founder of CoVenture, an asset management firm focused on deploying capital across venture capital and unique credit strategies. In this conversation, we discuss the private credit market, how borrowers and lenders are treating each other, where the areas of opportunities will be, how founders can respond to the pandemic, and how source data in advertising and e-commerce has given Ali a better sense of the trends in those industries. I really enjoyed this conversation and Ali didn't disappoint. Before we get into the episode though,

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are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

All right, guys. Bang, bang. I have the one and only Mr. Ali here. Thanks for doing this. Thanks for having me, Anthony. I feel like we are so close in New York City, but yet so far away with you in Brooklyn and me in Manhattan and just the water separating us with the quarantine. I know.

It's crazy. Do you think it's better to be in Brooklyn or Manhattan right now? Well, according to the numbers, they're both bad. Yeah. okay so what's less bad i think i think brooklyn might be winning man like there's a little bit more space yeah i don't know we'll see all right guys i'll leave one of my best friends this is gonna be a lot of fun um you are uh the founder of uh co-venture maybe give us a quick update what is co-venture what are you guys doing right now yeah so at co-venture um we do both venture

capital and we do asset-based credit um in when i say asset-based credit what we do is we find sort of novel asset classes or asset classes that have never been financed before in an institutional way. And then we lend against those assets. So some of the types of things that we finance are perishable produce, YouTube libraries, you know, straight mean revenues, e-commerce, ad spend, all kinds of sort of off the wall stuff. And in venture capital, we do early stage investing, primarily in FinTech, primarily in sort of newer economies, that might be the YouTube economy or the Spotify economy or the Thumbtack economy, et cetera, or anything where there's sort of some new invention of an asset class. So that's what we do as a firm. We've been doing it

for a handful of years. And yeah, that's a summary of us. Awesome. So I want to start first with the credit markets, because I think a lot of people, one, don't understand it, and two, don't realize the impact that COVID will have on it. They're usually focused on equities, either public or private equities. Maybe just give us a quick overview of what is the credit market and what's the difference between the public credit market and the private credit market? Sure. So credit markets are pretty broad, right? There's broadly debt and equity. Equity, you sell a percentage of your company and the person gets a future profit interest in perpetuity. And credit, you borrow money and you owe some fixed rate of return in the future. And credit markets right now,

public credit markets are being hit more than private markets for now and that'll change and the reason is people can respond to speculation so in private credit you really only have issues when someone is supposed to make an interest payment and they don't or they're supposed to have some sort of asset coverage or there's some sort of covenant in an agreement that gets breached an example of a covenant might be you know in direct lending right so you always hear like private equity companies are levering up their businesses what it might mean is a leverage buyout occurred. A private equity firm put up $100 million of equity. They borrowed $200 million of equity to complete the transaction of $300 million in total. And one of the covenants of

the lender is to say, we're expecting this private equity business to pay our $200 million back plus interest with some percentage of the profits. And so it'll be some sort of debt to income ratio that they're purchasing or levering up or lending against. And then there's covenants around what kind of EBITDA levels that company needs to maintain. And if they don't maintain those EBITDA levels, then the lender can say, okay, now we're gonna go take over the business and default on the loan.

So that's an example of a covenant or another example might be, hey, you have to pay us your interest every quarter, every month. That's private markets. In public markets, what people are speculating. So for example, let's imagine there's something like a mortgage-backed security.

So there might be a public security that what it does is it owns a building and there's some equity layer, right? Which is like the actual owners of that building. And they may say, I own a building, the building's worth $100 million, and I'm going to put up $20 million of equity and the debt providers are going to put up $80 million of equity. Now, one of the covenants in that agreement might be that the $80 million always needs to be secured by $20 million of equity subordination. Well, you know, if the building is sort of sitting there and nothing's really changed in private markets, there's going to be all this sort of hemming and hawing of people saying, well, the building's still worth

the same. And once this is all over, it's all going to be okay. In public markets, you can see a change in a daily basis. And so the public markets do is they speculate on whether or not the economy will come back. And then if the price of that equity goes down, then the lender says, aha, you know, I need to be secured by 20% of equity, I'm no longer secured by that. And you need to either give me the building, which would be pretty shitty, or you need to raise more equity so that I have more equity cushion. And the problem is when your share price is going down, or when your security price is going down, and you have to raise more equity, that's like the worst possible time to raise it. And so what you're seeing is credit markets in public markets are

reacting more quickly, because the reaction is either a lack of liquidity, because maybe some of these mortgage backed securities can't pay their interest. Some of it is speculation. In some cases, you're seeing, you know, private or corporate companies say, you know, I, or borrowers are saying, I don't believe that, you know, Carnival Cruises is going to be able to make it's interest payments. And so you're seeing the bonds trade off. Because let's imagine I had, let's imagine I was Carnival. And I don't know what their bonds are trading at right now. But I said, Hey, I'm going to issue $100 of debt, and I'm going to pay 5% interest on that debt. Yesterday, or two months ago, getting paid 5% might have been okay. But Carnival is now riskier.

And so so in my demand is I want to get paid 10%. Well, the way that that would happen is the bond price will go down. So Anthony, if you own a bond that was worth a hundred dollars, that was paying 5%, I would buy it from you for something under a hundred dollars. Because if I buy it from you for say, you know, $99, then I'm getting 5% plus, you know, that spread of the discount that I bought it at. So you're starting to see the reaction in public markets happen a lot more in private markets. It hasn't, there hasn't been as many defaults yet because it just hasn't been enough time. Right. So there's like all this sort of new cycle around, well, people aren't making their rent payments this month i think probably in private markets people are gonna they're not

gonna be happy about it but they'll say okay fine if you miss an interest payment we get it like a virus is going around destroying the world like that's not so good if it happens another month i think it'll maybe be okay if it happens the third month that's when you'll start to see stuff break and the last part is in private markets the borrower and lender relationship are maybe a little bit more um sort of close-knit where you know like if you have if you've securitized your assets who do you argue with all your shareholders of the securitization i don't know but if you have a private lender and you can call them and say hey look you know person i know i owe you money you can either foreclose on my assets and then maybe get some percentage of your money back

or you can let me work this out with you and i'll pay you later maybe you know i think those are the conversation that are starting to happen. Yeah. So what's interesting to me is, first of all, the relationship you're talking about here in the public markets, there's at times thousands of people who hold this stuff. And this is going to be for companies or even the MTA was saying that, you know, ridership of the subway is down 90% and they're worried that they don't have the revenue to pay their bonds and things like that. So that's a very different type of relationship and also kind of lender than if you look in the private markets. In the private markets, Is it safe to say that in almost all of these relationships, you're talking about one single borrower being a company or corporation, and then there's just one lender per relationship?

And maybe a company has multiple lenders, but really it's kind of a one-to-one. You're not seeing any sort of like, hey, I took money from an SPV, and then I've got to deal with all the shareholders on the other side of the SPV? It depends, and so it's a whole spectrum. I mean, in the simplest sense, there might be a borrower and there's a lender, and there's only one lender in the whole deal, and the borrower has a direct relationship. And if the borrower has a really good relationship with that lender, they may say, look, we've been working together for 10 to 15 years.

You don't want to blow up. I don't want to blow up. If you force me to do all the things that are in the covenant packages of this loan, I'm going to default. And if you're a fund, you don't want your borrowers to default. You kind of look dumb.

Or it might be a lender who that's the whole reason they do this. They're hoping you default because if you default, they get to own equity in your business. and so knowing who your lender is and what your lender's sort of goal was is pretty important you know and then and then next is also understand the situation your lender is in so if your lender is exposed to a ton of stuff that's like sort of hitting the fan that's not

so good because they might be acting uh reaction in a reactionary way or if stuff's hitting the fan you may be the least of their problems and they just don't want one more to fall it's really hard to kind of figure that out the other thing is is your lender levered right so if your lender gave you money and they gave you 100 million dollars but only 20 million of it was theirs and they have a bank who gave them 80 million you know in many ways leverage is not good because it magnifies losses another reason leverage isn't good is you're not the boss of yourself like you know usually when we do a deal we're senior lenders part of the reason we do that is because you know we don't want to take more risks than we need to take. And the other part is, like, let's imagine

I have a portfolio company that has an issue. I almost always know more about what's going on with that company than some bank who might be lending to me where they got like my investment committee memo and my data room and all this stuff. But they don't know the actual situation on the ground. They're not on the phone with the company every day. And not having leverage gives you like sort of the ability to sort of do what you need to do to make the right decision, rather than doing what you need to do within the confines of rules that were set pre-COVID or pre-circumstance you could have never expected before. There's another situation where you might have multiple lenders, and those lenders are

all acting differently. And I'm trying to figure out how to navigate what makes sense for one lender versus another. You know, one of the things that's often in terms where if you have multiple lenders is all lenders need to be treated per posu or get most favored nation. What you don't want to be is a lender to a company where the other lender is getting treated more fairly. So that might be a situation where you have one lender who's being a total jerk, your other two lenders or four lenders or even five, 10, whatever, are being great. And you have to figure out how to navigate all those relationships that one lender doesn't blow up everything else. But then on the other hand, you might be totally thrilled that you've diversified your capital base, which is something that you often hear. and so and the last part is understanding like if you're private equity owned you know Blackstone

is sort of a big deal if they go tell their lender hey I believe that if you give me a little bit of flexibility here I'm going to work this out one they're a really important client to the lender and the lender doesn't want to screw that up two they have a lot of credibility because they've been through this before if you're like a rinky dink private equity firm that you know doesn't have that same sort of relationship with large banks you can't have those same conversations so i it's really really hard to say this is how a lender-borrower relationship works because there's so many other factors involved what what can people do right now to ruin their relationship right or reputation so like we hear all the time hey you could build your reputation over

years and years and years um and you can be the greatest person in the world in the bull markets when the bear market hits, it's really easy to kind of blow up that reputation that you've built by just doing kind of shitty things. From your perspective, like what are the things that are most likely for somebody to do that then leads to kind of the hurt on the reputation side? Is it just not following through with what they're supposed to do or something more complex? So, you know, so usually when something goes wrong, it's the borrower's fault, right? They didn't do something they were supposed to do. In this case, like a virus occurred, everyone got sick. So everyone had to stay home. And so people stopped spending money. And like, it's sort of

not your fault anymore. And one reaction might be to go to all your lenders and say, everything's fine. Everything's not fine. Like, I've left my apartment four times this week. Like, fuck you, if you think everything's fine. And, you know, one way to ruin your reputation or confidence from your lender is to be ignorant. Or, you know, one temptation that a lot of founders and entrepreneurs have is to show confidence, because if you don't show confidence in the market, people assume things are worse than they are. I don't think this is the time to do that. I think this is the time to say, here's our plan. And here's our base case. Here's how we think things are going to affect us. In a good scenario, it doesn't affect us or affects us less than we thought.

In a base case, it affects us. And here's what would happen. In a bear case, this is how bad I can get. I've found in the conversations I'm having with our portfolio, the more worried the founder is, the less worried I am. The less worried the founder is, the more worried I am because it makes me think that someone has to worry and it's not them. The second thing is hiding information. One temptation is to say, oh my God, I'm lending money to, because often we're working with companies that are lending money to other companies and they may have a loan that's not performing. One thing they may want to do is refinance that loan and say, well, you know, this is a borrower that we've worked with for a long time. You know, they're struggling and they

already were struggling. And this is a moment that makes it even harder. Let's, let's, let's lend to them again. Let's put a little bit more money out because I'll help them get through this time. You know, in rare cases, that's the right thing to do. But I would say, look, like you, normally, if you're going to get yelled at for making a bad loan, this is the time that you're not going to get yelled at. Just like cut it off. And even if it was COVID related, people understand if it wasn't COVID related, people are going to still think it was COVID related and give you the benefit of the doubt. So it's a really good moment to kind of cut things out from the book or make, if you saw something trending in a bad way, make this the quarter that you write it off.

But the way that you can really screw this up is lying, pretending like you're more optimistic than you are committing fraud, or doing things that are going to put your lender or your investor in a bad position with their investors, because those are things that are sort of unforgivable. Yeah, so it sounds like really a lot of the maybe the don't do's are just do what you say you're going to do. Don't be an idiot and tell the truth, right? Like those are like the big things. And if you do that, everyone kind of understands, hey, look, this is a really bad situation. And we're all in this in various ways um and get ahead of it right i mean it's pretty think about this it's a lot easier to have a conversation and say there's a there's a chance that x y and z thing

is about to happen we're working really hard for it not to happen if you were us how would you be handling it and then you bring your investors into the problem and it becomes their problem too and then they're brainstorming with you if it goes wrong later whether it's right or wrong golf thought that they were part of the solution. And now it's everyone's fault, not the investee's fault. If you hide it and you want to just tell people it's going to be fine and you hope it is. And then later you're like, Hey, this thing I didn't mention, um, it went wrong. You have, you have one or two options. Either. I didn't tell you about it, even though I knew it might be an issue or two. I didn't think it was an issue and I'm an idiot. And now it's an issue,

right so it's just a lose-lose and so get it your your investors are seeing so much stuff right now that like they're a lot more tolerant of information you know I know for us with our LPs you know and and we we are excited and think this is a really good time to be investing actually but we said hey this is everything that could go wrong and in the event that it goes wrong in the next few months now you know you end up having this sort of tricky issue where a lot of your lps are going to want to talk which is fine you want to be over communicative the hard part about that is they may have an idea um and you may disagree with that idea and not do it anyway that's sort of hard but a majority of them um and that's not because one person's wrong or one

person's right you know it's just if we all knew what to do we would all do it a majority of them we're going to have the conversation and say, wow, you're thinking about this the right way. And no matter what happens, you've kind of been communicating. So I think, you know, just a lot of communication and a lot of realism and start crappy and then like get better from there. When an investor calls me, I'm telling them all the things that could go wrong, not all the things that are going right. Makes sense. You mentioned the covenants and like the idea that there's conversations that happen, especially in the private markets right now in credit, where folks basically say hey look if you kind of call all of these covenants or enforce them uh i'm going to

default and cause problems uh for myself and for you etc where's the balance there and what i mean by that is like why have the covenants if when things go wrong people then don't follow them or they're kind of like enforced uh you know on an ad hoc basis almost to some degree i mean there's a spot like all my answers right now there's a spectrum so in some cases um you so if i write a good loan document a covenant will be broken in the best and the worst of times because if a covenant was never broken it was probably too loose of a document and what inevitably happens in normal times is a portfolio company will you know will be operating and something crappy will happen or something they never even expected will happen and you say hey you breached a covenant but

i'm either i'm okay with it because it's not that material or i get what happened and i want to keep being a good lender. Two, it's material. And I'm not going to foreclose on you. But what I do want is to increase the interest rate, right? So there might be a payment penalty, there might be, hey, you know, your assets are underperforming. So I need you to raise more equity to cure my, you know, my protection. You might say something like, hey, I'm going to like do something to be lenient on you now. But in exchange, I want warrants in your business, because the reason I'm helping you is really to help the equity of the business, not really to help the debt. and then the the other is a lender who did it because the whole time they were hoping you'd

break a covenant so they could take your business from you you know one of the and so that's that's always the case and and this is no different right so the reason the covenants are in place are one to bring people to the table the most important covenants when we're right when we're investing in a deal is the leading indicator covenants so we'll often look at cohort analysis and try to do things where if something's going wrong now it means that something really will go wrong in six months and so what we want to do is have those covenants so that when it happens our reaction is not we're defaulting it's that um you are in default but here's a path towards a cure that way we don't get into this sort of emergency situation later um

you know and then and then in other cases one of the perverse incentives is actually the better the asset, the more comfortable you're foreclosing. So, you know, in an ideal world, what you might say is if you're sort of the rational investor, you might look at all these investment opportunities. One investment opportunity is you are going to buy into the equity of a good asset. You know, let's imagine it's a really nice hotel and you say, well, it doesn't have a lot of leverage on it, right? It's a hundred million dollar hotel. The debt is only 50 million of the 100 million, so it's not a lot of leverage. We know that when this is all going to come back, it's probably going to stay in business and the equity is down because the

market said it's down, but I want to go buy in. In a weird way, it's actually, that's a riskier asset in some cases because the lender may be more comfortable foreclosing on it because they're pretty sure they're going to get all their money back or most of their money back. In another scenario, you might be looking at a deal where it's not a great hotel and it's really levered, maybe 90% leverage, and the equity is down a lot, that lender is actually more unlikely to foreclose if they don't have to. Because if they have 90 of the $100 out, and the true value because of COVID went down, let's call it 6%, 8%. If they foreclose, the transfer of the asset, the foreclosure, the litigation, the damaged goods are going to be less valuable than the 90 bucks back,

and they may be afraid of not getting par. And so they're more likely to work with you because it's no longer the equity's problem, it's the equity and the debt's problem. So there's all these sort of interpersonal dynamics that might make it a little bit less obvious than you think. Yeah. Do you think that there will be changes

in covenants moving forward after this? Will we see pandemic related covenants or do you feel like most of the covenants that are in there today tend to kind of cover a lot of the issues that are gonna come up during this? This will get written in legal docs forever now. The question is, how do you define pandemic? I don't know. If the President of the United States declares it a pandemic, it seems like a pretty crappy way to define it. And vague language is what litigation is made of. so there'll be there'll be some um version of it um i can imagine there's going to be certain

industries where getting pandemic insurance will be an obligation you know for the airline industry for example i can imagine on a go forward there's going to like you know how banks have fdic insurance which basically says well if you're an fdic insured bank you take deposits i think there's going to be some sort of like things similar to that to the airlines where they say hey you know you have to take a percentage of your profit and like it's going to be taxed into this um you know government trust and then in the event of a pandemic um you know cash will be doled out inevitably it won't be enough cash but at least people won't have the same reaction like oh my god american airlines did all these like dividends and share buybacks

whatever they did and how crappy of them to now need government support if the shareholders did okay i bet you're gonna see stuff like that i bet you there's gonna be pandemic insurance that's broker to the government um and then i think one of the interesting things that's happening insurance right now that people are starting to see a lot of press on is like if you're an auto insurer life's pretty good most of your assets were you know because because an insurance company they make money because you pay them premiums and then they have a bunch of cash and they invest that cash and insurance companies are regulated they're not allowed to do risky things with their cash because you know if your house burns down you want to make sure the insurance company has

the cash to pay you out so their assets are primarily in pretty not risky stuff at the same time like there's not a lot of car crashes so auto insurance is doing great the government I can imagine telling these insurance companies that in times of duress or in times of pandemic we're going to increase your tax rate to go into this sort of pandemic insurance pool and then the government will subsidize that pool. And, you know, hospitality companies and travel companies will also be required to take out that insurance, just like there's key man risk. Yeah, super interesting. There's a lot of people who have said that they are getting more bullish on going and buying assets now. So whether, you know, Chamath came on the podcast and talked about going look

for some good assets. Howard Marks recently wrote a memo talking about that they're buying things where they find value and kind of have switched to a more aggressive stance. What are the types of assets that you think people should be looking for? And I know that there's some debate as to like, do you go for the good assets or the bad assets and kind of how you think about that? Yeah. I mean, look, I, so I don't, I think a lot of public securities are being traded on speculation, liquidity mismatches, uncertainty around what interest payments will be have to paid or not and not really unlike going and like driving up to a building being like i don't know would anyone go in this building maybe it's on a nice road and the other buildings around it seem

pretty nice there's no graffiti so you know i think in normal times you look at an asset you decide how valuable the asset is and you lend against it and now there's a lot of market dynamics i'm not really a guy to sort of expect i don't know enough about market dynamics to feel like i'm the person to go do that in my little world of private credit i don't think that there's a lot to do yet for one covenants are still breaking and april and may will be a lot worse than march and june will probably be bad and you know it's super cool that like you know the government's trying to tell us that everything's okay but it's not you know no one's going outside and the world's collapsing and this is this is really fucking bad um you know people aren't going to

have jobs so i'll tell you one thing right so like you're not going outside so you're not spending money and then we're all going to get a stimulus check consumer credit isn't going to be that bad in march because also people got laid off at the end of march consumer credit won't even be that bad at the end of april may is going to be fucked may is going to be so bad and so a lot of people are going to look at this and think that they were weighing in or that the market's been corrected and it hasn't you know and then the other thing is a lot of entrepreneurs haven't really reacted to the new reality i think there's still some sort of optimism and um it's good to have optimism but you know i don't think like the bid ask has really kind of come to reality yet

um so i'm sure maybe i'm sure in public markets there's stuff to do because there's distress and like i'm sure apollo reeds and blackstone reeds are probably good to buy because you know if goldman's letting you know a blackstone reed i'm sure blackstone's not gonna work with goldman anymore if goldman acts like a jerk you know by the way i wouldn't want to buy like the reed of like a rinky dinky sponsor where like goldman doesn't care about them so but but in my world of private credit it's not a lot to do yet i mean i think what's happening is lenders are going to their borrowers and saying hey this seems pretty bad huh and the bar is like yeah this is pretty bad what can you you know what can you do and the lent and the borrowers who have been performing

really well in good times are going to have a lot of leverage with their lenders the borrowers who weren't performing even before this are going to have less leverage and then they're working on a plan you know and what in some cases one of the things that's interesting is you know right now the world got riskier so you'd expect spreads to go up if you have a borrower who is already struggling the worst thing you can do to them is make them pay more interest payments so you have this super weird dynamic where sure you know the risk is going up so you should be asking for a higher yield but the company can't pay for it because people aren't buying their thing um you know by the way if you're an inventory lender and you've been lending to an e-commerce company

or a physical retailer against a bunch of their, I don't know, surfboards. It's probably not great to collect those assets right now. I don't know how surfboard sales are gonna do. And so there's a lot of stuff that people are trying to figure out where it's just not distressed yet. And I'd rather be too late than too early.

Yeah, let's switch to the venture side because you guys have made a bunch of venture investments as well. How are you seeing the good CEOs or good companies handle this situation? I know you and I have kind of talked about it's like this pandemic playbook where basically kind of being decisive and jumping into action early is probably better than waiting. What do you see those companies doing right now that

they kind of walk away and say they're doing the right thing? So, I mean, so venture kind of went in this cycle of waves, right? So there's one, which is the pandemic occurred and venture capitalists sort of view themselves as contrarian thinkers, even though they're not. And they were like, oh man, markets are down. It's a great time to buy we're open for business and any other venture capitalists who's scared right now what an amateur i've been through cycles this is going to be great and i'm going to be here with you and then and that was bullshit right because what happened is all of a sudden all these mostly bullshit right because all of a sudden all these vcs had a handful of companies in their

portfolio but if you have a big enough portfolio someone was hit really hard you know in some companies, you're going to see a dip in sales of 20, 30%. Some companies are going to have a hard time sort of doing, you know, making new sales and won't hit their growth targets. Some companies lost 90% of their revenue. And okay, so for two to three weeks, that's what you're focused on. And it's not that you don't believe yourself when you say it's good to buy at the bottom of the market. It's just hard to spend your time giving capital to a new company when a company on the bored of is in crisis mode. So then what you do that the next week, you know, people kept tweeting or whatever the hell they do. And then people were saying, okay, well, let's look at our fund.

How much drive product do we have left? What percent of our portfolio companies have a lot of cash? What percent of them don't have a lot of cash? Who are our most important fund drivers? And how do we make sure they're okay? And then let's figure out how much cash is available for everyone else. You know, one of the things that happens in venture capital is usually VCs focus on one stage it might be a seed stage firm a series a firm a series b firm whatever but um when you do a round and you expect some other firm to come in and do the next round it's usually on the back of hitting your plan or hitting close to your plan or growing in a world where people are going to struggle to grow like if you're an enterprise software company and you're making

sales it's probably not gonna be a lot of sales to be made right a cfo is gonna be sitting there being like, I can lay off more of my friends, or I can buy this cool thing. And if it's not a cost saving thing, you're not going to get it. So there's not gonna be a lot of growth, which means a lot of these VC funds had to take their fund and carve out a larger portion than normal for follow on and insider rounds to lead insider rounds into their portfolio companies. That just means new names will be printed less, right? There's just less room for new deals. And so I think most VC firms have done that now. Then there's the stage of going to every single one of your portfolio companies and going through like the sort of generalized plan. Okay, let's go

through every single one of your payables and figure out what you don't need to pay or what you can reduce. AWS bills, probably reduce those. Salesforce bills, probably reduce those. G Suite bills, probably reduce those. Landlord rent payments, probably reduce those. So you literally go into your state your credit card corporate credit card you go into your bank account you look at every outgoing wire every outgoing amount and say what do i not need to pay and what do i need to pay later and then you for shrink your employees which is sort of the hard part and you decide you know one if you had underperformers and companies are notorious for not being good at laying people off or firing people who aren't performing often because they're founded by new

entrepreneurs you don't like having those conversations you now have the best excuse ever um you know to do that as sad as that sounds and then you say okay so if i if i'm not going to be able to raise money for 12 to 24 months um how much capital do i need and you often need to extend your runway and that might mean even more layoffs and then you say let me go through my customer list what percent of my customers are like in travel i should assume that none of them are going to pay me um you know what percent of my customers are streaming services how do i lean into those customers. But I would be, if I was an executive on the phone with all my key customers trying to figure out how I can proactively work with them. So those are the basics. And then

after that, every company is sort of its own snowflake. Yeah. It's really interesting because I think there's the two components, right? You can grow revenue and you can cut costs, but what we actually will see here is some companies will suffer pretty drastically and some companies will actually get aggressive and steal market share right and and um there's simple things like you know travel and hospitality obviously are going to suffer for the most part um but then the streaming companies will uh will do well what i wonder is um you know and i've thought through a lot like you don't see every restaurant struggle for example right so uh things like panera is selling groceries out of their um locations because it's a way to continue to drive revenue while they have

their locations open and no one's coming in to actually dine in or you'll see like a local small business who says, hey, you know what, we can't actually have people come in, but we can really ramp up our delivery business, right? And kind of go ghost kitchens, etc. Are you seeing kind of that ingenuity, you know, from entrepreneurs? Or are people still in the mode of like, let me get a lay of the land and understand what's happening before I make any rash decisions? I think, you know, it's, it sounds cool to say, wow, this is like my moment to play offense while everyone else is playing defense i think that's right i think it's a little um look if you're an entrepreneur and you think you're smarter than a virus you're pretty fucking cocky so i think

having some humility going into this is important and you can have a hypothesis that this is better for your business um you know we have a portfolio company that um is in the sports space and one of their hypotheses is that because a lot of sports are down they're actually going to see an increase revenues and increase the demand but it's still a hypothesis and we're not taking action on it until we see the data to prove that we're right because there's so many things that I couldn't have predicted like you know okay I didn't know how I didn't know that footwear would be hit harder than apparel generally you know that seems like a or or I didn't realize how much luxury was going to get hit you know I was talking to another lender and they were saying that their lent you

know their borrowers are struggling because they can't lower their prices um and because they lower their prices it takes away the brand quality right and then that you know people kind of know that but you it gets hit harder than you expect you know you know things like beauty and staples are doing well um i didn't expect podcast streaming to be as down as it is compared to music streaming um you know and then you start thinking about things like okay well 90 of spotify's revenue is subscriptions not ad spend like there's all these things like you just didn't think about before all this occurred i think in a month and a half two months from now you'll start to see data as data starts to prove out your theses and hypotheses yeah lean into it but until then

um have the hypothesis and know what the data you would need to see is to go take action on it but trying to convince yourself you're the smartest person in the room right now especially if it's your first time going through a crisis i don't know doesn't doesn't seem like be prepared but don't go too early well and another piece of this i think is there's a big difference between what i'll call like the traditional main street small business and a technology enabled kind of venture-backed business and if you really think about the technology enabled venture-backed business they almost have this expectation early on the reason why they raise money is because they're going to operate at a loss for some period of time things like how much runway do i have

what's my burn like that's kind of built into the model and the belief is over time you'll become profitable and grow and you know get more customers etc the small businesses don't operate like that right most small businesses are kind of very thin margins they're profitable or break even in that sense and they don't have big cash you know in a bank account and so it almost feels like venture-backed businesses just in the mindset of how they grow that they operate at losses for a while, et cetera, and then have raised money to have these runways are in a little bit better position than small businesses that might only have two to three weeks of cash. And if revenue goes to zero, they just can't, they just can't do it. Right. Yeah. I mean, I think that's always

been the case. You know, I think we're noticing that, you know, it might change how people choose what companies to join. Right. You know, people might realize, oh my gosh, a small business doesn't really have a lot of cash. And do I really want that to be my employer? um i but i think the reaction is probably going to be the government's going to say well we sort of rely on small businesses to exist um that was really bad we probably don't want that to happen again and so let's come up with some sort of like program where we're able to move faster you know that yes the whole idea that the sba was going to move fast and like be able to distribute cash quickly did feel like if you believed it you should probably change your

career you know like the SBA is like the DMV of finance and we're sort of seeing that happen now and on top of that you know if you're a bank you're you just lose lose lose either you originate small business loans quickly but it's really hard to do your KYC AML so you get fined you do it slowly and you get yelled at for doing it slowly you decide not to because and you get yelled at for not doing it or not having an SBA license, or you do it quickly and you charge enough in origination and servicing fees where you can kind of withstand future fines so that you can lend quickly and people get mad at you for having made a lot of money on it. There's just no win here, right? And so you got to actually create aligned incentives for the originators of these loans to

actually get them to go do it. But right now, if you're a bank, you have so much PTSD from the reputation you create yourself in 08 that you're like is it really worth it do i need to be doing this and then if you're a bank you're definitely not going to make a new loan to somebody who isn't already your client because you know the kyc and aml of that is so hard like why would you take the risk and there's so much fraud that occurs during a crisis um that is just not worth potentially getting taken advantage of i also think it'll change how smb's bank like i think is my bank SBA license is going to matter soon. Yeah. Is the fraud thing, um, like explain that a little bit more when you talk about, there's a lot of fraud and kind of just nefarious activity

in crisis. If you were a terrorist organization and you knew that banks were going to be making loans at a faster rate than normal, and you're trying to figure out how to get cash, this might be a good time to try to get cash from a bank. Yeah. Like that's the thinking of it. Right. And during any fraud one, people get desperate, right? So they need money and fraud, you know, fraud occurs, there's two types of fraud. There's fraud, where it's a good person who got desperate and does a bad thing. And there's fraud, where it's a bad person who intentionally did a bad thing, even though they didn't need to do a bad thing. The first type starts to happen more in times like this. Look, if you got laid off, and you don't have another job, and you're kind of

like worried because your kids are at home. I don't know what do you what do you care more about like fraud or your kids safety, kids food. So yeah, there's going to be more phishing attacks, there's going to be more hackers there's going to be more fake news there's going to be more people you know trying to um commit fraud in the system if you knew that there was going to be 350 billion dollars of sba loans being doled out right now and you were a bad actor it seems like a pot of money that you might try to go after yeah and it's probably going to end up being more than that i saw that they're already talking about another 250 billion possibly to uh to try to backstop some of the small business stuff yeah let's get the 350 billion out first you know like

what's crazy to me i think is uh how bad the information is like after even the first day there was like conflicting reports of how many people had applied how much um you know those loan applications were worth etc and i don't think the government really wants us to know you know like i think that they're kind of like you know there's good data is best hope is second best and bad data is worse we're in hope yeah it's it's a it's a good way to look at it um two of the trends that i know that you spent a lot of time on mainly because you guys have portfolio companies is uh one e-commerce and then two kind of ad spend or the advertising industry let's start with e-commerce what are you guys seeing there on the e-commerce side that you

think um is either interesting or people should uh should be paying attention to i mean look i think this is a it's been a great time for e-commerce generally to show the world that it really meant like the variable costs of an e-commerce business are really important you know if you think about how an e-commerce business is built um you know it's cogs it's your sort of software services your website stuff like that and it's marketing spend and you have employees if you're a big e-commerce company you might have a warehouse an inventory by the way you have your inventory lender who, you know, God knows they don't want your inventory because if you can't sell it, they can't sell it. And then you might have more employees than normal. But by the way,

if you have a warehouse, you probably have more cash than the average small business, maybe. But you can toggle that up and down. If you have a physical retail location, you have your rent. You have a lot of fixed costs that you can't toggle up and down. And on top of that, people can still shop online. So e-commerce, our hypothesis right now is it's going to be hit a lot less badly than most it's really hard to predict where consumer demand is going to go down as more and more people are laid off it's going to be bad however like you know i know i i probably spent a third of what i normally spend last month because i'm just not going out and not doing stuff so i have you know the average individual is probably generating more excess cash

if they are employed they may go online and shop that's what i mean by you know in one hand you could be an e-commerce company say oh my god now's a great time to play offense because i know where the world's going all my competition's going down but there's so many competing variables that like okay so people are spending less maybe they have more time to shop online um people are getting laid off maybe demand's going to go down you know it's just too hard like it's too hard to know um so you know i can't give too much confidential information on e-commerce other than those sort general data points. On advertising, you know, we're seeing a handful of sort of factors. One is views are way up. People are at home, they're on screens, and they're watching more. And CPMs

are way down. Part of the reason CPMs are down is because if you were spending a million dollars a month, and that was your budget, and now views have doubled, your CPMs will just come down in half. But you know, you're seeing slight decreases in ad spend right now in the last two weeks of March. You're seeing way more views than normal and different parts of the ad market are going to get hit differently. You know, print, radio, TV, things that are hard to measure and are expensive are going to get really hit. Social, video, just, you know, banner ads, less hit because they're easier to measure and the cpms are cheaper and so you can get a better bang for your buck um you know and then by the way if you really are something like if you're peloton or you're

hulu or you're someone like that you're going to get a better roi in your ad spend now than ever and so you might start leaning in because there's less noise um so we're basically seeing ads cpms coming way down views going way up and ad spend generally being down five to twenty percent depending on the medium. And I can imagine Aspen going down 20 to 50%, but that some platforms are going to perform way better than others. And I would be pretty bearish on media companies that sell premium high CPMs and more bullish on media companies that have exchanges and sell generally lower CPMs. Snap sells at a lower CPM than Instagram. That's a bullish comment. YouTube sells at a lower cpm than instagram that's a bullish comment uh you know thing the other

thing is um you know spotify people aren't turning off their spotify subscriptions and the last thing that sort of is an interesting observation is companies are people have traditionally looked at ltvs and enterprise sales revenue as stickier than consumer generated revenue like a netflix subscription feels less sticky than enterprise software for enterprise software i bet you see a bigger dip than you see in consumer apps because people are still at home watching netflix and they don't have a cfo of their personal life negotiating with all their different vendors and netflix doesn't care about any one subscriber but if you're two percent of the revenue of a company or if you're even 20 basis points of revenue of a company that's huge and so i bet you end up

seeing more negotiation and decrease of prices of enterprise often you see a consumer yeah that that makes sense when you put it that way. Does this change, you think people's view of kind of ad supported businesses versus subscription businesses? Like kind of what exactly what you're talking about, almost changing the way that people think about how they build their business in the future? I think that, you know, enterprise software will probably be thought of as cyclical going forward. I think one of the things that people, you know, we talk a lot about internally is what does a consumer cap stack look like? And historically, you know, you've always said okay well you know your home loan and your auto loan are probably the most senior and then

it's like you know utility bills and then it's like credit card and then it's like unsecured stuff and then it's like your nordstrom's card and you look at default rates per consumer and you kind of like go up and down that stack just like a corporate you know uh cap stack exists you have your senior lender your secured lenders your unsecured lenders whatever and then what we've always thought is spotify subscription like whatever your cheapest per utility subscriptions subscriptions are probably more senior in your consumer cap stack than most people think. So I would probably want to finance someone's Spotify subscription before I'd want to be their credit card provider. Because I bet you, you don't pay your credit card bill, but you still maybe find

a way to pay your Spotify bill. The flip side of that argument is you pay your Spotify bill with your credit card. I don't know, maybe, but man, does it feel good to be providing a $9.99 per month service that is probably being used a ton if you're out of work or your smartphone or Netflix compared to like a credit card. So it's just, it'll be interesting. I think we're going to have a bunch of new data around what default rates and what churn looks like after this that we never had before. Yeah. The thing I think around the ad supported businesses too is that advertiser who had the million bucks and views have gone up two times. So now all of a sudden they're paying 50% less CPMs. At some point, if we stay in this quarantine, I wonder if there's

an impact on sales that changes their CAC and LTV calculations, right? So literally, just because you have the million dollars to advertise, if no one's buying your product, at some point, do you literally just say, hey, we're not going to advertise, right? So it almost like dries up because sales dry up. Yeah, I mean, I think people are definitely gonna be start running bearable and base case ltvs you know one of the things that people always say like ltv has become this sort of like initially cacti ltv was everyone's like holy grail metrics and i think in the last couple years people become a lot less enchanted by ltvs because what you do is you take your monthly revenue and you take six months of total churn data and assume that's what's going

to last forever and you come up with some number that looks very close to infinity um in terms of like what your ltv is and i think people are going to start to say like what is your ltv in different environments so i do think that it's actually going to become a more useful metric again because people are going to know how to measure it instead of just looking at it. It's like, oh, don't worry. My churn in my first four months is zero. So it means that my LTV is like 93 quadrillion, you know?

So I also think that we're going to, I think the last crisis saw a shift towards digital ads. And I think that you're going to see another shift there away from print TV and traditional sources. I don't think people are going to be really doing a lot of billboard ads right now. It doesn't seem like a very good idea. You know, so I think you're going to see somewhat permanent shifts.

But I also think that you're going to see, you know, companies like the New York Times and others who have relied on premium CPMs. They've already started going more and more towards subscription revenue, again, and paid revenue. And I think as things like COVID show us how much bad information there is out there, people are going to keep paying up. I know that I've picked up probably two to four subscriptions while I've been home because I'm just reading more and watching more. I don't think I'm going to turn off of them. i think that's gonna be a big deal that's probably gonna be a forever shift yeah and i wonder also like uh on the subscription side there's some things you know we don't watch a netflix show every single night right but it's something that is cheap enough where i couldn't even actually

tell you how much it is is it nine bucks ten bucks twelve bucks whatever it is when you say not watching every night you're not looking me into that right because i am on netflix every night right now yeah but it's like let's say that you've got i don't know most people probably have somewhere between four to 10 subscriptions, right? That, that they're paying for across various services. And some of those, uh, like a Spotify, you probably actually do use every day, right? If you go to the gym, you listen to podcasts, whatever. Uh, but then other things you may use once or twice a week, and some of you actually may only use once or twice a month. Um, and what I think starts to happen is, um, the businesses themselves will actually change the way that

they think about the product or service, right? The more that you can kind of become a daily habit, I think also changes. Um, and so it almost then brings you to something like a Quibi versus a Netflix, right? Where these, the Quibi thing is basically 10 minutes short form content. You're supposed to be able to consume it, you know, much quicker daily, et cetera, versus let's sit down and watch a hour and a half documentary. Um, I don't know if it'll prove out, but, but I think that that has to enter the conversation at some point, uh, for people who are looking at the subscription based businesses as well. The Quibi thing will be interesting. I mean, I think a lot of like i'm not i don't know jack about storytelling except that i always remember and and i actually

this guy i'm on a board with uh kind of put the construct for built the contract for me he's like you know if you look at a john grisham book john grisham does this awesome thing where he creates like you know very short chapters and he always has three subplots running and so at the end of every chapter you have a subplot that gets extinguished and you're really interested to know it's going to or sorry on a clip like on a cliffhanger and you get to the next chapter and you're sort of wondering so you read that chapter to keep getting to the next chapter we're going to find out and then there's another cliffhanger and then you read the third chapter another cliffhanger and you finally get the answer to the first cliffhanger and then he creates another

right and so if Quibi can kind of create that dynamic with their audience where there's always a cliffhanger where you come back the next day I think that'd be interesting I don't know if that'll be true or not um who knows um but i do agree that this daily habit thing is important and i do agree that um cost per utility of use is going to be a really really important metric you know what's the value like i wonder if there's going to be a kpi that starts coming out which is how much do people spend for every minute they're on netflix and i bet you if you looked at like the 9.99 you pay for netflix and you look at and then you divide that by how many minutes per month that'd be super fascinating to know that metric compared to hulu compared to disney plus

um the other thing by the way that quibi reminds me of is it's a short duration asset so in lending like let's imagine you lend you make five-year loans you know in one case that's not so good because you have to take a five-year view on the economy a five-year view on the company and so people say well if you make a 30-day loan it's really easy to predict what's going to happen in 30 days the problem is some every once in a while it's not right like i don't know maybe there's gonna be some virus that starts in a country and spreads to all the other countries and everyone stays home for a while right and you didn't know that was going to happen all of a sudden your book of 30-day assets all gets correlated to one and goes

to zero because we all stopped paying payables this month um and then on the five-year loan you know you basically look at your default rate you say well my annualized default rate for two to three months is super bad but then over the duration of the whole asset base you know i had out of five years six really bad months the thing performed okay in general but the shorter duration of the asset you know the more your whole thing can get wiped out and if you look at the effective default rates often people say oh well factoring for example it's like 15 45 90 day receivables and you'll see default rates in like the two to four percent range sometimes you have to annualize that out so if you see two percent defaults every month it's really a 24 default rate quibi i think

in some ways be like in a similar thing where i am curious how many false positives you're going to get where people download quibi but they can't get hooked on these short stories and they just fall off um but i don't know i'm not i'm not a storyteller i don't have good taste i've never liked something before everyone else liked it and then like all of a sudden it became popular so i'm not there i gotta ask what um have you noticed any changes in uh the things that you're consuming on your phone so obviously we're all spending more time in front of computers tvs phones etc just by nature of sitting home but have you started to consume content from other platforms that maybe weren't before or you notice hey you know i'm spending a lot more time on

instagram whereas previously it was twitter or something like that i'm finally i i am finally reading uh my newsletters that i get because i've had a bit more time to do that um but i find myself spending a lot less time reading the wall street journal and hearing what somebody's interpretation of what an expert said and instead just looking for data like i don't i don't need and by the way i think reporters are doing a good job this is not like a dig on anything like but i'm less interested in seeing like a two-page article analyzing something that an industry expert observed from talking to someone else instead i'm like all right just send me the export i want to see the csv yeah super interesting uh before we finish up uh two minutes on a bitcoin

and crypto you've uh you've previously described yourself as crypto curious what uh what are you thinking there or any kind of thoughts i was super bummed to see bitcoin get crushed when the market started to uh go into sort of panic mode because it was supposed to be a safe haven and you know everything's correlated you know everything's correlated was truly true that week um it started to rebound i don't have any observations other than let's see where we land two months from now and how it ends up behaving relative to other markets but i'm really in wait and see move mode i but i think it's hard for something to be a store value when it dropped that far that fast I mean there was a night and I think maybe we both remember that night where like I was on my

phone texting everyone all my loved ones being like I don't know maybe it's all gone you know like um and that's scary it's not a position I want to be in yeah the black Thursday I told you this and I'll say it on here uh I never thought the day would come where Paulina had to look at me and be like it's gonna be okay but seeing it drop 50 percent in a single day it was just like it almost took your breath away to actually watch it happen yeah i mean look i think the whole like bitcoin thing is like i don't trust the government the government's shitty like the government's trying to take all your information like the government if you act out i just throw you in jail and there's like a lot of negatives about having a government you know but you know they

do like there's like an army you know that's pretty good and you know people are giving shit to the postal service like yeah there probably should be those some like government entity that like make sure letters you know if fedex goes bankrupt will still get to where it needs to go even if it takes freaking ever you know like so I do think there's utility to a government and um I don't know like I didn't go into this thing knowing anything really about Steve Mnuchin I probably think more positively of him though now than my sort of neutral view I had on him a few months ago and I think he has the benefit of seeing Hank Paulson drag drag drag congress senate and you know pundits the mud to save our economy last time at least we had the

playbook and then government showed that like it's really important and it's important because they can do great things like stimulate the economy and they can do shitty things like have some president who doesn't can't speak in full sentences confuse the nation right and like i think if you're gonna sit there and say that the government is doing things wrong and be annoyed the government by definition you're saying how important the government is and bitcoin doesn't have a government yeah it is uh it's one of these things where um time will ultimately tell us the answer but it is absolutely fascinating to be living through this right now and kind of watching it all unfold um because it feels like every day there's something new whether good or bad um but

it's just really really interesting to kind of watch it all play out so um i appreciate you doing this? The one thing I'm doing is I'm trying to take notes every day. I encourage anyone else to do the same thing, which is eight years from now, you're going to want to look back and see what your daily notes were because it's going to be really easy to look at March and April at the same day. For example, Friday, could not understand the market. Monday, what the hell happened to the equity markets? How are they up so much? I wrote in my little notepad like, oh man markets are gonna get crushed tomorrow they were flat they were flat you know and like i'm really glad i have that note so that eight years from now i can actually look at my daily

playbook and like every day i write a hypothesis what'll happen tomorrow and what'll happen 60 days from now i talk about my observations and it just shows you you know a lot of these predictions i had a lot of conviction on and they were wrong so can we start a uh daily tweet from molly on what the market will do tomorrow and then we'll measure the accuracy no way because my compliance team would never let me and i would never do that to people because that's a way following that is a way to lose money i love it man all right where can uh where can people find you on uh twitter and find co-venture yeah i mean i'm at ali b hamed on twitter you know i i respond to most dms unless it's like weird don't send me weird stuff and then um knowing you're out

knowing some of the people follow you on twitter and then um yeah i'm not gonna give my email address out i'm around all right what's coventure's website coventure.bc all right sounds good man i appreciate you doing this uh we will have to do it again stay safe i'll look forward to seeing lunch money later today yeah i appreciate it i feel like uh at some point you're the second best person on that show oh yeah of course i mean listen i i uh i don't even like admitting it but polina literally uh scolds me for uh not not participating or performing up to her standards so it is what it is she's really good i think it's more about her being good than you being bad i think you're both good she's just gooder i appreciate that you're uh you're lifting my

spirits in a time of uh dire stress you anthony you can't help it she's so good that how are you supposed to ever live up to that it's not ali is uh being very kind while uh his fiance sits in the same room as him and my fiance sits in the room with me so we're uh we're both the uh the two intelligent folks uh just try to dish out compliments all right all right talk soon my friend thank you talk to you soon dude hey everyone pop here if you like this episode of off the chain and want to help us take crypto to the top of the apple spotify and other podcast charts please do us a favor and rate review and subscribe to review simply go to the off the chain home page scroll down until you see the five blank stars taking 15 seconds to fill those stars in and leave a quick

review goes a long way in helping us take the entire crypto ecosystem to the top of the charts i appreciate you listening and see you next time on off the chain