We Study Billionaires - The Investor’s Podcast Network - TIP 010 : Venture Capital Q&A (Investing Podcast)

Starting point is 00:00:00 This is episode 10 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll take complex things and make them seem insanely simple. They make your boring drive-to-work feel exhilarating. They give you actionable investing strategies. Your host, Preston Pish, and Stig Broderson. All right, how's everybody doing?

Starting point is 00:00:31 This is Preston Pish, and I'm a company by my co-host, Stig Broderson, and today we have an awesome guest for you. Peter Goday is with us. Peter currently owns his own private investment bank, and he's going to be talking to us today about venture capital. So there's a lot of people out there that might not necessarily know what venture capital does. Peter is going to teach us some very important lessons and provide you with some fantastic information. So without further delay, I'm going to have Peter kind of introduce himself and give you a better background of his experiences in the financial industry. And so, Peter, go ahead and give us an intro about yourself. Sure. Happy to do it. Let's see. Let's go all the way back

Starting point is 00:01:13 to a place that's near dear to my heart, West Point. And that was 1991. I graduated there. Played some rugby in major in economics. And then I went out to the world of the Army and jumped out of airplanes and went over to the DMZ in Korea. Learned a lot about the Army on the DMZ. Came back to Fort Lewis, Washington, where I was an executive officer for a battery over there. And then I decided to come back to New York, where I grew up and get married, settled down. And I also worked for West Pointe Admissions for quite a few years, about eight years in the reserves while I was starting out my career in finance.

Starting point is 00:01:53 and started out with Merrill Lynch back in 1994, which was the year where the Fed did some crazy things with interest rates. So I jumped right into that, and it seems like I have jumped into situations where there was always something going on, something happening. So it was uncanny how I seemed to be right place, right time for some action. So although I never got to combat in the military, I tried. I was on the DMG. but I certainly have been to financial combat several times, whether it was the internet, whether it was the subprime crisis, and whether it was that first year when we kind of fastened our seatbelts and rode through 1994 with the Fed raising rates many times. So we'll definitely have to bring you back on the show for as interest rates change because that's Stig and I's biggest thing that we like to talk about because we see that as like the number one critical variable that controls all. market swings and everything like that. So, yeah, having you to maybe come back and discuss some of that as things start heading up, I think would be a good choice.

Starting point is 00:03:00 Yeah, yeah. Well, I thought the U.S. government wasn't going to lay interest rates rise. 17 trillion in debt. It's like, why don't we keep them low? Yeah, I mean, we're only on, what, six, seven years now where they've been next to nothing. I mean, I'm sure that won't have any kind of impact in the future. Exactly. Hit the gas on inflation and keep interest rates low. Let's go buy bonds, just kidding. All right, Stig, so you go ahead and fire away the first question here. Yeah, so Peter, I'm really curious about this venture capital. And I heard a lot of rumors and a lot of stars about venture capital. But looking from within, how can you best describe venture capital?

Starting point is 00:03:42 Someone perhaps that doesn't know what it is. Sure. It's investing in small private companies. I mean, that's your basic simplest definition. And with venture capital, it's something that I've actually done in my career in alternative investments, almost on the side, investing in other companies as I was running more major financial businesses. But basically, it's one and the same. If you're looking at private equity, maybe you're looking at anything from on a debt side to the equity side, you're looking at a capital structure of a firm. It's the same thing.

Starting point is 00:04:17 It's either small or large, but it's the same thing where you're trying to optimize the capital. capital structure and figure out what's the best way to get that company from, you know, one point to another point and making sure that you're doing it the right way. So whether it's a small company, which I'm involved in now making investments and raising capital for smaller companies on the venture capital side, or larger companies, whether it's a structured credit company where you're doing some financial engineering or going out and doing some tax structured work. You know, it's all about where's the capital structure?

Starting point is 00:04:54 How do you optimize it? And how do you take care of the needs of a business owner that's trying to focus on their business almost myopically and not realizing, okay, I'm going to need, you know, X amount of fuel in the tank to get through phase one, phase two, phase three of the growth of the business. And I need someone not a commercial bank that's just going to give me one loan. But I need somebody who's going to ride through that process with me and make sure that I'm getting the capital I need at the point in time that I needed. Okay.

Starting point is 00:05:26 So, you know, one thing I often hear when I talk to other people about venture capital is that they always ask, that sounds very risky because you're working with sometimes debt and sometimes, you know, small companies because by nature it's small companies. So do you think it's a more risky game or is it just not always people knowing what venture capital really is? Well, it's all about knowledge. And, you know, when I was younger, bingo. When I was younger and I was at DLJ back of the day, I left Merrill Lynch to go to work. Again, it was right place, right time. Alternative investments wasn't even called alternative investments not so long ago, 1996, I guess it was. And I looked at the older guys in the firm and saying, well, I'm working 24-7. I'm in the office every weekend. I said, you know, this experience thing, I think it's overrated.

Starting point is 00:06:15 it is until you get experience and you realize the value of it. And now I really sound like an old man, but the bottom line is, you know, everyone says, oh, go out and throw money at 10 opportunities. And one of those or two of those is going to hit, you know, for venture capital model. I don't believe in that. I believe you do thorough due diligence on five companies and you figure out, and you have the resources where you've got a network in place and you're talking to people that are like, hey, this is going on and this is going to hit in this space, and these are the reasons why.

Starting point is 00:06:48 And then it's about things that are analogous to other space, say, okay, this looks like something I saw seven years ago. And me, I'm a copious note taker, so I've got notes on everything. And let me look at that deal that I looked at and compare and contrast it and say, okay, well, where's the cash flow? In the end, you want to clear away complexity, you want to focus on, all right, is it cash flowing? You know, is it bad? Is there a J-curve involved where, okay, three months, four months, five months from now, it's going to pop and start being, it has some net profit. Okay, then where do you go?

Starting point is 00:07:21 Do you have to get out in front of the pack and need more capital, capital infusion at that point to invest in marketing and branding to make sure that you're going to be, you know, the lead dog? So to answer your question, it's really specific. It's case by case, and you've got to get in there and do the hard work of figuring out what that business is because I think, you know, Preston, as we know, there's no excuse in finance for not rolling up your sleeves and doing the hard work of saying, I don't want to look at 10 companies. I want to have a system in place that gives me the opportunity to increase my probability

Starting point is 00:07:56 success after looking at five companies and picking that one or two. So it's not a 1 in 10 hit rate. It's a 1 in 2 or 1 in 3 hit rate. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is.

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Starting point is 00:12:28 And so I guess my question is this, what is the biggest mistakes that you see startups having if you had to narrow it down to three? like when you hear somebody say one thing or you see a specific thing, you're just like out the door, like, okay, this ain't going to work. Yeah, yeah. And it goes back to, you know, the more you learn and the more of a body of knowledge and frame of reference you have, the more simple you gravitate towards, simplicity you gravitate towards. And I harken back to the days of my plea beer West Point where my squad leader said, you know, proper prior planning prevents poor performance.

Starting point is 00:13:03 and you talk with some of these guys who are building a business, and they fall in love with the technology. And I'm not saying that that's bad. It's a good thing to be passionate about what you're doing, but they fall in love with this so much that they start being delusional, where it's like, wait a minute, you're not looking at where this company is going to be. It's like you've got to be taken care of not your company today, your company a year from now, your company five years from now.

Starting point is 00:13:29 It's like you've got to have that vision. And if you don't have it now, you better get it quickly. because if you're not taking care of things, then you're leaving your company and yourself susceptible to people that come in and basically steal your company and not give you the proper valuation. You know, there are bad guys out there. And like any industry, Wall Street has bad guys and they'll come in there and say, okay, well, we're going to look at you for a while and then they'll tell you whatever you want to hear.

Starting point is 00:13:59 And then they'll come in and steal your business, say, we're going to take, you know, 51% of the equity or more for a fire sale price. And that's because there's lack of prior planning. You've got to make sure you've got balance sheet. You've got to have a war chest to take into any battle that's going to be able to get your business through some tough times because any business is going to have tough times or how great the technology or what the case may be. And so you're saying they'll come in and take 51% of the equity because they can foresee,

Starting point is 00:14:28 oh, my God, they're going to run out of cash at this point in time. They're going to be strapped. And so then we're just going to kind of swoop in like, like, you know, wolves and snatch up all that equity whenever that time comes. Is that what you're kind of referring to, Pete? Yeah, it's funny. You mentioned wolves. I call it the antelope situation where the lions in the Serengeti and they're looking at the antelope and they'll get them away from the herd. And I'll say, okay, so we're going to buy you next week.

Starting point is 00:14:54 And they'll say, oh, great, fantastic. I'm going to get bought at a 10x multiple on Ieba da and everything's wonderful. and then all of a sudden it's like next week comes like, okay, I'm ready to take that, dump the cash on me, and then it gets drawn out, and then all of a sudden it's a month. War of attrition. They've got all the data. They know the cash burn rate. Now they know the debt service.

Starting point is 00:15:17 They know everything that's going on. So it's like, and they can pinpoint, okay, let's talk to this guy, you know, three months from now when he's going to be in a hard, hard place. And then what happens, I'm not going to say it happens frequently, but that's, you know, if you don't plan and repair and you're not looking out for your company, exactly. It can be susceptible to the antelope situation. Yeah, it goes totally to your point of if you're not planning and forecasting

Starting point is 00:15:41 and having that foresight of where you're going, you're going, you're going to find yourself in that kind of situation. That's a fantastic point. Stig, you had a question there? Yeah, because, Peter, you know, I was thinking about how do you determine the value of a company and perhaps also through the glass of a venture capitalist? list. Is it very different than when you're looking at stocks for bigger companies, you're to determine the value the same way? Absolutely. It's, it's, it's, worlds apart. And it's funny because

Starting point is 00:16:09 that's another lesson you learn with experiences. You know, you want to say, oh, yeah, I'll value that company. I'll throw a dividend discount model or economic value added, or there's a million other ways to value the company, NPV cash flows. But through the years, I've found that the most valuable way of approaching it is looking at comps. You know, you want to compare it to other companies that have had liquidity events. And that's real, you know, nothing's worth anything until it sold. So, you know, when you're looking at these companies and, you know, I had one company in the last couple of weeks that was like, oh, yeah, we had our patents valued at $3 million.

Starting point is 00:16:50 I kind of had to hold back the laughter. And I was like, okay, well, can you sell them tomorrow for $3 million? Like, well, the patent attorney told us that they, we could. It was like, okay, who's he going to him then? Yeah. Exactly. Is he going to buy him from you? So that was, that's something I've heard many times over from great traders.

Starting point is 00:17:13 You know, that's like a Paul Tudor Jones thing where it's like, you know, it's not worth anything until you sell it. And if you're selling it, selling to the person that sold it to you, then you're in trouble as well. Hey, Pete, I'm kind of curious. How many companies do you kind of see that come in and that are looking for venture capital that have a bottom line, have some net income, 50% of them, or what would you say on a ratio? 50% of the people come in with a green in their bottom line? Yeah, I would say that I'd say it's a little bit more because to have the kind of the Hutzpah to go out on your own.

Starting point is 00:17:52 You usually have confidence and intelligence and you know how to make money. Not always the case, but I guess it's for me, through my network, if I'm getting introduced to a company, I'm usually getting introduced to intelligent, thoughtful business owners that are kind of ahead of the game. I'll give you my, I had a couple of calls yesterday, and one of them was with a guy that owns an engineering company that has a technology that it's his third technology he's been successful with the other two so this is something that's already cash flowing you know it's already making money for him um it ran it got so much traction early on that he's run out of money

Starting point is 00:18:33 because it's gotten that big so those are nice situations to be in um but to answer your question Preston I would say it's more I think when you're talking 50% or less it's probably a lot less than 50% if you're talking about all venture capital opportunities. Okay. Okay. Yeah, but I would say that, um, that yeah, because, you know, anyone comes, we wake up this morning and it's like, hey, I've got an idea for a brand new bird feeder. Um, in fact, I do have, I have a bird feeder that's a squirrel proof bird feeder that was somebody thought up in the Midwest and has made a lot of money, uh, because it, it's activated that spins around the squirrel and throws them off the bird feeder. Oh my God. That sounds awesome. Yeah. So it's called the Yankee.

Starting point is 00:19:15 Yankee flipper. I'm not getting any advertising, but I love the thing. It does work. And they have a funny video, and it shows you, as you guys know, as you guys know all too well,

Starting point is 00:19:27 the power of media nowadays. It's like you don't need CBS, NBC, you know, big networks, because they have this video on, is it Vimeo or on... Yeah, Vimeo and YouTube, yeah. YouTube, probably. It's YouTube.

Starting point is 00:19:42 And it's called the Yankee Flipper Birdfeeder. And somebody sent it to me, because I knew I was trying to feed my birds and not the squirrels. And sure enough, it's gone viral. So I'm really excited about all the opportunities that are out there. Well, we'll have a link in the show notes for people to pull that up if they want to see it. I know I want to see it. I got a quick question for you.

Starting point is 00:20:04 So, you know, whenever we're value in stock, Stig and I, if you look at the current market conditions here in November of 2014, you know, the thing that the discount rate I'm kind of trying to use and trying to find business, on the market for is around 10%, but we're dealing with large cap companies and things like that. When you're dealing with venture capital, I've heard that the number is typically around 40 to 50 percent as the discount rate you guys like to use as kind of like a starting point. And I know each company that comes in is different. But are you really trying to get your money back within two years? Is that really kind of the way you look at it?

Starting point is 00:20:37 Absolutely. I'd like it back tomorrow. But I think that goes back to the model I was talking about. out, which is what everyone refers to is, oh, the venture capital model. I don't understand that model is C-10 companies, pick 10 companies, invest in them, spread it, you know, diversify, and then get your one or two. And that one or two better give you the money back in two years because you're licking your ruins on the other nine or eight. So, so that's basically why I think everyone's like, that's where you have to get for your successful company. When it's kind

Starting point is 00:21:11 to pop, you don't need a pop, you know, you don't need a two or three X. You need a 15, 20 X. to get where you need to go to pick up the pieces on all the lost, the sunk costs of investing in the other clunkers, let's call them. What's the typical costuristics of the companies that you're looking at? Even though it's like small companies and startups, I guess, you know, if you have a blog or something, it's not like we can call out Peter and ask you if you can fund us. I guess that's not how it works. Yeah, well, I'm excited. There's a lot of other, you know, things that are popping up, the crowdfunding type things. And I'm excited about that because, you know, I'm all about, God bless the United States of America. Let's build the economy. And that means getting capital to people who have brilliant ideas. And, you know, the model that's been around for so long on Wall Street is, you know, it's either you've got to have the relationships or you've got to have whatever it takes to get that put in the door and get the meeting with the venture capital firm.

Starting point is 00:22:15 that will consider writing a check to you. So now with this crowdfunding and everything else, I think there's a lot more opportunity for getting out there. If you've got an idea, I think it is like social media is a way. I'm a big fan. I have another company that's doing a lot of flying around and meeting with and doing retail distribution

Starting point is 00:22:40 and selling the wholesale channels. And I'm like, guys, let's get, let's look at the whole spectrum of opportunities for marketing, and let's realize the power and the potential and the cost-effectiveness of social media. To get out there, instead of having somebody hop on a plane and go to different cities and talk to retail, let's at least test out going direct with social media because you can fire with a rifle instead of a shotgun, and you know exactly the demographics, especially with, you know, all the information we know or we can buy with data. I mean, I come from a structured credit background, so I'm about knowing everything about a person's

Starting point is 00:23:18 personal balance sheet and being able to loan on that. Same thing with being able to know, okay, that person loves to buy soaps or perfumes or whatever in Cincinnati. Okay, that's a person you want to have on an email distribution list to say that's a product that's going to resonate with them. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up.

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Starting point is 00:26:30 and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. I know we're seeing that on our side, just with our business, the importance in how social media can be used. And the most amazing thing with it is you have analytical data. So in marketing in the past, it's been like, hey, let's send out a thousand flyers and you have no idea what the actual impact of that capital that was spent on that

Starting point is 00:27:17 marketing campaign or whatever. But now it's amazing because it's all digital and you can actually see all the analytics behind it. I mean, that's one of the reasons Google's just so phenomenal. but that's a sidebar in itself. No, no, that's a great point because, you know, I saw it early on in structured credit where you had Solomon Brothers putting together the models as far as prepayment risk way back in the day. And it was like, wow, look at them. They spent $100 million or more, whatever the number was, on building this incredible

Starting point is 00:27:47 model. And it was a one variable model. It was like prepay or not prepay. And it was like, and that was powerful enough back there relatively to put them way ahead of the game and obviously their alpha generation was phenomenal and all of a sudden they spin off and do long-term capital and it's like but then they got ahead of themselves because they were playing mean reversion strategies and using 100 times leverage and that works until it doesn't when it doesn't it blows up so it works until it doesn't I like that yeah yeah so uh so that was um

Starting point is 00:28:18 that was fantastic and but that's basically a pressing exactly to your point which is google realized early on it's all about the data if you can pull data and get that data that's powerful information, and you can run the algorithms over that data that are going to give you, pull out real information and useful information and timely information, then you're way ahead of the pack,

Starting point is 00:28:38 and you're going to be able to make a ton of money. Yeah, it's funny. When you look at Google and their acquisition of, like, ways of YouTube, all these big networks, it's amazing because they, I think they have so much analytical data that they can see that one of these,

Starting point is 00:28:55 you know, these online companies, whenever they're starting to grow and build really fast, they have some type of model that's giving them some type of tip off to snag up the YouTube, the snag up the and it's just, it's amazing. I mean, like I said, we could talk about this for a very long period of time and go off on a total tangent just talking about Google. In fact, Stig and I are reading a book about Google right now, so this is probably why it's in my head.

Starting point is 00:29:19 Anyway, let's go ahead, Pete. It's Google. I made an investment in a firm down in Baltimore called. called Reddell Analytics. And that's taking the lessons learned in the war in Afghanistan and Iraq as far as big data, real-time acquisition of big data where there's communications or other things, and synthesizing that with incredible algorithms that pull, that can give a Fortune 500 company real-time intelligence and information they can use to help the companies.

Starting point is 00:29:51 So, Pete, this is a question that Stig and I like to ask at the end of every interview. and we find that we get probably the best, you know, information out of this question. And the question is, what is the best investment advice that you've ever received? Wow. I've received a lot of good investment advice. And now I'm thinking about 20 years of investment advice. And I'm coming up with a couple of things. But I think if I had to pick one, I'd say Arthur Rock.

Starting point is 00:30:21 Arthur Rock, I was blessed to have Arthur Rock as a client back at DelJ. And he was one of the founders of venture capital, really. He was at Harvard Business School and really forward-thinking, incredible man. So anyway, he said it was, again, going back to simplicity, genius is simple, right? And what Arthur Rock told me personally was what Warren Buffett tells the world, which is never be afraid to let an opportunity go by if it doesn't feel right. And I've actually learned to value what my gut tells me. And I don't like using gut because your gut is your brain actually synthesizing all the data of 20 years of experience.

Starting point is 00:31:05 And whether you know what's going on or not, you're actually, I'm fascinated with the brain too. What your neocortex does is amazing. And you ought to listen to it because it's actually synthesizing memories and patterns throughout a lifetime. And if your brain is saying, wait, something doesn't feel right, there's something to that. There's maybe you can't point at it or you can't quantify it. But it might be, you know, you can't quantify it, but it is quantifiable. And it's something that your synapses are telling you and your axons and dendrites are, you know, are a machine. And they're a damn good machine.

Starting point is 00:31:40 So you better listen to it when you see an opportunity and something's like, whether it's a person that, you know, you're like, wait a minute, that seems unethical or, you know, look for little hints that are going to tell you, no. I'm not going to deal with that person because of ethical issues or because of, you know, they're not building the business the right way and they don't want to get on track to do it the right way. That was really a really great tip, Peter. As you probably also know, Prest and I really big on books. Do you have any recommendation to a really good investment book, perhaps something that you would use yourself? Well, it's funny you mention that because I always do Sunday nights.

Starting point is 00:32:18 I do my mentoring. If somebody is coming out of the military, they always get my time. And I used to tell them a list of books. And now the first thing I tell them is work with the right people. And this goes back to your gut. If you think you're working with the wrong people, you probably are working the wrong people. And you need to get out of there. So that's the first advice I gave to people.

Starting point is 00:32:40 And then when I go into books, I give them the handbook of alternative investments, which is, yeah, the first thing you want to do is have that body of knowledge to understand the space. And, you know, I was lucky enough to kind of have the opportunity, you know, pop up to work in alternatives early on. But now, you got to keep your eyes open and not keep your eyes open right in front of you, but look, 360 degrees and every other perspective you can actually reach for to see new opportunities. And if I was in another department at the LJ, when I saw alternatives start to grow, and I

Starting point is 00:33:14 basically did everything to transfer over to that group because I knew the promise of alternative investments was huge. So as far as a book, yeah, I start off with the handbook, Walterer investments. And then I also say things like seven habits of highly effective people, just how to make sure you're working well within a group. You know, it's funny on Wall Street. Sometimes you come out of a meeting and you're like, you know,

Starting point is 00:33:37 that person never played a team sport in their entire life. The whole thing is the soliloquy of how great I am. You know, it's like, yeah. So you're saying Eco is big on Wall Street? That doesn't sound right. No. Just a little bit. Just a little bit. Pete, amazing feedback. I mean, that's just phenomenal. I know that everyone in the audience is definitely taking notes and listening to some of the things that you're putting out here. So we would like to really thank you. For anyone that's interested in learning more about Pete, he owns, his bank, his investment bank that he owns is called Camp Fire Capital. We'll have a link to the site on our show notes if you're interested in visiting there and contacting Pete. The website is very boring, but it's boring by design because I've got enough people that are doing business with me.

Starting point is 00:34:28 I'm not doing a lot in marketing, let's say. And I have other interests as well, quite a few other interests. Well, that's fantastic. Pete, thank you so much for coming on the show. We really appreciate everything that you've provided to our audience. Appreciate it. Great spending time with you, Preston and Stig. Great, great spending time with you.

Starting point is 00:34:47 Okay, so let's go to our question that's a moment. somebody from our audience had submitted to our website. If you want to submit a question, you can go to Asktheinvestors.com and submit your question. And this question comes from Raymond Sheedy. And Raymond says, hypothetically, if you buy all of a company's shares outstanding, will you own the whole company outright? Or does the business keep some of the shares for itself and therefore unavailable to the average investor?

Starting point is 00:35:10 For example, when a business announces a share buyback, what happens to those shares? So, Raymond, this one's pretty straightforward. If you own all the shares of the business, then you absolutely own 100% of the business. Where you might be getting confused is that whenever a company does a share buyback, that benefits if there's multiple owners. But if you are the sole owner and you end 100% of that business, there would be no reason for you to be buying back shares from yourself, because at that point you'd be the only person that would own it.

Starting point is 00:35:38 Okay, so that concludes our show for today. And we'd like to thank Pete Goday for coming on the show. I'd like to thank Raymond for submitting his question. and we'll put a free signed copy of the Warren Buffett Accounting Book in the mail for you. And thanks for joining us, and we'll see you next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.com.

Starting point is 00:36:01 Submit your questions or request a guest appearance to The Investors Podcast by going to www.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application.

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