We Study Billionaires - The Investor’s Podcast Network - TIP340: Hedge Funds, SPACs, and Chocolate w/ Jason Karp

Starting point is 00:00:00 You're listening to TIP. Hello, everybody. Welcome to the Investors podcast. I'm your host, Trey Lockerby, and I am so excited to have with me on the show today, Jason Karp. Jason has had an incredible career so far, starting as a quant at major hedge funds like SAC Capital, under billionaire Steve Cohen, as well as Carlson Capital, where he became co-CIO or chief investment officer. He then moved on to start his own fund, Turbion Capital, which at its peak managed over $4 billion in assets under management. Along the way, he helped his family start a successful company called Hugh, most known for its chocolate bars, which recently sold to Mondalies. For his next act, he is now

Starting point is 00:00:43 founded Human Co, which focuses on providing permanent capital to health and wellness brand, as well as the launch of a recent SPAC, or special purpose acquisition company. On today's episode, I guarantee you will glean some incredible wisdom from Jason's experience, both as a hedge fund manager and as an entrepreneur. We discuss the view from the mountaintop, opportunities and health and wellness, what is a SPAC and why are they so popular at the moment, and much, much more. I thoroughly enjoyed this conversation, and I hope you do as well. So without further ado, please enjoy my conversation with Jason Karp. You are listening to The Investors Podcast, where We study the financial markets and read the books that influence self-made billionaires the most.

Starting point is 00:01:30 We keep you informed and prepared for the unexpected. All right, everybody. I'm here with Jason Karp. Jason, I cannot tell you how excited I am to have you on the show today. We're going to be talking about a lot of things that I'm curious about that are near and dear to my heart like health and wellness. And just going over this amazing career you've had so far. So, welcome to the show. Thank you for having me.

Starting point is 00:02:01 All right, so I do want to touch on some of your early success, starting out at SAC Capital under the leadership of billionaire Steve Cohen. What did you learn from that experience and how did it shape your investment approach? It's been an interesting journey. My period at SAC was actually a great one. And I spent my first, call it six and a half, seven years at another hedge fund where I started as a quant and a fund called George Weiss Associates. And I met many people at SAC.

Starting point is 00:02:32 At the time, it was sort of viewed as the best of the best in terms of places to learn. And they didn't disappoint. I was brought into a unique position of a new entity within side of SAC, where the goal was to really focus on much bigger positions, much longer term oriented investing versus what SAC was known for prior to that, which was much more short-term and even day trading in some instances. And Steve is just a phenomenal manager, trader, and investor. He started to see where the puck was going towards the need for bigger, more concentrated positions where you could actually withstand the volatility and hold it for quarters instead of holding it for weeks.

Starting point is 00:03:17 And so I was brought in to basically be one of the lieutenants of this new entity where I functioned as a director of research. And I combined a lot of my quantitative training where I started as a strict one, doing things like statistical arbitrage, I used a lot of my quantitative training to basically build a hybridized fundamental research model, which incorporated a lot of data that we were able to capture and combined it with subjective human judgment in terms of what positions we choose, how we size them, how we hold them, how we do our fundamental due diligence. And I think what was amazing about that environment was it was pre, this was late 2004, early 2005 when I got there. And it was before some of the scandal stuff happened,

Starting point is 00:04:05 you know, in 2009 and later. And it was really an entrepreneurial culture that took an incredible open-minded approach to figuring out the best ways to invest. And they were also able to attract, I mean, I still think to this day, some of the best people and smartest people and most thought-provoking people who brought really the best out of me, many of those people I met at So for those in our audience who are curious or are interested in going into the hedge fund industry or even starting their own fund, maybe talk to us about your decision to start Turbion Capital and what that entrepreneurial experience was like for you. I was at three funds over the course of 14 years. I went straight to a hedge fund when I was 21 years old right out of college in 1998.

Starting point is 00:04:52 And each chapter was very different. My George Weiss chapter was very much. about understanding quantitative methods, really hardcore analysis. That's where I began as an analyst, understanding how to marry fundamental research with quantitative research. The SAC chapter was very much about large, concentrated positions, activism, very deep fundamental research that was required to hold positions through thick and thin, you know, take big, big drawdowns, hold them for multiple quarters. And then after that, I went to become the co-CIO, a Dallas-based hedge fund called Carlson Capital, and there I wore a lot of hats. I was helping manage some of the fundamental portfolios.

Starting point is 00:05:38 Carlson was really known for their market-neutral approach. By the way, almost everything I did over those 14 years was what some people call kind of pure alpha strategies, where you're generally market-neutral, as many shorts as you do longs, and you're trying to capture true alpha as opposed to just sort of riding the direction of the market. And each of my bosses and mentors at each of those three places really had this sort of pride in the reason hedge funds should get paid is for alpha, not for beta. And all three of them really ingrained that into me. So my three bosses and mentors over those three chapters all took a lot of pride in the reason we get paid a fee is to create alpha.

Starting point is 00:06:23 And that was kind of deeply ingrained in my own philosophy of investing because of how they approach the world. And the Carlson chapter for me was amazing because prior to that, I'd just been basically a portfolio manager and an analyst. But I hadn't learned how to run a firm. I hadn't learned kind of how the sausage was made, how everything from operations to marketing to dealing with the back office, to dealing with things like trade breaks and all of the, there's enormous complexity in managing a head front. And I don't think I appreciated it fully until I was the COCIO of Carlson. When I was there, I quickly realized like this was a big piece of the puzzle that I was missing. And then after I felt like I really learned it from Clint, who's the founder,

Starting point is 00:07:11 it was a fabulous mentor for me. I felt like it was my time and it was my turn. And what I learned about myself throughout all of this was I'm actually an entrepreneur at heart. I love investing. I've always loved investing, even from when I was in high school. But it's more about the business aspects of investing, as opposed to just sort of the notion of pushing pieces of paper around and sort of arbitrage, which I did do a fair amount of. And it was quite lucrative for me. But it never, I always enjoyed that part of investing more from the sense of playing a game and winning at a game as opposed to like deep fulfillment. The deep fulfillment I got from my experiences over those 14 years was much more about the entrepreneurial itch that I needed to scratch.

Starting point is 00:07:58 It was about building teams. It was about solving real problems. It was about providing a service to people who couldn't do it on their own. And so there was a moment where I sort of felt like I'd hit a wall at Carlson. And I went to Clint, actually just for the sake of your listeners, will probably appreciate this. I was in a funk where I just kind of felt like I was hitting a wall as an investor and as a manager. And my wife, who at that point I'd been married to for seven or eight years, obviously knew me very well. And she looked at me and she's like, something's wrong. You've got to change it. You've got to start your own. And I looked at her and there's a, that's the PG version. There's sort of an R version of that story where she basically swore at me

Starting point is 00:08:40 because she saw how frustrated I was. And it's probably not appropriate to give you the R version. And I said, you know what, you're right. And I went to Clint and Clint had started his own fund many years earlier. And he was a real gentleman about it. And I said, I got to do this on my own. It's sort of the last chapter, like I can't go higher than starting my own fund in this industry. And, you know, I think I was 34, 35 at the time. And I said, I just, I got to try it on my own. Because I can't really like go up from here. And that was the genesis behind starting Turbion, kind of all the things I have learned and express it in the way that I finally wanted to express. and that was how that got going.

Starting point is 00:09:22 All right. So now Turbion is managing over $4 billion, and it's this incredible success. Did this turn out to be everything you thought it would be? So this is the most interesting part of this interview, I think. So I launched Turbion. I really believe that I think I wanted to do that, and I certainly knew I wanted to invest my way. But I definitely made a bunch of, I think, mistakes in how I set it up.

Starting point is 00:09:45 I think I did a great job in hiring the right people. We had an amazing culture. In fact, one of my lieutenants who was my president, her name's Amy, Amy was fabulous in sort of being the Yin to My Yang and helping run the business. Amy's also with me now at Humico, and she and I basically worked together now for 11 years at three different places. She was also at Carlson with me. But what happened in 2015 was sort of this remarkable revelation. We had three very strong years in a row of pure alpha. We were top decile for our strategy three years in a row, which is why we got to four and a half billion in three years, which was a pretty rapid growth. And then that year,

Starting point is 00:10:30 we also won best new hedge fund manager in the country from institutional investor, which was an award that I was sort of coveting. And to me felt like that would mean like we did it, being effectively craft best new hedge fund. And yet my help at the time was pretty bad. And I was depressed. And we finished that year with another great year. And it was my biggest earnings year up until that point by a lot. And it was one of those years that you're supposed to say like, wow, I made it. And by all accounts, on the surface, it looks like I did. And I said to my wife one day, I said, I don't think I could do better than this. And I'm sick and I'm miserable. And there was this sort of deep, deep hole inside of me that I thought would be filled from kind of getting to that point and it wasn't.

Starting point is 00:11:17 And then I sort of had this kind of real panic moment. This demon I've been chasing for most of my life is still there. And I sort of thought I would kind of quiet that demon by doing everything that I had done. One of my mentors who's extremely well accomplished, I won't mention him by name, but it's one of the people you can imagine, he said to me one day, and I think a lot of top hedge fund managers suffer from this. And they don't talk about it because when you're that successful and you're the head of your firm, there's this shame in being able to talk about things that are wrong, because people look at you and a lot of people just presume that if you're financially successful, it means you're

Starting point is 00:11:57 successful in other aspects of your life, like your family, your friends, and most notably happiness. And most often those things actually are negatively correlated, despite this belief that getting financially wealthy means all those things get solved. And what this mentor said to me was, he said, Jason, I've been to the top of the mountain and there's nothing to see. And I kind of didn't believe it when he said it to me because I'm like, ah, that's no way. And then I kind of had that moment myself in 2015. And I'm like, oh, my God, he's right. And I think there's a number of managers who I've now spoken to over the years where we

Starting point is 00:12:31 could literally have like an AA group of people that would just talk to each other because they can't talk about it to other people because nobody has any sympathy, obviously, for financially successful people. But many of them are miserable people and have terrible family lives and many of them die young and get sick. And I still do, but I had that demon that kind of fueled me to get to where I was. And then unfortunately, my competitiveness continued to drive me despite my illnesses. And I kept going. My financial performance thereafter suffered.

Starting point is 00:13:08 I proceeded to have my only down year after that in 16 years. I was really proud of the fact that I basically hadn't had a down here for my entire career. And it wasn't bad. I mean, I still, from the beginning, you know, I still made double digits for my investor when we returned the money. I knew over the course of the next couple years that this wasn't my ultimate calling. I was doing a disservice to my investors by just keeping the money and still trying if I really felt like I wasn't going to be the best at what I was doing.

Starting point is 00:13:39 And it was also, I'd also have been a student of the industry from the moment I got into it in 98, and I watched a considerable evolution happen where there was just a massive amount of legal edge in the late 90s, because only a third of probably managers even had a Bloomberg when I got started, and people were still going to the public library to get 10Ks and 10 Q's and so information was a tremendous advantage when I first got started. And then with the rise of quants and the rise of the democratization of information and hedge funds all of sudden became popular and lots of people started going into it, I started to watch the reasons that got me excited about being in that space were being arbitraged away. And it was becoming less and less interesting because it was becoming much more competitive and much more

Starting point is 00:14:30 difficult. There was a lot more noise and a lot less signal than there used to be. And so a lot of my challenges that were happening as an investor in 16 and 17 were actually things that I didn't even think I got wrong, but I actually got them wrong, obviously, in terms of price. And so that connection between effort and outcome, which I believe is always a key marker for people's sanity, literally in psychological experiments, if you want to make someone crazy, you disconnect effort and outcome. You know, they've all these famous studies where people like pull on a lever and, you know, sometimes it gives them an electric shock and sometimes it gives them a reward. And if you make it random, it literally drives them crazy. And I felt like there were aspects of at least short term investing.

Starting point is 00:15:15 And by short term, I mean under a year, not like day trading. Some of the shorter term forms of investing, I felt like we're having more and more and more of a disconnect between effort and outcome. And those, there were just a variety of variables that sort of conspired for me that made me ultimately decide that, you know, I was, I was basically done managing a hedgehook. Wow, that's some amazing wisdom and insight. Thank you for that. Let's take a quick break and hear from today's sponsors. All right.

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Starting point is 00:19:33 sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify. com slash WSB. All right, back to the show. Now, before we go on to the next chapter, I just want to touch on one investment. you made that stood out to me, which was your activist involvement into Sun Opta. Now, activism pops up here and there, especially with hedge funds, but it's not as common as it was maybe in the 80s,

Starting point is 00:20:08 especially when you're just running a pure alpha playbook like you mentioned. So I'm curious, what drew you to this opportunity and what made you get involved? Activism for your listeners, and there are a handful of hedge funds who've sort of made their name being activists. Value Act, Bill Ackman is probably the most notable. And an activist is, basically like a hybrid between a private equity investor and a public investor, where you take a meaningful position in a company, you usually have a board seat, and through your large ownership, you try to affect change in a way that you think will dramatically improve and enhance shareholder value. I did a handful of them at SAC. I was involved in a couple of them at Carlson,

Starting point is 00:20:51 and so I had some experience in being an activist, and I really enjoyed it when we did it. It was part of what I think helped me realize that ultimately I am an entrepreneur because, you know, you do have a clearer linkage between your effort and the ultimate outcome when you're an activist because you're literally trying to make yourself right, as opposed to just sort of hoping the management team in the case of a traditional passive investment just gets it right. Sanopta was a company, and we didn't really talk about my, I think we can get to with the human co-piece, but I've had this kind of dual-passing.

Starting point is 00:21:27 in my whole career of health and wellness as well as investing. Because right when I started working in my second and third year of work, straight out of college, I got very sick. And I was diagnosed with several autoimmune diseases and a degenerative eye disease where they told me I would be blind by the age of 30. And I was actually losing my vision and seeing double for almost six months when I was 23 years old. And it was a very difficult time for me. I was deeply depressed. I was ashamed. I didn't really tell people about it and I hit it. And I was also told there was no cure for what I had. I actually solved my illnesses for the most part. I mean, I've had some relapses, but I've basically been in remission for 20 years through food and through lifestyle. And I had to

Starting point is 00:22:11 figure all this out on my own before health and wellness was like a thing. And I ultimately discovered through DNA sequencing that I just, I don't detoxify like a normal human. And so I have to eat and live in a much stricter way than the average human does so that I don't get sick again. And so this has deeply shaped my worldview in a lot of areas. But one of them was health and wellness and how important it is for all of humanity. And I was kind of like a canary in the coal mine in that whatever made me sick in months, it makes everybody else sick over many, many years and sometimes decades, but it's just that I'm sort of a faster responder to some of these common aspects of modern living that's making everyone sick. And so I've had this sort of

Starting point is 00:22:57 really acute sense for health and wellness and for what goes into kind of food and all products that you put either in your body or on your body over the last 22 years. Sanopta was one of these companies that was like nobody knew about them. I'd actually discovered them through my experience with Hugh Kitchen, the snacking and chocolate company that I co-founded with my family. And they were, at the time, the largest organic ingredient provider in the world. And we were buying more and more certain ingredients for Hugh at the time. And we kind of outgrew our middlemen. And somebody said to me, you know, when we were like, well, where do we buy? You know, at the time, it was one of our ingredients. We're like, well, where do we buy this quantity? They're like, oh, you got to go to

Starting point is 00:23:43 synoptic. And I said, who's synoptic? And then I started digging on it. I realized it was a Canadian public company that was also cross-listed here in the U.S. Nobody I talked to had ever heard of it. And I started doing a lot of digging on it. And what happened was, Sanopta also, it was kind of a hodgepodge of a business back then. This was back in 2016 when I first started looking at it. But they also had one of the large, and it's actually quite topical today, they had and now have the largest plant-based milk manufacturing capacity for other.

Starting point is 00:24:17 companies, what they call private label manufacturing in the country. So if you go into Whole Foods and you see an organic 365, which is the Whole Foods brand, or you go into Costco and you see the Kirkland brand, and you want to buy organic almond milk, Sun Opta makes it for them. And now they're the largest private label, oat milk manufacturer in the country, which is relevant because today, Oatley announced that they were IPOing at a $10 billion valuation. And Oatley is going to come out at 10 times, 10 times the valuation of where Synoptus paid. So for your listeners who want to figure out a sneakier way to play OLD, Sanopta is the way. And my belief was that health and wellness was exponentially growing and that more and more people like me, I was sick.

Starting point is 00:25:06 And so I approached health and wellness from a curative perspective. But everyone around me was approaching it from just a, you know, people just want to live healthier. They want to look better. They want to perform better. They want to age well. Well, you know, this is a universal trait of humans. And so I had this governing belief that health and wellness was going to be a segment of a business that's going to rise and grow much, much faster than other segment. I viewed that Sanopta was effectively an arms dealer in a war. And, you know, there's an expression which is in a war. You don't want to pick a country. You want to own the arms deal. And I didn't know necessarily who all the winners and losers were going to be, but I knew that if this company was supplying, all of the innovation that was happening, that they were going to benefit. And what happened right when I first started investing in it, and admittedly, I was 18 months early, which does tend to happen. They made a terrible, terrible acquisition. And so all the trends and aspects of the business that I wanted to be long for were basically overshadowed by this bad

Starting point is 00:26:07 acquisition they did in a frozen fruit business, where they overpaid for something that also kind of had some real operational challenges. The theme was right, but the execution was bad. And so I got really big in it. I bought 10% of the company. We wrote a letter. This is when the stock was about $3.50. Today, it's around $15. And we wrote a letter to the company as the largest shareholder and basically said, we want to help you fix this because your theme is dead on. And literally, if you just do a B plus job, your company is going to go up manyfold, but you got to get out of your own way. And it took a few kind of trials and errors over, you know, a couple years. Oak Tree ended up becoming the largest investor. We helped bring in a few different people

Starting point is 00:26:55 involved on the board. Then another activist got involved, the firm called Engaged Capital on the West Coast. And it was basically Oak Tree, me, and Engage were the top three shareholders. And a very ambitious yet logical plan was established that would take a couple of years to basically clean up the operational challenges and just allow the company to thrive in a way that they were already on path to do. And last year, which was the first year, basically that all the things were firing, Sonopta was the top performing food stock in North America. It was up 360% last year. And as all of your listeners should know, it was my single worst contributor to my fund performance in 2018, which was the year that I returned the money. And we were down small single digits that

Starting point is 00:27:43 year. But so not there was 75% of my loss that year. And then of course, I couldn't allow that. So I created a special purpose vehicle for my investors to basically say, look, I'm going to return all the money, but I'm not selling this position because we're just a little early. And so we created an SPV. And thankfully, I had a few investors who stuck around. I put a considerable amount of money into it myself, and now we're up considerably. And I think it's got a long way to go because in the last 12 months, oat milk in particular has become very, very popular and interesting to a lot of people. Oatley is obviously capitalizing on it. But Sonopta makes the oatmeal for all of Oatley's competitors, and they're all being well-funded. And so I think Sinopta has a considerable

Starting point is 00:28:26 amount of runway to go, and Oatley will only highlight the valuation disparity between them and everybody else. So that ties in really nicely with your Hugh Kitchen experience, which you noted you founded this with your family. And it's become very well known as of late, especially for its chocolate. So if you've seen Hugh chocolate on the shelf, which is my favorite chocolate, I got to say, it's been a huge success and just recently sold to Mondalies. So talk to us a little bit about how you became more involved in that company with your family and helped ultimately bring it to an exit. So the background to Hugh was my brother-in-law, Jordan Bray, around is my wife's brother. So he was aware of the journey that I had just gone through. I

Starting point is 00:29:06 incidentally met my wife right after I kind of cured myself. And I was just a prolific reader of all of these books around health and wellness, biohacking, functional medicine, which is a growing field that wasn't accepted as real science back then, but now is, which is basically treating the root causes of diseases as opposed to the symptoms. And Jordan started reading a lot of the same books that I was reading. And he didn't have my autoimmune issues, but he just noticed that when he started eating cleaner, he performed better and looked better and felt better. And he really got into this style of living. And where Jordan and I gravitated the most when we were doing a lot of our kind of research and sort of studies was around kind of this evolutionary

Starting point is 00:29:54 approach, or what some people call ancestral, which was the basis behind paleo. and the paleo diet. Jordan came to me in like 2010 and said, we're trying to eat this way, which was basically paleo inspired before really paleo was an accepted term. But it's this idea that we don't eat like humans anymore and that we've evolved. And there's a lot of indisputable science behind kind of the evolutionary influences on how we've become who we are. And it also works obviously with animals. And that really resonated with us. But we felt like there weren't many offerings out there. And he said, why don't we create a restaurant that is the manifestation of all of this stuff that we've been reading and doing? Because even in New York City,

Starting point is 00:30:37 it's too hard to find things that meet the guardrails of how we want to eat. And I said, look, I said, you know, I'm a professional investor. Restaurants are notoriously terrible businesses. He was in real estate at the time. I was at a hedge fund at the time. This is before I started Turbion. And I said, look, we don't know really what we're doing, but we know we have a passion. I said, maybe it'll be a decent business. I can't really tell. But frankly, if we can have a place where we could eat every day and we could sort of prove to New York that you can combine ultra simple ingredients that are evolutionarily inspired, where everything in the restaurant would be gluten-free, grain-free. Everything that needed to be organic would be organic. All the animal products

Starting point is 00:31:20 would be wild and grass-fed and sustainably raised animal products. I said, if we could prove to New York that this could be done, let's give it a shot. And we hired a bunch of people because we knew what we didn't know who could help us. Jordan ultimately quit his job in real estate development to pursue this full time. And we took no outside investors. It was all us to fund this very large experiment because my view was this was a very controversial topic at the time. It was unproven. And we did not want to compromise our guardrails. We didn't want any investor ever telling us like, Yeah, why don't you use the shittier ingredient, which will improve your profit margins, and nobody will notice the difference?

Starting point is 00:32:01 We wanted this to be truly what we were willing to eat every day ourselves. And that's how Hugh Kitchen, which started as a restaurant in New York City, in Union Square, got started. And then when we were kind of, we did a lot of experimentation in the year leading up to the opening, which was in October 2012. And we were doing a lot of baking with grain-free flowers and making grain-free cookies and muffins and scones. But we wanted to have chocolate chips for these things.

Starting point is 00:32:28 And our philosophy was no refined sugar. And we could not find chocolate chips that met our ingredient guardrails, which was dairy-free, refined sugar-free, no soy, no preservatives, no additive. We couldn't find it. There were a couple at the time that tasted terrible. And so we hired a chocolatier using our ingredients to try to develop a baking chocolate that we could use in our stuff. And the recipe that we ended up landing on was so delicious that Jordan had this idea of turning them into bars.

Starting point is 00:33:00 And then we started making bars out of the same chocolate that was inspired by baking. And out of just luck, one of our chefs at the time, his girlfriend worked at Whole Foods Columbus Circle. He was bringing her bars. And one day she asked, can we sell these in Whole Foods? And we said, sure. And that's how Hugh Consumer Products business really got born. And it was Jordan's idea to basically take this baking chocolate and turn it into bars.

Starting point is 00:33:22 So chocolate in particular is a pretty crowded industry. So I'm curious what you brought to the table from your days as an investor as you entered into this entrepreneurial experience and what helped set Hugh chocolate apart from the rest. You know, it's funny because we've been asked this. And I do think that quote from Buffett that being an investor makes him a better businessman and being a businessman makes him a better investor, I wholeheartedly agree with that. And obviously, a lot of, I've studied hundreds and hundreds, if not thousands of businesses over 22 years as a professional investor, you know, both long and short. And, you know, I learned a lot.

Starting point is 00:34:01 And I learned a lot the right way and I learned a lot the hard way. And this was no exception. And a lot of those learnings went into, you know, I was the controlling shareholder and the chairman up until the day we sold the Mondawees. And a lot of my learnings as an investor obviously influenced how we built Hugh, how we raised money for Hugh, how we managed the finance, of Hugh, how we hired at Hugh, along with Jordan and my wife, Jessica. And my wife, Jessica, and Jordan, you know, were really the sort of day-to-day operators of the business for the first many years. And I functioned born as chairman because ironically, and this is just sometimes how life goes, I started Turbion within two months of launching Hugh Kitchen, which was a disaster

Starting point is 00:34:40 of a year. But just sometimes the stars just align to kind of make it work that way. The chocolate was never intentional in the sense of, hey, let's go build a business in chocolate as sort of a business plan. We knew we had a winner because of how good the product was and how hard it was to make. I think Jordan and Jessica and I did not appreciate the literally infinite variability that goes into making chocolate. If you had told me, A, what the competitive set look like and B, how hard it would be to make chocolate, beforehand, I don't think we ever would have done it voluntarily. And I think there was sort of this really interesting insight that I learned from the process, which was counterintuitive to what I learned in business school, which was, if you go into a

Starting point is 00:35:26 category that's very well established like chocolate, where you know there's a lot of demand, you know, there's a lot of demand internationally too. It's not just a U.S. phenomenon. But it was relatively homogenous. There wasn't much of sort of a healthy chocolate category and the few healthy chocolates that existed back in 2012 were frankly gross. And they were ultra dark, they were bitter, they were pasty. And they didn't even compare to the taste of like a conventional milk chocolate. But milk chocolate isn't healthy. It's laden with the fine sugar. It's got a lot of other crap in it, you know, the stuff that you would buy in like a gas station or a movie theater. And we developed a

Starting point is 00:36:03 chocolate that we didn't realize at the time, but now in retrospect, it's obvious, that was kind of one of the first that actually tasted as good as anything else out there. And it also happened to be ultra-clean and healthy and actually lower glycemic than conventional chocolate. And so if you go into a category that's very big and homogenous, and you come in with a challenger that's just really different, it's almost like that competition is irrelevant. And in fact, it gives you even a bigger tailwind because you know you already have a category that people care about. And so we just started to take off almost without like intention. And we didn't approach the business in a true, deliberate, like, let's scale this to be huge. We didn't approach

Starting point is 00:36:49 the chocolate part of the business that way until probably like three, four years later. And when we realized collectively that we had something, because our restaurant was actually doing quite well, and the focus was on the restaurant initially. And when we realized that we had something that was truly different and unique and was having such resonance with people that we didn't even know about. And we were helping all different types of people, from people who actually needed to help, like many diabetics consumed Hugh Chauppet, to people who just wanted to have a healthier treat. Then we realized we had something special and then we decided to really lean into it. Let's take a quick break and hear from today's sponsors. No, it's not your

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Starting point is 00:40:42 This is a paid advertisement. All right. Back to the show. So often when you're growing and scaling a company like Hugh Chocolate as rapidly as you did, you're not so often focused on the bottom line, right? You're more focused on growing top line. So I'm curious as to how you approach that, what your strategy was, especially going into this exit with Mondalese, where you focused on producing free cash flow or just growing the distribution? Great question. Now that I've been an angel investor and a private,

Starting point is 00:41:13 I'd say venture investor for the last decade, I've seen a lot of different approaches. And usually in venture, particularly if you have a winning product or early stage stuff, you never try to make money because the returns on your capital to reinvest in the business will always be much greater than you taking that cash as a dividend. And that is why it makes sense to take whatever potential profits you might have and just keep redeploying because you're getting effectively a much better return on that capital. We actually, because it was a family business, we only had one outside investor, which we took on a few years after we opened, and they were a minority, but they like us were very focused on cash flow. And our restaurant

Starting point is 00:41:54 actually made money. And so we had this sort of luxury of using some of that cash flow to push it into the consumer products business, the CPG business for growth. But we did it in a much more slow way than some of the other companies have been involved with that raise venture money, meaning from venture capitalists who have a time horizon where they want you to grow as fast as you can, and they ultimately need to sell that business so that they get paid. As I watched some of these other businesses that I invested in, it had actually really good financial outcomes. I had a few early investments in some health and wellness companies that were sold for big multiples to public companies. I felt like in a couple of the instances of those, they sold too early.

Starting point is 00:42:35 They harmed the brand because of the venture money that was behind them. They kind of grew way too quickly, they oversaturated, they harmed the integrity of the brand because they just needed to get into as many stores as possible. And Jordan, Jessica and I had this view that we didn't want to do that, that we wanted to make sure that it's okay if we grew more slowly and we never wanted to compromise on the authenticity and the integrity of what we were offering. And that ended up being, I think, a really good decision. We grew much more slowly than some of our, quote, competitors, but I think we ultimately got a much higher multiple than our competitors because our brand was so much stickier. Before we sold, we had metrics that you could see like key performance

Starting point is 00:43:20 indicators on how many bars and other products now. We have crackers and we have hunks, which are chocolate-covered nuts. And our kind of fastest growing skew is our huge gems, which are our huge chocolate chips, which you can both bake with and eat as a snack. And our metrics around all these products were really unprecedented in terms of how frequently they would turn, turning meaning like sell in a store, and how many dollars we would generate, you know, called dollar velocity in a store. And to an acquirer, what they care about is, okay, you're pretty small relative to us. You know, in the case of Mondalys, we took Mondalies on as a small minority partner in the beginning of 2019. Mondalies is the largest snacking company in the entire world. They're the

Starting point is 00:44:05 parent company or the holding company behind Oreos, Cadbury, Toblerone, Chipsa Hoy. And more recently, they've gotten into some healthier brands that they bought. They bought Enjoy Life Foods, which is an allergen-free brand. They bought Tate's cookies and they bought Perfect Bar. And they've been actively trying to skew healthier. And I thankfully think they're actually doing a good job at it. And we kind of looked at ourselves and we were thinking about like, what do we want to look like when we grow up and scale and really providing access to a lot more people was a big part of our mission. And we knew that we thought we could create the best chocolate on our own, but we didn't have the learnings of the know-how on how to get truly national and how to get

Starting point is 00:44:47 into all of the big change, how to deal with all of the challenges of producing in scale, and how to produce in scale without compromising on quality and how to buy much more of our ingredients, again, at the same quality that we wanted. And Mondalys made it clear that they were very understanding and had shown in their previous acquisitions that they didn't want to compromise on the quality. And they didn't want to compromise on the brand mission. And we did a lot of diligence. And we got comfortable with them as a partner.

Starting point is 00:45:14 And they were our partner for almost two years before we sold to them. You recently launched a SPAC with Rohan Oza and his crew over at Kavu. We've never really talked about SPACs on this show. So I want to just break it down for our listeners really quickly. give a little bit of a SPAC 101 breakdown. So they understand what that is and what its purpose is for. So SPACs have actually been around for 20, 30 years, but they've gotten very, very popular in the last two years for several reasons. A SPAC is a single purpose acquisition company, and it is basically a blank check company that is public, where you go to a group of public

Starting point is 00:45:55 investors, anyone can participate, and you raise a pool of funds that is locked in a trust bank account. You then have, so it's just cash when you raise it. And there's a sponsor group, which are kind of think of it like the management team of the SPAC. The sponsor group is behind it. And you are betting on that sponsor group to identify a private company that you think should be public. So a SPAC is, there's a misnomer that SPACs, quote, buy companies. Spacks don't buy companies. Spacks are typically much, much smaller than the company that they, what's called reverse merge with. And what a SPAC does is just to use round numbers, you know, our SPAC, Human Co-acquisition Corp, raised approximately $300 million. That $300 million is sitting in a bank account.

Starting point is 00:46:40 Our sponsor group is the Human Co team and the Kavu team. And Kavu is one of the top-performing venture funds within health and wellness and consumer package goods. They've had nine exits, the last five years. They've had numerous unicorns. Rohan, as you mentioned, is on Shark Tank. He's been involved in some of the best brands in the last decade, including he was the chief marketing officer in vitamin water when they sold the Coca-Cola. Rohan has an amazing background and his partner, Brett Thomas, have an amazing background in identifying brands that can become bigger. And so our team, as Humico, their team is Kevoo. And then we also assemble a group of our board members who bring real interesting learning,

Starting point is 00:47:23 and experience to the table that money cannot buy. And if you look at some of our board members, three of which were very high-profile public company executives. For example, one of our board members is a guy named Brian Kelly, who was the president of Coca-Cola, then was the CEO of Currig, and took Green Mountain and Currig to a $14 billion valuation and sold it. And here's a guy who ran a huge public company. We also have a guy named John Foraker, who was the CEO of Annie's, the organic food brand that he took public and then sold it to General Mills. And so we have this great group of board members. And we all bring a lot of things to the table. But right now, it's just cash in a bank account. And what we have is we have 24 months to go find a private

Starting point is 00:48:05 company that has an enterprise value of, call it a billion dollars, up to $8 billion, that are private. And a SPAC effectively shepherds that company public and helps bring it public. It's an alternative way to going public. And the reason that in the last 18 months, there have been probably 300 SPACs that have been created, which is probably more than like the five years combined before that. It's been well over $100 billion has been raised in bank accounts. And everybody has 24 months to find a private company to bring a public. And SPACs are controversial because it's very much about the management team, the sponsor group. Spacks are a way that the sponsor group can get very wealthy. The sponsor group typically takes 20%, like a hedge fund, of the capital that's raised.

Starting point is 00:48:55 In many instances, the sponsor group is just interested in matchmaking, where all they're trying to do is find a private company, basically say, hey, we're a good way for you to go public. And then the investors, it's actually a good vehicle for the public market investors too, because prior to the announcement of a SPAC has to go look for a private company. And then what happens is, let's say we find a private company, we will announce it that we have now come to terms with a private company to bring them public. It's almost always a much bigger company. So the SPAC will end up owning 20, 15, 25% of the pro forma.

Starting point is 00:49:30 And by the SPAC, I mean all the shareholders of the SPAC. And then the existing company will still have the super majority of the equity. you as a public market shareholder, you have a vote when you announce the deal. If you announce a deal and the public market hates it, they can vote no and block the deal from happening. And you effectively have a put option, not effectively, you actually have a put option at $10 a share, which is where SPACs typically go public, and you can get all your money back at 10. And where you can lose money as a public shareholder is after the deal gets voted through and officially what's called D SPACs.

Starting point is 00:50:05 Once it de-SPACs, now you actually just have a regular public company. And the shareholder base of that is going to be a mix of the participants in the SPAC itself, the sponsor group, and the company that was private that is now public. In the case of human co-acquisition Corp, and of course every SPAC sponsor is going to be biased towards themselves, but we're taking a different approach. And we are not just matchmakers. This is our day job. This is not a side hustle.

Starting point is 00:50:32 So this is what we do every day. We observed that there were a lot of large private company that we think should be public. And we think the public markets do not have enough offerings for mission-driven, ESG, socially responsible type of investors. There's just not many ways to play it. And Tesla has become sort of de facto way for everybody to play ESG. Beyond meat in the food space was probably the first kind of high-profile play that went public and now commands an outrageously high valuation because there's not many ways for public shareholders

Starting point is 00:51:07 to play. And so that's what we're doing in human co-acquisition court. We went public two months ago. We are actively seeking and talking to many private companies. We obviously can't say who and how and how far along we are because we are a public company and we do have to, you know, obviously adhere to the SEC regulations. That is what we're doing for big companies as our spec. And for smaller companies, call it $300 million and smaller. That's what core human colors for it. So for big companies, we're using the SPAC and for smaller companies we're using our holding companies. So yeah, I know for example in food and beverage, for exit opportunities for investors, there's sometimes only a handful of what they call

Starting point is 00:51:45 strategics, right? Those bigger companies, you mentioned like Mondalese, who are willing to take on a smaller company and put it under their umbrella. So it sounds like the SPAC is going to democratize this a little bit more and allow for a lot of these companies to be able to exit or at least go public and pay off their shareholders in a new way? It's an old way, but it's coming back into vote. It is definitely a way for democratizing. It's going to massively accelerate the number of private companies that can go public. SPACs have some significant advantages over the regular way IPO process.

Starting point is 00:52:18 It is much faster. You do not have to roadshow for months and months and months. You get a determined price from the SPAC as opposed to when you go public the regular way, you don't know where the market's going to value. Whereas when you go public with a spec, the price is determined. And so that's a big advantage. And probably for the kind of companies that we're talking to at Human Co Acquisition Corp, one of the greatest benefits is that you get our entire team now as part of your team. You get our board. You get people like Rohan and Brett. You get the Human Co team. Several of us may or may not become board members of your pro forma company. And on the Human Co side, where we have a lot of

Starting point is 00:52:55 public market experience. My partner and I, Ross, we both have over 20 years of public market experience. A lot of these private founders don't want to deal with public markets. They're worried about reporting quarterly earnings. They're worried about investor relations. They're worried about watching their stock price move every day. There are a lot of downsides to being public. And I think having a sponsor partner that knows how to navigate that part so that you as a management team of your private company can focus on what you do best. I think that's a compelling value proposition. Well, you touch on ESG, so I just want to spell that out for our listeners. That's environmental, social, and corporate governance-focused companies. So you've mentioned Tesla

Starting point is 00:53:35 is sort of taking up all the market share of ESG opportunities in public markets, which I think is a fascinating viewpoint. What do you think the future of ESG looks like beyond SPACs in the public markets? Well, I think it's accelerating massively now. I think for a very long time, BSG was viewed as almost like a tax where B corporations and companies that had a mission of trying to help other stakeholders, not just stockholders, but other stakeholders like people and the environment and your employees and aspects like diversity. Those concepts used to be viewed as sort of like they were mutually exclusive. Like you couldn't have a good return if you cared about all those other things. And in the last decade, it's been very clear that those two actually

Starting point is 00:54:24 are correlated and not negatively correlated, and that many ESG-oriented companies who care about these other things attract better talent. They actually compound returns faster. And in some cases, they actually grow from a revenue perspective, it's not just the valuation. From a revenue perspective, they actually grow faster because the people who want to buy those products actually care about who's behind us. Why are they doing this? Does this support my own personal values? And in the last decade, what's been great about some of the younger generation is that they're starting to vote with their wallet and starting to buy products that actually are kind of manifestations of their own personal values. And I think companies like Hugh benefited from that.

Starting point is 00:55:07 I think certainly companies like Beyond Meat, that's almost their entire business model and a lot of big kind of sexy private companies like all birds. There's many really successful companies that are using these aspects behind them and are working. And the more they work, meaning the returns come, the more capital will go towards them. And the more capital that goes towards them, the more innovation accelerates. And it's this virtuous cycle that will continue. So I am super bullish on categories where you have this intersection of mission and business. And I don't think they're mutually exclusive. I would caution your listeners, though, that there are many concept companies, what I call sort of pie in the sky hope stories, that have no prospects for years and years and

Starting point is 00:55:55 years of ever generating even revenue. And there are some insane things happening in the public markets right now that are very scary. And as investors, and unfortunately, I've lived through a few cycles, including 99, 2000, and then 2008 as an investor. There are going to be many of these companies. that sound like they have a great mission and have a great hope, but go to zero. And what I always like to tell investors and entrepreneurs and companies that even were involved at the Chumico is you can't help people if you don't have a viable business model. You're not going to help people if your business doesn't succeed. The best way you can help people is make sure you have a viable model that can employ more

Starting point is 00:56:35 and more people, that can raise capital, that can generate real ultimate profits and ultimately be a real business. And I feel like right now we're in a very bubbleish period where people are ignoring business models again. And the last time I saw that was 1999. And so you definitely have to be careful as an investor right now in the difference between speculation and investing because there's going to be a lot of companies that go to zero. And I just want everybody to be cautious about that, that they're actually doing their real work about like, how does this turn into a real business. So I know that you've thought about this, but at what enterprise value would you consider taking human co-public? Oh, I'm not saying that. I think we're too early. We're still in like

Starting point is 00:57:21 any one, and we're really building it. And we have a lot of work to do to continue building it, to continue hiring. We're going to announce a very high profile partner in addition to our company next week. It's early days, but it is something that I do intend to do at some point. So, Jason, thank you so much for coming on our show. Maybe hand off to our audience where they can learn more about your funds, your SPAC, Human Co, your other endeavors. We have a website, Humanco.com. Our SPAC has its own website, HumanCo.com. We're listed on the NASDAQHMCO as a ticker. We're also on Instagram at Human Co brands. I'm not that active on social, but my handle is at Human Carp on Twitter, at Human Carp on Instagram, and obviously

Starting point is 00:58:09 keep a lookout for the evolution of our own products and brands. Coconut Bliss, Monty's, and Snow Days are all brands that you can follow and try if you want to sort of experience what we're doing. And then finally, you know, if you're interested in playing plant-based milks, Sonopta is a public company. The tickers STKL, and it will be highlighted as Oatley is working to go public. and thank you so much again for coming on the show. I really hope we get to do it again sometime. All right. Thanks so much for having me. I appreciate it. All right, everybody. That's all we had for you this week. Be sure to tune in next week

Starting point is 00:58:44 where Stig is going to be sitting down with the Mastermind Group. And if you're loving the show, don't forget to subscribe to the feed so that you get these episodes in the app every week automatically. And while you're at it, go ahead and follow me at Trey Lockerby. Find us on Twitter. Check out theinvestorspodcast.com. Or go to Ask Theinvestors.com to send in a question. And with that, we'll see you again next week. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to

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We Study Billionaires - The Investor’s Podcast Network - TIP340: Hedge Funds, SPACs, and Chocolate w/ Jason Karp

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