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You may have heard me reference the idea of maniacs on a mission and how much that idea excites me.
Well, David Cenra is my favorite maniac on one of my favorite missions with his weekly crafting
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With well over 300 episodes, your heroes are surely in the lineup,
and his recent episode on Oprah is particularly great. Founders is a movement that you don't want
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Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best.
This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you
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My guest today is Ali Hamad. I first spoke to Ali on this podcast six years ago. He was 26 at the time
and four years into building his investing firm Coventure. I said at the time that Ali is an example
of what's possible when you think creatively, and today's conversation underlines that point.
Six years on, Coventure now manages $2.5 billion and Ali continues to find alpha in esoteric places.
We talk about YouTube catalogs, creative opportunities in real estate,
and how venture investing helps them get better at credit. We also talk about his lessons from
building an investment firm and what it's like to work with Michael Ovitz more recently.
If you want to go deeper on a specific case study with Ali, I'd encourage you to listen to him,
Breakdown Spotter, and their YouTube strategy on business breakdowns. You'll find a link to that
in the show notes. Now, please enjoy this great conversation with Ali Hamad.
All right. So this is a really cool opening stat, which I just realized this morning.
Last time we did this versus today, Coventure, the business that you started in your dorm room,
is 10 times the size that it was last time we talked, which was, I think, in 2018-ish,
something like that. That sounds right. So call it 200-something million of assets to
two-something billion of assets. One, I just think that's incredibly cool and interesting.
Congratulations on having built something consequential like that. But it's also a great way,
since there has been just objective growth, to talk about the lessons on the investing side
that you've learned in that intervening six years and the lessons on the firm building side,
which when you build a firm that size, and in your case with multiple strategies, multiple asset
classes, lots of people, it's really hard to build any business, but an asset manager too.
That's kind of how I would like to steer the conversation. And maybe beginning on the investing
side, because when we first met, the thing that stood out about you was this almost childlike love
of exploring new things emerging in capital markets. I think we called that episode creative
investing or something like that. And at the time, you were pioneering a new style of credit
investing. Maybe just describe what that has been like. Do you feel like you've continued that childlike
exuberance for things? And how has it evolved since 2018?
I think a lot of it is that we just love investing. And I used to take that for granted. I assumed
that everybody who worked in finance loved investing. And it turns out that a lot of people
in investing liked being liked. And a good way to become liked and have stature, ego or whatever,
is to be an investor. And doing investments that you will be liked for is sort of a dangerous
business to be in because it just almost definitely leads you to hot areas that are overpriced.
We never got that memo. We thought the whole time we were supposed to be like investing
interesting things that we think we'd make a lot of money on. So that was just the easy beginning
of it. I don't think I naturally got into investing. Like it's not like I was picked to be an investing.
It's not like I had a normal job that would lead me to investing. It's not like we got
called by a headhunter or recruiter to get placed into an investing role. I was like a pretty horrible
experience trying to get it up and running. The way we used to do it is we run around finding
interesting deals, convincing the founders that we could go get capital for those interesting
deals, then convincing a bunch of people they should give money to somebody who had no resume,
no track record, and no business investing, trying to convince them that we had found something
interesting. And it built like a really useful muscle. We couldn't go find another direct
lending deal and convince people to put money into it because there's a lot of places that you
could go do a direct lending deal. We had to go find something that was differentiated
and it had to be good. It had to be both of those things and we fought our way into it.
And I think that if it had been given to us as opposed to fought for, it wouldn't be so valuable
to us. And now you mentioned the statistics. By the way, their surprise to you is they are to me.
We're just really grateful for it.
I've noticed this trend recently that lots of the great investing stories started this way as
unfunded sponsors of deals, whether they had some sort of pre-fund or some collection of SPVs.
Justin Ishbya comes to mind. Eric from Stable comes to mind as a recent example.
Both started fairly young, similar to you. Do you think that that's almost the ideal way maybe to
get into investing, especially if you're starting very young and aren't coming from some famous
platform where you've been groomed or whatever, that this scrappiness early on is a feature?
I think it's useful as somebody who was the fundless sponsor, the ideal way. I'm not sure I
would say. I mean, it was a pretty difficult way to live. Again, you got to go find a company that's
interesting. You got to convince them to work with you and then you got to go raise the capital
in a very compressed timeline. It's very stressful. Eric actually said it on his episode. You have
to balance this fine line of producing confidence to the founder, but also making sure you're very
straightforward about where you are in the process. I do not want to do that again. That was not fun,
but it was definitely useful. It was useful for a few different reasons. The first is you do learn
the muscle of financing that's differentiated. You got to be able to sell the product. You also
are under a magnifying glass. If you're managing a fund and you have 20 positions in the fund and
one of them isn't doing very well, you convince yourself that it's not a good use of your time
to focus on that one out of 20 position because there's other 19 positions that have a better
opportunity to return the fund or drive returns. If that position doesn't work out, you still have
19 other shots on goal. When your business is being built deal by deal, it has to work. There's a
magnifying glass on the deals. The first investment we ever made as a firm that got any amount of
scale, it was a journey. We invested in the company. The business was doing incredibly well for the
first three years. Then it started to stall out. Their biggest client committed fraud. Their second
client ended up selling. Then they saw a reduction in growth. We had to raise multiple bridge rounds
into the business. We had to change out management teams. What ended up being a really productive
way is the founders are still involved. Today, the company is doing better than it's ever done.
It's more valuable than we ever expected it to be. I think our multiple on the investment is probably
over 100 times at this point. Man, that was brutal. I bet you if that deal had been one out of 20
in a fund, would we have flown out every single Monday morning to go see the management team and
work on that transition and work on the business and stick our necks out to help bridge the business
over and over and over again? Maybe. If that's how you learn how to do investing, that's how you
start, every other deal feels a lot easier. You deal with lots of investors now. I think you've
met lots of the same people I have. You're a connoisseur of this discipline and of the firms
that have been built to do investing as a business. Do you have an overall philosophy of the investing
world that you've developed? How do you think about what actually drives firms that get built,
investments that get made? We call the creative investing the first time where I think you were
really enamored of these unsettled frontiers and that there was huge opportunity at the frontier.
That's how you built your business. With the benefit now of six or seven years and a lot
more scale on a bigger team and all these battle scars, all these wins, do you have an overarching
view of the investing world that you could share? One of the questions I get asked a lot is which
firm do you most admire and want to be like? The answer is usually there's a bunch of firms that
were inspired by, but each of those firms were founded by different people who have different
skill sets than we have. They were all founded during different periods of time. Trying to
replicate something that's unreplicatable would be a really bad idea, but there are certainly firms
that were inspired by. We're inspired a lot by Eldridge, which I think has an incredible investing
machine. I think there's a few things they do really well. One, they have a very small team at
its core. They've built this investment capital machine by being an insurance holding company.
They have a flexibility to invest across asset classes and be sophisticated when they do so,
and they do an amazing job of hanging around the hoop for a trade, waiting for the trade to come to
them. You can only do that when you're in multiple asset classes. If you're a seed investor, you
can't wait for the trade to come to you because if you miss it the first time, you've missed it
forever. They've built a machine where they've never actually missed anything, as you can just
hang around for a really long time and then act really quickly in a matter of a couple weeks in
a large transaction when it really matters to them. What do you think the keys are to doing that?
One of the keys is to have high surface area with companies. They have a high surface area
because they can invest in a company in many different ways. The second key is they're not
vintage oriented. They're a permanent capital business. They don't care if they hit the deal
in this vintage or the next one. The third is they're a small team, so they're nimble and they
can act quickly. When you're a bureaucracy and you have a 180-day investment process, you can't
move quickly. I think that they're almost like an oxymoron in their ability to act in size,
but also their ability to act quickly. By the way, a way a firm like Apollo can do that
is Apollo puts decision-making in many people's hands. If you listen to Mark Rowan talk, he talks
a lot about how the average partner, I think that's still true, has been at Apollo for 18 years.
What Apollo has done is they've been very disciplined about finding young talent
and growing them in the organization. What that's allowed them to do is one, find good talent.
It's much easier to find somebody who's really young, grow them over time. Imagine underwriting
somebody and promoting them when you've actually worked with them for a handful of years than trying
to hire an MD that you've interviewed for a 90-day period and done some reference calls on.
So you have a higher hit rate. The other thing that they have developed in the firm though is
like-mindedness. It's not necessarily good decision or bad decision-making. It's do they make decisions
in the way Apollo would make decisions? What that's allowed them to do is have many individuals in
the organization who have been trained by the firm to make good decisions or at least decisions in
the way that Apollo would want to make them and then act quickly. In each of those cases,
very different organizations, we have no business trying to be like either of them because, again,
we were founded during a different period. I'm not like the management teams of either of them,
but we take tons of inspiration. I think the real key is figuring out who you are and what
you're good at and then trying to find a strength that's sincere to you. People, for a long time,
I wanted to, I looked at the Blackstone and there's a lot of things I like about Blackstone.
I'm just not like them. So trying to be better at Blackstone than being Blackstone would be like
really dumb. How are you unlike them? How are they in a way that you are not?
Well, Blackstone was founded as a private equity fund when that was still a really good idea to
start a private equity fund because there weren't that many at the time. Blackstone got into real
state at a time that was still really good to get into real estate because you could still outscale
other organizations. But Blackstone today is more of an asset management firm that has built a brand
of, we are going to be best in class in asset classes that are already large and we're going to
be the best at being the biggest. I don't think that opportunity exists anymore. The things that
I admire about Blackstones, I think they create a huge talent density. I think they take a level
of seriousness and care about the investments that they're in. I think that they've found a way to
have structural advantages over other people. I mean, Blackstone TacOps is the only fund that's
that big that can do the trades that TacOps does. And so they're usually the only ones or one of
the only few in the room when they're in a deal. Blackstone real estate is the same. They just
have a different opportunity because they were founded at a different time.
Aside from the firms that you've mentioned, what is the quirkiest asset management or
investing firm that you've encountered that you respect?
I think the quirkiest firms are the ones who have the least amount of rules. And the ways that you
have the least amount of rules are either by having such good returns that nobody tells you what to do,
having it be your own capital base, or having capital from some distribution channel that you
have a commercial relationship with, but not a social relationship. So what do I mean by that
commercial versus social relationship? So if somebody goes out and raises a fund, like if I
go raise a fund, I have a commercial relationship with my LPs, which is my sub docs, my LPA and a
bunch of other contracts. And I have a social relationship, which is, hey, I raised money from
you, and I'm going to do X, Y, and Z with that money. And my job is to earn excess return,
not just to earn it, but doing it the way I told you I was going to do it. And the challenge with
that is usually funds are 10 years long, at least in private equity or venture capital,
or a lot of long-dated asset classes, maybe they're three to five years if it's a
shorter duration asset class. And you basically predict how you're going to behave over that
three, five, and 10-year period. And so you have that social contract where you can't deviate your
behavior even when it's the right thing to do. When it's your own capital, it's a little bit more
intellectually honest, because if you change your mind, you don't have to report to anybody,
you're changing your mind because you think it's the right thing to do. If you have capital that
is only contractual, by the way, an insurance liability, and is an example of that, if you own
an insurance holding company and you sell liabilities to policyholders, you don't have a social contract.
You have a commercial contract that you owe them a 4% on the retirement duty, a 5% whatever it might
be. And after that, it's completely up to you within the bounds of what the NAIC will allow you to do
and being a good steward of capital and having a high level of certainty that you're going to get
the capital back. By the way, messing with LPs is one thing, messing with policyholders, completely
different ballgame, but it allows you to be a lot more flexible and interested in how you
deploy it. And I bet you if you found the most interesting investment firms, you usually fall
in one of those buckets. Either a firm that's returns have been so ridiculous that you can now
do whatever you want because your LPs are just, we'll say yes, it's your capital like a Soros or
a Sercano or a firm like that. Or it's an organization that has a contractual but not a
social contract with its LPs that allows them to be nimble and new. The other one are the firms that
run by their founders. Like I think one of the problems with a lot of investment firms,
and one of the reasons by the way, generational transitions haven't worked so well,
is when you go through a general transition, the new CEO's job is like not messed up with the
founding generation created. So if you take it over, you're like, oh my god, I was given this
incredible seat. I'm so grateful to the founders for having even built the firm in the first place.
My job is to make sure that I live their legacy forward, we maintain the quality of the organization,
et cetera. But the problem is like investment advantages change, the right strategy changes
over time. Like what are the odds that venture capital or asset-back credit should look the
same in 30 years than how it does now? Like almost 0%. But you're tempted to try to just
like not break the thing. So the other thing that I look for is firms that'll still run by
their founders because if the founder says, hey, we were doing this thing ultra successfully before,
we should now change, everyone's going to follow them into the dark night because they're the founder.
If it's a new CEO who's like, look, I know that that founder built like an epic investment firm,
the whole firm was built around discipline and quality and like sticking to our knitting.
But let's not stick to our knitting anymore. Let's change what we're going to do.
You better get this first few trades right. And there's just so much career risk. And by the way,
the type of person who rose to the top of that organization, it's probably less of an entrepreneur
and more of like a senior manager. So those are trademarks of firms that are very likely
to end up doing interesting things. You talk about maturity of asset classes and the relationship
between like time and scale of an asset class or a style and opportunity within that space
that you've observed. I can tell you one of the things that we think it makes us most differentiate
an asset-backed credit. And I think it's actually an interesting moment to sort of think about,
because in our firm, we do a few different types of investing. We do venture capital investing,
which a lot of the people who listen to this are very familiar with. We do asset-backed credit,
which is part of private credit. I always find it kind of amusing that private credit is all
stated as one thing of people are putting money into private credit. What does private credit
really mean? By the way, to most people, it just means direct lending, but there's many parts of
private credit. So we do asset-backed credit and we do hybrid capital solutions, which is sort of a
mix between credit and equity. And each of the different asset classes have pluses and minuses.
And we often talk about how do our different asset classes and investment strategies help each
other as opposed to hurt each other, because one temptation is you could get scattered or think
about too many things or spread yourself too thin. So it's really important to us in our
organization that by doing one type of investing, it makes us better at another. And I bring this up
because you asked the question about how long has an asset class existed and its maturity and where
it is in its lifecycle. The thing that venture capital brings to our credit business is not
the diligence of the rigor. I mean, I think a lot of people when they hear venture and credit,
they get spooked because they think, oh, credit, but more risk. That's not what it is. Actually,
the way we do diligence is just as rigorous, just as institutional as any other credit fund.
In fact, the goal is to be boring in how we structure things, it's to make it look
the way it's supposed to. The thing that we do we think better than other people on credit
is we spot markets that don't matter today, but will matter at some point in the future.
Because unlike venture, where the smaller you are, the easier it is to be good,
in credit, you almost want to be bigger to be good. I mean, the reason, again, that Blackstone
is so good at real estate or Blackstone TacOps is so substantial, they can just outbid other people
on size. So the only ones in the room, and then they have structural advantages once they're in
the business. The reason Apollo Athene is so powerful is it's like by far the biggest insurance
company. And so when there's a trade that's meant for an insurance company, they can just outbid
anybody else in the market because they're the only ones there. So as a smaller firm, you know,
and sure we've grown since the last time we spoke, but we're still small in the scheme of things,
how are we supposed to be an asset-backed credit where we can be the dominant player in the room
compared to others? And the only way we can do that is to be the only in a market that's too
small for other people to care about, but we have ambitions to be a bigger firm. And so we have to
then take a bet that that market will grow over time. The venture capitalist in us is good at
predicting future originations and predicting when markets are small today, but will be big tomorrow.
That's a muscle that other people in credit don't have. And so then we enter a market when it's really
us and only us. We aren't going to be in a market if we think it'll only go to $25,000,000,000,
$500,000,000, because that's just not that interesting. Credit is a business where you
can only really make money if you get to scale and you can only be dominant and have good returns
if you get to scale. And the other thing that's really nice about those new asset classes is
they haven't already been destroyed. The thing that we think is kind of funny is the older an
asset class, it's almost like the worst it's gotten. Like student loans, would you ever have a loved one
own like student loans in their PA? Like probably not $200,000 consumer loans that earn like a four
or five percent yield. Auto loans, would like you ever want to own an auto loan in your PA?
Consumer loans, a lot of these really mature asset classes have just been completely destroyed by time.
And why does time destroy them? Well, first off, there's a lot of people who have realized those
asset classes are big. And so they bid against them and they compete with each other and capital's
commodity. So you have like one smart person trying to outsmart another smart person over like three
or four basis points. The other is the older an asset class, the more it's had an opportunity to be
priced based on how capital markets work, not based on its risk. What do I mean by that? Well,
in something like auto or student loans, they're rated. Why are they rated? Well, they're rated
because they've been around long enough for a rating agency to build a base case of what they
think default rates will be. They then can build a loss coverage ratio. They think default rates
will be 2% and they can incur 6%. That's like a three times loss coverage ratio. And credit people
think, well, gosh, isn't that so great? Three times loss coverage because they can be rated,
they can be held by organizations that are regulated. A bank or an insurance company are
examples of that. And banks and insurance companies have cheap forms of capital because they're
regulated. What does that mean? Well, if I'm a depositor and I give my money to a bank, I don't
require a lot of return from it. Why? Because they essentially assume it's guaranteed by the government.
If I'm a retirement annuity holder or I own a life insurance policy, I don't require a higher
return from that. I don't exactly know how insurance works usually as the average policy holder.
But I kind of assume that God forbid something happened, the government will step in and save me.
The insurance company promised me and I didn't hear anything about how the way my money is being
used is investing risk. So I'm sure it's guaranteed. So these two regulated forms of capital have
cheap capital. Because these older asset classes are rated and rating agencies are tied to what
regulators will allow these cheap forms of capital to hold, those asset classes have no return anymore.
And so if you're trying to be a credit investor and earn money based on the risk you're taking,
how are you supposed to compete against regulated organizations? So these older asset classes
have largely just had the yields taken out of them. And then where the yields haven't been taken out
of them, say in the residuals like the bottom equity piece of these levered structures or whatever,
you have like a lot of really, really smart people all competing over them. I just don't think that's
a way to win in credit. And what's really interesting is if you think about like all the
blow-ups in credit, it's almost always old asset classes. You never hear, not that we do income
share agreements, for example, you've never heard anyone get blown up over income share agreements.
You never hear of anybody getting blown up over something that was perceived to be risky,
because it's structured correctly, it's sized correctly, it's not overlevered. And by the way,
Milken figured this out in like corporate credit. It turns out that like it's more risky to do
investment-grade credit where you're not getting paid for your winners. So if you have one loss
at like tanks your portfolio, and it was a lot less risky to do deals, we were getting paid for
the risk. That way, if there were a couple of mistakes that you made along the way, you still
got paid enough. Like the same is true in asset-back credit. It is much better to find some of that
nobody else is in where regulated institutions can't yet finance them, where you can pick the
market before anybody else realizes it matters, and then find ways to crowd people out over time.
What's a good recent example of, and I'm asking for recent so that it's not a sure thing,
of something that is small today, a market that is small that you could serve with credit today,
that you think could become big, just to bring the idea to life?
Yeah. I mean, the deal that we've legged into pretty significantly recently is YouTube catalogs.
YouTube catalogs are basically like music royalties. It's a media asset with a declining
decay curve of revenues. We found a company called Spodr, which has become well-known
really from us backing them over the handful of years we were there from the beginning.
They've become the dominant, really like almost the only player in that space,
where they can go find these media assets with a declining decay of revenues.
They can underwrite them using historical viewership data from YouTube that only they have.
They can then finance these catalogs. And then by the way, once they own the catalogs,
they can go to large advertisers and offer them premium ad space against brand-safe content.
And so they make more money on these catalogs than anybody else can, which is why when people
try to compete with them, they can't. And they've had a handful of people try to come into the
market and they just get crowded out. Well, people don't realize about that asset class,
because they think it's really niche and new, is one, YouTube's been around for 20 years.
Two, it's been growing at about a 40% cager still. It sends something like $15 billion out per annum
to YouTubers. And if you finance that asset class at anything close to what music royalties are
financed at, you're looking at something that's in the tens of billions, $100 billion of asset
class over time. That'd be one example. The other example that we're spending a bunch of time in
today that's much smaller, that we have a smaller position in, what I mean by that, it's like tens
of millions that we think can go to billions of dollars, is buy before you sell loans. It is
harder now to sell your home than it was before. It is harder to generate liquidity to go buy a home
than it used to be. And so what we do is we find homeowners who want to put a down payment on a
new home, but don't have liquidity. They're also being told by their real estate agent, hey, in
order for you to sell your home, you ought to do renovation financing, fix the driveway, fix the
kitchen, something similar to that. And so what we would like to do is we would like to make you
initially a small loan, so you can go fix up your home, call it $20,000, $30,000, which most people
don't really have out of pocket. And because these homes have been lived in for a while, the mortgage
is mostly paid down. So you're in at below a 50% LTV often, then we'll even buy your home from you
at a discount to what we think it's worth, which we'll explain how that works in just a moment.
You take that proceeds and you buy a new home. So now you're not living in a hotel for this like
weird period of time. And then we'll go sell your home for you. When we sell it, we take our amount
back, we send you the difference. We're not trying to like rip people off or anything. We just want
to make sure that we're getting in at an LTV that by the way is much lower than a mortgage. So it's
lower than 80%. And the duration on these transactions is like 90 days, 115 days, you can get paid
one and a half, two times more than a mortgage would be because if you went to a rating agency
and you said, isn't this such a safe asset? Shouldn't you rate this? They'd say, well, it's not a
mortgage. And you say, well, I have title to the home, I'm actually better than the first lien,
because there's no one to even foreclose on. There's no humans in the house. There's no lender.
I don't have like a second lien that I have to work out. I literally am the whole owner of this
home at a lower LTV than a mortgage would be. And because of the way capital markets works,
it just can't be rated yet. That's an example to us where if you look at just sort of like the total
transactions of residential homes in the US, that is like a tens of billions, $100 billion
asset class, we're getting paid probably 50% to 100% more than you want to be.
How is that different than like the iBuyer public companies open door, etc.
A few different ways. The first is these iBuyers are often coming in at a high LTV.
They're usually not doing any improvement of the home. The real answer is a lot of them were like
overfunded by venture capitalists and weren't really doing diligence. There's an extreme example,
and I won't name the iBuyer who did this. We had an individual sort of associate with the
organization and they took a camera and they videotaped a home that was not the home they
submitted to the iBuyer and the iBuyer approved it. I actually don't think that the iBuyer model
was such a bad model. It just got funded the wrong way. One, it was overfunded. Two, it was like held
on the balance sheet in the wrong way. The assets weren't priced correctly. And it was just an example
of venture capitalists perverting what could have otherwise been a great business. This is a business
that really started as a specialty finance company and knew it was a specialty finance company.
They were disciplined about having under 80% loan to value. They were disciplined about making
sure the assets were short duration. And we weren't trying to earn venture capital returns on asset
back credit. We're earning 50%, 60% higher than a mortgage. On an asset that's 90 to 100 day duration
instead of 30 year duration, we know that we're getting paid 400, 600 basis points more than we
should. We feel awesome about that. If we tried to turn that into something where we're getting
paid 100% ROE, we're probably going to break it. Yeah, so we didn't do that. What about real estate
more generally? You and I have talked offline a lot about it as a thing, as an asset class,
as a trend that you've watched and are interested in for the decade, let's say, to come or the two
decades to come. Real estate is one of these very old asset classes that you mentioned,
maybe the oldest. Brif on it for me, like, why are you so interested in real estate? What aspects
of it interest you? How do you think it could become interesting from an investing perspective?
The whole bang. We've been trying to figure out a way to eventually become real estate investors.
I think if we went out and we raised a real estate fund, if you will look at us funny,
we do tech-enabled asset-backed credit today. We do a little bit of prop tech. Prop tech could
eventually become real estate. So it's on our minds. But I'm good at one thing in the world
other than writing emails. It's financing assets. And I think that the housing crisis is a really
sad problem. I don't know how people in my generation or the generation after me are going
to buy their first home. I don't think first homes are available to them. So we have a major
housing supply issue. I mean, I'm from Los Angeles, and Los Angeles looks less good than it used to.
I mean, walking in the Third Street promenade is really sad to me. We've started thinking a lot
about housing supply and how to generate more housing supply. One of the markets we've spent
a lot of time on is the ADU market. Some people know what that is. Some people don't. But basically,
the ADU market has stemmed from the fact that California has come to the aha moment that
homelessness might be bad, which is great. I'm glad they've come to that conclusion.
And the way that they're trying to solve that is that they're taking zoning laws away from the
local municipality into the state's hands. In the past, what would happen is some developer would
propose a project. Locals would say we don't want more housing here because that's going to hurt the
value of our homes. And it turns out that an entire state full of single family lots right
next to the ocean is a really bad way to build housing supply. There's a reason that exists,
as people keep saying no to new supply. So what the state did is they said, okay, enough's enough.
We are now going to force permitting such that you have to approve a permit to turn a single
family lot into a multi-family lot. I think it's up to six units per lot. So long as the lot is
within 500 feet of public transit. And it turns out like almost every lot in California or in
Los Angeles is near public transit, whether it's a bus station or something similar. And not only
that, but the permit has to be approved in something like 90 days. The thesis is like
ridiculously simple. It turns out that a lot with six units on it is worth more than one with one
unit on it. And so we thought, what are all the different ways that we can invest in? And by the
way, the market is massive. Depending on who you ask, people would say that Los Angeles probably
needs 1.5 million more homes or a room for 1.5 million more families. If you assume that the
average home was going to be $300,000, so we're talking like starter homes, small homes in LA,
that's a $450 billion market in Los Angeles. Crazy. Pretty big target. And when you talk to us
about what are markets that are small today, that we can be the dominant at scale player and now,
and then by the time other people come into the market, we've already crowded them out,
that's the type of thing that we try to pursue. Now, the problem is housing prices are still
bananas, mortgage rates are still high, labor costs are still high, and cost of goods are still high.
And so as much as we've been trying to figure out ways to invest in that market, we've only
found marginal ways. And by the way, that's not to say we're not. We're still hanging around the
hoop, we're making small investments. And when we're not sure about how a thesis is going to work
out, the way to mitigate that, aside from diligence, rigor and discipline, and foreclosing when things
aren't working out is sizing. So we've made some small investments in the space. But we would imagine
that that's a space that we're going to be in in a really, really big way in the next two,
five or 10 years. And I don't really know when.
Whenever we talk, I'm always interested in the things that have your attention, but not yet
your dollars. What else pops to mind when you think about a category or an area that you spend a
lot of time energized by or investigating, but haven't yet really deployed real dollars into?
So often it's platform economies or ecosystems with bad governance policies. So for example,
it is like a tragedy that it is uninvestable to invest in sales first oriented businesses.
Sales force is a behemoth. There are many, many people who have made their living on sales force,
not by working at sales force, but by building tools for sales force. And it's just never
become an investable ecosystem. We're pretty bummed that the Shopify ecosystem hasn't become
investable, partly because Shopify either competes with kills or buys any of the apps on its platform
that have done well. One of the places that we feel like we've missed out on is any of these
ecosystems where the governance regime is not predictive. It's kind of funny if you run one
of these platforms where there's Spotify or Shopify or Facebook or YouTube or any of these
ecosystems that people build their livelihood on, you're kind of like a government. And if you ask
any business leader, like what they really want other government, they usually have a policy in
mind, but what they really want us to build, they just don't want anything to change. And it's really
challenging when you have these platforms that they don't have a governance regime that stops
changing. My hunch, you asked about like which investment firms are the most nimble. It's the
ones where they're still run by the founder. My hunch is actually as these platforms are no
longer run by their founder, they will become more stable. And even though the platform will do less
well, the investable ecosystem underneath it will actually do better. And so we look for that.
Can we talk a bit about what you've learned it takes to build an asset manager? So maybe starting
point would be like, what do you think are the key categories that you have to be good at? We
started the conversation, you've studied lots of successful asset management firms, we've talked
about them a ton. What do you think are the key ingredients to build a great, enduring, really
successful asset management firm? I'm often asked by the young people on our team, like what do
they need to do to evolve in their career? And my response is that there's five functions in
investment management firms. There's finding deals, there's doing diligence on those deals,
there's helping companies once you're in the company, there's raising capital and there's
managing the firm. The part that I'll try to focus the most on is capital raising and firm
management because I think those are where I have the most unique things to say. In capital raising,
I think most people think like, how do I raise money from a bunch of high net worth individuals
and then raise money from family offices and then eventually raise money from ENFs
and Amitstown Foundations. And the more sophisticated people who do capital raising start thinking like,
I have a product, I need to find product market fit and part of my product is the capital that I
have and how do I match that to the types of assets that I'm going to invest in, etc. The way we often
think about it is we have a new investing idea, we can only raise money from our existing LPs.
This is a strategy that we have no tracker for. One of the things that I think is kind of funny is
when a new manager raises money or when anyone raises money, really, you can raise money in one
of three ways. You already know the people and they trust you so they'll give you money for anything.
You have a really good track record or a good enough track record or you have a good story.
And since most people don't already know people who will give them money for anything
and since most people don't have a track record for a new idea, they come up with a really shitty
story. That's why we have so many geography focus funds or sector focus funds or firms that are
attached to a corporate strategic partner. So most of the time, people come up with stories
because of good fundraising tools, not because they have anything to do with actually being a
good successful investor. And we always joke that our fund ones are like the anti-story.
So we basically have to go to people who are already in our existing network that we've proven
that we're good investors with by raising SPVs as opposed to a fund with a bad story.
We then put them into a fund where we have a lot of discretion and that's like step one.
Step two is the type of LP who wants to get an excess return in exchange for taking a unique
point of view and they themselves feel sophisticated. Certain family offices serve this need, certain
endowments and foundations feel like they can do that and they can. Canadian pensions are another
example of edgy sophisticated investors who are willing to get paid more for taking a unique
point of view. And then eventually after fund one, fund two, fund three, that's when you start
maturing your capital base. What do I mean by maturing your capital base? Well, one, you're
looking for investors with a permanent pool of capital. You're also looking for investors where
their return expectations match the opportunity set because if you have investors who have an
unrealistic expectation of how much they can earn on a certain opportunity, you're either going to
over promise or they just shouldn't be a fit. Their liabilities or whatever their hurdle rate needs
to be is equal to the return set because again, we'll take that real estate example I gave.
If you are earning a 12, you might think that's an insane return relative to the six or seven
or eight that you should be earning. But if you're a family office that's based in New York and you're
paying a 50% tax on that, your opportunity cost is seven or eight percent, you can both accept
that's a really good investment, but it's not a good product market fit for you. You then also
want to figure out how can I make sure that my investors have the right duration set? How do I
make sure that they're diversified? There's no capital base that's perfect. Endamets and foundations
have a denominator effect. If you're working with family offices that all come from the tech industry
and tech goes to a bubble, then you suddenly are faced with sure you have a permanent capital
source, which is family offices, but they're all correlated to one. You would want to raise money
from maybe some family offices in Texas and some family offices in San Francisco and some family
offices in New York. Then again, ultimately, you'd want to figure out how do you go from a fund
management business and you want to scale ultimately into a capital markets business.
Where you start figuring out where on the spectrum are you making a commercial contract and a social
contract with an investor? In that fund one example I gave you, it's almost purely a social contract.
I have worked with somebody for five to 10 years. I have developed a level of trust with them.
I am writing an LPA with them, of course, but they know that they're basically putting the
mandate in my hands because they trust me to make good investments and they know that because it's
a fund one, whatever fund two looks like will be a little different than fund one was because we're
figuring out the thesis together. By the time you're on fund four, fund five, fund six, and you might
be raising money from interval funds or insurance companies who have their liability holders or
whatever, you are getting closer and closer to a commercial contract where you cannot deviate from
the strategy. You cannot deviate from duration and that's okay because you're on a fund six, seven,
or eight and you already know exactly what the strategy is. I think developing that sophistication
of making sure that the capital that you have matches the maturity of the fund that you're
investing out of the flexibility you need and also making sure that that capital is not forcing you
to fit a good story for fundraising into a bad investment thesis, those are some of the things
that we've learned in the capital raising side. What are the worst mistakes that either you've made
or you've seen made when forming capital for a firm as it grows? I think a lot of firms as they
grow, they're faced with the decision of do we do deals that are sized to the firm that we are now
or do we do deals that are sized to the firm that we want to become? It's not an easy answer and firms
have taken different approaches to it. Our view of how we've done that is we've tried to thread the
needle by doing both. We will try to take a position equal to the size of the firm that we want to
become but we will only hold that position in one of our funds equal to the size of the firm that
we are. So you can still risk manage it and then the challenge is if you try to raise that SPV
from all the exact same investors that are in your fund, that's not like any risk management.
You've just basically created concentration risk from them and you have this like fictional dotted
line that sits between the fund and the SPV you raised and if they yell at you for it,
you convince them like, oh no, but I risk manage it because this is my fund. That's not necessarily
true. So I think that the firms that I've seen blow up are the firms that just got too big,
too quickly in a deal before they knew it was working or ever. I mean, it's a humbling business.
We don't get every trade right. Nobody gets every trade right and taking existential risk just
doesn't make any sense. We've done that multiple times. Crypto is a great example. Like most people
in venture capital thought crypto was going to be an interesting place to be. We had a point of view.
One of those points of views was that a lot of the smartest people that we knew were going into
crypto. We had a point of view on guilds because we felt like they were reeds to the internet.
But we also knew that the trade, if it worked, was going to go really, really well.
And if it didn't work, we didn't want to blow a hole in the side of our fund. I think a lot of
people, especially people with a fintech orientation venture made crypto like 23% of their fund
or they realized raising money for crypto fund was easier. So they just did that.
And instead, they screwed up their entire business. In one of our funds, we decided going into the
fund that only up to 5% of the fund was going to be crypto. We were going to invest in a handful
of companies in the space because this is going to sound goofy. We're high conviction on the space,
low conviction on a specific business model. We got 2.5%, 3% of the fund of the way there.
It didn't work. We'll probably lose money on those investments. And that's fine. That's venture capital.
So I think a lot of it's just risk management. And then also it's just letting capital markets
dictate how you should do investing. The easiest sin and the most common sin in venture capital is
a young venture capitalist who wants to prove that they're good at investing before they have the
DPI to prove it. What they want to do is they want to invest in a company and have a brand name
firm invested a markup thereafter. And so what they do is they basically go into deals that look
like they can raise more money and they invest in them even if the valuation is too high or even
if the diligence can check out or even if the company is unlikely to have pricing power in the
long term or even if the company is unlikely to be enduring because they view that their job is to
back a company that Sequoia does the series A of. That is like the number one rule. If you want to
prove with short feedback loops that you can raise a fund 2 and a fund 3 and a fund 4. What ends up
happening is they get into hot spaces. They invest in very fundable companies where there's no
differentiation, no contrarian way of thinking. And then they get smoked by investing in SaaS
companies at 50 times revenues. If you look at the venture capital business model, there's two types
of seed funds. There's the seed funds that listen to their series A friends, hear what their series
A friends want to see and then go find companies that they think their series A friends are going
to go back. And those seed funds should be called originators. There's other seed funds or early
stage funds that develop a point of view to the world of what they think should exist. They then
invest in those companies and try to convince downstream funders that they were right. That's
the Union Square Ventures model. If you look at Union Square Ventures website or Andreessen
Horowitz's website or a lot of these firms that feel that way, they're basically media companies
that have oriented their entire business around having a megaphone that they can tell people
like we invest in this company because we think it's a good idea. Now our job is convinced you
it's a good idea. That business has a much higher profit margin than the sourcing and
origination business that a lot of early stage funds have come into. And why do they do that?
It's not because they're bad people or because they think that they're doing it. They're doing it
because they let their capital raising process dictate how they were going to invest as opposed
to forming their capital raising strategy around how they were going to invest.
You mentioned crypto and sizing as a great example of something important or seemingly
important in the world and how to attack something like that that's both exciting and uncertain.
Talk to me a little bit about Amazon. We've talked a lot about ecosystems around Shopify or
around Amazon or around other platform companies. And Amazon's a place in the Amazon ecosystem
and the kind of e-commerce ecosystem is a place where you've made investments in the past that
looked really good and now maybe looks less good. Maybe tell us just that story just so
we can do sort of not a postmortem because it's very much unfolding still. But a place that
probably was more exciting that it turned out to be at least in the first few years of the thesis.
So I'll back up and talk about why we like the thesis in the first place. We've spent a lot of
time on platform economies. When we think about what platform economies are investable or not
investable, we think of them along a range of binaries. For example, does the platform drive
traffic to you? Is there pricing power on the platform? So for example, in the case of Amazon,
you have comment and review modes. And so if you're ranked the highest and you can charge a little bit
more, if you're ranked the highest, the traffic comes to you for free so you don't spend much
money on ads. And then the thing that we like the most about Amazon in particular is that there's
variable costs. So you could toggle up your business based on how your revenues are doing, which is
very unique relative to what historically had been a fixed cost business. And the market was just
massive and it still is. Hundreds of billions of dollars of revenue is done by third-party sellers.
Amazon relies on the third-party selling business more than it ever has because it's getting a
lot of pressure on its first-party business and it wants to expand its margins and it makes more
money on third-party sellers than it does on its own stuff. So it's a really compelling market.
And about the time right after we made the investment, the supply chain got a lot harder
for a bunch of knock-on reasons from COVID. So for example, container costs went from $2,500
to $21,000. There was like a 400 basis points impact on top line and impact bottom line.
Amazon started receiving so much inventory into its warehouses that it started rejecting our inventory
because it couldn't handle everybody trying to front-load their inventory to avoid
backups in the supply chain because so many people had gone out of stock the year before.
Privacy rules became more strict so people were advertising less on Facebook and Google and more
on Amazon. So we were confronted with a bunch of challenges and I think this is an example
actually where we're at our best when things get hard. This is one of those examples. So
what were a few of the things that we did right? The first is we charge a lot of money
on the deals that are working so that when they're working, it makes up for the things that don't
work because we're in markets that we can't be perfect. This isn't something like a triple A
tranche of some loan book where you're getting paid a few hundred basis points and if goes wrong by
a little bit, you're toast. This is a space that we went in. It was a new space and so we structured
it like it was new. And so like in any new space, we ended up having some winners that won by a lot.
We had some businesses that are probably doing the way we thought they were going to do and we had
some deals that have been a struggle. And luckily the deals that have done really well have made
so much money that on the deals that are struggled, do we work on them? Do we fight really hard to
make as much money as we can on them? Absolutely. But it'll end up doing probably as well as we
expected to do were close, just a more scenic route to get there if you look at the portfolio
overall. And the second thing is sometimes we're going to be right and sometimes we're going to
be wrong and it's just sizing. So whenever we do a trade, especially in a new space, we want to make
sure that if we do the trade and it works, it'll help our returns. And if we do the trade and it
doesn't work, or it's harder than we expect, it might have a couple hundred basis points impact on
the returns or a few hundred basis points. And that's how we size every position. And whether
it's crypto, whether it's Amazon, whether it's any of the spaces that we've been willing to be on
the cutting edge of, if you're going to be on the cutting edge and you want to be able to offer a
product to your investors that's safer by being on the cutting edge as opposed to riskier by being
on the cutting edge, you have to size it correctly so that if it doesn't work, it's okay. And you
have to charge enough on your winners where they make up for your losers. And normally an asset
back credit, that's a really hard thing to do or on credit in general, because you make so little
money on the deals that are working. But that business, that's an example where we have companies
in that portfolio that have returned 20 times our money on the investment or where we get refinanced.
It's something like 42% IRR on the deals at work. And so if you have a couple of companies stumble,
it doesn't feel very good. But if you size them the right way and you've made them much
enough money on the others, you end up being okay. When you look at your venture portfolio,
it's so different from some of the other firms that you would say, I recognize this company,
I've seen this company four times and like four other websites or something. What do you think
it is that's driving the different kind of firm or deal that you've focused on so far? Where does
it come from? What do you look for? Maybe this is an opportunity to talk about how you underwrite
business models, which I think is really important for you versus just like, this is an X company,
like this space is going to explode so we like it. Yeah, talk about differentiation for you in equity.
I think the first thing is we are willing to change our minds and change our strategy over time
to match the vintage that we're in. When we first spoke, we had a strategy where we're building
software for equity in companies. We would basically become the engineering team for
non-technical founders and also invest capital. And that was a good idea at the time because
seed rounds were a lot smaller, people really needed more technical talent and we could get a lot
of equity for it. That is not a good opportunity anymore. And we shuttered that business. When
we shuttered that business, people thought, man, we knew that that wasn't going to work. Software
for equity, what a bad idea. It turns out the first fund that we raised there is like seven to
eight times DPI and marked it 30 times. So we've already returned eight times of money to people.
We're already marked it 30 times. I can talk about the returns because we'll never raise a
strategy like that again. But it feels good to be able to say like, we did something that made
sense for the vintage and we got out of it not because it didn't work, but because it doesn't
make sense anymore. So we'll start with that. We try to match our strategy of investing for the
vintage that we're in. And that keeps coming back to when your capital raising strategy,
which is how do I have an LP base that gives me the flexibility to be nimble to do what I need
to do to make money for them. And then I think one of the things that has benefited us from being
in credit, we have a lot of rigor in our diligence process. The way that we really built our business
and where most of our AUM is across the organization is in asset-backed credit.
Asset-backed credit is a business where you live and die over like one basis point. I have LPs
who have counter invites in their counter of the day, not just the day they think that the interest
is supposed to hit them. The time of day it usually hits. So that by 4pm, if it hasn't hit their
account, because the wire deadlines at 430, they're pinging us. That is how we learned how to do
investing. Oh, by the way, we never got the benefit of the doubt when we started the firm.
So it's not like we were like BlackRock. Not that they ever would miss a payment. But if we
missed by 24 hours, people thought, well, it's BlackRock. Maybe there's a technical thing.
I remember one time our bank made an error. And when we tried to explain to our LPs that it was
the bank that made the error, there's no way they believed us. What are the odds the bank made an
error, not us? So that level of discipline and rigor and perfection, when applied to venture
capital is dangerous because it causes you to be too linear, convince yourself every trade has an
issue with it. There's a reason not a lot of credit funds have become good at venture capital
or credit business have become good at venture. But when it's at our best, it makes us really
disciplined about not thinking about the noise and the signal and avoiding wrapping paper companies.
A wrapping paper company to us is good founder, good syndicate, good market that's hot, vertical AI
right now, but not the right company, not a company with pricing power, not a company with
barriers to entry over time, etc. And when we're at our best, it allows us to go through a very
simple process. In each company that we're looking at, we have to ask ourselves, what are the things
that we need to believe for the company to work? The hardest passes, and I'm guessing a lot of
people listening to this can relate to it, is when you're talking to a founder and you believe
everything that they're saying, but your gut says, don't do the deal. And why is that? It's usually
when you're 90% sure of like 15 different things, but 0.9 to the 15th power is a really low number.
And so our diligence process is how do we get to 0.99% on 12 of the 15 things and accept that
there's going to be a few that we just don't know. We're not going to know TAM early on,
especially in the markets that we invest in, because we try to avoid obviously consensus
markets with a big TAM. Instead, we're trying to invest in markets where it's like an unobvious
market. That's usually how you have less credit investments. So TAM is often one of them, quality
of management teams, some of the management teams we've known for a long time. We certainly do
diligence on management teams, but gosh, how well can you really get to know somebody in 90 days to
six months? And how often is somebody who's a really, really good first employee somewhere
or executive somewhere going to be a good founder? It's just hard to know. And the third is just
sort of like philosophy of go to market, competitive set, etc. So we say, what are the 15 things?
Then we ask ourselves, would we be good at those 15 things? Usually when we develop a new market,
we're going to be in. It's next to a market that we already have been in before. So it's not like
we're going to go from like, when we got into new forms of media, we have been looking at
specialty finance companies that were originally new asset classes. We came across YouTube as a
new asset class. YouTube taught us about new forms of media. And then we did new forms of media.
It's usually something that's one step away. And it's usually a space where we've seen 50 Bs
already. So we can recognize an A. And the third question we ask ourselves is, would this be a
good use of our time? And usually when we see a deal in a market that we've never seen before,
we just pass because either we can take too long to do diligence and we'll miss it,
or we can do not enough diligence and make a bad investment. But if we keep seeing deals in that
space, we start to ask ourselves like, hmm, maybe we should learn about that space. We keep seeing
activity there. The ADU market, the California housing market was an example of that. We saw
like seven or eight deals in the space. We kept saying no. And finally, like, you know what,
there's a lot of smart people that seems like a big market. Let's put boots on the ground,
go to Los Angeles, talk to not real prop tech investors. Let's go talk to real estate developers.
Let's go talk to real estate investors. Let's go to property managers and really understand what's
going on here. And now when we see a deal in that space, we are prepared. We have a prepared mind.
As simple as that is, if you kind of go through those three things and you think of yourself as
a business that finds a good idea and then has to convince everybody else it's a good idea,
as opposed to just trying to originate deals, everyone else already knows is a good idea,
there's a lot of profit margin in that. How do you approach something that will take the obvious
one, which is AI, which is on everyone's mind, not just for investment opportunity, but for the
ways in which it will affect their portfolio, their lives, whatever. How do you approach something
like that with your investing head on? Or how have you approached it? So the first is, we don't
think that you have to be the first investor in space to make the most money on it. If you were
the first internet investor in the 90s, do you think you made more money than the best internet
investors of the 2010s? Probably not. The second is, we have to have a differentiated point of view.
And right now, our point of view is pretty similar to a lot of people. It's better to have a data
mode. A lot of people have pitched us these asset-heavy infrastructure businesses because
there's not enough chips. So there's a chip shortage and maybe there's an asset. You can
finance a bunch of chips and then lease them out. The theses that we have now are pretty
unoriginal. And so I think we're waiting until we have something original to say. And I think
that speaks a lot to our model is by being in multiple investment theses, we don't feel forced
to deploy. I think a lot of people in venture capital are looking at their historical portfolio
and thinking, oh my god, it's garbage. I better make up for that soon with new deployment before
anybody finds out and make a bunch of interesting AI investments that get marked up really quickly.
So by the time anybody realizes my 50 to 100 times SaaS revenue deals suck or my crypto
deals suck, don't worry. I have this new thing that I can show you that's in a separate fund.
And by the way, I'm raising fund three. We don't feel that pressure.
One of the other big things that seems like an important trend in the world is more money flowing
into long duration capital intensive, cat-backs heavy technology business models like deep tech
or American dynamism or lots of terms for it. In general, how do you think about from the equity
perspective, a business you know is going to be really capital intensive, but may have at the end,
the pot of gold at the end of the rainbow is great because it's very defensible. It's high barriers
to entry. It's got some stickiness. It's dominated some new space. How do you weigh the trade-offs
between seems like this big bucket of companies that we know is going to be really capital intensive
and therefore you're probably going to take a lot of delusion? But at the end of the story,
it's super, super defensible. I think it depends on the firm that you are. If you're a large,
multi-stage firm, you can do that. If you're not a large, multi-stage firm, you're basically putting
your lives in the hands of capital markets. And if you're smart, it doesn't matter because you're
basically relying on capital markets to stay stable and for the capital markets to agree with you.
That seems like a hard business to be in unless you're willing to fund the company over and over
and over again until it gets to its end state. And then you're so big that you actually have a
portfolio of investments so you can take risk. It's probably what a soft bank should have become.
It's probably what a tiger should have become. It's probably what any of these $10 billion
plus investment firms should have been. And it's probably not what a series A funded should do
if it's not multi-stage. What is the most common mistake that you've seen in private credit writ
large? You said before, private credit is now this one thing in people's minds, but it's got
lots of subcomponents. You do asset-back lending. What are the other components of private credit?
And how much do you agree with this? What feels like in this ether, this snide perspective on
private credit as this thing that exploded and people maybe have some questions about
as a new asset class, maybe riff a little bit more beyond just asset-back lending and private credit?
And I think the biggest mistake, the most obvious mispricing I currently see on private credit
is the pricing of non-sponsor-back versus sponsored-back direct loans. Most people think
sponsored-back direct lending is less risky than non-sponsor-back. Sponsor-back would be lending
money to a company that's owned by a private equity firm already, and you're basically giving back
leverage in an LBO, for example. Non-sponsor-back direct lending is finding a founder owned company
that isn't owned by a private equity firm and offering leverage to that business. So it could be
so the founder could take money out of the business. It could be so they could use the capital to grow
faster, whatever it might be. The thinking goes that a business that's already owned by a private
equity fund is easier to lend to because if things go wrong, the private equity fund can keep
putting more money into the company or also because the private equity firm's already done a lot of
the diligence, so there's probably less skeletons in the closet or at least two minds are greater
than one. All these different reasons that having a private equity fund in front of you
makes the loan less risky, theoretically. And in non-sponsor-backed, this is a company that's
never been underwritten before. It's more expensive to do the diligence because you can't take anything
for granted. If something goes wrong, you have to be prepared to take over the company, switch out
management. All those things come with execution risk. But the reality is if things actually go
wrong in a hot market, yeah, the private equity fund's going to fix the problem because they don't
want to hurt their relationships with the direct lending ecosystem and the credit ecosystem.
In a market like the one that we're about to enter into, these direct lenders, one, don't have the
capability of taking over these companies. They really are relying on the private equity firms
to do that. On top of that, a lot of these direct lending businesses are now set up to be valuable
public companies where they're very focused on their free cash. And the best way to be focused on
your free cash is to have less employees. So you end up not staffing yourself appropriately to take
over companies if you ended up having a high default rate. I'm 100% sure that anybody who works
at one of these firms would disagree with that and is like probably banging their phone as I say this.
But I think that's just how they're staffed. I would be surprised if they actually had the
confidence to go take over one of these businesses. They don't want to mess up one of their sourcing
relationships. You hear the pitch of a lot of these direct lenders. They will tell you like how
close they are with all of their private equity firms. So these private equity firms are able
to basically go and dictate the terms to their lenders as opposed to the other way around.
You want to read the closest thing to a finance book becoming an action book.
The Caesar's Pal's Coup is like, I think a great example of this. It was the fight between Elliott,
Oak Tree, and Apollo. It turns out that a private equity fund with its back against the wall
actually has more tools to defend itself than a lot of the lenders do. And in a non-sponsor
back direct lending deal, that private equity firm is actually no longer a liability.
And I bet you that when push comes to shove, a founder whose legacy, identity, and entire
net worth is in the equity of a company will do more to save that company than a private equity
fund will if it's one out of 20 positions. A private equity investor is going to be hyper-rational.
They're going to decide this is a 5% position for us. We're not going to put good money after
bad or they're going to assess it compared to the opportunity cost to the rest of the business.
They're going to decide that their relationship with one of the lenders isn't worth
risking their entire business model. And they're just going to let the company fail.
People find a lot of false confidence in historical data points.
Equity investing is all about trying to predict the future. Credit investing is all about assuming
that the future will be the same as the past. And if you look at any credit underwriting memo,
it's almost 100%. This is historical loss rates. This is historical financials. Assuming
management is wrong and every credit investor just blanket assumes management is wrong because
they usually are. Let's just take it down 20% to 30%. There's no discontinuation of what if this
new technology is going to disrupt the company or what if management isn't good or whatever.
It's always like a very, it could be 20% worse or 30% worse than before and we can still withstand
that. Or if we went to another GFC, this is how companies similar to these behaves, we could
withstand another GFC. I think usually if you talk to a credit investor and they start saying,
we could withstand another GFC, that's like your first indication that they're all just
basically assuming the future will be the same as the past with some bumps along the way,
those bumps being similar to the ones that we've felt in the past. And I think that's where a lot
of people get themselves in trouble. Coming back to the topic of firm building,
you talked a lot about fundraising. We didn't yet get to building the people side of the business.
What have you learned here, maybe even with extra attention to the mistakes that you've made?
Because those are always such a great source of lessons. I know that obviously it's much bigger
and you've worked with a lot of people. When we first met, you had a very, very small team.
What have you learned about managing the people and the culture of an asset management firm where
typically the people are the entire business? Like there's not a lot of other assets in the business?
I think actually this is the part where I've learned the most in having built the business,
is the firm management and developing the people. And I was talking to an investor friend
and he was asking like, what was the number one thing I've changed my mind about,
about how we think about building the firm? And I used to think about the firm in terms of compromises.
We would compromise by raising an SPV. So you have to incur a complexity to go do a deal.
You would compromise by hiring a young person over an older person, because you want to like
develop them over time. We've learned that our firm is largely built on the few things that
were incredibly uncompromising on. And what that means is we make five more compromises
for every one little thing we're uncompromising on. But it's a lot harder to stay true to your
uncompromises than your compromises. What's an example of that? We're uncompromising about the
fact that we don't want to be forced to deploy in a bad vintage. And so the only way to keep the firm
active and alive and in the flow is to be able to invest in multiple types of ways. If you're
only in one asset class and your asset class is going through an overpriced vintage or a bad vintage
deploy in, you either can keep investing in that bad asset class or stop investing for some vintage.
And then your employees are going to leave, you're out of the market. It's very difficult to keep
momentum. As we see like talent development, ambitious people are largely better investors
than unambitious people. At least that's what we think. Ambitious people want to grow their careers
over time by increasing the scope of work and the scope of their role. They can either do that
because the firm is growing or they can do that by politically taking scope from other senior
people in the organization or they can do that because senior people in the organization voluntarily
leave like at a benchmark or a USV or some of the store adventure capital firms. And I don't plan
on leaving because I'm still pretty young. So if you want to build an organization where you can
keep your deal flow on, you can create and keep momentum in the organization and you can keep
a place for your most ambitious people to continue to grow in their career, sitting out of a market
for two years is really challenging. And so instead what we've done is we're in a few different
markets so we can always be deploying in the market that has the best relative value at any
given time. Right now, venture is not that great of a market. Valuations are still too high, even
though they shouldn't be, even though we've all gotten like slapped in the face over it. Acidback
credit, as much as I thought it was going to be a really good market to invest in recently,
has trailed corporate credit. We are starting to see that change only in the last three months
have we started to see things actually reprice and asset back credit. And then hybrid, it was like
a bonanza. It was amazing. There was tons of deal flow, not a lot of capital. There's not
many hybrid funds. And hybrid as a strategy really solves the price mismatch between founders and
investors. Great. So we compromised by being more than one asset class to be uncompromising about
not deploying in a bad vintage, keeping momentum in the organization and having a firm where our
young people could be ambitious and find good relative value and stay active in the market.
Another thing is we wanted to be flexible on our investment mandate. If we want to grow really,
really fast, the two things that we would do is we would hire senior lateral hires who already
know how to do things. And we would raise single name SPVs. It is much easier to raise money for
a very discrete thing. You can raise like hundreds of millions of dollars very quickly if you find
a really good deal. And you can grow really fast if you hire a bunch of senior lateral people with
track record brand recognition, etc. The problem with both of those things, make a senior lateral
hire comes to more risk. There might be negative selection bias. They probably already have a
way of thinking whether it's right or wrong. It'll be different than the firm's way of thinking.
It comes back to the Apollo example I gave with their partners being there for a long time.
They don't have as much political capital in the organization. So the best investors are people
with great political capital and social capital in the firm. So they can get things done quickly.
Everybody buys in and they're allowed to take risk because if they fail, they already have
enough social capital in the bank to take measured versions of failure. When new people come to the
organizations, they usually try to hit singles because they don't have enough social capital.
It takes a really long time and they can't do controversial things or make contrarian bets
because they're too nervous of risking social capital. Instead, what they do is they try to come
to me and try to convince me that it's a good idea, get my blessing with the rest of the organization,
then they do the deal. So one of the things that we compromise on is we grow the firm more slowly
because we're uncompromised and I'm wanting a lot of our senior leaders to have been built
internally within the organization. We want to make sure that the investments that we do
are because they're good investments, not because they're investments that are easy to fundraise for.
If we wanted to raise a fund that was easy to raise for, we would have gone out in 2020 and
like raise a VC fund and do a bunch of vertical SaaS companies, which just would have been a
bad idea. And so what we've done is we've had to make our fundraising effort harder by raising from
unique pools of capital or alternative forms or mandates that are sort of vague or raise money
for fund ones. When an existing strategy we have a lot of demand for, but if we grew that strategy,
it would dilute the returns. So instead, the way we grow the firm is the harder thing, which is to
raise a fund one in a new strategy that we think is better as opposed to easily growing a strategy
that we think would get watered down if we made it too big. So the number one thing that we've
learned is to be very intentional about our uncompromises and let our compromises come from
those as opposed to the other way around. You said that valuations in early stage equity markets are
not what they quote unquote should be. How do you think about that? How should they be priced in
your mind today? We use a lot of frameworks as opposed to like, I think a lot of people who
enter venture capital and somebody who comes as a credit investor who's very quantitative,
and I'm sure one of the things that you were probably tempted to do, take some like data set
of all the deals that were done in the past, what percentage of them end up being like 30 times
outcomes and 10 times outcomes and three times base rates. Yeah. And then you're like, okay,
I need to enter companies that are approximately this valuation and that'll get me to like a
4x gross and a 3x net. The challenge is the data is really challenging because there's
selection bias in it. Not every company gets reported, not every round gets reported,
and it probably skews positively because the failures probably don't get reported and the
successes probably do get reported. And the second is the quality of the investor really
matters. And so if you're taking like venture capital overall, there's so much dispersion
in performance, what you'd really, really want to do is only take the deals that you've done
historically and try to figure out the hit rate of those. Instead, what we try to do is we try to
like build this bottoms up view of we know that if we don't get a 4x gross and a fund, we probably
haven't earned the right to raise the next one. If we assume that enough of our companies, if the
15 things that we believed work become worth at least a few hundred million dollars or five
hundred million dollars or a billion dollars, let's build a portfolio that way. And then whatever
great upside comes after it, so be it. How wonderful of a surprise. And then when we do that,
we say, well, if the things that are right on the horizon happen, how big will the company be?
If a company has a really big TAM, we're a lot less disciplined on valuation because like the TAM
is massive, they fit product market fit, the company can be worth over some huge amount,
we'll pay up a little bit. One of the successes actually we've had is investing in companies
where the TAM is more cuspy. It's not to say that it's a good TAM or a bad TAM, it's just a TAM that
we can't predict. And most VCs will just avoid those companies entirely. Instead, we do those
deals just with lots of valuation discipline. So we have a company in one of our portfolios
has an opportunity to like return the fund or be a major return driver. And we did that deal at a
6 pre. And that is a company that doesn't have a lot of addressable market. Actually, we couldn't
figure out what the addressable market was. There's just no data about it. And it was a new
business model that had never existed before. That is a company that is likely to be a huge
outcome for us. And the unique point of view we were willing to take is that it's okay if a company
has TAM as a major risk, let's just price it accordingly. And then also just being like really
clear about what stage that you're investing in. For us, the way we define seed versus series A
versus series B, I think a lot of people would define it as a $3 million round done at like
low double digits. My hunch is that venture capital was a model that kind of worked. And when we
started doing this in 2014 seed rounds were usually like five to eight to $10 million pre-money
valuations. We've like had inflation, the internet's bigger, business models are more proven,
acquiring customers is faster. The founders have often started companies before, the senior
executives have been at companies that have scaled before. Like, I'm comfortable that valuations
have gone up. I think that the seed rounds will probably settle in at like low double digits
pre. That would like make sense on a linear basis from where they were before. If you're going to
do a deal at like 20, what you have to believe is you're basically doing a seed round attached to
a cheap series A. If you'd done just a seed and they'd like develop product market fit and then
they raise a series A, the series A probably would have been done at like 30 to 35. You're like
blending those two together, but you had to be like clear that you're doing that. And we think
about the risks that we're combining there because a seed investor, our number one job is to identify
product market fit before other people have realized there's product market fit there.
That might be because they've already sold some customers. That might be because there's already
pilots or that might be because it's a pre product business, but we've been able to talk to customers
or we would be the customer or one of our portfolio companies would be the customer.
And we have a unique insight that other people don't have that it's a market that will be interesting
even when other people don't realize it will be. And when the company has product market fit in that
market before other people realize it does. And if we do that right, and the company can make that
go from unobvious to obvious, it'll be prepared to raise it series A. And it turns out that often
revenue is the way it makes it obvious to people. And then when we're raising a series A, our goal
is to figure out can someone other than the CEO sell the product and is the product adding value
to people in a way that can be underwritten, but isn't like extremely obvious. People often talk
about churn. Churn is like a great metric because based on future churn, you'll know how much revenue
the business will do. You'll understand the lifetime value of the customer, understand the
lifetime value of the customer will allow you to understand how much you can acquire a customer for,
how much you can spend on account management, etc. But what churn also does is it's the
leading indicator of is this actually providing value. When you're doing a series A, you can start
spending a lot more time on user metrics, and you can have some sort of predictive understanding of
is this product going to have pricing power over time, because people are using it over and over
again. And you start looking at like the other underlying metrics, how many seats in the organization
are actually using on a daily basis, a weekly basis and a monthly basis. So if we're doing a deal at
20, we are accepting that we are betting on the deal at a lower than expected series A price,
because we were taking a bet with data that we don't yet have, because all we're doing is
buying the seed in the series A at the same time. It is very rare we are willing to do that. And so
it's very rare we are willing to do a deal that drifts from those low double digit valuations,
unless there's some sort of compelling thing about the founder, some sort of compelling thing
about the market that nobody else sees, or something that we know about the market that most
other people don't know about the market. A lot of the advantage that we have is also we see
relative markets. Before doing a hybrid deal, hybrid capital investing to us is basically
looking at a company that is credit worthy. They have a capability of borrowing money on a debt
to EBITDA basis that they want to or against some assets on their balance sheet if they want to,
but they don't want to take straight debt, either because they don't want to stay at a maturity,
like a loan term, or because they're nervous about debt and they don't have leverage on their
business, or because they don't want to incur full current pay on the investment. And so what we'll do
is we'll take an investment that we think could withstand credit on its own, but come up with
customized terms that we can get paid a lot for. For example, maybe the duration of the deal is a
couple of years longer than what current non-sponsor back direct lending markets will bear. Maybe
we'll allow them if we think the deal should be like 14% current, we'll make it 5% current,
but like more than 9% pick. We'll take that trade off. Sometimes what we'll do is we'll take our
returns and we'll say we want a third of them to be current pay, a third of them to be contractual,
and a third of them to be equity oriented via warrants or participating for securities or
something similar to that. One of the things that allows us to be so disciplined when we see a market
like venture get overheated and have that hitting us in the face over and over again, is when you
see a market like hybrid is right now, which is just so mispriced, and you can earn a low to mid-20s
IRR on these transactions, which is similar to that, what a growth equity investor would pitch,
but you're taking credit risk that feels almost similar to that of a non-sponsor back direct
lender. And so when you start to see the trade offs of what bets am I taking in my venture
business right now, and how good do I feel about those bets, like how certain do I feel about this
bets compared to the ones I'm taking in another part of the organization, and am I getting paid
enough for it? It's just become screamingly obvious to not pick up the pencil if you shouldn't. And
by the way, you can still scratch the am I being busy itch because you're still deploying.
If I put you in charge tomorrow of a large family office, multi-billion dollar family office,
and your job was to allocate that capital to managers, you had to hire managers,
you couldn't do direct deals, which would probably kill you. You'd probably spontaneously
combust if I took that away from you. But just for the moment, what attributes would you care
the most about when evaluating managers? So I would want to understand the quality of the returns.
I think a lot of investors have made money for reasons they didn't expect to make money,
and I value that a lot less than going into an investor and asking to see their initial memo,
which by the way, some of them don't have memos, and trying to understand what the initial thesis
was. And the outcome doesn't need to be for the exact reason they thought it needed to be,
but there should be some underlying thesis. And people often talk about repeatable methodology,
and they want to see a sourcing methodology, they want to see a strategic value add methodology.
What I'm really looking for is just clarity of thought of, did you figure out the aha moment
of what everybody was missing about this investment? And did you call your shot?
I'm looking for people who called their shot. And I'm looking for some evidence that they did.
The second thing that I'm looking for, and by the way, you asked the question,
I'm answering how I hire people. Because what am I doing when I hire an investment professional,
I'm essentially hiring someone to co-manage your investment with me. The second thing is,
I'm looking for them to lean into the strengths that are sincere to them. Some people are really
quantitative. Some people have a huge megaphone. And when they invest in a company, it can explain
to everybody else why it's a good idea. Some people have amazing sourcing edge. I don't think
there's a specific way to win. I think that the way to win is picking a way that's sincere to the
person trying to win in that way. And when people try to be something that they're not,
they try picking companies because other people think that the space is interesting.
They try to be a great sourcer, even though they're sort of an introvert or a clues.
They try to be some totally extroverted person tries to suddenly become a quant.
That's often where I see people trip up. And then I'm looking for sincerity. They believe themselves.
I think there's a lot of people who are very promotional. And I'm looking for self-awareness.
People who they're doubting themselves more than anybody else's,
questioning themselves and they're changing their minds, flexibility of thought.
And people who really love investing because if you're doing investing because you want to get
wealthy or you're doing investing because it's a way to be part of a community where you can become
liked or feel needed or feel important or solving some other thing in your life,
you invest for the wrong reasons. You either invest in too short of a time horizon,
you invest in consensus bets, you want to invest in high signal areas.
And I'm looking for people who really are obsessed with investing.
And usually you can tell that when they have a hard time talking about anything else.
The friends of mine who are like, that I'm closest to that are great investors,
will hang out and we'll spend like 10 to 15 minutes trying to pretend like we're catching
up on each other's lives. And we'll just go back to talking about investing.
So true. You've met with so many LPs and you've raised money for at least three, even more
different strategies, which are very different from each other. If you had to start a business that
was in the business of being an LP, or that's a fund to funds or some new model, how would you do
that given everything that you've learned from being on the other side of the table?
A partner you'd want to have yourself does what they say they're going to do. It's what you want
out of your manager. It's only going to report. It's only going to explain the rationale.
It's somebody who's quick to respond. And it's somebody when things go really well,
they're willing to double down and take advantage of the opportunity. And when things don't go well,
they're going to fight with you on it. And if things end up not the way that you wanted to
go, that doesn't mean that you're going to stick with them forever no matter what.
But there's some sort of like predictable process. And I don't know that it's that more
complicated. The things that we look for when we pick like a perfect LP is we're looking for
somebody who's reliable. We're looking for somebody who wants to invest with us across
multiple ventures. We're looking for somebody who has co-invest capabilities. And they're set up to
have co-invest capabilities. Everybody says they are, but not everybody's prepared when you bring
them a deal. And we're looking for somebody who's going to do a lot of diligence. We want high
conviction partners. And we get spooked when somebody is interested in investing in us after
a couple of meetings. We want somebody who's going to be staffed for the team of people who used to
do direct investments themselves. They want to go through the data room. They want to go through
the data tape. They want to read our investment memos. They want to go through case studies,
deals that went poorly, deals that went well. And then we want them to send us the investment
memo back to us and tell us what they liked and didn't like. But what we're looking for is like
a rational, reliable partner who's there for as long as we deserve them to be there and who's
transparent with us about where their heads at. What company is most exciting to you where it is
also unexciting as an investor? Company you love that you wouldn't want to invest in?
As a consumer, I love companies that are willing to sell me a dollar for 90 cents.
And so it's sort of funny, like Go Go In Flight was a great example. I don't know if it's a good
company because I've never studied it. But I always just think I love companies where their big
businesses, even though their product sucks, because imagine the product ever became good one day.
Yeah, busted but booming is what we call these.
Yeah. And on the flip side, how terrible would it be if the product was already perfect and nobody
wanted it? And so as an investor, I'm a sucker for things where the product really sucks,
but everybody seems to need it anyway. And as an investor, I'm not really that into things where
I'm like, what a charming product, but they're still not producing any cash flow.
Do you have any investing views that you think would make the most other professional investors
scratch their heads? I think when we see a problem with the deal, we are much more likely to weigh
the problem of how much it matters as opposed to say this company doesn't work because there's a
problem. And I think most investors are more willing to pay a lot of money for something with no
problems than to pay the right amount of money for something with some problems. And the way this
is expressed in credit is people are willing to accept almost no return for a credit that seemingly
has no problems. And they're unwilling to deploy at all, even if they're paid a lot of money for
something with a couple problems. The same is true in software where management might be an issue or
TAM might be an issue or margins might be an issue. And people are looking for a problem and they
think of these companies as binary as opposed to just weighing the issues as they see them.
And I actually think they take a lot more risk by doing that because if you're paying up a lot
for perfection, it is so much harder to be perfect than to pay the right amount for something that's
imperfect and accept you might be wrong about something. I think a lot of people also are just
driven by career risk. Very few investment firms are set up to benefit people for making the
firm money as opposed to doing things that won't get them fired. The best way to not get fired is
do consensus stuff because if you lose money, everybody else lost money too. I remember the last
time I did this podcast with you, everybody on your podcast was assessed with uncorrelated risk,
less correlated risk. And by the way, for our firm for a long time, we were in three or four
deals and all of them seemed like they were completely uncorrelated. That was what everyone
loved about us. And the only thing we could do to break the firm is start doing things that were
sort of correlated. And I remember thinking in my head, I never said it out loud to people was,
uncorrelated is great when everyone else sucks and you're doing well. And uncorrelated sucks
so much when you're the only one doing badly. And everybody else is doing fine.
Yeah, wrong and alone is not the best thing.
Wrong and alone is just brutal. So what's interesting is one of the reason uncorrelated
returns end up also being really high returns is because you're basically getting paid a ton of
money to take the risk of being wrong and alone. Yeah. So yeah, so maybe like of all the things
that I think we're willing to do, we're willing to be wrong and alone in a way that almost nobody
else is. When I did my episode with Michael Ovitz, we talked a little bit about you because he's
been working with you and Coventure in the last, I don't know, six months or a year.
Obviously, you have matured a lot as a business, you're 10 times the size like I mentioned at the
start. But also I would just say like, when I talk to you now, it's much less like, how do I get a
foothold and much more how do I build a enduring institution? Tell me about working with someone
like Michael who I think has done this with a small handful of investment firms in the past,
many like Andrews and Horowitz are sort of household names now. What's that experience been
like? What's been like working with someone like him, which I think are listeners will love since
we just had him on. So the most surprising thing about Michael is he's as good as you think he is.
I've known a lot of people who are reasonably successful. I mean, Michael's has done ridiculously
well, but I feel like I know a number of people who are sort of winners in their own space and
have books written about them and stuff. And I've gotten intros from those people.
Michael, the response you get when Michael makes an introduction is just so different. And there's a
lot of imposter syndrome. I know the types of people he's worked with before me. And I look up to them
and I look up to the firms that they've built. And it creates like this feeling of like responsibility
that when he makes an introduction, and he puts his name behind somebody, like you got to show up to
the meeting prepared, you got to show up to the meeting like with your A game on. But like, it's
usually somebody that I would have taken me 10 years to meet. If I ever met them at all. And if I
met them, I probably would have gotten 15 to 20 minutes with them. And instead, I'm like meeting
them in person. It's over a lunch. They're excited to meet because the last few people Michael introduced
them to were incredible. And Michael, other than picking me, has had to be really careful picking
people because the first or second time he messes up, people stop receiving that introduction the
same way. The thing that is less written about or people know less about him, he lifts your gaze
a little bit. My idea of what good is is different now because I work with Michael. And when Michael
thinks about what good is, I mean, you know, he's worked with Mark Endres and he's worked with Josh
Kushner. He's worked with a lot of these people that were like his definition of good is just
different than the definition that we all have. And that's his normal. His normal is our great.
And so he causes me to expect more from people. And he also, I mean, I remember there was like
this situation where last quarter, our firm wasn't moving quickly enough. And Michael moves quick.
I mean, I've always thought I'm somebody who moves quickly. I'm proud of how quickly the firm has
grown while also maintaining quality and everything else. But holy crap, his idea of quick is
completely different. And so I had this conversation with our team. I said, look, it's a holiday week.
I'm expecting you guys to work long hours, not because I want you to work long hours during a
holiday week, but it's because we haven't achieved all the things that we needed to do last week.
And today's Thanksgiving, I need everybody in the office. And he had this like really terrific
reaction to me. He goes, you don't have to tell people to work hard. If you just demand quick
deadlines, the work will come. And for the people that it doesn't come, like, you know what to do.
And so it just created a level of velocity, a level of quality. And then I feel goofy saying
this because he's probably gonna hear it, but it's like a level of mythology in the organization.
When Michael asks for something, we're thinking, holy crap, Michael, it's asking us for this.
Like we want to impress him. We know the other people he's worked with. We know the bar he holds.
And it just like makes you sit a little straighter and walk a little faster and read your
notes a couple more times before you send them over. And for example, when we're looking at deals
and we're looking to co-invest with some of the firms that he's worked with, our diligence better
rock because if it doesn't rock, you're gonna disappoint the guy. And you feel this great
level of responsibility that he's taken about on us. So working with him has been as good as I could
have hoped. What is your personal motivation and how has it changed? I think there's very few jobs
in the world where you can read the news and it matters for your job. And I think being a politician
is one. And I like most other people don't want to be a politician. Unfortunately, that seems
like a really crappy job. Investing, I mean, geez, it's like the world's best problem. It's the
everything problems. Not only is it the best game of all time, but the difference between a game and
investing is investing really matters for people's lives. If you make a good investment, good people
get to reap the rewards of it. They stay employed, they get employed. If you make a good investment
and you're able to raise money from institutions that you're proud to work with, you get to give
those institutions more money back. If you make an investment in a platform, the platform becomes
bigger and it offers something to the world. I mean, it sounds dumb because people who aren't
in finance will probably think this is like the most narcissistic thing to say in the world.
Investing feels important. It feels like it matters. And so you get to solve a intellectually
challenging problem. But unlike a puzzle, it has real life implications. And the decisions you make
end up having some scale to them. One of the reasons to get bigger is because it feels good to
be bigger. And by the way, getting bigger matters for a whole bunch of different reasons.
Ambitious people are better investors than nonambitious people. One of the traits of ambitious
people is their competitive. Competitive people want to play in the big leagues. They don't want
to play in the minor leagues. And the way to play in the big leagues is to invest more capital
because you're competing with better talent and you want to prove you're the best at something.
There's like natural gamification things being bigger and to attracting better people. And by
the way, if we try to build an organization, we promise people that we had no ambition, we wouldn't
get ambitious people. And we probably would be worse at investing for it. So there's like
reasons related to that. But for me personally, like Bezos has said this in a bunch of interviews,
it feels good to be needed. If I sold this cup to you and you bought the cup, you'd be happy
because you had the cup and I'd be happy because I sold the cup and there'd be some manufacturer
who made a cup for two minutes of their life and that would make that time valuable. If I'm
teaching a class and I like don't show up to the class, how awkward would that be? It's like a one
to 50 a relationship. 50 people would have wasted their time. They would have like gone to class.
They would have been confused. If you were given a lecture, I bet you'd feel like some value and
importance of showing up and giving the lecture. And if you code an app, then like how great is
that like thousands and thousands of people use this? Like one of the reasons that I feel like
people in technology when they're at their best do feel like they're making the world a better
place, even though that's become like a term that's made fun of now, which is kind of sad,
because they're able to like do something that took some amount of their time and impacted many,
many people and change the way that they operate. And when you invest, you get to invest in a bunch
of people doing that. If your goal is to solve like a really complicated problem that has real
life impact and feel needed a lot and like be a competitor, it's the best job in the world. I mean,
I can't believe anyone would want to do anything else. I don't know that there's a better place to
close the conversation. It's so fascinating to me that it's been six years, but we talk a lot,
so it doesn't feel like it's been that long. I just want to highlight like how perfect that
closing answer is to those listening, most of whom or many of whom are either are or are aspiring
to be investors as their profession. And if you don't feel a kindred spirit in that answer,
maybe investing isn't right for you. It's kind of the most interesting problem in the world.
So Ali, thanks so much for doing this again with me. Thanks, Patrick. Really, really appreciate it.
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