[REPLAY] Ali Hamed – Novel Venture Investing at CoVenture, Venture is Eating the Investment World 5 (Capital Allocators, EP.233)

19:56So we often think about a company as inflection points of risk. A lot of venture capitalists and investors generally make the mistake of thinking, well, a deal that's doing a few hundred thousand annualized revenue is a seed deal. A company that hits the million dollar annualized revenue run rate is a series A deal. five to 10 is a series B deal and so on. We often think about what are all the things that we need to believe for this company to exist in the world in an enduring lasting way. And if there's like 15 to 20 important things, we often find that the hardest passes are the ones where we're 90 % sure of 15 things, but 0.9 to the 15th power is a really, really low number.

20:29So what we're looking for is to use our diligence process to figure out of the 15 things, what are the 12 that we're like 99 % sure on? And then what are the three long poles in the 10th? And what we're trying to do with a founder is before we invest, is we say, this is what we think you need to achieve before we want to invest again. You need to prove that somebody other than you can make a sale. You need to prove that the data you're gathering will actually lead to insights that let you improve your product. You need to prove that your first nine customers are all going to have a positive ROI and resubscribe.

20:58The other lesson we learned is from Jordan Bettman at Radian. He has this wonderful practice with his founders where the day after they close, they ask, do an outline of your deck for your next round. And then let's make sure that every board meeting, we revisit that to make sure we're still on track or we adjust it. So we know where our North Star is. We've tried to adopt that practice as much as we can of saying, what is success? And success is related to revenue. Revenue does prove things. It proves that you can sell. It proves that people are willing to pay, whatever. But it's a byproduct, one of the inflection points of risk that we're really trying to model out.

21:25Historically, what we've always done is we've tried to put some money in the beginning. And as they've limited these inflection points of risk, pile in more. It's a market today that's made it harder to follow on than it used to be. Historically, we used to think, gosh, every time we invest a dollar, we probably want to hold two and reserve. If you were to ask a private equity professional, for example, at least a rational one, what should you do in an overvalued market? They would say, well, I want to be a net seller. How do you do that as a venture capitalist? You're a minority owner. You can't force a sale.

21:50In our view, maybe the way to be a net seller is to take less pro rata than you might intuitively think. One of the hallmarks of venture capital is buy a bunch of cheap options and lean into your winners. We actually are to the point of view that during a market like this, we're actually loading up more of our checks into the initial round and then doing less into the follow-on round, especially for our best companies. A lot of our drive pattern now is to bridge a company through a moment where we think they can get to that inflection point, buy up, get ownership at a good price. But what we're not doing is saying, wow, this round, this company is raising a$700 million valuation or a$500 million valuation.

22:21There wasn't a lot of diligence done. It's just a market bet. Those have become less interesting to us on balance. I want to turn to these four categories of the investments you'd like to learn and dive in a little bit more. So you started with fintech, what aspect of fintech is most interesting? Today, we're most focused on financing businesses. We've done a handful of consumer application businesses, and we've gotten more excited about international fintech than we expected ourselves to. I'll give a theme that we think is really incredible, which is the international buy now, pay later thesis.

22:49International buy now, pay later is so powerful, maybe even more powerful than in domestic buy now, pay later, because you're actually creating a credit profile for a consumer that's never had credit before. And what it does is it gives you a relationship with that borrower that's an order of magnitude better than anything anyone else can provide. That's different than a domestic buy now pay later that might have incrementally better data points. But at the end of the day, they're still incremental. You can lend$10 ,000 instead of the borrower being able to get$9 ,000. Internationally, you can lend$500 to somebody who was previously only able to get$50.

23:21And in the playbook, and this is across multiple companies, is as follows. You basically advertise to a bunch of consumers and you make loans to all of them. Some people pay you back and some people don't. The people who don't, you leave a loan. The people who pay you back, you make another loan to. And you make a bigger loan. And then you make a bigger loan and a bigger loan and so on and so forth to the point where you end up having this borrower base of 95 % amazing borrowers and 5 % crappy borrowers. And you're the only one in the world that can lend the amount you can lend that 95 % of good borrowers at the rates that you can lend to them to.

23:49It's almost like they're invisible to the rest of the world. What's so amazing about that is that you can lend at high margins to a repeatable customer base. And then you can distribute whether it's through merchants, other e-commerce companies, or however you might want to with a 10x better product. And I think one of the things that's attracted us so much to fintech compared to other asset types is one, we think we understand it. And two, we think most VCs don't. And one of the most wonderful things about fintech companies is most of them are pretty bad businesses. And we spend a lot of time trying to actually discern which fintech companies are good companies to begin with, and which fintech companies are just never going to have enduring moats, high margins, compounding modes, et cetera.

24:27And if you juxtapose that to something like SaaS, SaaS companies are kind of checklist businesses. You know, it turns out that all SaaS companies are good business models. They have high margins, they have switching costs, they don't take a lot of money to invest. If you run them through 15 different KPIs, whether it's CAC, LTV, payback period, et cetera, everyone can kind of get to the same valuation. If you have a really good brand, you pay a low multiple. And if you have a bad brand, you pay a really high multiple. In fintech, you have to go back to the basics and decide like, is this even a good company?

24:52So those are some of the reasons we like fintech. And a lot of financing businesses to us today are examples of that. The other is software companies that didn't realize they were fintech companies until recently, or realize they will become a fintech company eventually. People don't borrow money from lenders anymore. They borrow money from their software providers. And these software providers have, one, they're in the flow of funds of what they do. They have intimate relationship with the customers. They can use that relationship to get data about the customers that nobody else has and finance in a way that nobody else can.

25:18So those are some of the aspects of fintech that we really like. So you didn't mention anything about crypto in that. And a lot of what we hear about in the fintech space in the whole DeFi world comes out of the crypto ecosystem. So how are you thinking about crypto as it relates to all these lending strategies? Crypto has been hard to get excited about a lot of things for us. You know, I think we're crypto curious and we've gotten very bullish on certain businesses. So QuickNode is an example of a company that we've invested in. It's a node as a service business. If you're trying to run a node, it's hard.

25:47If you're trying to run a node and do a lot of transactions at scale, it's even harder. And trying to build that infrastructure yourself without something like the equivalent of an AWS for the blockchain is really, really hard. And QuickNode had a real use case and business case for a lot of companies that shouldn't be doing this themselves. And we understood the business model. It was a way for us to make a picks and shovels investment in the NFT space. We thought the founding team was incredible, but it wasn't a, hey, here's a token. And if you think really, really, really hard and hope a bunch of people speculate on one day, it'll eventually be valuable.

26:16This was a blockchain company that we understood the customers were. We understood understood why they couldn't do this themselves. And we understood why QuickNode was best in class for what they do. The other thing that we're spending some time thinking about is a lot of these guilds that invest in metaverses. You've probably heard a lot about Axie Infinity or YGG or some of these others. These guilds, basically what they do is they run around, they buy NFTs, they buy assets within these metaverses. The metaverse basically is a virtual world that people play games in or interact in. And they're really interesting because a lot of these meta verses have limited amount of assets in them.

26:44And what a company like YGG would do or some other guild is they'd run around, they basically, for no better explanation, buy the real estate or own the real estate or own the NFTs within that game, and then lease them out or rent them out to the players of those games. And to us, that feels like an analog to a lot of the other stuff we do. We like providing liquidity to platform economies. That is almost the exact same thing as providing liquidity to a platform economy if you think of these metaverses as a platform. If you listen to Gabby, the founder of YGG, he talks about his competitor set being Uber, because Uber is trying to find drivers and he's trying to find gamers.

27:16He's literally enabling hundreds and hundreds of thousands of people to earn full time livings through these play to earn games, where YGG is like the landlord of all these communities. And that to us really, really resonates. The things that don't resonate are here's digital art. And if you look really closely, you'll understand how wonderful and beautiful it is. I don't have good taste. And I don't think I'm about to start having good taste, especially not consumer taste. I've never been somebody who like did well in life because he was like a thought leader in what other people are gonna want later.

27:42I've been wearing the same sneakers, the same jeans, the same t-shirts since I was 14. So I'm just not a consumer. So I'll never understand that. Even in my history as doing credit investing, we don't ever do a good job lending on an LTV basis. We're more cashflow lenders. So the tokens and the crypto businesses that we understand why there might be future cashflows for, or where there's a real business model we'll pile into. And we're very excited about it, but we're not going to be in speculators. So you mentioned earlier when you talked about platforms as one of the four key areas you book, that some platforms are investable and others aren't.

28:13What do you mean by that? So we run these platforms. So all kinds of characteristics that we think are important. And I'll give you a few examples. Does it drive traffic to you or not? In Amazon, it does. An Amazon seller who's ranked highly in a category doesn't need to spend much money on marketing and ads because the traffic will come to them for free. It's almost like you're in a mall without paying for the rent for foot traffic. In Shopify, that's not true. In Shopify, you wake up every day and you spend money on ads hoping that people eventually come to your website. So that would be one example.

28:39Does it drive traffic to you or not? Is there a compounding mode? Take Amazon again. You know, every time you sell something, you might get a review. So you get ranked higher. So you get another review. So you get ranked higher. So you'd have another review. So you get ranked higher. In Shopify, you don't have that same compounding mode. In Instagram, the more followers you have, the easier it is to get more followers. In Twitter, the more followers you have, the easier it is to get more followers. Those are examples of compounding modes. Is the platform predictable? You know, I think Google search has been reasonably unpredictable.

29:04Facebook timeline has been reasonably unpredictable. TikTok is really unpredictable. what posts are going to get seen and which posts aren't going to get seen. There's a lot of agencies that promote music through TikTok. It's just guess and check. They try 90 different challenges, 40 different videos, whatever, and they just spend tons and tons of money making a bunch of videos and they hope one goes viral. That's a really, really hard machine to build. I'll keep picking on Amazon because we're so bullish on it. It's not that hard to figure out what will be ranked highly. If you have a lot of reviews, the reviews are really good, and you sell for a competitive price and you don't run out of inventory, you haven't done anything messed up, like break the terms of service on Amazon, you're going to be ranked highly.

29:38It's not like this big black box of wondering what it takes. So we're looking for platforms that aren't black boxy. And then we're looking for platforms that have been good to the people on the platforms. So you can keep going down the list further and further. But those would be some of the examples. I'll give you one last one because I think it's an important one. Does it monetize on your behalf? YouTube does an incredible job monetizing for creators. If a creator ends up having a lot of views consistently and puts up good content, YouTube will do all the work selling ads against your content and you can actually earn a living.

30:04By the way, it's why YouTube content is so good. YouTube content is good because YouTubers make money. They use that money to reinvest in production. And you have people like MrBeast producing incredible stuff. Instagram is so hard to make money on because Instagram doesn't roll out programmatic ads at scale and share those economics with creators. What that means is creators aren't making money. So all they can do is post memes. The reason Instagram is just a memes page is because memes are really cheap to make and nobody's making enough money to produce anything better than a meme. And I don't know about you, but I'm incredibly tired of seeing memes.

30:35And so we're really, really nervous about Instagram. And we think Instagram is really at risk of going away because the creators on Instagram aren't making enough money to actually make good content. And again, you're not going to Instagram anymore for your friends. You're going there for the creators. You're going for them there for the professionals. You turn on a cable network because it has good content, not because your friends are watching. And so Instagram is going to really, really struggle because they can't lean on network effects anymore like they used to. So those would be some examples of the characteristics we look for.

31:02Okay. This other category, which is the one we probably talked most about last time, this whole area of novel assets. And you mentioned network decay, and you've talked about Amazon and Instagram as if they were the platform. I know most of your investing has been underneath that in those ecosystems. I'd love to hear more about these sort of novel assets and new media. I'll use Amazon as a case study of a new asset type or new asset class and why we think it's so much more interesting than investing in an old asset class or old asset type. If you're investing in something that's mature, whether it's residential mortgages or auto loans or consumer loans or other asset classes that I keep picking on, at the end of the day, there's a lot of people who know how to do it and regulators are comfortable with it.

31:39And you can finance them. You can eventually get them rated if you have about three years of data. And then insurance companies can buy them. Banks can lend money secured against them and tell regulators like, hey, look, we have 50 years of data on consumer loans. I'm lending a certain advance rate. This is obviously a good advance rate based on the asset class. And I can show you all these different data points and peak default rates and everything else. and then regulators will bless it as tier one capital, whatever it might be. The problem we see there generally is we think the next 50 years are going to look a lot different than the 50 years prior.

32:08And so would I rather have 50 years of data than not have 50 years of data? Yes. But I don't think it's as comforting as most credit investors will give it credit for. We don't think it's like the end all be all or the blessing. If you think about music royalties as an example, music royalties trade at 15 to 20 times revenues. Think about how much the music industry has changed over the last 20 years. I understand that it's an uncorrelated asset. I understand you can do asset management. I understand that streaming is making the streaming world better. But there's a lot of questions that we don't know about music.

32:35We don't know if there's going to be so much more supply of artists that the big artists are going to be more diluted. And sure, music might make more money, but that artist might make less. So what we look for is asset types that people walk into knowing that they don't know everything so that you can structure them in a way that's a little bit more humble. Amazon is a great example. So basically, the Amazon third party seller ecosystem is a bunch of people who sell stuff on Amazon. There's resellers who sell things like Kleenex or Colgate toothpaste, they basically just operate very, very thin margins because they're selling a commoditized product.

33:06But most of them are actually selling a micro innovation, they're just small businesses. And instead of paying for rent, Main Street in your local town or on Park Avenue, they're paying Amazon FBA fees. And there's nothing explicit about the traffic that they're paying for in the traffic, but it's sort of implied that one of the main reasons you're paying Amazon FBA is because you're getting traffic from it, which is pretty good. All they are is small businesses with cash flow and EBITDA, but you can buy them at reasonably low multiples for a whole bunch of different reasons. The direct lending world is not ready to finance this ecosystem.

33:34Why? Because the direct lending world is already now an LTV ecosystem. Direct lenders would have a really hard time explaining why their stuff is so safe if they had to point to debt to income. People are financing stuff at such high multiples now. you're buying something at eight times and you're financing it at 70%. That's 5.6 times debt to income. So every direct lender runs around talking about how good the equity sponsors they work with are and how low their LTVs are. The Amazon ecosystem in the flip side is financing a much higher advance rate, 80, 90 % advance rates. But because you're buying things at three to four times, you're looking at something like a 2.7 to a 3.6 times debt to income.

34:09So it's just a different type of underwriting. You're financing the cash flows, not the loan to value. And as we just talked about a moment ago, I'm much better at financing cash flows than I am at just basic loan to values. And it's going to stay that way for a while. It's going to take a really long time for these assets to hit ABS markets or get rated or anything similar. So cost of capital is going to not come down for a bit because the regulated institutions can't get in. The direct lenders, it would break their business model being LTV lenders. And all it is, is just financing businesses with predictable cash flows.

34:36So that would be an example of why we love new asset types in general, as opposed to just trying to be a little more perfect than everyone else is. the same stuff everyone else started doing. What are some of the newer new asset types that you're looking at? So some of the spaces that we're spending time on that might not be institutional yet, but could be in the future. One is we're looking at yield farming. And the way yield farming works is you have a decentralized exchange, like a Uniswap or a Sushi Swap. And unlike a centralized exchange that holds inventory, a decentralized exchange doesn't.

35:03So what they do is they rely on the inventory from other knuckleheads like me. When I do it personally, I was just lending my Ethereum or Bitcoin or whatever to a liquidity pool. And And what happens is, Ted, you come to Uniswap, you want to buy Bitcoin. Because I'm lending my Bitcoin to Uniswap, it has inventory, it can make the trade. And in exchange for me providing that liquidity to them in this pool of Bitcoin and Ethereum, whatever it might be, the pool ends up getting commissions off of it. Another space that we're spending a lot of time on is user-generated games. So anything that sits in Roblox or Minecraft or Fortnite, we're invested in a company called Infinite Canvas that's essentially a quasi-game publisher of user-generated games.

35:37And what will that one day look like? If you think about what the music publishers are, they're essentially financiers and musicians. I bet you that the future of game publishing is not spending years and years coming up with a game and trying to distribute it in metal CDs, metal boxes at people's homes. It's these user-generated games. And so what will a publisher, what will a financier look like in that ecosystem? We talked a little about these guilds that sit in metaverses where they're essentially the landlords of the metaverse. And these metaverses are places that kids spend hours and hours and hours of their weekend.

36:05So they really are places. And you really do want to get access to them. and they really are unique. You know, one of the challenges with metaverse is though is the supply of games is infinite. More and more people can come with more and more games and we don't quite know yet if it'll be power law and that Axie Infinity will just get bigger and bigger and bigger forever. Or it'll end up being there's 90 different Axie Infinities and nobody really cares about being where their friends are because I was just making the argument against network effects. So that would be another spot that we're spending time on.

36:29International buy now, pay later. Obviously I gave a thesis there. That's one that we're spending a lot of time on. It might be a bit more actionable. And the other theme that we spend a lot of our time I'm talking about is what is an example of a company where you can lend money and get paid by one person, but you're actually taking the credit risk of somebody else. You have produce pay is an example of that where you're basically lending and getting paid as if you're lending to a farmer in Mexico or Latin America who doesn't have as much of a credit profile, but the credit risk where you're really taking is the US-based distributor that they're working with.

36:56Reverse factoring is the same sort of concept. There's a lot of software companies that are starting to finance their customers where the credit risk you're taking is different than what you're getting paid for because you're getting paid by the person receiving the capital, but you're taking the credit risk of somebody else. Those are all themes and theses that we're spending a lot of our time on right now. I'm curious, as you're looking at all of these novel assets across these different strategies, how does that play out in the competitive environment of venture capital if other people aren't as in tune to looking at some of the things that you do?

37:28So I think venture capitalists generally struggle, one, to figure out which financing businesses are valuable and which ones aren't. And we kind of talked a little bit about the framework that we use to think about that. But two, I think a lot of people in venture capital get mixed up between what it means to be capital efficient and what it means to be equity efficient. And what I mean by that is in the Amazon ecosystem, especially a lot of VCs have thought, oh, like not for me. It's a roll up. There's profitability. They can't figure out why it doesn't make sense for them, but they know it doesn't because they heard the word roll up and it sounds like it's private equity and they were told not to do private equity.

37:58By the way, a lot of our companies that we invest in end up being profitable. This is a crazy stat that I just realized. In the first fund we did at AcrossBeam, nine of the 25 companies we backed are over$20 billion of revenue run rate and profitable, which is just insane for venture capital. But it's because these financings often allow these companies to be super equity efficient, even if they're using a lot of debt to finance cash flow and asset. In the Amazon ecosystem, as mentioned, normal private equity, you finance acquisitions with about 65, 70 % an advanced rate debt, maybe lower than that and often lower than that.

38:28And you wouldn't really go higher than that. And it's for two reasons. The first reason is you want to make sure that if the company ends up becoming less valuable than it thought it would, there's some cushion underneath you. The second reason is you want to be aligned with the private equity firm that's buying the company. If the private equity fund put none of the money up, they don't really care how it's going to go. In Amazon, as mentioned, it's the opposite. You can finance them at 90, 95, 85 % advanced rates. One, because you don't care about the alignment anymore. You're their whole facility.

38:53You're the only financier. So if they scrub that facility, they're toast. There's alignment. The second is because these acquisitions are happening at such low multiples, you can rely on the debt to income, not the advance rate for your margin of safety. If your debt service is two times, you can watch this company lose a lot of its EBITDA and still know you can amortize off the debt. You're not relying on a game of musical chairs where you're looking for a refinancing. You're relying on amortization. And because unlike normal LBOs, where the leverage is only 65 or 70%, the leverage here is much higher, it doesn't take that much equity to get these companies to a lot of scale.

39:26I mean, we've seen companies go from being worth less than$20 million to a few hundred million dollars literally in a year. We've joked with our VCs, if you get a 20X on a deal, I don't care if it's a VC deal or not. I just want the 20X. So maybe I'm not a VC, I don't know. But I think that's what sets us apart compared to others who immediately when they hear EBITDA, immediately when they hear cash flow, immediately when they hear how much capital is required for a deal, they shy away from it because they don't understand capital markets or the capital stack. So if they're shying away in the early rounds, I imagine they may also be shying away in later rounds.

39:57I'm curious how follow-on financings work in some of these businesses. It's a lot of marketing and it's hard. If we have a vertical SaaS company in our portfolio that's growing 15 to 20 % month over month, it's got reasonable margins, got a reasonable payback period that's under a year, it's in a big enough market and the founder doesn't trip all over herself or himself, it'll get funded by basically anyone. And it's just about what price. If it's a company with a balance sheet, A lot of venture capitalists and growth equity firms really struggle to figure out, will it be enduring? Will it take a lot of capital?

40:27Will it be dilutive? Is it right for their firm? And we spend a lot of time educating the market. I would actually argue that right now in the Amazon ecosystem, the worst place to be is between$10 and$20 million EBITDA. Because at$10 and$20 million EBITDA, it's too big for a family office or a high net worth individual or a group of angel investors to finance it. And it's not big enough where it's obviously a breakout. It's not as big as some of these other businesses that have raised these massive rounds. So a lot of the growth equity firms, because they're really struggling to figure out what's different between one and the next, and should they be financing them or should they not?

40:58They're all sort of sitting on the sidelines. And so you have to raise money from a lot of alternative types of capital, a lot of alternative types of investors. I mean, the market is really cheap relative to the fact that these companies are often growing 25%, 50 % quarter for quarter. They have high margins. They have compounding moats, variable cost P &Ls. They have diversified revenue streams. There's no concentration in them. We've never seen a company that's profitable and growing its EBITDA 50 % quarter over quarter raise at such little multiples and have so much trouble raising because so many people say, oh, just we haven't figured out the market yet.

41:26And I think that's not unique just to Amazon. We've dealt with that in other ecosystems before. So we spend hours and hours and hours of our weeks going into the rooms of other venture capitalists, going to the rooms of private equity firms, growth equity firms, and just educating them on the market, putting out posts, doing podcasts, whatever it takes to prepare people so that by the time we come into a deal, they know that we've looked at the market a lot and this must be one of the deals they should do. So I want to take a step back and ask you about what you've experienced in these different iterations of having a venture capital fund and particularly in an environment where you're doing something that's a little bit different, but there's robust interest in venture capital.

42:07What have you found as you've gone out into the market? One of my biggest learnings is when we started the business, we tried to be really contrarian. And we thought, oh my God, we found a dime in the rough. This is going to be amazing. The founder can't really tell their story. We'll be able to tell the story for them. We're the only ones who understand the complexity of the business. And gosh, aren't we so smart to see something that nobody else can? And we forgot that we didn't have a signal either because we were so new. What we found is we needed to work a lot harder on marketing ourselves and marketing why we like a space before we were going to invest in a space that didn't already have a lot of interest.

42:40If you're Union Square Ventures, if you're Sequoia, the fact that you did the deal is the reason it's no longer contrarian. And because we haven't been around for as long as them, we had to take more of a blocking and tackling approach. We knew that if we were going to back a company that would not be in a space that everybody had been in before, we would need to do 50 phone calls to prepare them. So when we finally brought it to them, they knew what made it different and why the thesis was interesting. And we had to know that if we had 20 of those calls and all we were getting was blank stares, no matter how cool we thought the space was, we just wouldn't be able to finance it because we're not a multi-stage fund.

43:12That was a really, really important learning for us, where we realized that our customers are threefold. Our customers are the founders, the other VCs that will follow on to our deals, and our LPs who we're trying to make money for. And if we don't get all three of those right, no matter how smart we think we are, no matter how stubborn we can be, we're not going to win. The second point was the identity crisis, where it was very painful to realize that we would have to build a firm that didn't mirror our idols. And I know that sounds really goofy, but when I was in college, all I ever wanted to be was a venture capitalist at one of these firms that we all know about.

43:41And realizing that our firm was going to just look different and make money differently took a long time for me to really appreciate. The aha moment was when we realized that venture capital today is just such a different business than it used to be. We can't keep doing the same thing that all those firms we really loved and looked up to have been doing. And because they're already good at it, there doesn't need to be another firm doing the exact same thing that they're all doing. I think also as a firm, it's really important to be self-aware of what you are and what you aren't. If you're a really prestigious firm, you can kind of have sharper elbows and ask for a certain minimum ownership, and you're going to get it.

44:09And you can tell the existing investors that they don't get their pro rata, decide that you don't want to deal with hairy situations. That wasn't us. We realized that we were new. We would have to deal with stuff other people weren't going to be willing to deal with. We'd have to be more collaborative. One other crazy stat about the first fund, we had multiple companies going to the deals where we had to do recapitalizations. We had multiple companies going through litigation when we financed them. We had a company where I had to call all their payables and negotiate their payables down before financing them to make sure that they weren't insolvent the day we funded.

44:38And by the way, these deals are now worth well the nine figures. I mean, these are really, really high quality businesses now. We did things that I think the average firm wouldn't have done, not because we wanted to, but because we had to. What did you find the tipping point was from that third group, the LP community? A few different components. The first is on a personal basis, I had proved to people that I could make money. We invest institutional size capital in our credit business, and we had been making money for people for enough years where I was able to have a conversation with institutional investors who very much understood credit, or I could have a sophisticated, rational conversation with them about credit.

45:17And then after having that, start telling them about venture and they believed me because they had first built trust with them and credit. The second is time, which just took a really long time to have our first exits, to have realizations, to have a lot of those markets bear fruit. And the people who came into our firm are different pools of capital and and the different strategies we have known for years. The average check that we've ever gotten from an LP took us 26 months of knowing the person to get it. It's a long sales process. And I think a lot of people, when I talk to them, they say, well, I want to start a VC fund.

45:46And I often tell them, I can help you figure out how to do that in three years. But I don't know how to help you figure out how to start a fund within six months. Because it takes two, three years of helping people, introducing them to managers. I mean, a lot of the people who are invested with us, I introduce them to other firms that they invested in before they invested in us. I bet you some of them invested in us as a favor. for introducing the other firms. I think it's turned out incredibly well for them, but it took time. I mentioned 550 different groups or individuals or institutions that have invested with us over all the things that I've been a part of.

46:13It's probably out of 3 ,000 groups that we've known and talked to. It's the quarterly letters. It's explain the rationales, the investment memos. It's find a term with ventures is usually a black box and try to elucidate thinking deal by deal. It's trying to not use generalizations, like saying things like we have big networks or we have proprietary deal flow. And instead giving case studies that here's the deal we did. Here's why we did the deal. Here's how we found it. Here's how we won the deal. And then also we spent a lot of time talking about the quality of our returns. We have certain companies in our portfolio that have done tremendously well for reasons that we didn't predict.

46:44Those are not high quality returns. We're very happy that they happened. And I think in venture capital, people talk about pivots and this and that. Yeah, but if somebody pivoted into an idea that we didn't underwrite, we're happy it happened. And sure, we were good at picking a good founder who is nimble and could change their idea and whatever, but it's not how we're trying to make money. We're trying to make money because we had a point of view on a market, a thesis, and generally how they were going to approach it. And they got it right. And so I think being able to have those rational conversations and turn a black box into a bit more of a machine ended up helping us a lot.

47:11The proof was, you know, in our last fundraise, our past fundraise, fundraisers used to take three, six, 12 months. The last one happened in three weeks. I often joke, we kind of raised it in three weeks. But what we really did is we raised it in two years. Because the entire time we were raising the fund prior to it, we were telling people we were doing, we were sending the quarterly letters, we were explaining the rationale. So by the time we put up our flag and everyone knew when we were going to put up our flag, it was done. And it was the craziest experience I've ever seen. It was amazing.

47:37So Ali, if you look out a couple of years from now, what's on the horizon for Coventure? It depends on what's on the horizon for the market. We know that in the next 30 to 50 years, we want to build one of the great new asset managers, whatever that ends up meaning. It might not be tons and tons of AUM, or it might, but I think it's just going to depend on the opportunity set that we have in front of us. We know that today, there are a lot of financing businesses that most of the venture market doesn't understand. And that's a really important thing. And we're going to build a firm built around knowing how to back those companies.

48:09We also know that today, the economy is just going to be built differently in the next 10 years than it was in the last 10 years, because people aren't starting any new dry cleaner businesses. They're not starting new drugstores. Instead, they're being built within these ecosystems. And we know that there's a lot of technology companies that are going to invent new jobs for the average American. We want to go finance those. We will build whatever it takes to go get ready to finance those. You know, I've often joked that the best comparison to our vision of the future is almost like playing that computer game Red Alert 2, where you walk around like 10 feet in front of you is completely hazy and black.

48:39And the more you walk forward, the more you learn about the new field that you're walking into. Maybe it's a totally bearish comment on us as a firm that we don't know what the next five years is going to look like. But it's just a really unpredictable time. So to make some big, bold proclamation about what we're going to look like in five years, I think would be not right of us. Often we've had investors of ours ask, how are we going to size our next fund? We've always told them we don't know. We know the methodology. We're going to look at all the deals that we saw in the current one. We're going to decide how much allocation we could have gotten.

49:05And if we had the perfect sized fund, what would it have looked like? And then we'll go raise that size. And it might be smaller, it might be bigger, it might be anything. In Crosby, one, it was a$25 million fund. We co-invested with$100 million and we invested too quickly. All I needed is a bigger fund. I don't know what's going to happen in the future. So I guess I'm better at talking about the process than what it'll look like. Well, Leah, I want to make sure it takes some time to turn to some closing questions I didn't ask you the last time around. So what is your favorite hobby or activity outside of work and family?

49:33This is going to be an answer that'll give me a hard time. Right now, the hobbies work. You know, at a point in my life and we're in a point in the market where I don't think anyone who's worked in tech that I've talked to has seen something quite like this and seen the amount of activity and deal activity and everything else. And I think work-life balance is a really important thing. I don't have it right now. Honestly, I'm not that embarrassed about it. We are working our butts off because we are in a once in a lifetime moment. We wake up at seven and we work till about 11. And there's going to be a lot of people who think, gosh, what a terrible firm, or that's not a good example or whatever.

50:03That's fine. I don't need other people to do the same thing we do. I don't have hobbies right now. I just work a lot. All right. What's your most important daily habit? The two and a half hours I have in the morning before I start meetings. And it's when I actually get to read things deeply. It's when I get to solve hard problems, when I get to get ahead of things that are going to stress me out. If anyone's gotten a email from me that's generally frustrating, it usually comes out 7 to 8 a.m. when I have the mental fortitude to take on something that might not be an easy conversation. So I would say waking up early is my most important daily habit.

50:35What's your biggest personal pet peeve? Hyperbole. In venture capital, the example, and Savneet, one of my partners will talk about this a lot, is people get lunch with someone twice. And they're like, they're my best friends. We spend a lot of time trying to rein things back. We talk about being reasonably sure. We talk about humility. Like I think hubris is the most dangerous thing in the world and credit. You need hubris to start a business. In fact, maybe you need an irrational amount of hubris, but you need to have the humility to know how confident, overly confident you're probably actually being.

51:01So hyperbole and when people rely too heavily on signal, there's always the type of person who listens to the tone of how you say something as opposed to what you said. And that really bothers me. Which two people have had the biggest impact on your professional life? So I'll pick the two earliest major impactors, which are Michael Sloan, who's the founder of Chloe Soft's approved company, which is the job I had before starting CoVenture really. And he was the one who encouraged me to go back to school. He was my first investor. He was in many ways, the reason we were able to start our business.

51:29And then Savneet Singh, who you know, Savneet's now the CEO of PAR. He's one of my co-founders in CoVenture. He's the one who taught me investing. Amongst other people, I promise, if you're listening to this and you're one of the other people who have, I know that you have, I'll pick those two for the spirit of having to only pick two. What's the biggest mistake you've made and what did you learn from it? Hiring too quickly. One of the most important things that I've ever told about building an investment firm is that managing a$1 billion AUM firm is a really good business to be in, unless you used to manage a$6 billion AUM firm.

51:57And the challenge is it's really hard to go backwards in asset management. It's hard for morale. People want to make more and more money each year. In a startup, it's okay to overbuild and try to hyper growth and whatever. When we think about hiring, we always think, when are we stretched just a little too thin? And let's then add that next person. So I think today, we're a little more flow and hiring, we're a little more methodical, and we don't try to overbuild, because it's really, really, really hard to go backwards. All right, last one, Ali, what life lesson have you learned that you wish you knew a lot earlier in your life?

52:30It's cliche, but I don't think a lot of people practice it. But it's a lot of over promising, having a realistic point of view of what you can actually deliver. In fact, I probably overcorrect now, I think a lot of people get frustrated when I don't commit to something. But I'm really, really, really terrified now of saying that we're going to do something that we don't end up doing. And so we put a lot of preambles in everything we say, I think trying to surprise to the upside. And that goes both commercially and socially. You know, I just gave this comment of not having hobbies. I mean, the best way to lose friends is start a business.

52:59And I think one of the things that I'm trying to work on is how do I have a conversation with people who are really dear to me and who I love and say, hey, look, it's just going to be like this for a year. It's going to be like this for a few years, maybe. And, you know, I love you and I'm here for you. And if you call out, you need something, I'm here. But I think I could have done a much better job framing that early. So it's not just over promising commercially, but it's over promising socially as well. I'm trying to make sure that the people who matter know that they matter more often. Ali, thanks so much for taking time.

53:25It's fascinating. Thanks so much. I really appreciate it. Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.