Episode 41: Antonio Gracias - Founder and CEO of Valor Equity Partners

0:00This week on Generating Alpha, I sat down with Antonio Gracias, founder of Valor Equity, one of the most distinctive and influential investment firms in technology. Valor has backed many of the defining companies of the past two decades, built an operating model trusted by founders tackling the world's hardest problems. Antonio is one of the few true first principles thinkers in investing. A lifelong student of physics in the human brain, he's developed a systems-driven approach to decision-making, becoming an early investor and board member at Tesla, SpaceX, SolarCity, and The Boring Company, while also guiding companies like Warby Parker, GoPuff, and Guild Education through rapid scale.

0:41In our conversation, he breaks down the evolution of valor, the physics-based frameworks that guide his investing, how he evaluates founders over long arcs, and the biggest lessons from two decades working closely with Elon Musk. If you enjoyed this episode, please follow the podcast and rate it five stars on Spotify, subscribe to the YouTube, and share it to anyone who might find it valuable. I really enjoyed recording this episode, and I hope you guys enjoy listening. Thank you. Thank you, Antonio, for making the time. I really appreciate it. Hey, Grits. Nice to see you. So I'd love to start where I always start, the beginning.

1:14Tell me a little about your childhood and kind of the environment you grew up in, and in what ways do you think it was unique from your kind of average American childhood? Oh, man, you know, I'm, first, I'm the child of the Grits. You know, I was the only one I felt born here. My parents are from, go to India. My mom from Spain, Madrid, Spain. and I grew up, I was born in Detroit, grew up in grads, Michigan. And so I was the only Spanish-speaking kid in my high school, which, you know, was a little unique. I think from most Americans at that time, this is in the 70s and 80s. So that made me unique.

1:46And in other ways, it was like very much a little like childhood. You know, we had enough resources that we could do almost anything, but not so much if we could do nothing, right? We really had to work. And my parents were super focused on values and on working really hard. that we were given a lot of gifts, a lot of intellectual gifts, and that we had a responsibility to do something like those gifts to get back to society. So I have two brothers who are doctors, two sisters who are both dentists, and I'm a lone black sheep of a family that ends up in the best business. And you go off to Georgetown, if I'm correct, to the School of Foreign Service, the renowned School of Foreign Service.

2:25And during your time there, you do something which I think of as relatively unique, which is studying Japanese pretty intensely. and you kind of credit learning Japanese on top of both English and Spanish of shaping your thinking so I'm interested if you could kind of like explain how you think learning Japanese shaped your thinking and what's different about kind of if a person were to learn English as their first language and then Japanese or something else as their first language and I'd love for you to use examples specifically Japanese yeah I mean so look what I know now what I didn't know now is the language is is how we program the brain right so memory starts to form at the same time we form language and so it is the language you learn the logic pattern of the language you learn is actually how you construct the logic pattern of your brain and japanese has a different logic pattern than english so english um you know is is a is a language has a very linear logic pattern and um japanese language it has it has a topic of particle markers that mark things like taught the object and the subject of sense, et cetera.

3:27And you can move around a little bit, right? And so you get a bit of a nonlinear logic pattern. It's still very solid logic. You can think that way, but it is different. And so, you know, when you have these communication problems between people speaking Japanese and English, it's often because they actually, the translation doesn't translate meaning because the language itself in translation doesn't convey the meaning. And the best example of this is the Japanese high, right? So high means yes in Japanese. And you've probably heard the joke, right? You can hear someone in Japanese say hi, hi.

3:56But it really means like, I hear you, not like yes. But if you're hearing it in English, you're hearing the word yes. But it has a different meaning. And then if you scale that up in the overall language, it does have a different logic structure. And so you get a different logic pattern than you might get in English. And it made me think, if you peel back someone's skin and their skulls, and they were just a brain in a vat sitting there, we're all the same. Like we're all literally the same. It doesn't matter what, where on earth a human is born, we're all the same. The brain is, you know, about three and a half pounds, it uses 20 watts of power.

4:31What matters is how it's programmed. And the language that you program it in makes a big difference to how things. And what are some examples of that kind of nonlinear way of reasoning, way of thinking specifically? I mean, for me, some of the things we've done have been very counterintuitive. Like, why would we – in the same point, we invest in Tesla. We might invest in the industrial asset way back one of the old days. And that is nonlinear. That is applying many of the lessons we learned in the industrial world to technology. That is not a linear progression. You look at that and you say, well, that looks very nonlinear, man.

5:09And it is very nonlinear. And I think that I probably would not have done the things I've done and seen the things I've seen the way I see them if I hadn't studied Japanese, if I didn't have some of that base program in my brain. And I'm interested, this is kind of a fun question, but knowing what you know today, if you were to learn any language in the world as your first language, what would it be? Still Japanese or English? I mean, Japanese, English, Spanish, or really? No, I mean, I think it's my first language I learned English. I think English is lingua franca. You know, anywhere in the world today, people speak English.

5:40and that is that in a decision maker speak English it is it has become the common language humanity I think in many ways uh I think I've ever learned a second language but you know if you ask me for advice I think about it two ways um I felt very called to study Japanese I love the culture I love food love the people and so there's like a personal interest in learning a language and loving a culture that's really interesting I think that's a smart thing to do um and just It's a beautiful thing to do, right? You enhance your life and you enhance your understanding of humanity in that way. If you told me that you wanted to learn the most useful language in the world, what would I go learn?

6:15I'd probably tell you to learn Spanish because that's a language that's a common spoken America. And I think it's also a beautiful language and just the wonderful literature to experience and one of our cultural experience. Or I might tell you to learn Arabic. I think that I spent a lot of time in the Middle East recently over the last decade or so. I think this is a culture that we need to understand very well here in the United States. And we would be wise to have our young people learn Arabic and sometimes Middle East understand that culture. There's just many beautiful things about that culture.

6:43Same thing, beautiful poetry, beautiful literature, and a wonderful deep history. That's a unique perspective. I don't hear a lot of that. And so you, after Georgetown, you kind of go to law school and you founded MG Capital while in law school, if I'm correct, which I consider like the precursor to Valor, your first real fund firm. And one thing you did in that was help scale a plating company, if I'm correct, from 10 million to$120 million in revenue. And around that same time, you met David Sachs at law school, and then you also met through him, if I'm correct, Elon. So I'm super interested in that kind of time in your life.

7:18It seems like it was extremely, extremely kind of formative. It opened many doors. So I'd love for you to just tell me about what the chapter of your life was like, and what doors do you think it opened? Yeah. So there was a stop between there and Goldman Sachs. So I finished undergrad, I did two years undergrad, one year in Japan, and then two years grad school at Georgetown, School of Foreign Service. Went to Goldman. Almost by accident, I had a Goldman Sachs. Wanted to be a development economist, so I went to Georgetown. and then, you know, didn't like it, had a job at the bank as a consultant.

7:48We were doing some work there and didn't like it, and so I ended up going to work at Goldman. And, you know, when I was at Goldman, I realized that I really wanted to make something. I wanted to make a product for a living. I wanted to actually physically make something and be of service in some way that was, you know, just different than working at Wall Street. So I went to law school really to please my father. That's the truth. You know, my mom passed away when I was in high school, and my father had convinced himself and all of us, the children that their primary objective to life is that all their kids have doctor degrees so my brother's doctors he's a dentist i was gonna be the lawyer that was like the deal so he really wanted this and i had internalized that as my goal for him so i went to law school but i didn't want to be a lawyer at all so i didn't want to waste my time completely and i thought it'd be cool to make something so i started looking around for a little company to buy and back this is like in the mid 90s right 95 these the idea of a fundless sponsor it wasn't thing it was like a you know it was a young kid trying to buy a company and i found this planning company that was the subsidiary of a bankrupt business called kdi that i was able to buy and it played connectors so you know one of the people on the internet and this is again 1995 right internet started to scale up and connectors are the internet backbone so this was like the the least costly way of the the most value based in the way you could get into the internet business would be to do plating of connectors, which is what I ended up buying back in my first year of law school.

9:14Yeah, so I spent, what I realized in law school pretty early on was that I went to New Chicago where they had blind grading. So it was, you've got a number and you sign a scene chart when you do class. So I figured after the first quarter so that if you didn't sign a scene chart, the teacher would never know you weren't there. So I didn't go to class. I just could show up and take exams because of my number. And I met David Sachs the first day of law school. David Sachs was a brilliant law student. I mean, really brilliant law student. Probably could have been a Supreme Court clerk if he wanted to be.

9:42I'm very certain he could have been. And he was a brilliant man generally, but just a brilliant law student. So we became friends, and he would give me his notes, and I would use his notes, his outlines and stuff to take my exams. And then we'd trade notes with the people for our outlines, for their outlines, and I kind of made me an outline trader. So that's how I got through law school and how I met David and we became friends. and then he went to work at PayPal after law school, after McKinsey went to PayPal and Elon was the CEO of PayPal and X merged and Elon was the CEO of PayPal. I had started MG by that time as you point out and we were just raising money from a few clients at a time.

10:22We ended up investing in PayPal and that's how I met Elon. So yeah, it's you're in high school and you've got lots of high school kids that listen to this. You don't know. You never know what's going to happen who's going to go where um what matters i think most i just gave my own kids advice i went to college is to go off into life is like you know you want to be with people with great values to respect like if you have you surround yourself to a great value to respect i think you will you know you'll find that those those relationships those friendships are really uh valuable in life um not just really not just at work but just they're just valuable friendships and i've been blessed they're friends from middle school high school college law school that i've kept all the way through and so i've got to work with uh like david um others i've just we're friends and it's just amazing so yeah i think the most important lesson that is you know you just don't know if you're trying to help with great people that are good values who are smart you respect uh interesting things gonna happen yeah and i also think there's a kind of environment of people planning out a little bit too much in this day and age thinking they're gonna be x y doing x and y for five years and i'm doing this for 10 years and it's life comes at you um yeah i mean i tell people all the time you know like in any strategy game a firm fixed position is weak if you think about the problem with the strategy of like i'm going to plan my life over 10 years is the world is moving so fast you just you have no idea what's going to happen if you chase something by the time you get there it might be gone right um it doesn't work it doesn't work as a strategy you have to be very flexible it's going to happen because the future is changing so fast.

11:56It's probabilistic uncertain. The future is probabilistic uncertain. And so it's important to make great decisions along the way. And that gets you to an outcome that is good for you in the long run. And I'd love to just start focusing on kind of like the beginning of Valor. So if I'm correct, you start Valor in 1995 or kind of like a precursor to it. Tell me about that, kind of why you started it, what went into it, the early days. And then after that, I'd love for you to kind of go through the evolution of Valor up until today. but in terms of what do you believe are the most formative investments that kind of shaped your framework that you still have today?

12:30Yeah, look, we took that little playing company. It was 10 million in revenue and about 9 ,000 even done. I learned how to operate because I had to. You know, I read a book called The Goal. I got from my business school and gave it to all my players and they helped us improve the throughput of that factory using the thing called the theory constraints. And, you know, it was super formative. I mean, being a plant manager, really learning operations from the ground up was a new performer for me. So that first iteration was really in building that company, the connector company that you mentioned.

12:59It went from$10 million to$125 million in revenue in about five, six years. And then we sold it right before that in 2001. We bought an auto price company, fixed it, sold it. It made a few technology investments, namely one at PayPal, which is how I met Elon and some of those guys. But that was really just a bit. We were really operators. We were buying, I'd say, older industrial assets that were in the connector supply chain. So stamping, planning, molding, assembly, fixing them and making them grow fast using a lot of leverage. So 95 % leverage. And it became very clear when you use that kind of leverage, you need to make money for returning capital matters.

13:37And what we were able to do with our operational skills and what really was, then it was theory constraints. It's how you make something go faster, right? Make it velocity open system and quality, which was Six Sigma at that time. It's now the binding called lean. that lead toolkit was super important and we still use it today um so it's kind of 95 to 2001 or so in that period we start the firm we go we go from a couple of buying companies more office operators into the fund business and really don't know what we're doing you know if you look at those for a couple of funds there's industrial assets there's like a you know tree farm there's all kinds of stuff in there there's a ski resort and there's tesla and a few other uh technology assets because of all the relationships we had.

14:18And, you know, learned that the skills we had, the operating skills we had, we kept with us. We had a group called, it was an operations group, we now called the scale group that did lean operations. It was super important. It helped us not just with the, I call it control turnarounds we were doing, but also with the growth companies. And we learned that the technology companies are often a really great core product, but the other stuff around building a business in scale, they need help with. and those are the things we knew because we'd done them as operators and that we we'd done a lot of right so it's like if you're starting a company first time and you're a great technologist you know how to build the product you know how to make the the drivetrain for a car but the stuff about raking the whole car is actually it's new to you right making auto parts or making uh manufacturing stuff but that scale wasn't new to us but it was new to the people that were doing it so we could be valuable to the world by focusing those skills on technology assets so phase one was operators.

15:11Phase two is kind of like fun business figuring it out. Phase three is we get rid of the turnaround business. We then decide to go focus on technology and keep our operating skills into what's called the scale group and define our companies we're investing in as customers and ask ourselves the question, how do we serve these people really well? And if we serve them really well, then that will drive everything else, drive the deal flow and ultimately returns will be a consequence of building great companies. And we decided on this mission that we want to invest in great companies and make the world better with great entrepreneurs and support them and really serve them and adopt a Lao Tzu quote into our firm, which is in all of our conference rooms.

15:47It's about serving leadership. It's basically that it'll lead us best when the people say we did this ourselves. And that is our ethos. That's our operating ethos. We're here to serve. We're here to serve great companies, making it a little better. That's kind of the iteration we're in today. So over time, we scaled. As a result of that, we've had a growth fund that has grown over time. And then we had early stage vehicles. We used to make small early-stage investments off the balance sheet so that we would seed ideas to the growth fund. That then went into the fund because it did well, and that turned into a venture strategy.

16:18It now has two separate venture funds, verticalized venture funds. One is sustainability. It's real about food tech, retail tech, consumer. That's called VSV. And the other is the BAI, which is our artificial intelligence fund in partnership with Trades. So that's how the evolution of the firm happened. It really happened because we were trying to figure out how to be more valuable. and more valuable to the world by investing in these companies that are making it look great. I was supposed to interview Gavin this Tuesday, but it seems like we're going to do it mid-December. He's a great guy, a great friend.

16:49I met him because he was one of the first investors in Tesla. I was lead director, and he was, I call it, the lead portfolio manager at Fidelity and was just an awesome guy and super supportive of the company. We were just coming out of the gate in our IPO. and Fidelity bought 15 % of everything we ever issued. They were wonderful investors and he was the lead person there. He's really great. I hope you get to interview him. For sure. And looking forward to it. And if I had to kind of explain to someone today who knew nothing about investing, venture, private equity as a whole, and I had to explain to them what Fowler does in like one or two sentences, what would you concentrate it as?

17:31Or what would you call it? Yeah, we're looking for companies to make it a little better. that are growing very fast and they could also have high return capital those the two basic metrics right so it's like i think much of the world many people talk to they're in the venture business or in the growth business and technology they focus on high high growth uh high revenue growth that's important but then if you don't someday make money it won't work and so to generate capital that would train capital you have to actually have a system a machine that makes money. So the company itself is, if it goes to make a machine, it's the machine to make the machine.

18:05And that machine must be a very efficient producer of capital. And I think something that Valor does that's very unique and a kind of framework you guys have is pro-entropic investing. And I picked this up from the podcast you did with Patrick O'Shaughnessy, who I consider a friend. And so what is a pro-entropic company or founder? Yeah. So this is from the second law of third emics, right? So entropy is increasing no matter what i mean you can't it's like the fundamental law of physics universe right and so you and the second there's a second law third law is you can't reduce the pest to zero like there's the idea of like a stable launch equilibrium is a fallacy it doesn't it might exist in economics and textbooks but this is reality so what we're getting here is we want companies are really good at dealing with this change rapid change so chaos happening in the world it's being set off because of uh screen-alized disruption set off but we think because of deglobalization because of technological will change.

19:01There are companies that try to tamp it down, that really want to have stability. And there are companies that are good at reacting to it. And then there are very few companies, the very rare companies that are really great at surfing it. They're really great at benefiting from it. And they know how to take that energy out of the environment. Other companies have done poorly and used to their benefit. And the best example of this is Tesla. So Tesla, we buy this factory from the GM bankruptcy, the Fremont factory. That is a good example of like, here's a company that was a bad producer of capital.

19:31It had low return on capital, made bad products at a bad time, and then a bad time in history when there was a huge event set off, medical bankrupt. Out of that chain bankruptcy, we buy this factory. That factory took billions of dollars to create. We bought it for pennies in the dollar. We took all of that capital, which is really pent-up by nothing, sitting there, and repurposed it to make Tezza cars. and tested today is it was today because we were able to buy that factory for such a low price at that time in history. That's the ultimate pro-entropic move. It is literally the world's falling apart.

20:06We will decide to go buy this factory instead for paying the dollar and make cars. And to be a pro-entropic investor, I guess the underlying belief you have to have is the world's going to get more chaotic. So I'm interested in how you think about kind of going forward. is the world going to get more tropic or chaotic in a sense and and how do you guys plan on riding that i think it is i think it is i think it's like a sine wave you know there'll be there'll be local mints and local maxes there'll be moments when it feels stable and moments when it doesn't but you want you want to invest in people and companies that are really good at understanding how to ride those waves and how to benefit from them how to benefit from that chaos you know chaos is the ladder right you're going up or you're going down depending on how you deal with it and You just have to accept it, right?

20:47You've got to be really good at mapping the whole probability of the future so you aren't surprised, right? If you get surprised, your brain can't function properly. Your brain uses 20 watts of power. And if you're surprised, it pulls those power that power to your safety systems, that weight in your cognitive systems. If you're not surprised, you can actually act. You can think carefully, you can act. And so people that are pro-entropic, companies that are pro-entropic are really good at doing that. They're good at predicting the environment, shaping that environment, and making the future. And you just talked about sign curves and you also mentioned a kind of couple, a couple laws, laws in physics.

21:21I mean, this is how kind of just physics as a whole, you, you seem to take a lot of things kind of in your investment thesis from physics and you seem to think in a way that's kind of tied to physics as a whole. How do you think physics shaped your thinking? And, and, and yeah, why do you love it? I guess. Yeah. I mean, physics is the base law of the universe, right? These are, these are like immutable, immutable laws. And the theory of constraint itself was designed and popularized by Goldratt in The Goal. He was a physicist, and he was describing how to optimize a closed system, a manufacturing company.

21:56A company is sort of an open-end closed system, but he was describing how to optimize a closed system. The three laws of the third dynamics, right? The first law is energy is conserved, can't be destroyed, but it can be transformed. It's returning capital, returning invested capital, right? you can take energy, money is energy, you can put it into a system, you can transform it into something else. If you do that really efficiently, you'll win. If you do it really inefficiently, you will lose. The most efficient people at making that transformation are the ones that win over time. That's why ROIC, return invested capital, is an important part of our investment thesis, right?

22:29The second law of economics, entropy is increasing over time. That's the way it is. I mean, like it, don't like it, doesn't matter. You can get good at dealing with that. Eventually, maybe it destroys the entire universe and something else happens, who knows? but until that happens you can get good at dealing with it or you can actually try to fight it if you try to fight it you're going to lose that's the reality so we're looking for that's why we talk phoentropic people are good at it look good at dealing with that entropy and writing it and benefiting from it and the third is it uh entropy the ball dynamics is that entropy can't be reduced past zero it will never reduce zeros it's going to be there no matter what there may be moments of stability but they're fooling you um it's under the surface it's just going to break out in some way.

23:07And you want to predict how that's going to happen as best you can by using probabilistic thinking. It's basing in probabilistic mapping, but probabilistic thinking. That's informed about our entire investment thesis. I think it's incredible. It's one of the more unique theses I've heard. And I have this kind of, I don't know, theory that I think the most successful investors in the world, either it can be a mix, but either very innately talented at something like an example of B. Steve Cohen. I think he's very innately talented at trading or take a different perspective towards an industry that's like very commonly traded um and so i think what you guys do is kind of a mix of both of those things i think from what i can tell you guys are very innately talented investor but then you also kind of take to take these principles and invest off of them i'm interested in so you don't invest in a company or so i heard that you don't know for at least six months um and so when assessing kind of both the founder and the business you brought up this idea of asymmetric information in past interviews how do you think about asymmetric information over the due diligence process?

24:06In what ways does asymmetric information manifest itself? Yeah. So we want to write a small check, a bigger check, a bigger check, a bigger check, a bigger check, a bigger check over time. And we want to do that because we develop information entries that you're describing. What that means is we write a small checking company. We get to know you. We get to find out if our values are aligned. You know, do we believe in the same things? We behave the same way. And will you execute? It's pretty simple. Believe it or not, past performance does indicate future performance. It actually does. so watching someone over time you get to know what's going to happen you have a good chance of seeing them go through good times and bad times and six months is long enough to figure out to know someone's telling you the truth that six month uh guideline started out because in the early days we were having we were good at predicting the macro we're good from the micro like all the math and all the analysis that that was all good but we were we were getting fooled about you we're bad just bad people and it turns out that it takes about six months to throw out someone's bad you know i tell you the truth and you have to have multiple interactions to figure that out with multiple people.

25:02And so that six month, it's really a rule. It's a guideline, not a rule, I should say. But 90 % of the stuff we do follows that rule because it allows us to understand someone and how they, if we're values aligned, you know, our values are humility, integrity, responsibility, and excellence. And if we're values aligned and we can value you as like valuable investors because our scale group can help you, we think we're the best investors in the world for you. We can serve you well. If we're not, then we're not the right guys for you. And in the due diligence process, do you think it's essential that you kind of see the founder with them or with the company in a time of chaos in a time of what they're not really doing well and that's when these kind of values come to come to surface you probably won't see that in six months you might see it you might not you know and but which you will you will you will hear enough you'll learn enough to see how they're performing over time and what they're telling you and how that measures up against reality right that's the most important thing and then over a longer period of time oh major years and look at the best events we have they've gone for years we've been in spacex for like well over a decade now um it does the same thing i still hold my tesla share it's been it's been well over a decade you see how people behave over time and you see them in good times and bad times and they see you in good times and bad times and yeah you get to know someone really well in the bad times and when they're right in the bad times that's when you keep adding more capital it's all it's very counterintuitive right you when you know someone well you know the the management well you know the company well something bad happens that's the time to double down that's really the time because you have the conviction you know the people you know how they're going to respond um that's when you make the best investments.

26:30You talk about this concept of vector alignment, which is also a concept within physics. How would you, for people that don't know, how would you define kind of vector alignment within an organization, within investing as a whole? And what common cultural themes have you seen across the companies that you think have the strongest vector alignment? In this vector alignment thing, we have a bar from Elon. So we, you know, he has this table, which is a company that has a sum total of the vectors of the people working at, right? and the alignment part really we think is what values and mission. So if you have alignment and values in a company what are the underlying values of the social system and what is the mission that people are on when you have those things aligned that naturally aligns the vectors.

27:10One of the reasons that we like mission driven companies is because it's easy to align vectors when you have a great mission. You will attract great people. Those people will typically share values and they'll be on target on that mission. And I'm interested in You talk about psychopaths a bit, and you see them a lot in places like law, and places like investing, and kind of these very high-performing places. Tell me about psychopaths. I mean, so think about this as the – what creates a psychopath is an anomaly in the individual. They don't feel compassion. They don't feel guilt the same way an old brain does.