Episode 52: Michael Paulus - Founder of PCM Encore

0:00This week on Generating Alpha, I sat down with Mike Paulus, Stanford-trained entrepreneur, former partner at Andreessen Horowitz, and founder and CEO of PCM Encore, a multi-billion dollar family office. Mike studied economics and management science and engineering at Stanford, where he helped manage a portion of the university's endowment through the student-run Blythe Fund. He went on to serve as president of Adapar, the wealth management technology platform that reports on trillions in assets, before co-founding Assurance IQ in 2016. In the SureTech platform, they matched customers with insurance products at scale and sold to Prudential for$2.35 billion in 2019, making Mike a billionaire at exit as he bootstrapped the business.

0:40He's also spent time at a partner at Andreessen Forowitz and holds two patents for innovations in financial technology. In 2021, he founded PCM Encore, a fiduciary employee-owned multifamily office and has since grown it to billions of dollars in assets under management. In our conversation, we talk about his path from Stanford to Silicon Valley, building Adapart, co-founding and selling Assurance IQ, his time at A16Z, why he started PCM Moncor, how he thinks about alternatives and portfolio construction for high net worth families, and much more. If you enjoyed this episode, please follow the podcast and rate it five stars on Spotify, subscribe on YouTube, and share it to anyone who you think might find it valuable.

1:15I really enjoyed speaking to Mike, and I hope you guys enjoyed the episode. Thank you. Thank you, Michael, for coming on the podcast. I really appreciate it. It's great to be here. big fan. Thank you. Well, I want to start where I always do, the beginning, as you know. If I'm correct, you grew up on a blueberry farm in Washington State. Tell me about your childhood, the environment you grew up in, how that shaped you. I'd love to hear the backstory. Yeah, so I grew up on a small blueberry farm, almost on the Canadian border, and then my mom was the local Lutheran preacher. So it was a very idyllic childhood.

1:49But I was really always interested in the financial world and technology. And I think the farm taught me hard work, you know, certainly, but I also knew I wanted to get off the farm, you know, when you're going up and down the same row of blueberries for, you know, months on end, you're, it gives you a little extra motivation to, to, to do well in school. And, you know, my, my biggest memory was just thinking through the time till coffee time, then lunch till the end of the day, just because the work was so monotonous. And I said, you know, the most important thing for me in my career is I never want to look at a clock.

2:24And I've been very fortunate to do things where you're excited about the day. And, you know, that's that's that's one of the best gifts, I think, no matter what you do in your life that that you can take away. If I'm correct, after growing up there, you go to Stanford, you earn two degrees, a bachelor's and a master's. what was that like that contrast between growing up on a blueberry farm Washington state and then going to Stanford one of like the most prestigious kind of formal education institutions in the world um talk about your time there what did you take away what did you learn and and after that how did you know what you wanted to do or did you know what you wanted to do yeah it's it's a great question I I think the most the the biggest takeaway from Stanford from a positives was you get to meet your tribe.

3:09You get to meet people from all over the world that are like yourself. And I look at my best friends and they're from, you know, Nigeria, you know, I've met my wife at Stanford from Switzerland, you know, another good friend from Ireland. And I think you meet a lot of folks there that are very different and that has its own benefits, but you also get to meet these people that have so much in common and it kind of distills that group from around the world. And then I think being there at such an interesting time, you know, we had the 2000 crisis that Silicon Valley was just coming back from. You had, you know, Facebook really just starting to take off.

3:46You know, the coolest kids were getting internships there. And it was dynamic. I mean, Instagram was founded, you know, while I was there. You know, Bobby Murphy from my freshman dorm was one of the Snapchat founders and that was happening there. So I think to be at that time in that place as Silicon Valley was really just reemerging, I think I was very fortunate. Was it during those college days when you wanted to be an entrepreneur or did it take some time after that to really understand that? You know, it's interesting. I think I was ambitious and I didn't know how to channel that. I thought, you know, maybe I'll go into real estate development.

4:23You know, I took a job at BCG, an internship at BCG. You know, I was going down an investment banking path. I'd seen, you know, the entrepreneurial and the tech wave as well. So I think like a lot of young people, you know, I wanted to make something in my life. You know, I wanted to work hard and get ahead and kind of have the American dream. But I don't think I was necessarily, you know, like the kids you see that drop out of freshman year and are just, you know, are super entrepreneurial. I think, you know, later in my career, I realized how much I loved working for myself, but that wasn't evident, you know, early on.

4:59I mean, I think my life could have very easily taken a different path. After Stanford, how did you channel that and ultimately end up at a part in 2009? What was the space in between that or was it director? Yeah. Yeah. So it's a good story. So, you know, I had a great internship at BCG. It only lasted a summer, but I was working for a bank. I was in the New York office and they sent me to North Carolina to look for a bank. And it was great. It was a big IT revamp. And that gave me my first view into just financial technology, understanding how backwards things were, just the core opportunity there.

5:35But, you know, I had taken a job at Goldman Sachs in the TMT group, and I've got a lot of good friends that have done that. It's a great group with illustrious alumni. And that's what I thought I was going to do. And there was a person at Stanford named Steve McLaughlin, or Steve Laughlin rather. He's actually a partner now at Excel, great founder. And he said, you should meet this guy, Joe Lonsdale. And Joe had been one of the Palantir co-founders. And I went to meet Joe. And I'll never forget, it was a brand new Palantir building. No one had moved in. So it was an abandoned four-story building in the middle of Palo Alto.

6:13I come into the office. is Joe's got a lightsaber collection behind him. So you're the same, you know, I was like, am I even in the right place? And then as he started talking, you know, just an absolute brilliant, you know, really a genius. But then it was so creative and we could go and do this and this and this. And there wasn't this thought of, hey, if you do this, you get this position, this position, this position. He really believed if you're young and smart and you work hard, like let's go and do this. And it was just really invigorating. And that really changed my life. that caused me to go and build Atapar with him.

6:48During the time at Atapar, what were those things you pursued and worked on? And what do you think you took away from that time there and from Joe? Yeah, so we had this vague idea that the financial crisis had happened. People had lost a lot of money. Portfolios had not behaved like they were expected to. And how could we fix that? Kind of a typical Silicon Valley grandiose vision. And when we got there, really, we first channeled it into just meeting with hundreds of wealth managers. And that was just fascinating. And because, you know, of Joe and being in Silicon Valley, you got to meet with, you know, Iconica was being founded, you know, IEQ, some of the best wealth managers across the country.

7:28So just to be a front row seat to folks that are incredible at what they do. And a lot of what came out of those conversations was we had evolved from this world of stocks and bonds to alternatives, really, you know, hedge funds, private equity, real estate, venture capital, And, you know, in a capital model, they all seem to help with portfolios diversification. But post-investment, there wasn't really tracking that was happening. And if you look at the lead up to the financial crisis, 06 to 08, these were all going up together, which they shouldn't have had, right? And then it turned out that they all crashed together.

8:00So there was this real desire from the wealth management, really anyone with a complex endowment style portfolio, to better understand the risks they were taking, have a real understanding of the underlying exposures of the funds, and just wrap your head around this complexity. And that was really what differentiated ADAPAR. And we had this incredible tailwind of the independent RA movement as hundreds of billions or trillions of dollars moved out of wire houses. so it was just very interesting and it was it was fun to see so many incredible investors that have so many different strategies and I think that's something you get on this podcast a little bit you know there's a lot of ways to make money in this world but it was a fascinating front row seat and I learned a lot about enterprise sales you know how to go make a 500 ,000 million dollar sale as a 22 year old and that process implementation process and scaling it was fun you know we were blocks away from Google.

8:57And it was kind of the quintessential Silicon Valley startup experience. After Adapar, you go to Andreessen and you sit across the table from like, you were at Adapar and you were somewhat siloed to one company. And then all of a sudden you're a VC seeing all these founders. I guess my question around that is now that you saw all those founders from that perspective, kind of what did it teach you about the difference between good and great founders? And how did you kind of implement that into ultimately building assurance IQ, which you did after? It's interesting. The first thing I'll say is just getting to meet that team and, you know, Mark in particular, you see why he is such a singular, you know, person, how he invented it.

9:39I've just never seen someone that is a clear first principle thinker, you know, how he looks to the world and how he can live in the future. And then it was interesting because there's other people like Jeff Jordan, totally different, far more pragmatic, but incredible at marketplace businesses and a really good investor in his own right. And I think it's similar with founders. And I think you sort of look at product founder market fit, and we call it the maze as well. What does a founder have that makes them unique? But you had the emergence of things like Bitcoin, and Coinbase was an early investment at that point, and you kind of had to be a little bit crazy.

10:14And that was something that Andreessen really kind of embraced. What are the crazy subreddits? What's going on? And there were a lot of misses there, but that's also how you get the next big thing. And then there's founders that are just incredibly practical and detail-oriented, and they find markets and businesses that are really effective for themselves, or they're highly technical, and they figure out things on the infrastructure side. So I think in a way, there's not one prototype, but I think it's all about knowing what you're really good at and what you love and how does that match up to the business that you're taking.

10:49And I think businesses have such a different DNA in terms of what's going to make you successful or not successful. So I'd say that. And then I'd say, I'm kind of happy as an entrepreneur. I wasn't a VC first because you see dozens and dozens of really smart teams attacking the same space. And I think you start to look at things more probabilistically or statistically. And I think founder, you just need that naive belief that you're going to make it happen. And you touch on that point of each founder is different and has their own superpowers in a sense. I'm interested in a lot of people found and then just sit on the VC side and stay there forever.

11:27You did it. You moved on. You founded Assurance IQ. And so like, why were you right for that business? What do you think are your unique kind of abilities? And why did that work well when ultimately starting Assurance IQ? And tell me a bit about that kind of beginning. Yeah, it's a great question. So you asked about being an entrepreneur. I think one thing I learned at Andreessen is I am, you know, someone that loves to steer my own ship. And even if I have the best boss in the world, which I did at Andreessen, I just chafe under it, you know. And I think I took a personality test years later.

11:58They were like sort of authority and self-control. You're sort of off the charts. So on one piece, I'm just sort of incapable of being employed. I'm not sure if that's a good or bad thing, but it's me. So you've got to kind of embrace it. I found I love operating. I love being with a team every day in the day in, day out. So the cadence of being a great board member, it just it just wasn't for me. And I also found it's interesting. Well, I've been in technology. I have a more conservative view of the world. And if you think about technology for wealth managers or insurance doing life and health insurance, these were pragmatic things.

12:33So I wouldn't be a good blockchain, you know, founder. I, you know, I, I, I'm someone that has a DNA where I can really execute and synthesize and build the right product for a customer. But it's, you know, I looked at, I looked at like the businesses that, you know, Mark and Dreesen thought were great businesses. And, you know, I was sitting there at the, you know, at the table, the ones that I thought were great, and there wasn't a lot of overlap. And, you know, he he was looking for grand slams. And, you know, for me, there was, you know, where is there a practical problem where you can go or you can differentiate yourself?

13:10So I think for me, it was I needed to work for myself. I love being an operator. Just that team environment is just on a day to day basis. I love I just wasn't ready to sit in the investor chair and say no to 15 people a day, you know, as your typical day. and then you know there's a way that like I'm not I'm not necessarily a moonshot investor I'm a little too skeptical so I found markets that really suited myself so at you know at Adapar really the core insight was I think two things really consumers were looking online for insurance and there wasn't really a great way for that to occur and then when you were getting life insurance You had to go to the doctor.

13:51You had to get blood drawn. It was just a terrible process. So really, the confluence for us was how could we use data to potentially streamline that process for consumers? And then how can we take this digital consumer and give them an optimal journey? And in some cases, that meant, you know, buying totally online. And in some cases, it was how do you transition that person from online research and quoting potentially to an agent to help them through that process? You know, we called it the art of the human touch. And after Andreessen, you started Assurance in 2016. Yes. And very rarely do you see a company that exits for a billion dollars that doesn't raise venture money.

14:34And you guys didn't. You completely bootstrapped. And so I'm interested to hear how you started, why make a decision to become bootstrapped, and kind of the entire evolution of Assurance until you ultimately exited. Yeah, it's a great question. So I think the first thing with bootstrapping is you have to be in the right market from a cash flow perspective. So Adapar has raised hundreds of millions of dollars. It will be worth billions of dollars. It's going to be a great outcome for employees and investors. And when you're building a SaaS business, you don't really have much choice, right? You're investing a lot up front for hopefully a customer that's very sticky.

15:09We had to build a huge amount of infrastructure. So when we look at assurancing, the first piece is the structure of life insurance is remarkable, right? You get upfront commissions for virtually the entire value from the carrier. So in a way, we said, what would be the reason to raise? If you have good economics and you're profitable, you should be able to bootstrap this. And if you can't make it work, there's probably something at the core of your business that's wrong. I think we saw that with a lot of insurtechs. There was this thought of the economics will improve as I scale. We don't. Google just gets more expensive.

15:45All that stuff just gets worse. So I think we figured we had to get the core economics right and the cash flow followed just because of the nature of that business. You know, I think as well, we really did not want distractions. And I think moving from the middle of Silicon Valley, where it was all sort of lunches and networking, up to Bellevue, where we could, you know, Washington, where we could just focus on our customers, really be out of sight, out of mind was so good because it was 10, 12 hours a day, just totally focused on your customer. And I think that was one of our biggest competitive advantages was we could just be obsessed with our customers, period.

16:17We weren't thinking about how a VC would see us in the next round and we could do the right thing. Like if customers did better with an agent, we put them on an agent. We didn't have to make this story for a VC around how we were replacing agents. So you could really just practically follow what was right for the business and the customer rather than, you know, kind of the next narrative for VC. So I think that's the biggest benefit you get from bootstrapping is just that customer focus. And it's maniacal, right? If you could go bankrupt this next month, you are really focused on it. Everyone says they're focused on the customer, but it really sharpens it when you've got that pressure.

16:55And what does that environment feel like? What does the culture feel like when you're bootstrapping and there's a chance you can go bankrupt every month? How is that different? Because obviously you were in Adapar, which raised money. You were in Andreessen, where you saw a lot of companies that raised money. How did you see that kind of the differentiation in the cultures between a bootstrap startup versus the one that kind of has that safety net? Yeah. So, you know, first of all, most small businesses in America are bootstraps. So I think you get the appreciation of what most entrepreneurs are going.

17:26You know, we're so lucky, the privileged few, they can go out and raise a lot of money and have that buffer. I think for us, if you marry bootstrap with growth, I think that's where it gets challenging. And a lot of it was every day you had to be so on top of your metrics. You know, so many, you know, I think at Adapart, we were so focused on record. You know, what customers were we closing in the quarter? What did that look like? You know, if you're going to spend$100 ,000 on Google this month, and if you don't get that money back, you know, that the business is done, And you're really focused on what did we do today, this morning, this minute.

18:01So I think probably the way we were able to grow really quickly to hundreds of millions of dollars of revenue while being bootstrapped was to take that period of reflection and analysis down to the day, the hour, the minute. There was no such thing as a quarter for us. Before we go back to the episode, I want to take a short break to talk about my sponsor, Ro. The Generating Alpha podcast is presented by Rho, the all-in-one banking platform for startups. Thousands of startups like Perplexity, Product Hunt, and more use Rho. You get everything you need to manage your startup's cash. Fast banking setup, cards with up a 2 % cash back, and a yield that turns company cash into extra runway.

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19:16Thank you. And back to the episode. And after that evolution, four years later, you ultimately exit to Prudential for$2.35 billion. How did you know it was the right time to exit? How does an exit of that magnitude come together? So for us, we had really two things coming together. The first is the Medicare business was growing and becoming very significant for us. And Medicare, from a cash flow perspective, is the opposite of life insurance. You spend a lot to acquire a customer. That customer stays with you for a long time. It's illegal for carriers to advance you commission. So you're paid out over years.

19:50So, and we saw that was the opportunity. It was growing very quickly. It was a great space. We had a competitive advantage. And quickly, a couple of years after the acquisition, we had hundreds of millions of dollars of debt financing. So that was one side of it. The other was as a insurance carrier, if you think about the direct guys, the guys that do a lot of advertising, they are all also the carrier and the under it because there's this tension, right? You're spending a lot of money to acquire someone. So you want an underwriting process that's going to approve most people. And that's why the Geico's, the progressives, they do both.

20:23And they usually have something for almost anyone. If you look at the brokerage market, it's a little bit different. You have a panel of carriers and then each individual carrier can be a little bit more picky about their risk. So, you know, we saw if we wanted to continue to innovate in the product and then critically have control over that underwriting. Because, you know, a small change in the Swiss Re-algorithm and our economics would be underwater. And, you know, so we saw that there needed to be a synergy there. Given that just the hundreds of millions of dollars of life insurance that we were writing, that scale means basically a trillion dollar balance sheet.

20:59And that really led to the process of us becoming part of Prudential. them. After that exit, you built what you're kind of working on now, or at least the kind of first first instance of it, which was a PCM, which is PCM on core, initially as a family office, and then expanding it to become a multifamily office. Why wealth management? Why building wealth management? Yeah, so it's been very organic. So, you know, after I sold and was really kind of out, I went to play golf for a couple of weeks, and I was miserable. I'm terrible like golf. But I also, I just love being around really smart people.

21:35I love building things. So I think the first permutation was really for myself and my family. How do, you know, we optimize this portfolio, and then how do I work with great entrepreneurs? And I love that. I love investing with entrepreneurs. I love, you know, being very involved. I like rolling out my sleeves. Then I kind of alluded to this, I think, before on camera, but my father-in-law was a co-founder or Logitech said, hey, would you think about managing my money? You know, there really is no upside in managing your father-in-law's money. It's just awkward Thanksgiving if you mess up. But we did, and it was great.

22:10It worked out great. And he had a totally different set of objectives, you know, a different tax situation. So the portfolio looked very different from my own. And I love that. And, you know, that really got me thinking about the next evolution of this and led us in 2024 to become a multifamily office and open to others. I think if I look at that motivation, coming back to what I love to do every day, which is work with really, really smart people and be part of that team, even as a billion dollar plus single family office, you really can't get the best talent. It's subscale. There's not necessarily opportunity.

22:46And I saw that a lot at Atapar, these small single family offices that were just a bit sleepy. And that's not the environment that I love. So part of growth is let's go get the best tax expert that we can. Let's go get the best investment team. Let's scale out the private market side. So that's a lot of how I looked at it is really even for myself and my family. How do we have one, just the broadest set of services? And two, how do I surround myself with really smart people every day? And from a high level, what is PCM Encore now? And what's the investment philosophy? How's it differentiated than your kind of average multifamily office out there?

23:22Yeah. So if we start at the top, we're an employee-owned fiduciary, you know, and we have a wholly owned tax practice. So we'll come to a client and we'll say, well, there's going to be some part of it that we'll manage, but we want to understand everything. And often the best opportunities are in making sure you have full interest deductibility on your mortgage. How do you structure your private investments? You know, what are you doing in retirement areas? Oftentimes, it's really not the money that we'll actually manage where there's the biggest tax advantages. So it's very holistic. Underneath that, you know, we really look at endowment style portfolios.

23:59And our view is, you know, what are the best family offices and endowments and foundations doing? They have found seven to nine asset classes that have really independently or somewhat independently non-correlated returns. And you find by putting a portfolio together there, you have better outcomes, more return and less risk. And you're able to create a lot of resilience. And I think a lot of what we're looking to do is bring that style of portfolio to the individual investor. And then the biggest difference, right, is that you and I pay taxes, right? If you're in the state of New York or California, that can be 45, 50 percent.