E335: Why the Best Investors Ignore “Capital Preservation”

0:00Before you became a family office investor, you spent two decades bootstrapping SaaS companies. What did that teach you about being an investor? What it taught me about being an investor is really kind of putting myself in the shoes of the founders that I'm investing in. I can see clearly the challenges that they have. I can relate to them very well. I can see their blind spots because I have about 20 years of experience doing that. It's just generally built a instinct inside of me about what companies do well and which ones don't and which founders do well and which founders don't don't and whether or not they have the chops.

0:39And obviously, when you're investing, you're also competing against very sophisticated venture capitalists. What edge do you have there that VCs don't have? One of the edges and not for all VCs, right, is that I was a founder for a long time. So one of the things that I just mentioned, what makes me different than like, let's say like larger VCs, for example, I'm investing my own capital, right? And I don't have the same kind of incentive structure where I have to deploy capital like VC funds do because they, that's how they make a living. So it's a totally different mindset. Also, because I was a founder, I think a lot of founders relate to me better.

1:15I think the age of the family office investing in venture has come upon us because there's no investment committee to go through like a traditional VC. Family offices can be just as smart money and just as nimble and not be as onerous as venture capitalists are. What's also interesting, I think, for the founders who want these types of syndicates is that they are getting access to investors that can really add value. except instead of being like a black box in a VC where VCs obviously have LPs that invest in them right but you never get to see who those LPs are right the way I work is is really kind of open source I give the diligence materials in a data room to all to everybody they can see all all the memos and cap table financials you know you name it they can see it and I usually do a zoom with the founder where everybody joins and they can hear the hear the founder speak about the company and also ask questions so it's really transparent and i think that kind of radical transparency is very different than what's been traditionally bc something more why is that so different than the traditional venture co-invest process most co-invest processes you have to be in the main fund to do a co-invest which is a black box i would say uh and and then there are only a kind of allowing select LPs to go into their best deals and they write an investment memo and ask you if you want to invest or not.

2:45I don't think that they allow you to really get into the weeds and do your own underwriting. People really want that semblance. It's not even a semblance, it's actual control. They want to be able to create their own portfolio. I think that post-exited founders, ultra high non-worth individuals, family offices, they are very sophisticated and they can make their own decisions, right? They're buying secondaries in Anthropic, they're doing secondaries in SpaceX, Neuralink, and they want to be the ones that can also underwrite that next unicorn. They're just as smart as any other VC, just to be honest with you.

3:21There's nothing magical or unique about a VC, in my opinion. Interesting. It's a trend not only in family offices, but also in institutional investors. I recently spoke to an Ivy League endowment and they talk about that. they're really focused on minimizing their unfunded liability, being able to do more direct deals, being able to have access to liquidity, being in their own kind of pools of capital so that they could transact if liquidity needs came to mind. So it's not just family offices that are Yeah, institutional investors are avoiding blind pool funds. Institutional investors are really focused on how do we get more into direct deals?

4:00How do we get more into co-invest and how do we control our destiny? That for me in specific is why I've also, I've thought about it. And a lot of people have asked me to do it. I haven't really kind of created a fund. First of all, I'm not really interested in that because I think that although I am invested in some funds, just as a practical matter, I'm invested mostly in, I wouldn't say generalist VC funds, but I'm in very niche emerging managers or really high conviction managers that are doing very specific things like biotech VC or crypto VC or synthetic biology VC, things that I just really wouldn't, first of all, know how to underwrite because they're just way out of scope for me.

4:43But I want to have access. I want to have exposure to those industries. And I'm usually picking one to three, let's say, exceptional managers. And I tend to like emerging solo managers. They have an edge, usually. And also, I can also see their deals more often and they're willing to share more often with me. And then I can do those co-invest with them or maybe even do my own syndication for something that I think is exceptional. Some of these SPVs that you're doing, they get as large as nine figures, 100 million plus. Tell me about how you get to these kind of quantums on single deals. You got to be really lucky, first and foremost, let's just say, because I think for me, it's been a combination of luck, combination of really selecting only the best of the best that I think are outliers in terms of doing co-invest for them.

5:37For me, the way it's really kind of worked is I usually write a seed check into companies and then when the time comes and they've kind of hit, let's say, and there's a real name lead or they've kind of hit some sort of technical milestone, My investment, by the way, just to kind of back up so that it's a little bit clearer, my VC investments are barbelled, right? So I am investing in really deep tech, frontier tech companies. And I've been doing this for about six or seven years when it wasn't as fashionable as it is now. So that entails a lot of hardware companies fall into that in a theme, let's just say robotics, quantum, AI, which is too much of a general term, I would say.

6:26Synthetic biology, those types of things, right? And then I'm barbelling it with things that I think that cannot be crushed or killed or vaporized by those frontier technologies that I just mentioned, right? And so what would constitute that? It's a very hard thing to define, but I can give you concrete examples of that. So we just invested in a company called Nara Organics, which is a baby formula. So the idea being that regardless of how much AI or robots or whatever there are, you're going to feed your baby formula. And as a practical matter, I know way too much about baby formula. It's a beautiful business.

7:04and I could spend a lot of time telling you about that, but that's, I'm trying to give an idea where we did AG1, for example, Athletic Green, which a lot of people probably who listen to podcasts know who are early investors in that company. We did a company called Flex Storage, which is a competitor to pods where they bring storage units to you, right? And they're tech enabled and there's a lot of reasons why it's better than pods, but the idea being that you're gonna always need to store your stuff, right? So that's the other end of the barbell And maybe those will not have the same kind of, let's say, trillion-dollar outcomes that a deep tech company can have.

7:39But they're still really good investments. So I think the flexibility of that is unique as well. Expert calls have always been one of the most powerful ways to build conviction. But today, investors are asked to cover more companies, move faster, and do it with leaner teams. With AlphaSense AI-led expert calls, their TGIS call service team sources experts based on your research criteria and lets the AI interviewer get to work. The magic is in the AI interviewer, purpose-built and knowledgeable-based information to conduct high-quality context-rich conversations on your behalf, acting as a trusted extension of your team.

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9:28Learn more at alpha-sense.com slash how I invest. I think the closest thing to that is Founders Fund. They like to go super early or super late. Once it's consensus, they basically, you could think of it as alpha and smart beta. Just to kind of retrace back to your original question, how did some of these get very large? We did, we did, I'll give you an example. One of the larger ones that we did is figure, right? Which is, which is a humanoid robotics company. The CEO is Brad Adcock. It's gotten a lot of attention lately because it's freaking awesome. Just to be honest with you, if you've seen the videos, it's an autonomous humanoid.

10:03It sells itself. Yeah, it sells itself. But when we first did that Zoom with Brett, I'll never forget it because it was really polarizing because I brought in a bunch of investors with me as well. And by the way, I've been convinced by my investors sometimes never to not go forward and a deal isn't good. So that actually works in my favor. Sometimes I have the blind spot, right? And I'm kind of using this hive brain to tell me where I'm going wrong, which is unique, I think. It's kind of the original angel groups. So these angel groups, I was part of one in Silicon Valley probably around 2010 or so.

10:44And you actually get a lot of value through crowd wisdom. And sometimes there's just so many different lenses to look at it. And sometimes you end up in the same situation, but you have higher convictions. Sometimes you change your mind. Sometimes you are no, and now you're yes. It's all over the place. But just hearing different perspectives is so valuable. It's something that venture firms have as their strength. Maybe their weakness is they have too much money, but their strength is they have this different ways of looking at the same deal. Having too much money is adverse incentive, by the way, because you can you'll you'll ignore some of the signals just to kind of deploy funds.

11:13You know, after all, they're human. Right. So like that's that's the way it works. It was really polarizing. It was Brett just had a hand, just like this robotic hand. And all he had was like 10 engineers that he had recruited from Apple, Tesla, Boston Dynamics. He had put 20 million bucks of his own money in, which really kind of stood out in alignment with investors. He had obviously the pedigree from Archer and Vetteri before that, being the post-exited founder. But after that, that, that Zoom, I got two different types of texts. Either people were like, this guy's freaking bananas. I'm out.

11:54Right. Or this guy's the next Elon. I mean, he was, he's a visionary. He is this. And that actually gave me signal, right? That gave me real signal being, because by the way, those two types of texts were being sent to me by very smart people that I really, really, really respect. It wasn't just random people. Right. And, and so I, I knew there was asymmetry in that. I didn't know he was going to win a hundred percent and it's still yet to be seen if he's going to win. Right. Even though he's, they just raised that, uh, you know, 40 billion or something dollar, you know, 40 billion valuation and they have Microsoft and Nvidia and all these other guys backing them.

12:33Um, but those are the unique situations that you can get into where you get valuable insight by doing these, doing it just the way that I do it, let's say. Was this a$2 billion round? No, it was the A round. It was a$300 million round. So I think we did close to$5 million in the A round. And then. So it's essentially$300 million on a prototype, which this was a while back, was unusual. Correct. People thought it was insane. And by the way, a lot of people right now think for agentic AI companies that are like SSI that is raising for like a 30 billion with no revenue, right? That seems insane to people.

13:18And it very well could be. Or if they're right, it might just be really cheap. I don't know. It's only time to tell. I can tell. But that's how these things get really big because all of a sudden, you know, at the$40 billion valuation, the mark is like whatever 65 times just 65 times and you see how that those numbers work uh we did a much larger raise in the in the b round because microsoft and open ai and nvidia and all these other major investors came in and um you know people are mostly followers and leaders at that point and we were able to raise i think close to like 40 40 million uh in that in that round in order for you to get these allocations and later rounds is it prerequisite that you come in early or could you have gotten in at the series b seriously it's much easier let's just say right because i already have the right uh let's say the relationship and that kind of thing i have come in into later rounds on certain certain companies we just did for example paradromics which is a brain computer interface company like neuralink based out of austin um and you know they've been around for 10 years, but they don't get the spotlight because Elon, they're not Elon, right?

14:33But they got FDA approval and Matt Engel is an extraordinary founder. They're based in Austin. That's a later stage one that we came in alongside PIF and Neom, which is the Saudi fund. One of the reasons I wanted to have you on the podcast is you kind of have two sides to you. You have the crazy deep tech investor who goes very bullish on certain opportunities, but you also have the family office lens where you're building a portfolio strategy. And you do have a rational side to you, not just investing into crazy startups that could go 100x or 0. Because I do think family offices, depending on the dynamics, many of them are actually over-diversified.

15:14You call it de-worsified. And there's these principal agent problems where the principal's job is not to lose money, and they're not really trying to increase the family office. you're obviously in growth mode. Tell me how you build your portfolio construction when you're looking to grow, not just preserve your capital. I actually don't believe in preserving your capital, just to be honest, because I think it's like this false sense of security. I mean, just look at how much the dollar fell this year. Look at inflation. I live in Miami. You couldn't give away the houses like six years ago that are now selling for tens of millions or hundreds of millions of dollars.

15:51So this idea that like, oh, let's just say I'm just making up a number, right? I'm worth$50 million. I'm good. Let me just make this like last. Is this, it's a fallacy, right? If you're not growing, at least at the pace of inflation, you're really deteriorating, right? And so I'm very cognizant of that. Maybe it's because I'm younger. I'm 48, right? So I still have some juice left in me and I want to do things. And I was a founder, so I still have that bug in me too, right? But I listen to a lot of smart investors and I don't see them trying to preserve capital. I see them trying to grow the pie.

16:34And really, if you even look at these institutional investors, they have much bigger allocations to things that have more alpha like venture, right? Or crypto or these types of things. And obviously I'm not reckless, right? Like I haven't, I put away enough that if something bad happens, I can fall back on it. But with the rest of the stuff, I'm trying to get thoughtful alpha, right? And so I do do real estate, for example. I've invested in a lot of real estate. I have a lot of real estate exposure. we've done we have shopping centers industrial um i've done a hotel which was the bane of my existence to be honest with you we did the boca hotel i could tell you uh the marriott and boca which we i bought like two weeks before covid and um you know i learned i learned how to run a hotel let's just put it that way right um which i never thought i would do uh and and and uh and it became the worst investment because of covid the best investment because everybody came um everybody came to South Florida and we had these crazy ADRs.

17:41You picked the one location in the U.S. that actually was growing during COVID. Yes. And then like about a year and a half ago, then it started going severely downhill because people stopped coming, right, as much. And then everybody got priced out of Boca. So even just getting labor got quadrupled the price. And then insurance prices went four or five times. So it became a bad business again, right? Time will tell you whether something's good or bad. And I got out of that unscathed. I actually broke even. Finally, we sold that just about six months ago. But, you know, I am trying to find alpha in real estate too.

18:21I'm trying to do the real, doing, you know, giving a shot to doing a hotel, which I never had done before. Now we're trying to do things where we can actually own the business on top of it or partner with someone where we do the improvements and then there's a real operating business and we can get part of the profits, not just rent, right? So I'm a partner in this racket club called the Racket Lounge in Southampton in New York. And it has pickle, paddle, tennis, and paddles grown. A lot of people are very, very into that sport right now. And it's a members only club. We own the real estate. And then we brought in a partner to operate the club.

19:05I'm trying to do more unique things than just buying, let's say a five cap multifamily, right, that I could, you know, increase rent support for today's episode comes from Square, the all in one way for business owners to take payments, book appointments, man and staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works.

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20:43Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Checkout is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them, and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in store, online, on your phone, or even at pop-ups, and everything stays synced in real time.

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21:53Run your business smarter with Square. Get started today. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Checkout is fast, Receipts are instant, and sometimes I even get loyalty rewards automatically.

22:23There's something about businesses that use Square. They just feel more put together. The experience is smoother for them, and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in store, online, on your phone, or even at pop-ups, and everything stays synced in real time. You can track sales, manage inventory, book appointments, and see reports instantly, whether you're in your shop or on the go. And when you make a sale, you don't have to wait to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing, so your best customers keep coming back.

22:56And right now, you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. That's S-Q-U-A-R-E dot com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. I had Roger Vincent, who spent a lot of time at the Cornell Endowment. And one of the things that he talked about is one of the mistakes that investors make is they double diversify. So they diversify within the fund. Sometimes they'll diversify, they'll triple diversify.

23:29Then they'll diversify within the fund asset class. So let's call it venture. So you diversify within the fund and you diversify within the venture asset class. And then everything has to be diversified. And that's where you actually get a poor performance versus if you look at venture as playing a role, which is outperformance and the spikiness. And you build around that, you realize you're not going to have 80 % of your money in this really spiky asset class, but you take venture for what it is, which is sometimes it'll outperform, oftentimes it underperforms, and it rarely loses money as an asset class.

24:02But I think that's something that you uniquely do in your portfolio. You don't optimize every asset class as if it's your entire portfolio. No, I don't. I think what I think is reasonable is probably unreasonable to most if you're trying to preserve capital, I would say. If you're not, I think it looks very reasonable, right? That this is what you have to do. I mean, like, what else can you do, right? I mean, obviously, I have the largest allocation personally to equities, to public equities. And recently, I think public equities have actually been acting like venture and giving venture-like returns, especially for during this AI boom.

24:38And if you were in the right sectors and that kind of thing, going back to your your the spikiness thing right that you just you just spoke about i think that's really interesting because you really have to be built for vc or crypto or these types of things because it's very hard psychologically to consecutively lose because you know sometimes the spikiness is like you lose 12 times and then you hit right and you know by that 10th time you're like man I really suck at this why am I doing this right like it's very hard to keep going because psychologically it could ruin you right um especially if you if you suffer big losses you know because because they were all consecutive said another way the j curve is learned helplessness it's like no no no no for seven years and although people know to expect it just feeling it it's just very different when you're just constantly being reinforced and then suddenly you have something that returns 5x your portfolio in year 10, you're like, what just happened?

25:42I technically got a 4x in my entire portfolio, but that felt that I don't want to do that again. If you think about it, that's what happens to founders. Like, so that kind of founder mentality is like, you're just told no so many times. And then when you get a yes and you get a win, it feels like, I don't know, you just won the lottery, right? So it's almost like one in the same, I would say. You got into crypto in 2012, very early. You bet big. What early signs did you see in crypto that made you really double down in it in 2012? I had a development team in Kiev. We had about 50 developers there.

26:18And at that time, it was a smart thing to do because actually Kiev has amazing talent. Ukraine has amazing technical talent. They actually are very close in culture to Americans, especially the young people. And so it was a really good cultural fit. So we had developers here and developers there, and they needed to play nice with each other and understand each other. And I would go and visit for a month. And also, I spent a couple of months there setting up the office and hiring people. It was a group of developers there that just kind of installed a minor on my Mac and taught me about it. And these guys were young and smart and PhD students.

26:56I just got curious because they were curious. I didn't go that deep initially, just to be honest. I mean, I guess you could, for very little money, you could buy a lot of Bitcoin at that time. And in fact, I have a funny story. I learned about Ripple XRP. And back then, I think it was 2013 or 14. It was around that time. It was 2013. Ripple had their own wallet. That was the only way you could actually own Ripple. At least that I knew of, right? Maybe there were other ways. And the way that you would actually buy Ripple or get onboarded was you had to go through some crazy exchange that, I mean, I don't know.