E392: Jason Pritzker on Family Offices, Venture Capital, and Long-Term Investing

0:00The only thing that matters is who's your partner? Who's running this business? Can they run it for a long period of time? And do they see the world the way that you do? Our lesson has been your primary responsibility is pick the right partners. Jason, how did the actions of your grandfather lead to the Pritzker family becoming one of the most prominent families in the United States? My great-grandfather was a bankruptcy lawyer during the Depression and also a small local businessman. He was buying three flats, fixing them up, selling them as condos. He made an introduction between one of his clients and LaSalle National Bank, which many iterations later is part of JPMorgan Chase.

0:42And the guy defaulted on the loan. My great-grandfather went to the banker and said, I feel responsible for this. I made the introduction. I'm going to pay back that guy's loan. I don't have the money to do it, but paycheck to paycheck, I'm going to pay back his loan. So then cut to a few years later, my grandpa's, he was a math genius. He was an incredible guy. I went to college when he was 14, and then he was a naval aviator. His core insight coming out of that environment as a kid was, why can't I use mortgage math to buy a business? Mortgages are well-known. You put up 20%, bank puts up 80%, you pay it back, and you own the property.

1:23At the time, there was no such thing as a cash flow loan. And you had to be a AAA rated public company with seesable assets to get a line of credit from the bank. But because his dad had paid back somebody else's loan, the bankers said, look, we don't really know this Pritzker guy, but if he's willing to pay back somebody else's paper, he's probably good for his own paper. And that was really the big unlock that started the whole thing, my grandpa was then able to do different math than everybody else when looking at acquisitions. And so then from about 1950 until 1980 or so, when private equity started to grow up, there weren't too many people running the same math as him.

2:09What's the lesson there? Capital gains tax was over 70%. And so the nexus of those two things, On the one hand, buying and building businesses at a really fast clip. On the other hand, it never made sense to sell anything because you gave all of the proceeds to the government. What that led to was a mindset of a couple of things. Very long-term ownership, tax efficiency. And if those are your two North Stars, the only thing that matters is who's your partner? Who's running this business? Can they run it for a long period of time? and do they see the world the way that you do, which in our case was tax efficiency and long-term equity compounding, that means you reinvest into the businesses.

2:55You try not to have distributions. You find ways through other acquisitions or innovation or human capital to keep the loop closed. And so our lesson has been your primary responsibility is pick the right partners. It's the thought experiment taken literally, which is if you invest only in companies where you want the person running it for 20, 30 years, if you take that literally, you're going to make different decisions than if you're looking to flip in five years. Absolutely. Culture is, we have a saying in our family, Hyatt is our most well-known asset. Conrad Hilton famously said there are three things that matter in hospitality, location, location, and location.

3:42Our corollary is people, people, people. That is really our major focus is finding the right people that want to be in their business for a long time. On the private equity side of our business, there's a little bit of a self-selection process because there are some CEOs that love the private equity cycle. Work for three to five years, you get your base and your bonus, and then you get a big check every time you go through a transaction. But there are some people that say, wait a minute, if I partner with you guys, I just get to run my business, build my business. I have a great capital partner that can be value-add in a lot of different ways.

4:20But I get to really just focus on my business and not the transactional nature of private equity. Double click on that difference. So you have two CEOs, one that wants to flip in five years and one that wants to hold for the long term. What are the key differences psychologically between those two CEOs? Sometimes investment in your business takes a long time to yield results, whether it's building a new factory or innovation in the product cycle. That could take five, seven years. And if you're on that three to five year timeline, it's not in your best interest to invest in that because it's coming out of somewhere.

4:56You're either going to raise more debt to make that happen. You can take it out of free cash. I think it's really cultural. It includes the CEO, but it starts with the board and goes all the way down to everybody in the business. This whole idea of selling a company five years from now and flipping, this has been this narrative that has been sold to institutional investors for many years. I had another Chicagoan, Sam Zell's longtime partner, Mark Soder. and if you think about it from first principles, especially if you're a taxable investor, probably the dumbest thing you could do is buy a company and then sell it five years later.

5:35Why? Two reasons. One is you have two lost years. So you have the first year where you're trying to figure out what you bought. You're trying to see where all the skeletons were buried. And two is in the fifth year, human nature incentives are a beast. So if you're looking to sell something in the fifth year, you're not gonna make these same long-term decisions. And then, of course, you have this tax hit. Even today, we don't have 70 % capital gains, but this constantly churning and the banking fees and all these things. But perhaps even more destructively is that you can't make these long-term investments, these factory investments or these capital expenses that may not pay off for 5, 10 years.

6:15Well, private equity, especially today, is so institutionalized that it's its own capital markets, meaning every single private equity-backed CEO is looking at the same exact model on what they should be doing, what they shouldn't be doing that can or cannot pay off to three to five years. To the extent that actually somebody that has a different timeline could fundamentally make different decisions and different investments. I have a couple thoughts on that. One, to push back a little bit. the three to five year timeline instills discipline. And so one of the things that we've tried to mimic on the TPO side of the shop, and we talk about 53 stations and how it applies there as well, but most of the guys that are really good or people that are really good at private equity are already thinking about exit when they get into an investment.

7:05And so they are hitting the ground running. There's a sense of urgency around what they're doing that if you have a forever timeline and you're not careful, you can get lazy about. We've actually updated our mentality from we have a forever hold period to we have no hold period. Why? Because markets are so dynamic. Our first principle, our first obligation is to the company. We need to do what is best for the company. And market conditions change all the time. And so we have to be thinking dynamically. And so while our aspiration might be to hold it for a long time, we need to be constantly doing that re-underwrite, kind of buy, sell, hold every day that you're not selling, you're buying.

7:51And so we think a lot about it on a daily basis, despite the very long duration. But to your point, if we can run a 10-year model on something and somebody else can only run a five-year model on it, that does give us some advantage. Expert calls have always been one of 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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9:47Learn more at alpha-sense.com slash how I invest. Said another way, you don't want to replace one dogma with another, which is always sell in five years to always sell in 20 years. Sometimes there's these local maximums and these opportunities to sell once in a generation at premium. We've learned this lesson to the positive and the negative. When the bus comes, get on it. If somebody is willing to pay you tomorrow's price for something today, in certain situations, that can be very compelling. And we've actually had operating teams say, we need to take this price because the multiple they're paying is not the multiple this business should be trading at.

10:26And we're going to need to grow a double digit CAGR for years just to get to the same outcome if multiples revert back to where they are. And we see it all the time in roll up businesses and others where it's just very dynamic market. Before you started a venture fund, you were first an LP. What did you learn from the LPC? So we have a fund of funds that's separate from TPO and 53 stations, where all they're doing is allocating into funds. Separately from that, when we were learning about venture specifically in the first phase before it was called 53 stations, we anchored and seeded a number of funds.

11:05And that was really where a lot of those lessons were coming from. We did it very intentionally to accelerate our own understanding of how venture works. We were on the phone with them constantly asking them why they were making the decisions they were making, why this deal versus that deal, how they thought about go to market, how they thought about their right to win, to really bring us up the learning curve before we were comfortable doing direct investing. 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.

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12:52Run 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, sometimes I even get loyalty rewards automatically.

13:22There'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 could track sales, manage inventory, book appointments, and see reports instantly, whether you're in the shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing to your best customers keep coming back.

13:55And 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. Managing risk for your business may be complicated, but your relationship with your insurance broker doesn't have to be. NFP, an Aon company, can help you navigate insurance markets and negotiate with carriers to build the right coverage for your business, helping you turn your risks into leverage.

14:32NFP's advisors are total business partners who help you protect your business and connect you with solutions to your toughest financial and workforce challenges. Whether your goal is to manage risk more effectively, attract top talent, empower your workforce, or grow your legacy, NFP is ready to help you succeed. Visit nfp.com slash how I invest today to unlock your full potential. Such an underrated point is a lot of family offices, when they start investing in venture, it's almost become a meme. They look for co-invest and they want to be direct on cap table. And of course, they blow through so much money because they don't want to pay fees.

15:06The only thing worse than two and 20 is a hundred and zero, which is you basically lose all of your capital. Yeah. So you guys took a very humble approach, which is we have invested in the space. We're going to learn from the best of the best, invest in top funds and pay down what Alex Ramirez calls ignorance debt. We're paying down our ignorance debt in the asset class. As we pay that down, we have the right to now start investing into companies and doing it in an effective way. It's a really interesting way to think about it. I still think we are on the journey. And I'll take this opportunity to talk a little bit about 53 Stations and how it got started, why it got started.

15:41But we are always on the journey. If I look at the progression of Fun 1, we're getting better at what we do every day. 53S, I'll start with the name, which didn't exist in the beginning. 53 Stations is a nod to a Buddhist parable. It's the story of Sudhana, who is a pilgrim seeking enlightenment. And the Buddha says, The path to enlightenment is through continuous learning. And so if you want to learn, go talk to that master or station. He goes, he learns everything he can. Master says, that's all I got. But if you want to learn more, go talk to this person or station. Rinse and repeat 53 times on the path to enlightenment.

16:21Goes through all 53 stations. And Buddha says, okay, by the way, the pursuit of, or the accumulation of wisdom is a noble pursuit if it's in service of sharing it with other people. So that's the story of Sudana. We've told that story for a long time at TPO in the context that we don't have LPs. We don't need to deploy capital. If you're interested in the space, go meet everyone in the space before you try and get a transaction done. So we wanted some tie back to TPO, who's our LP. And in our context, It's about maintaining a student mindset, being on the journey with our founders, learning every day, incorporating that wisdom into what we do and what we can share with our founders.

17:06Venture, so it is syncretic. It's very different from PE. What are some lessons that you took from PE to venture? Yeah, it's a great question. I'd say I've taken an equal amount of lessons from PE to venture as I've had to unlearn lessons from PE to be good at venture. So the two sports are completely different. In PE, you wake up every day. Your first priority is downside risk mitigation. What can go wrong and how do I fix that? If you do that in venture, you never get a deal done. The art of venture is squinting your eyes and saying, if this is successful, what could it become? So immediately, those are just diametrically opposed ways to wake up in the morning.

17:53In PE, you express conviction through the highest price. And generally in a banked process, that's going to win the day. In venture, nobody's seeing liquidity for a long time. And the great founders have a ton of choice, but they're picking somebody to join their team and help add value to their equation. Conviction through price doesn't win the day. I had Professor Ilya Stribilov, Stanford professor, who's researched this. In top tier funds, it's empirically proven get a lower entry price than other funds. And I said another way, when you have the hottest companies, it's not price that wins. One way to think about it, if you added the headline price to the sweat equity that firm is able to put in, you probably blend it up and end up with the highest price.

18:39But the founder is valuing that sweat equity much more than the headline price that they're putting out. In PE, there is an entire ecosystem of brokers that is incentivized to put the best deal on your desk. They're called investment bankers. All day long, they are looking for deals. What the big shops have done is insource that function. So we all know in venture, there's negative signal that comes with a banked deal. But the reason that is, is because the big firms have fleets of BDRs, great processes, that coaching tree, what I call the Belichick coaching tree, where they have great founders with great exits that then refer them to the next generation of founders.

19:21and so on and so on. So we had to update our thinking away from a private equity mindset, which I think as an investor hinges on IQ, where to be a great, particularly early stage venture investor, EQ becomes as important as IQ. What do you mean by that? Founders are the scarce asset. When we were trying to figure out our go-to-market, we own a number of large operating assets on the tpo side of the shop so we thought let's find verticals where we know something where we have a information asymmetry let's find early stage companies that are fixing the tech debt in that industry that's evolved to is the founders are the most important thing.

20:11So if you don't have the EQ to understand the longitudinal aspects of what makes a great founder and you're thesis driven, it's insufficient. You said another way, I will take an incredible founder over a perfect thesis all day long. Joe Lonsdale even says it to the extreme, which his biggest mistake in his first decade of investing was not investing in founders that were building what he believed was a bad company, but were great founders. Because A, they would pivot into it, or B, they would evolve so much that they would still make it a good company. You've been on many prominent boards, and today you sit on the Hyatt board.

20:55What has sitting on the Hyatt board taught you about being a great venture capitalist? The Hyatt board is so special. It is a really well-run board. One is make sure you have one board, not two boards. In other words, there shouldn't be information asymmetry within the board. If you have your inner circle of people that have one set of facts and the rest of the board members have a different set of facts, it doesn't promote getting the best mind share from everybody. How often does this happen? I think it happens frequently. It's almost the default. Yeah. Particularly, I think in the early stage companies where there's a couple different examples, but in the early stage companies, the earlier investors tend to have a different relationship with the founder.

21:39They have a stronger bond, the stronger bond and asynchronously, whether it's over text message, I'm on the phone, I'm on texting with founders all the time. That's what's going on in the board meeting. If you're only plugging in once a quarter, it's really tough to keep up. So one is make sure culturally you have one board, not two boards. Two independent directors are fantastic. In the early stage boards, what you often have on the board are the founders and investors. We'll all try as hard as we can, but there is misalignment of interest in that room. Independent directors can play an incredible role for the founder as mentors, as subject matter experts in their field, and as a leveling function within the boardroom.

22:25So I think independent directors are really important for early stage companies. are private equity boards. We own the company and we're in lockstep with the management team over what the strategy is and then how they're going to execute. In a venture board, you have lots of different entry points, different motivations. Those GPs are running their own fund. They had their own business to run. It might be doing great. It might be doing terrible. They may be going into a fundraising cycle where they're looking for a markup that's not in the best interest of the company. It's a natural consequence of how venture evolves.

23:03It's the Charlie Munger quote, if you want to look at behavior, look at incentives. Exactly. I've had this unofficial policy on the podcast where I don't really interview second, third generation family members. I found them to be difficult to deal with. Nepo babies. Nepo babies. I wasn't going to say it. When we chatted prior to scheduling a podcast, I was very impressed by how not Nepo baby you are. What's the key to success there? I'm very involved in YPO. And whether it's YPO or very successful founders, first gen creators, it's one of the things we talk about a lot. Said another way, how'd you end up not messed up?

23:42Yeah, because the default is actually messed up. Look, this starts with parenting. There's nothing I'm more thankful for in this world than how our parents raised us. I'll give you a second. So dad worked hard every single day. Mom is currently running the Aspen Institute. She cannot sit still. She's always engaged in something. But it was also the little things. So growing up, I'll give you a couple of fun, fun stories that always come to mind. One, we didn't know we were wealthy until sixth grade, when an eighth grader came up and pushed me and said, hey, rich kid, what are you talking about?

24:21And he showed me the cover of Forbes magazine. And there's dad and grandpa and Uncle Nick and Penny and a bunch of family members on there. And on the school bus ride home that day, I said to my brother, my little brother, I said, hey, we're rich. He said, what are you talking about? I said, we're rich. He said, we can't be rich. Rich people don't eat pizza. It's probably a couple of years before Richie Rich came out. That's what I thought growing up. I grew up on section eight housing and I thought that's how rich people, they drove in limos and like that$10 ,000 on baseball shots and things like that.

24:53We did not have that upbringing. So we spent a lot of time in Nepal as kids. I did my fourth grade year there. I think about this often. So walking down the street, nine years old with my mom, and she pointed at a kid across the street and in Kathmandu, it's extreme poverty. And this kid, no shoes, covered in dirt, tattered clothes, and snot dried to his face. And she pointed at him, she said, you see that kid? You are no different than that kid. You just got lucky in where you were born. So never treat anybody with disrespect and always be humble. And that stuck with me. And there are countless examples of those types of one-on-one teachings.

25:39And then around the table, the dinner table, a little later, it is drilled into you. Don't think you hit a triple because you were born on third base. The money is not yours. It's to grow the enterprise. It's not for personal consumption. My grandfather's grandfather was seven years old when he came here. He came from Ukraine. He was homeless. His mom came with him and his sister, and they didn't have enough money to sleep in one place. but they got together every Friday for Shabbat. And the rule was called it the nickel society. So this is a homeless kid sleeping under a billboard, shining shoes, selling newspapers.

26:18And when he showed up on Friday, he had to produce a nickel to give to someone less fortunate than, than they were. That mindset and that obligation is still with us today. We all take it very, very seriously being good community members, giving back. He wrote a book that was just distributed to the family. I read it every so often. It's a great grounding mechanism. At the end of the day, we were talking earlier about starting at Goldman. The name only gets your foot in the door. After that, it's on you. That's the one consistent behavior that I've seen across many family offices and the best performing kids is they send them to what I call financial boot camp to invest in banking, and they just beat the hell out of their entitlement.