Inside Marc Andreessen & Ben Horowitz’s Multi-Family Office

28:48But that's not true. You can have the firms communicate with each other and I do this regularly, right? And so, again, if you went to a traditional firm, they would start with more of the stock and bond mix. They might add a little bit of some sort of credit. We sort of tend to work with people more in a linear fashion, acknowledging that their portfolio is going to change over time, right? So we're not focused simply on exiting that position on day one, the concentrated, let's say it's SpaceX. We're not just simply going to be like, you've got to sell all of SpaceX. It's okay, SpaceX, if you hold on to it for 20 years, here's what the outcome might look like.

29:26By the way, we built a lot of tools to help forecast these kinds of things, which is, again, empowered by the fact we have professional investors who know how to do that. I mean, a lot of it, I'm sorry to be repetitive, a lot of it falls back to that. and then we we will do we will um customize based on their needs like so yeah strange alternate strange unusual alternative asset classes are definitely part of the mix we have some clients who do a lot in the art space um i'm not an art specialist but i know art specialists that can help you right so so we're very very flexible um but the point is the whole mix of things has to make sense right and so i'm not simply going to be and this is where um giving advice is an important part a lot of again firms will present you alternatives will say you can do this or you could do that you tell me what you want and they're doing this for various reasons one they may not actually have a strong opinion two uh it's liability if i tell you do this and you do it and then you're not happy well i told you to do that if instead i gave you three options and you pick B, I didn't pick B, you pick B, right?

30:32So we're very much into giving advice. We'll tell you, look, if you're going to put a lot of art, you might want to counterbalance that with this and that to make the whole portfolio work, right? So we sort of put ourselves out there. But I think a lot of people have desire and hunger for that. They don't want to sort of have to learn all these things and make the decision. They want someone who tells them, you should do this. Again, let's use a medical analogy. you know i have cancer you know okay you need to do a surgery right not well you know maybe you could do a surgery maybe you can drink some herbal teas you tell me that you wouldn't be satisfied with that with the physician why is that okay here right so you want to get a i think you want a professional telling you no no herbal tea for you like the tumor is big herbal tea is not going to work, right?

31:23You need a surgery, right? So that's one of the things we pride ourselves in. I'm so curious about your stance on the current markets and the current market volatility. So one, we have AI disrupting public markets, but we also have wars and GL politics and, I don't know, oil. And so how do you manage throughout all this? How do you provide assistance to the families, to your clients? And one, are you actively managing their portfolios? Two, are you helping them navigate through this? Because I'm sure they're seeing their wealth go up and down in different directions. Yeah, I mean, I always tell people, one of my favorite saying is, volatility is not the enemy, right?

32:04A lot of people fret. Volatility, I'm scared. But if you have a deep balance sheet and you've kept your portfolio at least somewhat liquid, volatility is a huge opportunity. It's like a fat pitch, right? And so you get assets that go on sale. You know, big equities, you know, stock markets every four or five years. There's like a 40 % drawdown, right? Blue light sale. You should have flexibility in your portfolio to take advantage of the blue light sale. And you should have your advisor call you up and go, hey, these things are 40 % off. It's time to back up the truck. So yes, we do do very active interaction with clients on the front.

32:44How much do you like to put in cash and real estate and all these other kinds? Real estate's actually for taxable individuals is a really very cool asset class because it's uncorrelated. So if you're, again, you're a SpaceX person, right? You have a lot of stock market risk factor, right? So if you take real estate, real estate's pretty uncorrelated to that. So it diversifies you. And then a lot of wealth in this country, a lot of wealthy families made their fortunes with real estate, right, including the present. And why is that? Because the entire banking system and taxation system was built around real assets.

33:27When banks and law and law, all these laws were built in the 20s, 30s, 40s, all there was was real assets, right? People weren't, there were no Internet companies. They were buying buildings, factories. So the tax code is very beneficial to real assets. And you can therefore get a solid teens return on a tax adjusted basis out of real assets and real estate. So to me, it's a very, again, if you've got the ability to stomach the illiquidity, because buildings don't trade like stocks, you should be holding a lot of those in your portfolio. So, yes, it's an important part. And then cash or very liquid bonds.

34:07people don't like bonds for the return profile they say well why would i own this thing it returns three or four percent and my answer to that is you're not owning it for the three or four percent you're owning it because it gives you that flexibility gives you that option value to liquidate that and go into something else very fast i remember during the global financial crisis you know i worked at a hedge fund the only thing we could sell was treasuries to raise money. Nothing else was trading. So having a treasury kind of liquidity buffer, super important. You can go sell those treasuries even when there's a horrible war or something.

34:44Someone will pay you cash for that. In fact, they might pay you more than they would have before because bonds is a safe haven asset. You take that cash, you go buy the distressed asset, right? We should talk about taxes. Yes. Taxes are probably one of the biggest talks around town, especially in California. Some people are like, oh, well, you made so much money, like you get to choose where you live. And if you want to live in California, that's the purpose of making a lot of money. Some people will say, oh, I've made a lot of money. I need to go somewhere else so I can save, you know, a couple percentage points.

35:17And I don't know, live somewhere for three, four years, something like that. But what is your main stance on taxes and where you live? Because we can also get into this afterwards. But the billionaire tax bill, that definitely, I mean, I don't know if this was based on principle or like a little bit of a protest, but I think it was over a trillion dollars left the state of California. So how do you feel about taxes? Well, I mean, no one loves paying taxes unless they feel they're getting value for it. Right. And I think when you hear people complain about it, it's I don't get value. Right. You know, my schools aren't great.

35:54The roads are in disrepair, whatever you hear these complaints. right so i don't think anyone's necessarily averse to paying tax if they feel they're getting value for and a lot of people who leave field are not getting that right so that's one um two there's a sense that the the revenues are mismanaged and i'm you know i'm not going to get into all the waste and fraud that happens but we all know a lot of that happens right but there's a lot of and moving is a very draconian move right because your family your your friends and all that So some people can do that and want to do that. And by the way, it's not easy.

36:27You have to sort of really move. So leaving your house here, your main house, and moving to Texas or Florida for a year or two with the intent of coming back doesn't qualify, right? If you do come back after a couple of years, the tax authorities here will say, look, you never sold your house. You never had the intent of leaving the state, so you owe us tax. So you really have to sever ties. You have to, of course, buy your principal residence, sell your principal residence here. You've got to register to vote. You've got to have all your physicians there, all that stuff to really prove to this state that you've left and that you have no intention of coming back.

37:03So the move isn't easy and it's a draconian change. Some people, though, if you have a really big balance sheet, it's worth it, right? But there's a lot of things you can do with your portfolio to mitigate tax too. So before jumping to, you know, I'm going to move to Puerto Rico or whatever. First, think about how you structure your investments, your portfolio. So there's all sorts of very clever ways to use the qualified business tax exemptions, QSBS. So you can create several trusts. Each of those trusts gets the now$15 million exemption before it was 10. So you can do that. Married couples now can get both exemptions.

37:41So there's a lot of things that if you do on that, remember we were talking about the pre-IPO, on the pre-IPO prep, you can do things to already mitigate tax a lot. Then you can use the proceeds and invest them in tax-advantaged things like real estate, if it's managed the right way, that is. A lot of real estate, unfortunately, is managed in a way where the buildings are sold a lot and that generates tax. But if you hold the buildings for a long time, you can use the depreciation credits and never pay tax on the income you're getting. So there's a lot of things you can do like that before you move.

38:13And we spend a lot of time, obviously, thinking about that pre-liquidity event and post-liquidity event. There's also a number of strategies you can use that generate losses, whether the market is up or down. There's some sophisticated strategies that use leverage. Using leverage is not always easy because leverage can be dangerous on a portfolio. Luckily, we have a couple of people on our team that worked at hedge funds and are used to leverage. So there are things like that you can do before the pull the plug on moving somewhere else. But I see a lot of people moving, though, to your point. Really?

38:47A lot of people moving. In fact, there's been a bit of a boomerang. Some people have moved and then come back. Because in their minds, they thought that saving several percentage points of tax was worth the move. And then when they move, they, for personal reasons, they're like, look, I saved money, but it wasn't. The savings weren't worth the cost to me personally. Right. And these are, you can't, it's very hard to predict how you're going to feel when you move somewhere else because you don't, you've never lived there. Right. So I think it's very hard. It's a valid point. Yeah. VCX by Fundrise, the public ticker for private tech, allowing investors of all sizes to invest in venture capital.

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40:37Get visas handled fast and get back to building. Visit D-E-E-L dot com slash sorcery. That's D-E-E-L dot com slash S-O-U-R-C-E-R-Y. Hi. Chamath recently went viral for a tweet about capital losses because of the destruction his SPACs have incurred on people. What is your viewpoint on capital losses and how do you use them to your point of offset? So we use them a lot, right? Capital losses are the core behind all those sort of liquid strategies I mentioned to you before, the leverage strategies and whatnot. there's some nuances in the tax code like you can't use a loss that comes to you personally unless you happen to be a professional in that industry so you can only use a small part of them so the way to use a loss is inside a fund vehicle that generates its own gains that can be offset by its own losses then you don't have to worry about extracting the losses and putting them on your personal balance sheet and not being a user.

41:42So if you owned a SPAC or something like that, and it went to zero, you may not be able to write that off, right? But if it's sitting in a portfolio in a fund structure, usually a partnership, you're going to have other things inside that fund. They're going to be offsets naturally so that you can shield the total result of that fund from tax. And that's exactly, I think, the right strategy for real assets and real estates where you're generating these capital losses, you're generating depreciation losses, and you use those to offset the income inside that fund. And then the total you get at the end has been tax mitigated, right?

42:19SPACs were a huge trend. Secondaries have taken storm. And so with secondaries, we're seeing not only lots of volume in secondary transactions, which is good, I guess, for growth investors, because that was really quiet for a while. But we're also seeing these multi-layered SPVs proliferate and cause sometimes scams. But in terms of secondaries, what are you seeing and what are you advising your clients on with these? So it's a fascinating space, to your point. It's a little bit like the comment I made before, where if you don't have professional investors on your team, you have to build a fund of funds to invest.

42:58It's the same idea with these secondary vehicles. I'd say be very, very careful what you're doing. Attorneys love to use this term, perfect your ownership interest. So let's say we're going to use SpaceX again since we've been on SpaceX. Let's say you've been working at SpaceX years and you create your own MOLLE Corp and you put your SpaceX stock in that. SpaceX doesn't want you, or most companies, I don't know the pictures of SpaceX, don't want you to transfer your stock to an external person, right? So what you do is you transfer it to your own entity and then you sell shares in that entity to other people right and it's not very clear and you often charge fees right so a lot i mean it's sometimes quite egregious to your point you've been paying two three five percent for the right to buy something um but the problem is the stocks are sitting in that entity and you are the manager of the entity the employee is the manager of the entity um and so they're the ones who ultimately even though they've written the promise saying when there's a liquidity event, we'll sell the shares and hand you the money.

44:01I've seen personally in cases where the stocks that are in the entity are sold by the individual managing the entity, and they don't need to seek approval from the people who invest in it, right? So be really careful when you go into these private entities. Any private company has its own set of rules. You can't sort of use intuition, well, that's fair or not. Whatever's written in the contract is what matters when you go into private. And the vast majority of the volume goes through these sort of questionable SPDs. Directly going on the cap table is what you should be trying to do, but that's extremely difficult, right?

44:38Obviously, right? And so that's where I would caution people really be very careful. So we spend a lot of time when we see these things doing legal diligence, which is expensive. You're going to pay an attorney$20 ,000 to review this thing and make sure it's bulletproof. do you really want to do that if you're going to be putting you know 500 ,000 into this so um be aware will your clients take these spvs to you to manage for them or do they just kind of do them on their own we've helped a couple clients try to build some um but most of the time we're actually trying to build one for our clients to get into a particular company yeah right it's been interesting to see.

45:19I did an interview series at Anduril and one of the questions I asked Macrim and Brian Schimpf, the CEO, is there is like a dark pool of fake SPVs going around for Anduril. And so with those, are you just going into deep legal matters and paperwork to backtrack and see if that is a viable vehicle? Have you seen any if you've run into a full on fraud before? but you know the first thing we do is we pay a background check company to see again using you as an example does she actually work at SpaceX what do you know so that's step one a lot of people don't even do that right ask your friends and clients how many of them have done run a background check on the on the person running the the answer is going to be no one right so just to get it's back to my just do some basic homework if you're going to do these kinds of things, right?

46:10Or get someone to do it for you. Venture capital has gotten some heat for not having the best returns, not being the best asset class. How do you manage that kind of alternative within these portfolios? What's your view on venture capital as an industry? No, that's a great, great, great question. No bias, of course. Zero bias. Zero bias. Look, if you look at the different asset classes and the dispersion of returns, right? Like the worst manager to the best manager, venture is the biggest dispersion of all the asset classes, like compared to private equity, credit, or hedge funds or whatever. And so to your point, that means that who you pick is super important, right?

46:57If the dispersion was this narrow, it kind of wouldn't matter, right? You kind of know what you're going to get out of that asset class. When the dispersion is this wide, and the stock market performs, by the way, somewhere in the middle of that, if you pick the bottom half, to your point, well, that's a problem. You should have just avoided the illiquidity, avoided the fees, and bought QQQ or something. And so I think picking the right managers and being exposed to the right people there is more critical than any other asset class. There's a couple of other interesting observations. I'd say, by and large, the industry has not tried to create entity value, right?

47:39What do I mean by that? They're often focused around one individual. And if that individual leaves, the firm is gone, right? Or the firm will have to reinvent itself, right? So because the person has their name on it, they're the only one there, and they've not built sort of an institution around it, right? And so the longevity of that entity is questionable and therefore it doesn't have entity value in and of itself right of course the funds have value but the entity itself doesn't what's really interesting about a16z personally for me and one of the things that attracted me here this firm has entity value right there's a lot of people who own this firm it's building you know a comprehensive set of products and services across different asset class sub-asset classes right be it crypto ai apps ai whatever.

48:27And it also has expertise around fundraising, HR systems, go to market. And so the whole thing is highly valuable. It doesn't just revolve around, it's not 10 or 15 people with one person, right? So I would say if you're going to, you know, invest for the long term, try and invest in firms that are trying to create entity value, because that's a sign of longevity, right? The firm's not going to disappear when someone decides to hang up the cleats, right? I think the other interesting thing is as the check sizes to participate have gotten bigger, scale has become more important, right? All asset management industries have some scale benefits to them.

49:10Venture traditionally had less and now has a lot, right? So if you're going to back a new AI startup, you can't show up with a million-dollar check or a$2 million check. It's useless. Or let alone, you're going to build an AI chip where the tape out for one chip is$100 million. And how are you going to participate in that? So you need to have large funds. So that's another thing. I think all of a sudden, it's become very clear that you need to have, there's been this dispersion. And you need to have a bigger fund. What's the biggest lesson that you've learned from Mark and Ben?

49:47The biggest lesson I learned from Mark and Ben.

49:53actually I have an interesting one so one of the biggest lessons I've learned from Mark and Ben it's really interesting it's about how to build a team and how to work with people and they said something when I first got here that was interesting they said we don't hire people for lack of flaws we hire people for their their sort of their skills and it was really interesting to me at first I didn't know what to make of this but for a long time i worked um you know in a large management consulting company and my reviews were all about addressing my flaws right so it's like well they would gloss over the things i did well it was not even worth mentioning and it's just a list of things i had to fix all the time and it's actually an incredibly demoralizing kind of thing because you the things you did well no one seems to care mention and then you're always being told every year after year these are the 18 things you got a fix to make it to the next level, right?

50:47Here, it's completely turned on its head. Like, if you are great at something, let's celebrate that. And we're all people, so there'll be things we might not like with that, but that's fine. We'll learn to live with that. And hopefully the balance is good. So there's this real embrace of, you know, the talents that people have. And so as a result, everyone here at the firm, what stunned me is every function I meet, people are really excellent at their function. The amount of talent in this firm is mind-blowing. And so it makes you really proud to be part of this place. So that's the lesson I want for MarketBag.

51:22That's a great answer. Hopefully. Yeah. Okay. What's the biggest mistake people make with their wealth? So I'll restrict my answer to the biggest mistake people make with their wealth to sort of founders of startups. I think because they grew up in the venture industry and in the private asset industry, they automatically gravitate to that. And so I'll see someone with their very first liquidity, their very, very first liquidity, they take it, and instead of doing something a little bit safe in case there's a rainy day, they turn around and they go put in a bunch of very early-stage startups, often referred to by their friends.

52:01And you just sort of sit there and you're like, listen, if you're going to do venture, at least try to do it in a systematic way, and not take, you know, 80 % of what you just got and hand it to your three friends. And almost always this ends in tears. Maybe I'm being exaggerating, but very rarely do those outcomes happen the same. And of course, because that individual who made it, their experience was one of success. It's hard for them to sort of visualize the statistics of the industry as a whole, right? So they're expecting that if they do two or three of these things, at least one of them will work and often none of them.

52:39Right. So that's the biggest mistake I see. It's like you finally got some liquidity, your hard work paid off. And what do you do? You go put it back in another sort of highly uncertain, highly liquid thing. Right. For those founders that come to you, they're post exit, they're liquid. Do some of them want to start on their second or their third company? and how do you manage their portfolios to do that? Many do want to start a second and third company, especially nowadays, you're young. Are you going to retire when you're 35 or 40 and not do anything? I mean, I don't think anyone wants to do that.

53:14So a lot of people want to do. And so if that's the goal, we try to keep the portfolio actually more liquid because their hope is that they can finance more of it themselves, right? The idea is, well, I did my first company and by IPO, I owned 15 % of it. the next time I want to own 30 % of it, right? And so I'm going to bootstrap it and use my own capital more. So we try to, yes, is a short answer. We change how we would suggest the portfolio based on those desires. A lot of founders, though, I think want to stick with their company very, very long term. They're not necessarily thinking, you know, two years out, I'm done.

53:51They want to stay along. I mean, this is their baby. They know it. They've grown it. so it's not necessarily i'm going to completely detach it's maybe my level in intensity will decrease maybe i won't be ceo anymore maybe i'll be chair or something like that but flat out leaving i'd say it's kind of the exception you do see it i want to do a quick fire on some macro okay okay is private credit in a bubble there's several flavors of private credit one is sort of direct lending so the idea is fico scores and things like that aren't the best indicators of credit quality maybe we can develop a different way to assess credit quality and we'll lend directly to an individual often okay that stuff has been fairly resilient and in part because it's So they sort of take the equity tranche, sometimes called the first loss piece, and they keep that on the balance sheet, the issuer does, and then the other pieces are sold.

54:54So there's like a buffer, right? If there's a few defaults, you're okay. Right? But there's more the sort of the private credit lending to companies, mainly sponsor-backed companies. And when people say sponsor-backed, they mean PE-backed companies. um and remember the pe companies how do you pe company private equity their equity investments right so how do you maximize return on equity well you use as little equity as you can right so you you buy a company and you lever it as much as you can so that your equity piece is small so that if the company improves the the return on equity is magnified right and so you're purposely levering these companies quite highly and you're putting that into a vehicle and people are investing into that leverage.

55:39So if there's an economic headwind and those companies start not being able to manage their debt, that's a problem, right? So at the end of the day, the question of whether or not private credit is in a bubble is really a question of, are we facing some sort of long-term slowdown or recession whereby these companies can't service their debt the way they were before. And that right now, there's no indication of a slowdown in the economy, really. There's a few, you know, there was a bit of a surprise on the employment report. But by and large, the economy is growing, you know, the long term trend for growth is not even 2%.

56:17And the economy grows above that pretty regularly. So right now, and the huge CapEx boom around AI is propulsing the economy. So I don't know that there's an immediate sort of macro event that causes these companies to not be able to support their debt. But it's a levered, high-risk strategy. Is the IPO window open? We're going to find out with SpaceX. What about OpenAI? Whoever goes first. Who's going first? I think SpaceX. But it depends if Anthropik and OpenAI are going to have a heated competition even more. Because I feel like they're in a battle right now. And so that's a race. But look, I mean, companies are still able to raise large amounts of money in the private markets, as we've seen with OpenAI and others.

57:03So the pressure to go public is not as high as it would be if they weren't able to. Right. And then, as I mentioned before, VC funds, growth equity funds have raised large funds. So there's capital available to do these things. um yeah i mean it's surprising how large fundraisers 10 20 50 billion dollar fundraisers happen overnight oversubscribe so until that stops happening there's you know less urged ipo unless you get to a size where the private market can't accommodate you anymore so it's in some paradoxical way right if there's like a slowdown in the economy and less excitement about these companies that's when they're going to be maybe more forced to IPO because the private capital then won't be available.

57:50I feel like OpenAI already pushed the limits on how much private capital they can extract with$110 billion around. I can't imagine how many more pockets you can go to. But no one thought before that that it would be easy to raise that sum and it was easy to raise it. Okay. What is your information and research diet? What do you watch out for? I'm kind of old school. I like to read source materials. I know nowadays, you know, people watch podcasts and things like that. I like to read Fed data. I like to read FRED, the Federal Reserve Economic Database that you can get free. I like to read quarterly reports from companies, transcripts of the analyst calls and those kinds of things.

58:39So that's what I spend a lot of time looking at reading and then of course listening to my clients who are in the know on the private private market side you do have a very good advantage i have a great great advantage there right right so you know i think of private investing there's like this two by two matrix which is like it's access and it's diligence right and so you know we're in a real sweet spot here right because i have access or we have access or clients therefore have access to all sorts of things because of the incredible network we have here. And then the diligence, it's a large firm.

59:12I can always find someone here that's worked with someone or knows someone that's worked with or been on a board or in a startup. So it's the amount of diligence I can do. It's very quickly, I can sort of assert whether or not this is a quality investment. So on that two by two matrix, I like to think, you know, I'm lucky enough to be up here, which is not going to complain. Very lucky. As we close out, what are you most looking forward to this year? so there's been a big effort at the firm to be more um outgoing with media and uh and this is part of that amazing so i'm very excited to uh to be out there speaking a bit more i mean traditionally a lot of wealth management firms tried to operate uh and multifamacies under a little bit under the radar um but i think for me personally at least i find that the way we set things up is so compelling and differentiated that i'm very excited to sort presented to the world more broadly.

1:00:07So that's... Also from what you've mentioned, it's clear that there needs to be more real information on these industries out there because there's a lot of traps. Yep. A lot of traps. So my goal is to educate. A long time ago, I wanted to be an academic. I spent way too many years at Stanford. I still enjoy teaching and educating people. So to me, that's the biggest excitement of this job. Amazing. Well, I'm looking forward to that as well. Thank you so much, Michelle. Thank you. Appreciate it. Hey, it's Molly. If you enjoy our interviews, check out our newsletter, sorcery.bc, where we deliver a once a week top deals and tech headlines email, and also go deeper on our podcast interviews.

1:00:46Subscribe to Sorcery today. And don't forget to subscribe to the podcast on YouTube, Spotify, Apple, or wherever you listen. Link in description to sign up.