MI309: Liquid Assets: Investing in Fine Wine w/ Nick King

29:32It's like, how do you identify what wine you're going to buy? Like, what is the wine that's mispriced that's under, you know, that's selling below its intrinsic value? Who decided that? It's a great question, especially because 15 minutes ago, I said I'm the least passionate person about wine on the business team. So we had put together an advisory board of a few masters of wine. One individual, his name's Adam Lapierre. He's actually our COO now. So started as an advisor who was providing some guidance on the sourcing front and pricing. An individual named Miles Davis over in the UK. The UK is the home of fine wine trade.

30:12The biggest fine wine trading businesses are over in the UK as a result of lower regulation over there, as well as some favorable tax treatment of wine as an asset class. And then two other individuals here in the US that we would take collection ideas to them and pricing to them to get some feedback. It was also supported by our first employee, Billy. He was working unpaid. That was one of the great stories of the stroke of luck, where we were looking for someone to write wine content and went on Upwork, found this individual, Billy, and he had written a book on wine, an ebook, and disintermediated Upwork, reached out to him on LinkedIn, connected with him, thought it was really interesting.

30:58actually ended up investing in our friends and family round and working three months unpaid and helping with those first sourcing activities. So we were looking at UK markets and presenting ideas to this advisory board to get feedback regarding pricing and asset selection. So for Billy, it truly was a labor of love since he was working for free, right? Right. Yes. A lot of credit to him. Set up a lot of our original marketing infrastructure, creating content on the wine, building those wine relationships and doing a lot of the sourcing in the early days. So at what point did you realize that you had a viable business that was going to make it?

31:43What was the moment in your head you were like, this is going to work? Yes. The moment was early May 2021. We had gotten qualification from the SEC the last week of April. So we had our first collection. It was a$46 ,000 collection of California wines, Harlan Estate, Opus One. Patrick had been coding 15 hours a day for the last three months to get the platform to a point where investors could purchase shares in these offerings. The KYC AML, the bank connection, the portfolio page, all of that, he got the product from zero to one. So I believe it was March 12th when we were launching our first offering.

32:31Four days after getting engaged to my now wife, we were launching our first offering and it launched at noon. Leading up to that, I had mentioned this waitlist that I'd grown to 800 people, all really word of mouth. And every week I cut the time in half where I thought this offering was gonna sell out. First it was, I hope it sells out in two months and then one month and then two weeks and then one week and then three days and then two hours. That two hours was that morning when we were pacing around my apartment because it's 11.30, there's nothing that we can do other than sit here and wait.

33:07The product's ready. The marketing emails are ready. And when we push the button to turn it on, half of the offering sold out within the first three minutes and ended up selling out in under an hour to 80 investors. And that to this day, I still think is one of my favorite days we've had since starting the business, watching that happen and all the time and effort that we had spent getting the product live and having it in market. So that is the moment. Yeah, that's awesome. So you initially did fundraising through family and friends. At what point did you reach out to VCs and start with that process?

33:47I want to hear about that. And I want to hear about your sidewalk pitch that I heard you mention. Yes, that's a great story. I was down with Luke this past week, actually, who I pitched on the sidewalk. Started reaching out to VCs after that first offering. Once again, I didn't know what I was doing. This was cold outreach. And actually, six months prior, I had cold emailed 200 VCs, 10 of them responded, and I got them on a monthly update list. I've been sending monthly updates now for almost three years. So pre-product, pre-everything. And that's where I started to curate a list of investors.

34:30It's actually really funny to look back at the original updates when we were talking about our waitlist, how many customer interviews we had done that month to today. It shows just how far the business has come. But yeah, so basically started with 10 VC calls, realized very quickly that I needed to start a process and get as many people into the pipeline as possible. A lot of startup growth is sales. All of fundraising is sales and you have to hit your numbers. Most people are going to tell you no, 99 % of the time it's going to be a no, but hitting the numbers is really important. So we started fundraising in that May timeframe.

35:11We actually got a term sheet in August and ended up passing. It would have been for more money than we had ever raised, but we thought we could get better in terms of evaluation. That was a tough decision given we at that point had two additional employees who were being paid and Patrick and I took money from personal savings to cover payroll that last month because there was cash flow related to the wines. So we ended up passing on that. And where this first pre-seed fundraise started clicking was when some of our investors on the platform had reached out to us and they're like, hey, are you raising any money for the company?

35:49And I was like, yes, we actually are. So we ended up getting$300 ,000 or$400 ,000 committed from our community of investors who had invested in, say, the first 10 offerings. That I would say is probably the second point where I was like, okay, this thing might work when you have people who are that passionate about this product that they want to invest. It's very helpful to have some momentum going into venture conversations. So at that point, we had some money committed. I was traveling up to New York. This was the second time I had ever been to New York. First time in kind of my adulthood. so I was going to pitch a number of investors but the main one was fintech ventures I did the natural card that I think every entrepreneur has pulled as I'm going to be in New York this week when in reality I'm booking the trip to meet with you but I get on the subway I go the wrong direction end up in Brooklyn turn back around get to the meeting spot my phone's dying because I've been navigating all day, make it on time, sweating.

36:58And I am pitching in a hotel and five minutes into the pitch with FinTech Ventures, Luke and Sergey, the fire alarm goes off in the hotel. I try to pitch through it, but it is quite loud. And what ends up happening is we end up on the sidewalk outside of the hotel. And I pitched for 45 minutes, sweating late August, early September in a suit jacket. And later that day, Luke let me know that they would lead the pre-seed round. Great story. Once again, another stroke of luck that it all worked out. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message.

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40:53That's theinvestorspodcast.com slash tip-finance. All right, back to the show. So you had mentioned effectual entrepreneurship, and I wanted to jump back into that and kind of revisit that idea. Was that a book that you read in college? And can you talk just a little bit about how it affected your creation of Vint. Sure. So it's actually a paper that was passed on to me by a UVA business school professor, an MBA professor. And I believe the paper is titled What Makes Entrepreneurs Entrepreneurial? And she studied 20 or 30 entrepreneurs, everyone from say single digit millions in revenue up to public company founders.

41:38And the common thing that this professor realized was that none of them took this business plan causal reasoning approach. The causal reasoning is I'm going to create this five-year plan, detailed financial models, and I'm going to go out and execute on this plan with sort of predetermined steps along the way. Based on what I had mentioned about Emory, it's still taught that way. Business creation is still taught that way in a lot of universities and the small business administration as well teaches this causal approach. I looked at that and I was like, every time I've created a plan, nothing actually worked.

42:18And it's always been this going with the flow in a way and this constant sense of uncertainty. And reading this paper really resonated with me about an effectual path that these entrepreneurs have taken, which basically means you have this certain end state and it's not like super well-defined, but for us, it's always been creating this asset class of wine and spirits. That is something that exists, but along the way, you're going to have people who shape that direction. You're going to have challenges that shape the direction that you get there. That direction might change as well over time as you bring in additional means to reach this end goal.

43:09So the quote that I think succinctly summarizes causal reasoning versus effectual reasoning is basically with causal reasoning, we're trying to predict the future. With effectual reasoning, we're trying to create the future because we can control that. Today, that's still been core to the path of Vint. The great examples of that are, I mentioned the iterations of Vint, a data-driven hedge fund, StockX for Wine, and ultimately we decided down this path with Regulation A collections. Those two concepts have, it wasn't a part of the plan to do this, but we hired Adam, who was our advisor that I mentioned, who is a one-of-a-kind talent, who has seen businesses, wine and spirits, e-commerce platforms in a very in-depth manner.

44:02So he went to us and we're like, we have all these assets. Today, we've done about 90 offerings on Vint. We need to sell them to return capital to investors. The best way for us to do that is going to be to own our own platform. So over the last six months, he's built that and it's become a material part of our business, this stock X for wine, if you want to call it that. So that was not a part of this five-year plan. Sure, an idea of we must sell these assets, but the form at which it presented itself, we had no clue. But Adam, being a really strong member of our team, brought it to life. and it's so core to building and scaling a startup.

44:46You must be comfortable with this uncertainty. In fact, you just should try to control your own future as much as possible and not predict it. Explain to me and our listeners that aren't familiar with StockX, like what the platform is that you're doing and how it's been a huge benefit to you. So StockX is a sneaker marketplace. People buy and sell sneakers. It unbundled eBay in a way by providing authentication services. So what we've done, we have this investment product or products, the Reg A collections, and then also a data-driven fund. Across that, there's about$10 million worth of assets that we'd like to turn over and return capital to investors.

45:31The Vim marketplace is, from a pricing perspective, direct-to-consumer in the U.S. is typically the highest price that you can get. If you're going B2B, they're going to sell to the consumer. They're going to take a margin. If you're going through auction houses, you're going to pay a 30 % transaction fee. So combining these assets with an e-commerce platform, it solves what is one of these common problems for marketplace businesses is the cold start problem. I don't have supply or I don't have demand. For us, we have the supply, which is assets that investors have invested in. And we were able to generate demand because these assets are very sought after.

46:07So the way that it functions is we are turning over assets that are either in the US or the UK to collectors, consumers here in the US via the Vint marketplace. And any assets that are owned by Vint investors, they get that return of capital. So you had mentioned that each collection is its own LLC. If I'm a person listening to this, I've got, I don't know, three or four or$5 ,000 that I want to invest. How do I do that? And then how do I decide what makes for a great wine investment? If I don't, let's say I'm certainly intrigued by wine, but I'm not super knowledgeable. How do I decide what makes for a great wine investment?

46:49Yeah, I'll start there and then talk about the products. What makes for a great wine investment? We take a two-pronged approach when it comes to sourcing based on fundamental analysis and then quantitative analysis. On the fundamental side, we're looking at regions, brand power, production quantity, critic scores, weather, all of this to understand, is this a quality business to use like stock analysis as an example. The value investing approach, is this a good business? So is this a good asset? Then we're looking at the quantitative side, which is how is this asset priced? Is it mispriced to its intrinsic value?

47:31That intrinsic value is derived via UK data, US data, and auction data. And if we can find assets that are a quality asset that are trading at a discount to their intrinsic value, we'll source those into collections. However, you as an investor, you go on the Vint platform, you see three collections, a Bordeaux collection, a Burgundy collection, a Cask collection. How do you decide between the three of those? We do a write-up very similar to a sell-side research report on each offering to outline, here is our thesis. What we notice with a lot of investors is that they typically diversify across a number of offerings to build this blended portfolio of collections.

48:17So that is, in the investor's view, their way to mitigate against regional risk. If you include multiple regions, wine and spirits, maybe wine futures or casks, you've additionally, we have fund style product that is accredited investors only, those who are sold on the asset class and trust us as a manager and will run a product based on a theme. So raise the capital, source the assets, and turn those over. So two options depending on your preferences of self-direction. Are you actually, when you're making a purchase and doing a collection, Are you taking physical delivery of the wine or the spirits or the casks or like, how does that work?

49:07Yep. We take physical delivery. So once that sourcing process is complete, investors have invested into an offering. All of the wine and spirits are stored in specific storage facilities for these assets, primarily in the UK is at scale, as I mentioned, less regulated and tax benefits over there have led to storage facilities that hold hundreds of millions or billions of dollars worth of wine. So we cover the storage. All of the assets are insured over the life of the offering. We guide towards a medium to long-term hold on the investment. And then once we notice an opportunity to exit these assets, so every day we're looking at US and UK data, is there an opportunity to exit, we'll handle the transportation of those assets, likely into the US because of the premium price that is applied to then sell the assets and return capital.

50:04How do you determine when to exit? Because I was looking at some of the collections and the holding period. It was definitely over a year, but how do you decide at what point we're going to exit? Is it when a certain return has been hit or how do you think about that? So, you know, we're targeting to beat the historic market returns. That's what we're looking for in terms of opportunities to exit. If someone comes to us and they are looking to purchase assets and their price is above what we estimate the fair market value to be, we're likely going to take that offer. And beyond that, that's an automatic trigger of, okay, they're looking to acquire assets above the fair market value.

50:45Other kind of thought process really revolve around that target low double digit type of return. So what we do is list our assets on a number of exchanges, marketplaces, including our own at a dynamic IRR type of calculation. So every quarter, that price is going up to try and hit these target IRRs by selling these underlying assets on different exchanges. So I know past performance is no indication of future performance, but what are some of the returns that you guys have had on some of these collections? Yeah, so we've done 90. We've returned capital from about 13 of them. And the net IRR on those exits is 28.5%.

51:33All that's been within the last nine months, which has obviously been fairly volatile in the equities markets, testament to our ability to identify assets that trade at a discount to their intrinsic value. Yeah. I heard you mentioned that you love volatility, that volatility gets you excited. Yes. Volatility creates irrationality. Irrationality shows itself in price, which creates buying opportunities. That's where volatility gets me excited is that it makes the market even more inefficient than it already is. So when a collection is sold, at that point, is the LLC dissolved, the funds are returned to investors, and then they have a choice at that point, whether they're going to do another collection?

52:18Or do you see that most investors are, once the liquidation happens, they're reinvesting in Vint? The number one product feature that investors have asked for is an easy way to reinvest once they have capital returned. We return capital in two ways. One is sometimes it's a dividend. Say we sell 10 % of the collection and we'll distribute that 10%, creating kind of a cashflow stream for investors, which they like. And then second is a total liquidation where they receive all the proceeds. But we recently rolled out a wallet feature that allows people to keep the distribution on platform and pretty easily reinvest.

52:54What other asset classes would you say wine and spirits is most correlated with? We've done a lot of work on this. One of the early things that we did was buy a lot of data, historical data on the top 1000 wines that trade. So that's built the foundation for some of the studies that we have done on the correlation front. The number one thing that we've actually seen it correlate with is oil. I'm sure about a 0.5 correlation to oil. We've seen a negative correlation to the S &P, very low correlation to bonds, to real estate, a low correlation to art as well, which I thought was interesting because one of our investors, he's a professor at Stanford as the CEO of Wealthfront.

53:43He's done a lot of work on collectibles, particularly wine and art. And he said the number one thing that this asset class correlates with is the wealth of the 1%. If that is increasing, the asset class tends to increase. So obviously over the last 100 years, that's been a decent bet. But yeah, as I say that, I would love to run maybe a correlation against LVMH as a luxury index versus wine. How do you get financial advisors to know about the product and to suggest it to their clients as part of a diversified portfolio? Is that something you guys are working on? That's something that we're very actively pursuing at the moment.

54:27We've done these 90 deals, we've built a track record, and I'm thinking right now is a pretty pivotal time in our business to cross the chasm into larger pools of capital. Advisors is that space that we're focusing on. I think the way to get access to them is really a distribution play. You need partners. You have these platforms that have a number of RIAs on them that you can unlock distribution. You have independent broker dealers who have hundreds of financial advisors and reps underneath them. So the approach that we're taking to get in front of them is the one-to-many approach. It's also built on social proof where if this platform has approved you.

55:15Me as an advisor, trust the platform. So there's a hurdle that we've overcome by being on the platform. Beyond that, which is more tactical, it's really education, telling the story of the asset class and how it fits into this alternative asset portfolio, which there's real estate, there's private credit, there's art, there's private equity, hedge funds, there are all these things that people can diversify into. A lot of these, you know, the Black Rocks, the Blackstones are promoting alternatives, telling the story about how Wine and Spirits fits into that portfolio. And the only way to do that is to keep putting content out there, keep having conversation, doing webinars.

56:00Those kinds of things are how we've gotten education out about the product. I wanted to hear before we wrap up about the long-term plans for Vint? If we were to talk in five to 10 years from now, where do you want to see the company? What do you want to be doing? Tell me about that a little. I would like Morgan Stanley, their investment strategist to say a 2 % allocation to wine as part of your portfolio makes sense. There's only one platform out there that's created a financial asset class to get exposure to it. And that's Vint. That would mean we've educated the investment community about this asset class, because we're not really focused on people who are passionate about wine.

56:41We're focused on people who are investors who think eight and a half percent uncorrelated returns are pretty interesting from a portfolio construction perspective. So if that's something that happens, I'll say we've done it. We've created this financial asset class and we've been able to return capital to investors at, And that is first and foremost, what we need to do for this business to be successful, which is why that marketplace business is very exciting to get capital back in the hands of our investors. Yeah, it's definitely intriguing. I'm going to look more into it. One of my favorite classes at the university I went to was called the Geography of Wines, which was a three hour class every Thursday night, my senior year, just learning about all the different wines throughout the world.

57:28and we got to drink it too. So it was pretty fun. But was there anything that we didn't touch on, Nick, that you wanted to before we close out here? I think we covered it all, Patrick. And I think what I said there at the end is where I would love to leave it. This is a financial asset class and that's what we're trying to do here at Vint. Well, I wish you luck. What's the best way for our listeners to learn about you, to learn about Vint to get in touch with you guys? Yeah, you can learn about Vint and the various products at Vint.co. You can reach out to me, emails nick at Vint.co. Okay, are you active on any of the social platforms at all?

58:11You can add me on LinkedIn, but not really on anything else. Well, I wish you the best of luck. This has been a lot of fun and thanks for your time. Thanks, Patrick. Okay, folks, that's all I had for today's episode. I hope you enjoyed the show and I'll see you back here real soon.

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