Transcript
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Last time when we spoke, you'd told me about
the strongest signal that you see for a new
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company.
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What is that signal?
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The signal for us has, especially in recent
time, has been key executives that leave large
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private companies to join early stage startups.
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If the head of engineering at Apple is leaving
for a startup and has been there 17 years, we
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want to know about that company.
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And because we have the relationship with that
executive, we oftentimes get introduced to them
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by the management team and start understanding
what that early stage startup is doing and get
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a very good look inside where other investors
mainly haven't even heard about the company.
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And I think the best example of that was in
2019, we were approached by an executive to
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help him liquidate $35,000,000 worth of Stripe.
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We asked him, well, why are you selling, and
why are you selling this much?
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He goes, well, I'm leaving the company.
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I'm joining something pretty exciting called
OpenAI.
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And at the time, people had not really heard of
OpenAI yet.
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It was a completely new concept.
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We did some work on it and actually started
getting to know what OpenAI was all about and
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chat GPT.
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Had we not had that signal from the executive I
mean, VCs weren't even really heavily involved
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at that point.
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There was very little knowledge of this
company.
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And due to the fact that we were able to build
a relationship over a many month period, we
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started understanding that that that OpenAI and
ChatChiciti was gonna be a very, very big
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thing.
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And the only reason why people would go there
and leave such a successful startup as Stripe
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would be that they figured this opportunity was
much larger and had much more upside than
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staying where they were.
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You mentioned that a Sequoia or Andreessen
Horowitz may not be as strong of a signal.
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Why is that?
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The large VC funds are managing 10, 20,
$30,000,000,000.
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So to say that you're leading around with, say,
a $5,000,000 check when you're writing many
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multiples of those $5,000,000 checks across
your portfolio sometimes isn't a a a strong
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signal because the VC firms themselves are so
overcapitalized.
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If that bet doesn't work out, it generally does
not affect the returns.
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It's really kind of a drop in the bucket for
them.
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But it's a lot riskier for an individual who
has a very large amount of equity and stock
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options in a start up to go lead to go to a
series a.
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And that to us means real risk taking.
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Right?
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The risk that a VC is taking by leading a
$5,000,000 series a or putting in a $5,000,000
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check or $10,000,000 check into a series a is
much, much less than a key executive who owns a
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100,000,000 of equity in a very established
acorn in many cases to go to a company with a
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$100,000,000 valuation that's pre revenue.
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Right?
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That executive is taking real calculated career
risk on that move.
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They know something even the VCs don't know.
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And there's not only the career risk of leaving
one company and putting all of your career
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baskets into an untested company.
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There's also the fact that oftentimes at these
large companies, you get refreshed in your
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equity pools oftentimes every year, sometimes
every couple years.
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So they're giving up this future equity.
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When we look back historically, those moves
have meant a lot more to us than who's actually
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leading the round.
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In fact, many of these executives are leaving
to go to these companies before there's even a
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lead and a significant round.
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And what we found is those with the
engineering, background and those that are
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highly technical people that actually know the
technology better than any VC ever will because
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they're internal and need to understand that
the next wave of what they're doing
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You alluded to it.
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There's so much capital and venture capital
today chasing, you know, a few really good
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deals.
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How do you know that you're not being adversely
selected in terms of the companies that you
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invest in?
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In addition to tracking fundamentals and
metrics and and what's really going on
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underneath the hood, I mean, we just invested
in an AI chip startup, which is pre revenue.
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Right?
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But our leading indicator on that one is key
engineer from Apple that was there 17 years
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just joined.
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1 of the key engineers from SpaceX that was
managing 30 engineers at SpaceX, one of the
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head of design engineering just joined the
company, and also a key executive from Long.
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Now they haven't even raised their series b
yet.
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But with that kind of firepower on the
executive team already, we're thinking this is
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an opportunity that we really need to dig into.
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And now it's just understanding what the
revenue traction is, what the commercialization
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is.
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From a product perspective, we think they're,
you know, they're way ahead, and and that's a
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very strong signal there.
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You're a thematic investor.
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Tell me about 1 or 2 themes that you're excited
about for 2025.
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We're thematic, but we also have to be
pragmatic that we don't know, you know, the
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technologies that are out there today.
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I don't think that we could have guessed 3
years ago that perplexity was gonna be a
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$9,000,000,000 company.
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Right?
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And that's why the signaling that we keep
talking about
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is so important because the
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true technology execs at these companies and
the people that are actually building these
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products are the ones that we wanna follow.
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Right now, we think AI chatbot agents are gonna
be a huge business, and that's where you're
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seeing executives from OpenAI and Propic
leading to these chat leading to these chatbot
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start up.
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And they get it exactly right, which they're
about 80% there being able to actually
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duplicate what a human does in a certain task.
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We think that that's gonna be a massive,
massive business for corporations to reduce
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costs and increase efficiency.
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So we're very focused on that.
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We're also, given the new administration,
focused a lot on defense tech, and we think
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that that business is just, you know, going
from a true transformation where you have the
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old guard, the Lockheed Martins, the General
Dynamics, those types of companies which had
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old technologies like the f 35, which is
basically already on the chopping block by the,
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the new Doge administration, and and now is is
really leaning into technologies on the
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battlefield that are being developed by very
innovative startups.
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I mean, Android is obviously the blue chip name
in that space, but Shield AI is doing very
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interesting things and other even earlier stage
startups than that that are bringing
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technologies that we didn't even know possible,
you know, 2 to 3 years ago.
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So we're paying attention to these broad
thematic themes, but, you know, it all comes
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down, especially in early stage investing, to
the people, the team, and their track record of
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what they've built at other organizations as
the true litmus test of whether we're really
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interested or not.
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We've seen a complete 180 in terms of venture
funds investing to defense tech over the last
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one, really, 2 years, but in the last year,
dramatic change in activity.
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In terms of the institutional secondary market,
who is accessing, you know, the Elon companies
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or these kind of companies?
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Who is that is out there in the market buying
these shares?
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Yeah.
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It's a it's a wide mix, but I would say it's
obviously the large institutional investors.
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It's the VCs.
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It's the hedge funds that are getting
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So you have VCs going to you and saying, I
wanna buy on the open market more exposure to
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my name.
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That's right.
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Once they get into a company, they come to us
and say, look.
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We're trying to size up, and we're trying to to
build a bigger position in this company.
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We've done that, you know, multiple times this
year.
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I think that they also are cognizant of the
fact that, you know, use us for liquidity and
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the other parts of their portfolio.
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So one of the biggest issues that VCs are
having is DPI.
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Right?
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So as much money as they're putting into these
new LLM companies, all the AI startups, the the
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military logistics companies like Anduril, and
the robotics companies are also trying to exit
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a lot of legacy things that they invested in
from 2017 to 2021 and and trying to get DPI for
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their investors.
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Right?
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So their investors are are saying, look, this
is great that you're putting a lot of money to
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work in AI and and and, you know, names like
Code 2 have deployed and and raised
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$1,000,000,000 just to focus on AI recently.
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But they're also looking at the rest of their
portfolio and saying, well, what was what
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happened to that hot Fintech company you were
talking about in 2019 and that hot SaaS name
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that you did in 2020?
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What happened to those?
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Because all of a sudden nobody's talking about
those.
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Right?
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So they're kind of forgotten zombies many I
mean, in many cases.
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Right?
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The companies have slowed their growth.
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They had to cut burn during the tech crisis.
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And a lot of VCs feel a little bit stuck.
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Right?
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So a lot of our job has become help us get DPI
on this part of our portfolio, and then
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hopefully we can recycle that cash into other
AI opportunities or things that we're we're
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looking towards the future on.
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So it's but it's really become, you know,
lopsided in that regard.
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Cash is not the problem for VCs right now, or
fresh cash that they've raised.
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Ideas is not a problem.
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There's a ton of companies to invest in right
now, but it's really liquidity in the rest of
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the portfolio.
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So when you're talking to an endowment and
they're saying give me fresh new money, they're
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saying, well, we have none yet.
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And obviously VC is a big part of the problem,
but the biggest part of the problem is private
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equity.
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So there's a massive liquidity problem right
now.
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It's creating really a bottleneck in the
industry.
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But in terms of innovation and the pace of
innovation, it's faster than I've ever seen it.
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It it is really truly astonishing what's going
on and what companies are developing and, and
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how it's affecting society.
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So you see from one side, VCs buying secondary
to add to their positions.
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You see some VCs selling in order to generate
DPI.
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What other types of investors, whether
institutional or non institutional investors,
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do you see regularly in the secondary market?
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Family offices have been an interesting one.
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I think family offices are a little bit less
self guided than a VC fund or a hedge fund
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would or an institution.
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There's a lot of times they don't have access
to the level of diligence that some of these
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institutions do.
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So they tend to follow a lot of their managers
onto opportunities.
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So what we see sometimes is, hey, we own this
company through a fund that, you know, one of
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the large VC owns.
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But if you offer it to us, we would size up and
buy more.
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You know, we would, go into an SPV that has
that name because we're really bullish on it,
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and it'll add to our position, which is
somewhat diluted across this fund.
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So we see that.
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And then obviously, and and this is where
markets get very frothy is is retail.
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Right?
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And so the high net worth investor is being
pitched a lot of these deals through the
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through the typical Morgan Stanley, Goldman
Sachs platforms, Merrill Lynch.
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And they're saying, look, buy SpaceX.
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Right?
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Everyone wants to say at the cocktail party
that they own SpaceX.
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It's, it's a terrific name to own.
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Obviously, they're doing very, very well.
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But it shows you that the retail market is
focused on on several names.
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And if that name becomes available across one
of these back platforms, they're they're
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literally devouring
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Interesting.
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SpaceX used to be strictly a family office
trade, almost like a cocktail trade, and then
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it went to an institutional trade.
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Maybe, again, it'll be so expensive, it'll be a
family office trade again.
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Yeah.
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Yeah.
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Look.
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Institutions are looking at it.
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Obviously, SpaceX the business model is an
interesting one, about 65% of the projected
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revenues and communications.
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Yeah.
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And the satellite business, which is a $99 a
month product, which is focused on the maritime
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industry, emerging markets, frontier markets,
which to be honest many of them can't afford a
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$99 subscription.
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So Elon has really built a great business with
the the the military payload business and
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obviously Starship, which is the best business
of SpaceX because it's really long term
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government contracts.
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And that's what everybody wants to see is long
term revenue visibility.
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And so that's what investors are really focused
on but the communications business although it
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will grow very fast, you know, things tend to
trade in an AT and T Verizon multiple.
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So it'll be interesting to see when the when
these companies hit or SpaceX hits the public
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market, what is the the public market gonna
value the communications business?
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What it's, you know, gonna value the Starship
and, payloadaunch business?
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SpaceX really is and where shareholders is is
many different companies in one.
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Like you said, high revenue, low multiple some
low revenue, high multiple.
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Never thought about it that way.
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Previously, you were the president at a
$5,000,000,000 hedge fund.
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Tell me about that experience.
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It was great.
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I mean, we were you know, this was during a
period, that the multi manager business was
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00:11:51,585 --> 00:11:52,304
really taking off.
226
00:11:52,304 --> 00:11:56,325
And this is when, really, Citadel, Millennium,
and others were really raising a lot of capital
227
00:11:56,625 --> 00:11:58,049
and really starting to take off.
228
00:11:58,129 --> 00:11:59,330
And we were trying to do the same.
229
00:11:59,330 --> 00:12:01,669
It's a very capital intensive business.
230
00:12:02,129 --> 00:12:04,309
It's a very leverage intensive business.
231
00:12:04,850 --> 00:12:09,570
And finding the right portfolio managers is a
very challenging thing to do.
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They expect, you know, large upfront payouts
before they've even generated $1.
233
00:12:13,330 --> 00:12:17,705
And so, you know, know, for me, it was, more of
a personal decision that I thought the private
234
00:12:17,705 --> 00:12:20,105
markets were gonna generate a lot more alpha in
the future.
235
00:12:20,105 --> 00:12:22,365
It was a good time for me to segue into private
markets.
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Explain to me as a third grader why it makes
sense to have multiple strategies at a single
237
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hedge fund.
238
00:12:28,269 --> 00:12:29,149
Thank you for listening.
239
00:12:29,149 --> 00:12:32,909
To join our community and to make sure you do
not miss any future episodes, please click the
240
00:12:32,909 --> 00:12:34,509
follow button above to subscribe.
241
00:12:34,509 --> 00:12:38,129
It's it you know, these strategies all trade
with different risk characteristics.
242
00:12:38,269 --> 00:12:38,509
Right?
243
00:12:38,509 --> 00:12:41,490
And and, you know, what we call in the hedge
fund world factors.
244
00:12:41,585 --> 00:12:41,745
Right?
245
00:12:41,745 --> 00:12:43,424
And they're all driven by different factors.
246
00:12:43,424 --> 00:12:48,705
Some people factor some strategies are growth
factors, some strategies are e n factor, some
247
00:12:48,705 --> 00:12:52,965
factors are currency related, and some factors
are just unmeasurable.
248
00:12:53,600 --> 00:12:57,120
And so you always have to have a variety of
factors in your portfolio that you can
249
00:12:57,120 --> 00:12:58,259
recognize and hedge.
250
00:12:58,480 --> 00:13:03,440
And that's why you want a strategy where you
have multiple factors going on to deliver a
251
00:13:03,440 --> 00:13:06,000
smooth, return profile on the strategy.
252
00:13:06,000 --> 00:13:10,524
A lot of times, portfolio managers get very,
very stuck in their own strategy.
253
00:13:10,825 --> 00:13:16,664
Managers are so focused on generating returns
from that one segment of the market, which may
254
00:13:16,664 --> 00:13:17,465
be out of favor.
255
00:13:17,465 --> 00:13:20,825
And so that's why a lot of money has been
raised to these multi manager strategies.
256
00:13:20,825 --> 00:13:24,959
It's just been able to smooth out the
volatility, smooth out the returns, and smooth
257
00:13:24,959 --> 00:13:25,519
out the risks.
258
00:13:25,519 --> 00:13:30,240
Now that being said, they're telling portfolio
managers, please join Citadel or any other
259
00:13:30,240 --> 00:13:31,120
multi manager fund.
260
00:13:31,120 --> 00:13:36,164
Here's $2,000,000,000 and make 3%, and we're
gonna lever it, you know, 15 to 1.
261
00:13:36,245 --> 00:13:38,485
And that's how these firms generate a lot of
returns.
262
00:13:38,485 --> 00:13:39,924
So it's not without risk.
263
00:13:39,924 --> 00:13:44,485
Everyone looks at the Millennium fact sheet,
you know, punching out a nice 12% annual
264
00:13:44,485 --> 00:13:44,985
return.
265
00:13:45,284 --> 00:13:48,804
But if you look at the overall leverage that my
Millennium is managing, it's massive.
266
00:13:48,804 --> 00:13:52,909
I mean, it's it's 1,000,000,000 of dollars when
stated AUM is $60,000,000,000.
267
00:13:53,610 --> 00:13:57,769
And so it's it's a very interesting strategy
and I think investors have become very enamored
268
00:13:57,769 --> 00:13:58,429
with it.
269
00:13:58,649 --> 00:14:04,029
Is that leverage somehow isolated or can can
one strategy blow up the entire fund?
270
00:14:04,544 --> 00:14:04,784
Look.
271
00:14:04,784 --> 00:14:09,684
It'll go on name, but there was one fund that
they they generated 60% of their return in 2023
272
00:14:09,985 --> 00:14:11,504
from European natural gas.
273
00:14:11,504 --> 00:14:14,725
Had that trade gone wrong, you could have seen
a major firm go under.
274
00:14:14,784 --> 00:14:20,850
When we look at some of these funds, it it it
taking on a lot of risk to generate a small
275
00:14:20,850 --> 00:14:26,209
measure of return that then the firm can
control at at the top level, and manage the
276
00:14:26,209 --> 00:14:27,829
risk, and manage the leverage.
277
00:14:27,970 --> 00:14:29,649
And so far, they've done a great job.
278
00:14:29,649 --> 00:14:33,345
But, you know, who knows what's gonna happen,
you know, if all the factors unwind and
279
00:14:33,345 --> 00:14:36,965
everything, basically melts down at the same
time, it'll be interesting to watch.
280
00:14:37,105 --> 00:14:40,404
While you're at the hedge fund, you were
recruiting portfolio managers.
281
00:14:40,465 --> 00:14:42,325
You were essentially a scout for talent.
282
00:14:42,545 --> 00:14:44,644
What did you look for in portfolio managers?
283
00:14:44,899 --> 00:14:48,899
A lot of it was, you know, a specific skill in
a specific market.
284
00:14:48,899 --> 00:14:52,660
When you're building a port a platform like
that, you really need to focus on guys that
285
00:14:52,660 --> 00:14:54,340
understand a market very, very well.
286
00:14:54,340 --> 00:14:59,485
And not only is they understand to 20 names
extremely well, they understand the industry
287
00:14:59,544 --> 00:15:00,264
very very well.
288
00:15:00,264 --> 00:15:05,944
It was very hard to find a portfolio manager
that was good across all industries, geography.
289
00:15:05,944 --> 00:15:08,345
They're looking for the best individual player
at that position.
290
00:15:08,345 --> 00:15:12,524
They were looking for that best individual
player that necessarily wasn't the best.
291
00:15:12,779 --> 00:15:17,740
He had to be a great stock picker, but he had
to really understand and be able to do great
292
00:15:17,740 --> 00:15:18,059
research.
293
00:15:18,059 --> 00:15:24,480
1 of the guys that we interviewed, I remember,
during the, the bird flu days, he was literally
294
00:15:24,539 --> 00:15:30,184
flying to farms and the egg farms to understand
how many queen chickens were being affected by
295
00:15:30,184 --> 00:15:31,144
the avian bird flu.
296
00:15:31,144 --> 00:15:35,545
You know, it was that type of research just
getting such great primary data and investing
297
00:15:35,545 --> 00:15:38,904
in in things that they had only the most
granular data in.
298
00:15:38,904 --> 00:15:40,799
And that to me is a great portfolio manager.
299
00:15:40,879 --> 00:15:45,779
A great portfolio manager these days, you know,
cannot sit behind a Bloomberg and understand
300
00:15:45,839 --> 00:15:47,120
what his portfolio is doing.
301
00:15:47,120 --> 00:15:50,080
You really had to get in there, had another
portfolio manager.
302
00:15:50,080 --> 00:15:51,759
He was an expert in the battery space.
303
00:15:51,759 --> 00:15:57,784
He would go to China and and and and
translating headset, while BYD was presenting
304
00:15:57,784 --> 00:16:02,024
because his his company in the US, it was a
battery company, was literally about to
305
00:16:02,024 --> 00:16:03,225
announce earnings the following week.
306
00:16:03,225 --> 00:16:07,544
So he he wanted to understand in Chinese, but
literally in person and go meet management and
307
00:16:07,544 --> 00:16:10,399
sit there with headset and understand what the
dynamics were in China.
308
00:16:10,399 --> 00:16:15,059
So before it hit the US market for earnings, he
would know how to hedge it and and what to do.
309
00:16:15,360 --> 00:16:17,279
And those were the kind of guys you were
looking for.
310
00:16:17,279 --> 00:16:19,519
This is like above and way and beyond what any
other
311
00:16:19,829 --> 00:16:25,264
It it's it's analogous to the high frequency
traders that shut up stops across from the
312
00:16:25,264 --> 00:16:29,825
exchange trying to get that data point one
second, but but this one was doing it through a
313
00:16:29,825 --> 00:16:30,325
translator.
314
00:16:30,705 --> 00:16:34,144
And and at the end of the day, it all came down
to fundamental research, and a lot of these
315
00:16:34,144 --> 00:16:38,440
guys were really you know, some of them were
just way above the crowd, in terms of
316
00:16:38,440 --> 00:16:39,579
understanding their companies.
317
00:16:40,199 --> 00:16:44,519
What were some mistakes that you made around
portfolio managers that looked like they could
318
00:16:44,519 --> 00:16:46,940
be really good and ended up being poor choices?
319
00:16:47,159 --> 00:16:52,355
We had one guy that was doing commodities, and,
he was rolling contracts in commodities.
320
00:16:52,355 --> 00:16:56,934
And it was kind of a, a a based on on buying
full contracts on on oil.
321
00:16:57,715 --> 00:17:02,355
And he ended up just losing so much premium
rolling these contracts, that his strategy went
322
00:17:02,355 --> 00:17:07,630
from being able to deliver, call it 10 to 12%
annually pretty consistently, to really only
323
00:17:07,630 --> 00:17:08,829
delivering 1 to 2%.
324
00:17:08,829 --> 00:17:12,910
Because he was losing so much in the role of
the yield, in oil contracts.
325
00:17:12,910 --> 00:17:18,670
And so, his numbers looked great, but when the
the market changed and volatility got a lot
326
00:17:18,670 --> 00:17:23,085
more expensive, the premium he was paying was
prohibitive, and he was just not able to make
327
00:17:23,085 --> 00:17:23,585
money.
328
00:17:24,045 --> 00:17:28,204
So when market factors change, a lot of you
have to really look, well, how do you actually
329
00:17:28,204 --> 00:17:28,845
make money?
330
00:17:28,845 --> 00:17:33,325
And what market factor is is really driving
your returns?
331
00:17:33,325 --> 00:17:33,565
Right?
332
00:17:33,565 --> 00:17:36,380
And for him, it was a premium of volatility.
333
00:17:36,440 --> 00:17:40,840
And when you're selling volatility or buying
volatility, the cost of volatility is gonna
334
00:17:40,840 --> 00:17:42,140
affect your return significantly.
335
00:17:42,759 --> 00:17:46,380
And so that's one thing that he thought he was
gonna be he said, look, it's not a problem.
336
00:17:46,519 --> 00:17:49,015
I know how to adjust to this, but he was never
able to adjust to it.
337
00:17:49,015 --> 00:17:51,674
So he didn't lose money, but he didn't make any
money either.
338
00:17:52,134 --> 00:17:57,494
What do you find in terms of clear thinking and
the ability to sell a simple story?
339
00:17:57,494 --> 00:18:01,734
Is that positively correlated to returns, or
does that mean that somebody's on a strategy
340
00:18:01,734 --> 00:18:03,900
that that's pretty commoditized?
341
00:18:04,920 --> 00:18:10,279
If you look at the top guys, right, it's it's
very rare that you find one guy that's doing
342
00:18:10,279 --> 00:18:12,680
one thing very well without a great team behind
them.
343
00:18:12,680 --> 00:18:13,000
Right?
344
00:18:13,000 --> 00:18:14,039
Most of these guys have
345
00:18:14,599 --> 00:18:15,960
That's what Ken Griffin will say.
346
00:18:15,960 --> 00:18:19,295
He he'll he'll say Citadel, his number one
skill is actually recruiting.
347
00:18:19,515 --> 00:18:20,015
Absolutely.
348
00:18:20,075 --> 00:18:22,654
Because the guy that's really good at
industrials.
349
00:18:22,795 --> 00:18:23,115
Right?
350
00:18:23,115 --> 00:18:28,955
Or really good at, you know, some subset of
industrials has really, generally, 2 to 3 great
351
00:18:28,955 --> 00:18:29,674
analysts with him.
352
00:18:29,674 --> 00:18:30,795
He's got 2 research guys.
353
00:18:30,795 --> 00:18:32,174
He's got a data scientist.
354
00:18:32,859 --> 00:18:37,579
It's very difficult to be good without a team
around you, and that's why it's become so hard
355
00:18:37,579 --> 00:18:39,179
to launch these individual hedge funds.
356
00:18:39,179 --> 00:18:39,419
Right?
357
00:18:39,419 --> 00:18:44,220
Because they require so much data, so much
risk, so much technology, so much talent to
358
00:18:44,220 --> 00:18:45,359
really do it properly.
359
00:18:45,784 --> 00:18:47,644
That you as one person, it's impossible.
360
00:18:47,704 --> 00:18:47,944
Right?
361
00:18:47,944 --> 00:18:52,345
And so these guys really have to develop a real
infrastructure around them to deliver market
362
00:18:52,345 --> 00:18:53,164
beating returns.
363
00:18:53,224 --> 00:18:54,904
And and it really comes down to that.
364
00:18:54,904 --> 00:18:59,559
And that's why a lot of these guys end up at
major pods is because they'd rather have the
365
00:18:59,559 --> 00:19:04,119
capital, the infrastructure, and the team at
these pods rather than go out and try to build
366
00:19:04,119 --> 00:19:07,559
it on their own and have to raise the money and
deal with LPs and and all the rest of the
367
00:19:07,559 --> 00:19:08,059
headache.
368
00:19:08,200 --> 00:19:12,840
Given the current regulatory climate and hedge
funds getting more and more complicated from a
369
00:19:12,840 --> 00:19:17,375
compliance standpoint, what is the true minimum
viable size for a hedge fund today?
370
00:19:17,375 --> 00:19:21,535
I mean, I've seen hedge funds launch at, you
know, a 100, 200, then it was 500.
371
00:19:21,535 --> 00:19:22,894
I really think it's a 1000000000 now.
372
00:19:22,894 --> 00:19:27,055
Problem is is that you're trying to attract
people from other funds.
373
00:19:27,055 --> 00:19:30,970
And generally, when you're attracting people
from other funds, and you're trying to attract
374
00:19:31,029 --> 00:19:35,190
senior investors, the issue is is there's gotta
be enough carry to go around.
375
00:19:35,190 --> 00:19:41,509
So if the main PM is getting, call it 40%,
right, of $300,000,000 and the fund is
376
00:19:41,509 --> 00:19:46,914
flattish, and there's only management fees to
feed the team, you really don't have a lot to
377
00:19:46,914 --> 00:19:47,475
work with.
378
00:19:47,475 --> 00:19:47,875
Yes.
379
00:19:47,875 --> 00:19:49,795
Because they know they're not gonna make any
money.
380
00:19:49,795 --> 00:19:50,035
Right?
381
00:19:50,035 --> 00:19:52,515
So they basically aren't leaving anything on
the table.
382
00:19:52,515 --> 00:19:52,835
Right?
383
00:19:52,835 --> 00:19:58,669
I saw a really surprising move the other day
where I saw, a pretty senior hedge fund PM go
384
00:19:58,669 --> 00:20:03,230
to a a large secondaries, fund, right, in the
private markets.
385
00:20:03,230 --> 00:20:06,849
He was a technology investor at a multibillion
dollar fund.
386
00:20:06,990 --> 00:20:11,164
And I think these guys are realizing, look,
it's difficult right now.
387
00:20:11,224 --> 00:20:17,625
When when indexes are ripping, when technology
in the Nasdaq is up 25, 30%, and you're going
388
00:20:17,625 --> 00:20:19,224
to your investors and saying, hey, guys.
389
00:20:19,224 --> 00:20:20,184
We have the short book.
390
00:20:20,184 --> 00:20:25,919
We're 25% hedged, and a lot of its index hedges
and a lot of its just not attributable to to to
391
00:20:25,919 --> 00:20:29,220
to real shorts because there just isn't a lot
of good shorts out there.
392
00:20:29,440 --> 00:20:31,359
Investors start questioning, what am I paying
you for?
393
00:20:31,359 --> 00:20:34,819
I'm paying you 2 and 20 plus expenses, plus
pass through, plus all this.
394
00:20:35,115 --> 00:20:39,454
And you're, you know, giving me returns that
are 60% below the Nasdaq.
395
00:20:39,994 --> 00:20:41,035
What is this all about?
396
00:20:41,035 --> 00:20:44,555
So that's why a lot of investors have gone
passive into ETFs and are just saying, look
397
00:20:44,555 --> 00:20:45,994
hedge funds just aren't worth it.
398
00:20:45,994 --> 00:20:47,835
The alpha is just not there like it used to be.
399
00:20:47,835 --> 00:20:53,009
There used to be a lot of seams and and there
was a lot more accounting fraud.
400
00:20:53,009 --> 00:20:57,570
There was these big Worldcom, there was Tyco,
there was, you know, every year there was like
401
00:20:57,570 --> 00:20:58,450
these big blow ups.
402
00:20:58,450 --> 00:20:58,609
Right?
403
00:20:58,609 --> 00:21:00,609
And hedge funds would just clean up on these
things.
404
00:21:00,609 --> 00:21:07,034
The regulation has gotten more, stricter and
and and obviously and and much more, and
405
00:21:07,034 --> 00:21:10,174
compliance has been so much more of an issue in
terms of audits and all of this.
406
00:21:10,394 --> 00:21:11,674
You're just seeing less of that.
407
00:21:11,674 --> 00:21:11,914
Right?
408
00:21:11,914 --> 00:21:16,720
And you're just seeing that shorts are just
much harder to find, on an individual basis.
409
00:21:16,720 --> 00:21:20,480
And so for a regular true hedge fund, where's
the short alpha?
410
00:21:20,480 --> 00:21:23,380
It's hard for them to prove where it is because
it's just non existent.
411
00:21:23,599 --> 00:21:29,335
When you're pulling these, you know, genius
level quants and portfolio managers, how much
412
00:21:29,335 --> 00:21:34,695
of the time are they leaving for primarily
economic reasons versus cultural reasons?
413
00:21:34,695 --> 00:21:38,055
They hate their boss or or or other less
rational reasons.
414
00:21:38,055 --> 00:21:38,455
You know what?
415
00:21:38,455 --> 00:21:39,735
We see a lot of different things.
416
00:21:39,735 --> 00:21:45,679
I would say one of them is at some of these
firms, it's very very difficult to work there.
417
00:21:45,679 --> 00:21:46,079
Right?
418
00:21:46,079 --> 00:21:47,359
Because single move you make
419
00:21:47,519 --> 00:21:49,119
Is that a feature or a I
420
00:21:49,119 --> 00:21:52,559
think it's a feature and I think, you know,
it's funny because I talk to a lot of LPs as
421
00:21:52,559 --> 00:21:54,019
well, and they're like, that's great.
422
00:21:54,160 --> 00:21:56,240
I love that they get rid of guys really
quickly.
423
00:21:56,240 --> 00:21:59,855
You know, this guy, you know, he's he's not
performing, so he's out.
424
00:21:59,995 --> 00:22:00,154
Right.
425
00:22:00,154 --> 00:22:05,515
I think turnover rate across the board is the
most silly metric for a successful startup.
426
00:22:05,515 --> 00:22:10,299
I think a successful startup should have
somewhere should not have, you know, a 100%
427
00:22:10,359 --> 00:22:11,079
retention rate.
428
00:22:11,079 --> 00:22:13,400
I think that's a that that's a sign that it's
too clear.
429
00:22:13,400 --> 00:22:13,559
Yeah.
430
00:22:13,559 --> 00:22:13,960
That's right.
431
00:22:13,960 --> 00:22:14,440
That's right.
432
00:22:14,440 --> 00:22:16,919
And I think a lot, you know, investors are
saying, be strict.
433
00:22:16,919 --> 00:22:19,480
You know, pull the trigger when you see that
something's on
434
00:22:19,480 --> 00:22:19,599
work.
435
00:22:19,720 --> 00:22:20,220
Standards.
436
00:22:20,440 --> 00:22:21,937
Now, you know, but when you're the portfolio
manager.
437
00:22:21,937 --> 00:22:21,948
Right?
438
00:22:21,948 --> 00:22:29,565
And I know multi manager firms and he says, if
I and he was at $1,000,000,000 industrialist
439
00:22:30,105 --> 00:22:30,424
portfolio.
440
00:22:30,424 --> 00:22:36,265
Says if I went to the bathroom and they saw one
thing in my portfolio, it was already hedged
441
00:22:36,265 --> 00:22:39,980
and they would close me out of, you know, 60,
70% of my positions.
442
00:22:40,519 --> 00:22:40,839
Right?
443
00:22:40,839 --> 00:22:42,940
So that's how tightly this is being controlled.
444
00:22:43,079 --> 00:22:43,579
Right?
445
00:22:43,799 --> 00:22:48,440
And if you got one thing wrong, you know, that
developed your returns from being 3% down to,
446
00:22:48,440 --> 00:22:52,744
you know, 2.7, you know, that's that's a factor
to get fired.
447
00:22:52,744 --> 00:22:55,244
And so it's a it's a really cutthroat world.
448
00:22:55,305 --> 00:22:58,984
So a lot of guys are saying, look, from a
lifestyle perspective, this is a lot of
449
00:22:58,984 --> 00:22:59,484
pressure.
450
00:23:00,265 --> 00:23:02,045
This is a a tough way to live.
451
00:23:02,345 --> 00:23:04,424
And so they they decide to wanna go on.
452
00:23:04,424 --> 00:23:07,759
And then people will will live in that tough
way while they're there.
453
00:23:07,759 --> 00:23:10,640
And the moment the money goes away, they're
like, why am I doing
454
00:23:10,960 --> 00:23:14,980
But you are seeing a lot of spinouts now, you
know, because once they build that reputation,
455
00:23:15,200 --> 00:23:20,424
the track record, and the, you know, the the
celebrity around what they're it's a lot easier
456
00:23:20,424 --> 00:23:22,904
to go out and raise, not 1,000,000,000 but, you
know, 5,000,000,000.
457
00:23:22,904 --> 00:23:28,024
I have a big thesis on spinouts, and I think
spinouts will continuously produce a lot of
458
00:23:28,024 --> 00:23:29,144
really interesting opportunities.
459
00:23:29,144 --> 00:23:33,144
And a lot of people say, well, what about
consolidation and when will spinout stop
460
00:23:33,144 --> 00:23:33,865
stopping a thing?
461
00:23:33,865 --> 00:23:38,710
And most people don't realize spin outs are an
arbitrage between talent and economics.
462
00:23:39,170 --> 00:23:44,609
So you might be at firm, the top talent the top
2 PMs might have 90%, maybe they founded the
463
00:23:44,609 --> 00:23:45,109
firm.
464
00:23:45,490 --> 00:23:49,784
In some cases, they're providing 90% of the
value, or 90% of the alpha.
465
00:23:49,784 --> 00:23:51,065
In most cases, they are not.
466
00:23:51,065 --> 00:23:56,105
So the question is how uneconomic could it be
before the top talent decides to move out, or
467
00:23:56,105 --> 00:24:00,869
how much money do they need for cushion in
order to to have the comfort to spin out?
468
00:24:01,029 --> 00:24:01,349
It it
469
00:24:01,349 --> 00:24:05,690
is the age old question, and I think, you know,
you're dealing with some massive egos.
470
00:24:05,990 --> 00:24:07,430
I just had a firm the other day.
471
00:24:07,430 --> 00:24:12,890
It's a $3,000,000,000 technology hedge funds on
the West Coast, and, one of their main,
472
00:24:13,894 --> 00:24:17,174
producers since they launched in 2018 was let
go.
473
00:24:17,174 --> 00:24:19,174
He was a significant partner in the firm.
474
00:24:19,335 --> 00:24:20,875
The main partner let him go.
475
00:24:20,934 --> 00:24:23,835
He had, you know, gotten a couple of ideas
wrong.
476
00:24:24,534 --> 00:24:29,119
He always wanted to get paid pretty much the
same as the founder, and they pushed him out.
477
00:24:29,119 --> 00:24:30,079
Kind of that cutthroat.
478
00:24:30,079 --> 00:24:33,299
Now he obviously made a lot of money during the
last 5 years.
479
00:24:33,839 --> 00:24:38,259
But, you know, this was an example where, you
know, they were up 50% in 2020.
480
00:24:39,200 --> 00:24:40,659
The Nasdaq was up 50%.
481
00:24:41,174 --> 00:24:44,855
They all took home several $100,000,000 and
investors were like, well, gee.
482
00:24:44,855 --> 00:24:45,335
That's great.
483
00:24:45,335 --> 00:24:46,795
But I didn't even beat the Nasdaq.
484
00:24:47,095 --> 00:24:47,595
Yeah.
485
00:24:47,654 --> 00:24:50,315
So investors are, you know, kinda pushing.
486
00:24:50,375 --> 00:24:50,535
Hey.
487
00:24:50,535 --> 00:24:50,775
Look.
488
00:24:50,775 --> 00:24:55,494
You had to diligence a lot of portfolio
managers that may have had egomaniacs, at the
489
00:24:55,494 --> 00:24:55,994
firm.
490
00:24:56,669 --> 00:24:58,369
How did how did you go about referencing?
491
00:24:58,669 --> 00:25:02,829
Do you all did you ever give them both benefit
of doubt or did we say, you know, if the
492
00:25:02,829 --> 00:25:05,549
previous firm didn't like the manager, there's
probably something wrong with them?
493
00:25:05,549 --> 00:25:06,509
You know, it's pretty interesting.
494
00:25:06,509 --> 00:25:09,069
We would backchannel a lot, and I think
backchannel is always the best.
495
00:25:09,069 --> 00:25:11,309
The references they give are not the ones that
you wanna speak.
496
00:25:11,309 --> 00:25:11,470
Yeah.
497
00:25:11,470 --> 00:25:12,345
It's the off list.
498
00:25:12,345 --> 00:25:12,505
Right?
499
00:25:12,505 --> 00:25:13,565
It's it's LinkedIn.
500
00:25:13,785 --> 00:25:15,724
It's asking people about the firm.
501
00:25:15,944 --> 00:25:18,265
And one guy, he was ultra successful.
502
00:25:18,265 --> 00:25:21,304
He was running $3,000,000,000 at one of the big
multi manager firms.
503
00:25:21,304 --> 00:25:23,724
I mean, the guy was a rock star.
504
00:25:24,105 --> 00:25:29,539
And he just said, every single person we spoke
to, he is the biggest jerk in the world to work
505
00:25:29,539 --> 00:25:30,039
for.
506
00:25:30,180 --> 00:25:33,079
And if he comes to your firm, he's gonna ruin
your culture.
507
00:25:33,700 --> 00:25:36,980
And, you know, so you can have everything look
perfect on paper.
508
00:25:36,980 --> 00:25:40,839
He even interviewed well, and he was very
charming in the interview.
509
00:25:41,194 --> 00:25:44,394
But then when people are, like, literally,
there was a rumor that he, like, tried to stick
510
00:25:44,394 --> 00:25:48,335
a pencil through one guy's hand because he was
so upset that he got something wrong.
511
00:25:48,795 --> 00:25:51,674
And so, you know, you you have these stories
and you're, like, oh my god.
512
00:25:51,674 --> 00:25:53,994
You never know that if you just called standard
references.
513
00:25:53,994 --> 00:25:54,234
Yeah.
514
00:25:54,234 --> 00:25:55,295
Thank god for references.
515
00:25:56,190 --> 00:25:58,109
So tell me about Next Round Capital.
516
00:25:58,109 --> 00:26:01,789
So what do you guys currently do, and what's
the future for Next Round?
517
00:26:01,789 --> 00:26:01,950
Yeah.
518
00:26:01,950 --> 00:26:04,190
So we're really you know, we're very, very busy
right now.
519
00:26:04,190 --> 00:26:06,669
I'd say 50% of what we do is on secondary side.
520
00:26:06,669 --> 00:26:12,615
The other, you know, call it 40% is on co
investments, and then 10% is is really kind of
521
00:26:12,615 --> 00:26:13,434
very niche.
522
00:26:13,974 --> 00:26:19,015
Sometimes even credit oriented or ideas that we
get that we work on, and that we'll invest in
523
00:26:19,015 --> 00:26:19,414
ourselves.
524
00:26:19,414 --> 00:26:24,075
So, you know, on the co invest side, a lot of
it's technology, a lot of it's AI.
525
00:26:24,420 --> 00:26:26,820
We're working on a data center deal that we're
launching in a few weeks.
526
00:26:26,820 --> 00:26:28,019
And here you're, like, following.
527
00:26:28,019 --> 00:26:29,059
Andreessen's doing the round.
528
00:26:29,059 --> 00:26:30,360
You're co investing alongside.
529
00:26:30,420 --> 00:26:30,660
Yeah.
530
00:26:30,660 --> 00:26:33,860
I mean, either, you know, Andreessen's doing
the round or somebody that we've been been
531
00:26:33,860 --> 00:26:34,580
introduced to.
532
00:26:34,580 --> 00:26:38,945
Again, there's a lot of connectivity between,
you know, you know, the the the network that we
533
00:26:38,945 --> 00:26:43,265
built in Silicon Valley and some of the rounds
that we, that we participated in.
534
00:26:43,265 --> 00:26:47,985
One example is, Grizzly, which got they had,
you know, a group of executives who just and,
535
00:26:48,144 --> 00:26:51,664
you know, the guys that built the whole
logistics network around that just left and and
536
00:26:51,664 --> 00:26:53,039
started a new start up.
537
00:26:53,600 --> 00:26:58,400
And I was extremely interested in what they're
doing, and so we're gonna invest in in that.
538
00:26:58,400 --> 00:27:02,320
And so, you know, we get these ideas, and and
some of them are great, some of them are, hey,
539
00:27:02,320 --> 00:27:06,799
this guy's got this great new AI idea, and he's
using very differentiated sources.
540
00:27:06,799 --> 00:27:08,025
And I asked him, well, what's that source?
541
00:27:08,025 --> 00:27:08,845
He says, well, Wikipedia.
542
00:27:09,705 --> 00:27:15,404
And I said, well, Wikipedia is really a source
for, you know, XAI and OpenAI and Anthropic.
543
00:27:15,625 --> 00:27:16,664
So why is it unique?
544
00:27:16,664 --> 00:27:19,705
Well, we can scrape it, you know, a lot more
efficiently than they do.
545
00:27:19,705 --> 00:27:22,710
And so you have to start to wonder, like, you
know, what's really the edge here?
546
00:27:22,710 --> 00:27:22,950
Right?
547
00:27:22,950 --> 00:27:26,950
Because everybody right now is really you know,
we're in the days right now of the Netscape
548
00:27:26,950 --> 00:27:31,909
Browser, the AOL, Lycos, when, you know,
everybody sort of was trying to build the
549
00:27:31,909 --> 00:27:36,329
technology and these companies and everyone was
just pouring money into each technology.
550
00:27:37,024 --> 00:27:39,345
If you think about it, that's where AI is right
now.
551
00:27:39,345 --> 00:27:44,384
It's really a a money loser and the technology
is just being built to make it the most
552
00:27:44,384 --> 00:27:44,865
efficient.
553
00:27:44,865 --> 00:27:47,365
The next wave of this is gonna be the
monetization.
554
00:27:47,424 --> 00:27:48,625
How do you make money from it?
555
00:27:48,625 --> 00:27:49,105
Right?
556
00:27:49,105 --> 00:27:53,159
And it really wasn't until Google figured out
how to make money from search, the search
557
00:27:53,159 --> 00:27:53,879
really took off.
558
00:27:53,879 --> 00:27:56,039
And that's really when the internet and e
commerce took off.
559
00:27:56,039 --> 00:27:59,240
It's really because you were able to search and
you would see ads and and they were able to
560
00:27:59,240 --> 00:28:00,039
make money from search.
561
00:28:00,039 --> 00:28:04,279
And so that's where we are today because the
only way you make money right now is OpenAI is
562
00:28:04,279 --> 00:28:06,940
saying, hey, pay 21.99 for OpenAI Plus.
563
00:28:07,399 --> 00:28:07,899
Great.
564
00:28:08,144 --> 00:28:11,184
That's not gonna create a massive business,
right, while you're still losing
565
00:28:11,184 --> 00:28:11,684
$8,000,000,000.
566
00:28:11,984 --> 00:28:17,345
So until the enterprise side is figured out,
how you can charge companies a lot of money to
567
00:28:17,345 --> 00:28:21,184
to use your service, that's when AI will become
really, really valuable.
568
00:28:21,184 --> 00:28:23,605
Today, it's valuable because we've discovered
the technology.
569
00:28:23,670 --> 00:28:28,789
But it there's gonna be so much more money lost
than VC money burned during this period while
570
00:28:28,789 --> 00:28:31,509
everybody figures out, okay, so what's the
business model?
571
00:28:31,509 --> 00:28:31,750
Right?
572
00:28:31,750 --> 00:28:33,930
How does this actually generate a lot of
revenue?
573
00:28:34,230 --> 00:28:36,470
And how do you actually get profit margins out
of it?
574
00:28:36,470 --> 00:28:36,970
Right?
575
00:28:37,244 --> 00:28:40,865
I I, you know, made a comparison yesterday,
Tesla versus Ford.
576
00:28:41,484 --> 00:28:45,664
You know, Tesla in 2010 was worth, you know, a
$1,000,000,000.
577
00:28:46,684 --> 00:28:52,779
Ford was worth $44,000,000,000 Today, Tesla's
worth a trillion, Ford is worth 56,000,000,000.
578
00:28:53,400 --> 00:28:53,720
Right?
579
00:28:53,720 --> 00:28:54,220
Why?
580
00:28:54,279 --> 00:28:57,240
But Tesla's not the only one e v, EV maker out
there.
581
00:28:57,240 --> 00:28:58,619
There's Lucid, there's Rivian.
582
00:28:58,839 --> 00:29:02,119
Well, Tesla figured out a way to make each car
profitable.
583
00:29:02,119 --> 00:29:05,019
So Tesla makes $9,000 per vehicle, 92100.
584
00:29:05,644 --> 00:29:07,424
So it's profitable unit economics.
585
00:29:07,804 --> 00:29:10,544
Rivian loses $37 per vehicle.
586
00:29:11,164 --> 00:29:14,625
And Lucid loses a $137,000 per vehicle.
587
00:29:14,924 --> 00:29:20,170
So it can be a great idea, but it's the
business model, because Elon integrated
588
00:29:20,470 --> 00:29:24,789
production, he integrated acquisition and and
streamlined the manufacturing process.
589
00:29:24,789 --> 00:29:25,849
He created Gigafactories.
590
00:29:26,549 --> 00:29:32,070
He did things that he knew would would create a
business and that he could make money from it.
591
00:29:32,070 --> 00:29:32,390
Right?
592
00:29:32,390 --> 00:29:36,924
So futures just went bankrupt because it's all
a great idea and that's where we are today in
593
00:29:36,924 --> 00:29:37,085
AI.
594
00:29:37,085 --> 00:29:38,224
It's a great idea.
595
00:29:38,525 --> 00:29:40,384
It's gonna revolutionize everything.
596
00:29:40,444 --> 00:29:45,025
But the problem is is people are have to figure
out the business model first so it survives.
597
00:29:45,164 --> 00:29:48,765
At the end of the day, investors are gonna one
day wake up and say, I'm no longer gonna fund
598
00:29:48,765 --> 00:29:49,424
these losses.
599
00:29:49,869 --> 00:29:52,029
And that's where the the rubber is gonna meet
the road.
600
00:29:52,029 --> 00:29:55,950
What would you like our listeners to know about
you, about Nexon Capital, or anything else
601
00:29:55,950 --> 00:29:56,849
you'd like to channalay?
602
00:29:56,909 --> 00:29:58,990
You know, just have a lot of fun what we're
doing.
603
00:29:58,990 --> 00:30:03,325
We're always, you know, looking to see what's
next, obviously, in in the name, And we're
604
00:30:03,325 --> 00:30:04,845
really excited about what's coming in the
future.
605
00:30:04,845 --> 00:30:09,904
I gotta tell you, when I started the business
in 2020, just a few months before I I launched,
606
00:30:10,365 --> 00:30:12,605
my brother had been diagnosed with pancreatic
cancer.
607
00:30:12,605 --> 00:30:16,785
And so for me, it was always a goal to have my
own firm nameplate on the door.
608
00:30:17,259 --> 00:30:21,660
We brought him to treatments around the world
trying to to to really see what we could do for
609
00:30:21,660 --> 00:30:21,819
him.
610
00:30:21,819 --> 00:30:23,759
And, unfortunately, he passed away in of 2020.
611
00:30:24,299 --> 00:30:27,740
And that's where I really felt like life is,
you know, you gotta take the opportunities that
612
00:30:27,740 --> 00:30:31,115
that you see now, because it can all end in a
flash.
613
00:30:31,115 --> 00:30:35,115
And and that really taught me that, life is
very fragile and, you know, thank every day
614
00:30:35,115 --> 00:30:38,095
that we're here and, you know, enjoying what we
do.
615
00:30:38,394 --> 00:30:38,894
Absolutely.
616
00:30:38,954 --> 00:30:41,055
Well, we've known each other since 2016.
617
00:30:41,275 --> 00:30:45,473
We we partnered together on DraftKings, and
it's it's been great to partner together and,
618
00:30:45,785 --> 00:30:47,032
look forward to continuing
619
00:30:47,032 --> 00:30:47,656
a conversation.
620
00:30:47,656 --> 00:30:47,968
Great.
621
00:30:47,968 --> 00:30:48,592
Thanks for
622
00:30:48,592 --> 00:30:49,528
having me, David.
623
00:30:49,528 --> 00:30:50,151
Thanks, Con.
624
00:30:50,151 --> 00:30:50,775
Take care.