I asked a $2B investment genius for his best startup ideas (and it was genius)

0:00anything where it brings efficient pricing where efficient pricing doesn't already exist is probably a good idea the thing that I always loved about Uber surge pricing was there was like some you like like need like if I needed to get to the hospital on New Year's Eve in New York I'd want to pay for surge pricing and I'd feel grateful that surge pricing existed like I remember when it first started off like that was my first reaction it's like gosh that would be amazing surge pricing might actually save lives and surge pricing by the way of helping people like with like temporary housing or seasonal housing or

0:27you know just sort of spreading people out to kind of where there's a lot of empty homes I could imagine that making the world a better place Ali hemed is in the house welcome thanks for having me good to see you um I listened to you on Patrick osan's Podcast and you were spitting like 40 insights a minute and I was like I need this guy I need to understand the business of Finance with this guy so selfishly I you know we're making this happen well I'm going to do my best to live up to that expectation Let's Just Jump Right In what uh what sort of ideas and opportunities

1:06are you thinking about right now so the two main themes that we've been spending time on are one you know the uh the lack of housing um and two the price Discovery between Founders and investors and one is sort of like a capital Market structural problem and the other is a thematic problem of like here's an industry or a sector um you know and and so those are some like themes that we're trying to invest along and then there's just broader stuff of what types of asset classes should we try to get into and how do we find those asset classes what philosophies do we have about where to invest and what

1:43areas to go into um so I would say if it was a type of startup company or sector that we're looking for it maybe lack of affordable housing and the shifting labor force and if it was a type of investing it would be along the lines of Founders and investors having a trouble having trouble agreeing on price let's dive into affordable housing I'm like selling my apartment right now so it's sort of top of mine um I saw that Joe gbia the co-founder of Airbnb is building he raised like I think like 50 million bucks or something to build 40 or 50 million bucks to build these a

2:20startup around small prefab houses what's your thought on the whole prefab Housing Opportunity we're looking for a company that doesn't use a ton of money to figure out how to make it work and you know the problem with a lot of these businesses is you're taking a really big bet that prefab housing is going to be the future they raise a ton of money and they consume a lot of capital but we haven't really seen any of them kind of go through that J curve and get out of it and we're looking for a more Capital efficient way to approach the space you know from a financing perspective it's

2:55sort of a weird credit problem because let's imagine I wanted to fund Construction I could fund regular way construction like General Contractors um and you know that seems like it might be risky because have you ever heard of anybody having a good experience with their contractor and feeling like they didn't go over budget and pass time and get the permits done on time and all that stuff like I haven't um and so the prefab homes might be easier because they're sort of copy and paste the problem though is like your severity of loss on a prefab home is quite high so let's imagine you know I don't I don't know Joe Gia but let's

3:29imagine he came to us and he said hey guys like you know I agree with you starting these companies is incredibly Capital intensive it's really difficult to get a venture outcome if I'm going to have to raise hundreds and hundreds of millions of dollars to go build all these homes so instead what I want to do is I want to go uh raise debt financing and I want the debt financing to finance the construction the in the uh of the of the homes and you know construction financing is a thing that exists my reaction to that would be well Joe what if your business goes bankrupt what do I

3:59do with all the parts of the you know prefab home that like whatever robots and whatever technology you're using to build these things like it's it goes away it's not like I'm going to go into the factory and like restart your business for you and by the way if your business went away there's probably some reason for it which is like you were probably losing money on a monthly basis um you know on operating losses because you have this Capital intensive startup so does that mean that I have to also fund your your technology company to recover the debt that I just lent you and so what we would look at that is you

4:30know sure is the likelihood that anyone home is going to get constructed higher on time and on budget yes but if we lose money on one home we're probably G to lose money on all the homes all at once and the severity of loss is quite high and what we try to do in debt financing especially we're financing assets is ensure that if we lose money we only lose a small amount of it so you know if if I were to lend to a bunch of general contractors you know and to build 100 homes the old school way sure maybe they'll go a little bit over budget and

5:02maybe one or two of them might not even get built but it's very unlikely that they're all correlated to each other and that they would all not get built at the same time and it's a lot easier to basically just say Okay 100 homes are going to get built I'm going to lend $80 against 100 homes uh $100 of homes that way if you know they go 20% over budget I'm still covered it's very difficult to apply some loan to value or Advance rate or however might Finance the stuff if there's binary risk that the whole thing might go poof and so we we hope somebody

5:33we think it's inevitable that that will become a space where there are successful winners we just don't think we think a lot of people are going to lose money along the way and um and we'd rather just kind of wait to see the winner emerge so I first of all I like I like that you think it's inevitable it means like you know there's there's something here if you were an entrepreneur and you were starting and you you know you believed in the space you saw the opportunity obviously trillion dollar Plus Market you know asset class you know how would you go about building you know this company's called

6:09Samara how would you go about building a Samara that might fit your model a little bit more by the way Samar might work I'm talking about some business that I've never even looked at so gosh you know hopefully hopefully Joe gy is not like listening to this be like what is this idiot talking about this business that I've never talked to him about I apologize um no but one he may have some insight that I don't know about where he's going to be able to build it in a more Capital efficient way the second is you know there might be a a fund that you know is

6:41like a two three billion dollar Venture Capital fund where they can take many different bets of 20 3040 $50 million equity financings and you know a few of them don't work out but the the Tam on the outcome is so big that how great would it be if one of them works like there there's a reasonable investor out there for this type of business we're just not it and so the answer might be do exactly what he's doing which is go build this really Capital intensive business um for the founder by the way it might still be a good idea even if for the venture capitalist they they end

7:11up getting so diluted or they have to put so much money in that the only outcome they could possibly have after getting $150 million cost basis into the deal you know is 10 times their money if they fund a company that becomes worth five to 10 billion dollars they own 10 20% of it um for the founder that's still a great outcome and so the the answer might be do exactly what he's doing and by the way you know he's got this great background and you know I'm sure people are going to give him capital and he's credible and he's more credible than the average founder and

7:38also so so what Joe gbia who I don't know should do is also very different than what a normal founder should do who's gonna have less access to Capital I mean he's the type of person who go should go build a business like this it's just it turns out that in my little part of the world I mostly do debt financing and in debt we can't really take binary risk but if I was a Founder who didn't have access to insane amounts of cap capital I would try to find ways to build more Capital efficient companies in the space build credibility you know Airbnb was was more Capital

8:09efficient than this endeavor and it was the success of Airbnb that gave him the capability of raising a lot of capital before he had a lot of validation um so I would go do the same thing that he did which is go find another idea that's housing related that is more Capital efficient build and sell that company um and then use that credibility to go raise a lot of capital out of the gate for a capital ensive one and if you think about the founders who have built really major Capital intensive businesses that make a lot of sense for them specifically like Delian Founders fund with vardo like he had to be Delian

8:40you know the average founder can't take that as a learning like they have to first work for Coastal and then Founders fund and then become kind of pseudo famous and have a lot of access to Capital and be a genius and then go start a space company you know there steps um you know but there's a lot of capital efficient things to do I mean I the space that we've Ted talked a lot about is the Adu ecosystem and so you know adus which which some people know about and some people don't was basically came out of this idea that California had which is that you needed

9:09to rezone a lot of single family lots and make the multif family lots and by doing so you would increase housing Supply historically that zoning process was complicated because local municipalities would want to block it because they don't want more housing Supply in their specific neighborhood it brings property prices down same demand more Supply um and so they took those zoning out of the hands of the municipalities put them in the hands of the states and force them to approve those and um and and I think most people think that's probably a good idea but there's complication you know if it was an Obviously good idea people would have

9:41just said yes parking is an example so maybe companies who can solve the parking problem um tick financing might be an interesting idea you know so these businesses are financed differently it's not like a regular Way Mortgage um and so you know it's a way to finance multi-tenant properties um you probably need a new form of property management uh you probably need development of adus that don't have to pre be preab businesses it might be repurposing of a garage repurposing of something that you know a structure in the backyard adding a structure in the backyard um you know I think there's a lot of businesses that

10:15you can go build that have a really really big Tam um that you know aren't just finding new ways to build in the first place um and you know just to give you an idea the the Quantum of the the uh opportunity set you know I most most studies or or sort of research projects on even the city of La would say la needs like over a million new homes and if you assume a starter home is 300 400 500,000 um that's a $500 billion do opportunity that seems like a pretty worthwhile opportunity even if you get a small part of it in LA yeah I mean and that's that's kind of

10:51I think why so many entrepreneurs are drawn to the space I think with respect to Joe I think it's funny because like The Grass Is Always Greener right he did like the asset light thing the marketplace thing and then he was just like you know a lot of a lot of consumer software people have this moment where they're like but I just want to build something that I could touch you know um it's very common in entrepreneurs like that and I don't think it's wrong I mean he also earned the right you know he earned the right to go do something like that where you know you're taking less

11:26risk on betting on him because he has a level of credibility you're taking more technical risk and capital markets Risk by betting on the company and it's completely rational but you can't take both operator risk and capital markets risk that becomes a bad investment idea and you know so I think if you're going to consume a lot of capital then you have to be more credible operator than if you're going to consume very little for a much higher multiple over you know uh on the investment I think there's probably an opportunity to do prefab houses like luxury preab houses like buying them setting them up in like

12:06the cat skills Upstate New York something like that and also setting them up in like Sonoma Napa a bunch of like places that a lot of people want to go to and then you buy like a Soo house type membership for access to it so to me that's more interesting as an entrepreneur like I would less like to be in the business that Joe Gia is in but I'd more rather be in the business of like I'll be your customer like I'll buy a few of these but I'm going to build a brand um and recurring Revenue how you sol the utilization problem you know the

12:38challenge is you want to make sure that it's you know the the inventory is available so that like you could consistently go to somoma or Napa or the cat skills or wherever you want to go but you have to have some minimum utilization and then there's always going to be like the peak Seasons which is like during the holiday season people are going to want it even more or less and during like certain working periods you're going to want it more or less and you know and we seen a lot of these sort of like nomadic I think half of them were called Nomad or something these

13:03like nomadic startup companies where like you'd like buy a subscription and you could go to like live in like Bangalore and live in London and live like all over the world and it became like an even better you know remote work made it an even better idea developers being able to work from anywhere made it a pretty good idea and and it it got tough even Soo house by the way which is you know the example you gave like they had to cut off Miami and New York City memberships because those got too crowded right have you seen anybody solving that an interesting way the utilization uh and occupancy rate piece

13:34well I think there's a bigger Trend that play which is dynamic pricing on the internet so uh there was a huge backlash I'm sure you saw recently with like Wendy's tried to do surge pricing did you see this the uh no oh yeah I did see that that was awesome good for them yeah they tried it they tried it and and God bless them for trying um they claw it back I believe uh but didn't Uber get a bunch of backlash for it remember like when Uber did surge pricing and everyone thought it was just bananas imagine Uber without surge pricing I can't I cannot you know I

14:11would I I cannot you you would be thinking of the other startup that got created were the key differentiators that they had surge pricing there's there there's a huge opportunity to create surge pricing as a service to a bunch of businesses that's another business I'm interested in I like that idea what would be your favorite industry that needs surge pricing I think by the way this is the solve this this is the solve for the if anybody is doing this and they want to apply surge pricing to it I'd want to take a look exactly exactly I don't know how much time you have on your hands but

14:47in the event you have some extra weekend space there's always nights and weekends you know I live for it so I do I do think that um I saw a business recently actually it's called plus plus grade have you heard about this no I don't have good deal flow what is it plus grade plus grade Canadian company uh I think they ended up raising like two 300 million bucks and they had this great idea which was obviously a lot of people want first class on airlines sure so what they did is they created a widget integrated with a few um Airlines so that there's a bidding for the first class so they make

15:33it easier to get uh you know everyone's happy because you know people are getting into these first class seats sometimes at like a discount and the airline's happy because they're utilizing you know they're making more money versus giving it giving it away or something like that I think it's really interesting it's got that Dynamic kind of approach where it's like a bid-based system it's an auction system system it's fun to do and the airline industry it makes a lot of sense um there's a lot of money changing hands so yeah I mean that's oh go ahead I mean anything where it brings efficient pricing where efficient pricing doesn't

16:12already exist like is probably a good idea yeah um I guess my reaction is that the competition is for other people who are making their decision to bid on pricing and like there need to be like some like delayed response so like you know if you're an employee of a business that has a policy where if you fly like you know overseas or something you can fly first class you have infinite price elasticity and so then you just have like you know whatever two Sigma employees competing against Citadel employees for like Infinity pricing on on whatever their first class ticket is going to be um I can imagine

16:46that being like a hilarious outcome where some like Airline takes down like a $23,000 you knowt is it like British Airways flight totally I think that and and my guess is those whales like that's probably where the majority of that Revenue comes from similar to in the gaming industry like the majority of your Revenue comes from you know 5% of of your customers I think there's a charm in a line though so yeah the one you start differentiating you know like like as if we don't have enough issues with socioeconomic disparity and like lines waiting in line is like one of the last equalizers that exists you know and

17:26um I'm not I'm trying to figure out which Industries you could pull that off with without like kind of damaging that like last piece like restaurants it's kind of sad in New York like you know you can pay whether it's like a coner service or some service to like just make sure that you can get a table at a great restaurant but because of that it's taking away like all Serendipity and it's taking away like all like the wonderfulness of a last minute plan or the wonderfulness of a special night out and like you know if you belong to a business or you have some level of

17:55access you can just like spend money to have access to great food and if you don't you're like stuck trying to like apply for reservation at midnight 30 days before the reservation opens which is like a pretty crappy experience um so I that would be like I guess the counterargument yeah I mean I'm not saying it makes the world a better place but I I do think that it probably optimizes Revenue now I think that we as entrepreneurs I think we we can start with here's a business opportunity and then okay now we have this business opportunity can we make this beneficial for all parties and I

18:31think that's the way to look at it yeah mean the thing that I always loved about Uber surge pricing was there was like some you like like need um and and it was like more like less of a need of like oh I want to have like a slightly better pasta dish it was a need of like like if I needed to get to the hospital on New Year's Eve in New York I'd want to pay for surge pricing and I'd feel grateful that surge pricing existed no matter really who I was and I actually always like I remember when it first started off like that was my first

18:57reaction is like gosh that would be amazing like surge pricing might actually save lives um and you know kind of running it through that thought exercise even you know and and and surge pricing by the way you know of helping people like with like temporary housing or you know seasonal housing or you know just sort of spreading people out to kind of where there's a lot of empty empty homes um you know we do have like a major issue so I could imagine that making the world a better place search pricing as applied that a housing Supply yeah I mean because I I think I mean everyone is feeling that it's just

19:36become unattainable to buy a house you know and there there's also policy policy shifts that could happen like one of my favorite policies uh is in Singapore where you're economically incentivized to live closer to your parents and the idea is like the government's going to save money because you have child care and Elderly Care like embedded residentially like in like you know uh ge graphically and so like you could make it less expensive but then you could like lower your tax revenue or something to like have it be more affordable or you could have more buying power if you're also going to save money for society in some other way

20:11I always thought I always thought like interesting policy changes like that could be kind of fascinating yeah I also think I wish there was an easier way where I could just get like alerts around like here are policy changes in spaces that I care about real estate countries I care about United States and based on that like that'll help me come up with new ideas to build yeah the um because otherwise you have to get lucky right it's like oh I was at a dinner and someone told me that in Singapore and then I looked into it you know it's like how do you open up all these

20:45opportunities to people so entrepreneurs can actually how do you how do you systemically see like what are all the policies of every little municipality and state and like government that have like been implemented to increase housing Supply yeah yeah I think I I don't know that that exists um I also think but I think it also like continues to go back into you know where are we directing our Workforce and like how are we incentivizing people to take Majors that are going to help them like add to different parts of society like I I forgot where the um where I heard the idea or maybe it's something that's

21:18already being implemented where like student loans should be priced based on the major you're going into and if you're going into a major where under supplied in a certain type of Workforce you should get a student loan and you can still go into some other major that has less application but if we've decided that like we need more construction workers maybe we should like repic the student loans for construction workers both on a Quantum basis and also a cost basis to like incentivize them to go in the right direction um something like that I could imagine feeling obvious yeah I mean and also like imagine not imagine not taking

21:50a loan and you just get paid to be in school like the reverse of it yeah the um I we looked for a while at Vocational School where You' partner with the employer and we recently made like a really big investment into an accounting firm and you know one of the ideas was like should we start partnering with that accounting firm to create more accountants and it's like this sort of hilarious I mean so so YouTube has been like a really great impact on my career in my life um because of some of the Investments we've made but also the you know not everybody can be a YouTuber

22:23sadly and so sort of like as more and more people only want to be YouTubers less and less people want to be accountants and so like the pricing power of accountants has gotten Higher and Higher and Higher and as we think about like shifting labor forces and like the incentives for those labor forces like what are the ways that you could create them and a school where your education is paid for because an employer is so desperate for new in you know new new people I it feels it feels like that's obvious the thing that we haven't really figured out is how to like kind of get

22:50around the negative stigma that for-profit education has because so many private Equity firms and so many people who have run these organizations did just such a poor job and there's just a reputation that's really hard to get around yeah um I'm trying to think like who who's the most successful private Vocational School like who's done really well I mean there's obviously like the University of fedix is but but but really like there's like the dev shops and I'd say like general assembly at least had an outcome and I don't know enough of the story of like what happened and why it didn't become bigger and of where they hit their like

23:29constraints because I remember at one point they ended up pivoting from being like sort of like a school to being like a B2B business where they were like Consulting for big organizations I think they kind of just became like a consulting firm at some point um I don't know how lamb is doing I mean obviously Lambda had seemed like it was having a lot of success in the beginning I mean the idea of Lambda was really smart which was basically for folks who don't know you signed up to a boot camp essentially they taught you to be a developer and then there was an income share agreement yeah it was free to go

24:01right and but they would just take a percentage of your salary uh for a certain amount of time and I wonder if they need some level of incentive where like it's not quite free but like you don't have any cash outlay except like maybe like you you either either it's free as long as you end up getting a like choosing to take a job in that space um or like as long as you graduate but I feel like if you give something someone to something for free like they end up treating like it was free and it ends up becoming like this free option as opposed to like a dedication or like

24:33a like like if you're a doctor and you go through like however many decades of schooling you need like you're gonna end up being a doctor like like very rarely be like well you know now that I've done that I'm gonna be a YouTuber right right you're like pretty pot committed I feel like there needs to be some skin in the game and like maybe one of the ideas is like you have a loan but the loan gets forgiven and it gets put into some retirement account you know and it compounds over some period of time where like it turns into some sort of pension like imagine you know instead of paying

25:05$200,000 for school you took a loan at a 4% rate and then you were forced to Escrow in some retirement savings account and it compounded over a really long time and like instead of being in debt you ended up having like this like Nest Egg I don't know there's got to be some flip yeah there's uh there's something there I think that this space was really really popular 2020 2021 maybe even 2022 like the lambdas I was seeing like the Lambda for X pop up everywhere and it sort of fizzled out fizzled out and a lot of people thought like oh this model doesn't really work

25:40but for people listening I actually think that income share Agreements are interesting um I also think that I think Lambda raised a bunch of money too um so there's probably a way you can do this more bootstrapped at least to start yeah I mean the the challenge we have with income share agreements is I don't think that they can be viewed as like a replacement of tuition I think they have to be viewed as a subsidy because the the financial product we've always thought was sort of cuspy and the reason is like let's imagine I give you an income share agreement Greg um I I don't

26:16know that you need one but let's imagine I gave you one um what are you gonna do like if you move to Spain how do I go get the money from you like how do I service it and then what jurisdiction does it get service and how do I prove the pay stub and if you go to your employer and say hey can you pay me in one account with half the money in another account and half other half or like can you pay me a base comp and a consulting fee like basically once I the underwriting was sort of possible because you could underwrite the

26:44efficacy of the school and like your background and like your likelihood of by the way you know maybe maybe it would have required some skin in the game so it didn't feel like a free option but then like if you leave what am I going to do I'm going to come after you for this like income share agreement that's going to hurt the reputation of the school you can't really pay it you might be hiding the money from me how would I know if you're hiding the money from me there's no um precedent of really trying to like foreclose on these income share agreements what is the term on the

27:10income share agreement like you need to give some P like people a capability of getting out of it like perpetuity is not a legal concept and so there's like a lot of these issues the financial product itself where I thought it was best applied when it was thought of as a way to subsidize cost um but knowing that like the the school for example would have to like subsidize the capital provider like the capital Provider by themselves just the income share agreement wasn't getting properly compensated for how much risk they were taking it was basically a mediocre or crappier version of a consumer loan but you're getting paid either the same or

27:40slightly less and you had headline risk so of your Lambda what what's your next move I mean I think one of the challenges is if you raise a lot of money you have to grow before your feedback loops come out come back and you know at the risk of talking about a business that I wasn't really there for so sorry Lambda now um like I I would imagine that you're educating students you then have to make a decision before you actually know how they're going to do and then like how are you supposed to possibly make like a data driven like uh decision framework and so you're raising a ton of money

28:13you're building out a school for needs that you don't even know like you actually need and then like four to five years later you figure out if the first students were any good at what they did not just because they got a job did they stay retained at the job did they get promoted at the job did they successfully pay the income share agreement back and I'm sure Lambda has some data now about it but like it feels like they were forced into this like hypergrowth period before they could really know how the students were doing and so I would probably just take like a more rational cost-efficient approach I

28:41probably wouldn't do a space as hot as developing or development because you know I think there's been a lot of Dev schools I think Founders want to solve their own problem they have a hard time hiring engineers and probably go into an industry that was a little bit less competed for and ID probably partner with a handful of employees so you know there was one that I thought was really compelling that was like partnering with trucking companies and teaching people how to be truck drivers that to me seems more compelling less crowded and by the way the feedback loops are probably a lot quicker because how how quantitative is a truck driver

29:12you can TR check their mileage you can check their safety you could check their insurance premiums how are they driving are they driving safely are they not driving safely and I bet you you'd feel a little bit less pressure to raise tons and tons of money into that business and grow at hypers speed because there's just going to be less you know competition makes sense I uh I've got two ideas for you two thoughts and I want your you know you're the finance wi so I want your feedback on it so one is okay so we we've got we own a few agency businesses and one of our

29:45businesses works with a very large cpg company they do about 500 million a year in Revenue however they're highly levered and they're going you know I guess rates have gone up and they're struggling right now sure so they have we we produce some work for them and they love the work but they've gone to all their vendors and they've basically said like we're not paying you based on how you know for whatever reason yeah I don't know the first you know so my team came to me and and and was like hey do you know like a collection agency or something like we never have you know

30:24this never happens to us and I was like no I don't you know I don't know what to do and my thinking is there's probably other agency owners or internet business owners that deal with um collections but there's no like you know beautifully designed stripe Atlas for collections type thing there isn't like I wouldn't even know where to go so my question to you is is there an opportunity in creating a collections type business uh for for more of a digital native entrepreneur yes um do you know J Kahan I don't think soan shoot I hope I'm pronouncing his name right Kahan um so he's got a business that

31:12does this um and it's basically trying to like reinvent bad debt collections because it is important and by the way bad debt collections there's all kinds my favorite kind of bad debt collector is a bounty hunter um and I'm do you know how B bonds work I've just seen them un signs so um so I think his company is called january. comom changing debt collection for good so it is a good idea and someone's pursuing it and people should find out more about it because I think he's a really smart guy I've lost touch with him I mean you know we see we see each other around sometimes but I'm

31:46not that close to how the business is doing but I've always been impressed by him okay so Bail Bonds I think are this like insane product where basically what happens is like you get arrested and you may may have done it you may have not done it and so you post bail in between then and the trial date and like one of the reasons that you want to post bail is um you know you want to go back to your job if you can't post bail like you can't call your employer from like jail and say hey I'm taking like a two week sick leave until my court date but I

32:10swear to God I Didn't Do It um and I you know I probably shouldn't make light of it actually a lot that does happen to people and it's tragic they they do end up spiraling so what happens is you go to a bail bondsman and um the bondsman will basically like if you owe $20,000 or whatever you pay the bail bondsman $2,000 or $1,000 whatever they give the judge $220,000 and then they put a bond on some asset and it might be a car or your house or whatever and the reason bounty hunters exist is like the bondsman doesn't come get you they hire a bounty hunter to come get

32:40you and it's like literally these like SII like civilians who just like physically chase you around to try to physically come get you to go to the courthouse and the bondsman gets his money back as long as you go to the courthouse eventually for your trial um and you know that was like not so like that's like this the the worst kind of bad debt collections then there's like the middle of the road bad debt collections which is like your Macy's card and or if I don't know if Macy's still exists I think allegedly it does so you have like this Macy's credit card and you know Macy's isn't gonna like

33:10ruin its brand efficacy by like chasing its customers for like money that's owed and so they sell that debt to a bad debt collections agency and then even worse some of these bad debt collections agencies commit fraud and like even though like they they will call you and say hey Greg I you owe Macy's like you know 1,400 bucks or whatever you owe us but they actually never had the claim they just saw that it was being shopped and then when their actual bad debt collections person comes to you and tells you 1400 you're like no no I already paid it turns out you pay the

33:41wrong person it's like a really messed up industry and so you're right to think that there's actually a good like something to do there um you know and and with the e-commerce company you that that also just demonstrates that e-commerce companies are difficult to lever I mean or CP businesses like I think I think one of the nice things about software companies is that you don't move stuff around the world and you don't have inventory and cash flow Orient you know planning and stuff but cpg businesses like think about how those businesses operate if they make a $100 of Revenue they're probably spending 10 to15 of the

34:14revenues on ads and then they're probably spending another like 30 to $40 of the revenues on Pick and Pack warehousing shipping stuff like that there's probably a couple hundred basis points of the revenue going to returns but let's ignore that for a moment and then and then by way your sgna is usually like 10 15% of your revenues and so you went from like you know 100 minus 10 to 15 for ads so you're at 85 minus 40 for Pick and Pack warehouse and everything else so you're at like um 45 and then you're like overhead was like 10 to 15% and so you know you're now at

34:47like 30% um you know like very quickly if these businesses do a really great job they end up at like oh and then your cogs sorry your cogs are usually 30% of your revenues and so have to tighten all of that and if you're really really good as a cpg business you're earning 10 to 20% um IAH margins and by the way here's the other fun thing about a cpg business is you have inventory and you gotta if you're growing the faster you grow the worse your cash flow Dynamics because if you're growing you have to spend money today which you have less of on the

35:18inventory you'll need more tomorrow because you're going to need more of because you're growing and then on top of having wonky ebit cash conversion you're going to have volatility during the the year because in Q4 you're probably going to sell more or if you're a popsicle business you're going to sell more in the summer or whatever almost every cpg business has some level of seasonality and so you end up having this like 10 to 20% eaab margin business um that has seasonality and your EBA do margin your EBA do doesn't convert to cash fully it usually converts at like 50 to 60% and so really you know on your

35:52revenues you can only withstand 5 to 6% interest and you can only lever your eidal so much you know you can't really lever like if you leverage your EA do five times you know $10 of evah of which you're only collecting $5 of cash and you've taken $50 of debt against it no wonder they can't make their interest payments and so that's also one of the reasons that these cpg businesses have to lever less than than a normal you know a software company could on the same ebit do margin so the best way to not get not need a debt collector is to not finance a cpg business with debt

36:27that's true that is true um but you know you look at it and as the vendor we like this is a household brand of course they're going to you know it didn't even cross the team's mind um which I think is fair but it is the reality of the service business is that you will have bad debt and sometimes it's hard to predict um where it's going to come from I guess well the other Challenge and and by the way this is like one of the things that makes some lenders better than others is understand where you are on the utility stack you know and and if

37:03you're a vendor like if you're if you're Amazon and you're lending to an Amazon Seller and the Amazon Seller owes you money you have a lot of power you might be junior in the capital stack but if you turn off the person's account you suddenly became senior in the capital stack um you know if you're the CRM you have a capability of getting paid uh you know for ramp I feel like that's one of their benefits is like they're senior in the capital stack or if you're brex or any of these card companies like what you'll notice is like they still get paid because people rely on those cards

37:33and those working capital lines and so there's like this ongoing utility um when we think of actually Consumer Credit we think of it very similarly like if I lend somebody money to go get a tattoo like they got a tattoo they may not pay the bill if I lend money for a fridge and I turn off their fridge they're probably gonna pay me so I turn the fridge back on um you know there's like a a company called pjy that we think is like especially compelling where you know if you don't pay your your phone bill they'll like lock your your phone so like you can see stuff

38:04coming in like calls and messages and you're probably going to go pay that and so you know one of the things as a vendor is realizing try to like do I have like an ongoing utility to this business and making sure you get paid before your ongoing utility is like sort of like not fully rendered yet I like it um that's why I don't know Char your problem on this payable reable you know J first of all january. comom incredible incredible brand name for business like the idea first of all they got the dotom so kudos to them and also like the idea of January it's like

38:43a fresh start um I think is so smart so they they did a good job there yeah oh yeah it's an awesome as soon as I saw that's what they were called now I was like of course yeah I'm in right right actually I think the the best branding R redo or name redo is um EV Ventures turning into headline I didn't see that isn't it just an incredible name headline I'm so jealous H I'm not even happy for them that's how jealous I am you gotta be happy man you got to be happy it's like I'm kidding I'm kidding I wouldn't say it if I wasn't but it

39:19felt it made it a more compelling comment you know totally that's fair that's fair I mean names matter especi especially now I think especially as things get more and more commoditized I talk about that often around how important the brand and the name is and um I actually think it's undervalued relative to you know a lot of things so we've been actually buying up domains which actually leads me to my next uh sort of idea for you I'd love your feedback on so we bought the domain recently I think it's startup dividend.com and we're seeing uh a lot a lot of uh you know internet entrepreneurs

40:02solo preneurs people building these you know GPT rappers SAS tools that sort of thing um and they're not going the Venture Capital route they're actually um they're building like businesses that make money without losing a lot of money first exactly it's exactly what they're doing yeah oh man as a Credit Professional that makes me feels so good exactly exactly so uh I'm sure it's Ali A lot of these business are Ali approved and a lot of a lot of them are starting to get good unit unit economics but you can't blame them they just don't have some of the money to scale but they're they're afraid of raising

40:47Venture at this point and maybe it's not even afraid is the right word they're just kind of like um I don't know if this is a venture scale opportunity um I might not you know I might live in um you know Slovenia and I don't know any venture capitalist so there's there's that as well and so I wonder if there's an opportunity to fund some of these entrepreneurs and I don't know how you'd structure it I'm curious your opinion but that you'd get some dividend uh from from them yeah I mean I think um but I think there's like a lot of benefits I also don't think it's like all one or the

41:31other I mean when we started our business we're like pseudo bootstrap pseudo not bootstrap like I I couldn't afford when I started the business to hire a bunch of investment professionals so I raised a few million dollars from individuals and it was important to me to raise from individuals and not firms because I didn't really want to be feel feel like I was being forced on an exit Horizon and you know the and I'm in the business like a professional investor who's institutional their number one job is to make as much money on the investment as possible possible and they sometimes have aligned incentives they sometimes don't have aligned incentives

42:02they can't just say yes to things if you know even if they like feel like it might be good for the partnership because they have an obligation to their third party institutional LPS and so there was like this initial want to raise money because we had to but not raise more money than we needed to and then there was like this discipline that came with it because it wasn't like we rais money from like big institutions that would just give us like they weren't like motivated to back of the truck can give tens of millions of dollars more they only wanted to give us more if like it felt like it was like an

42:31obvious Roi and and it created some level of discipline in two ways the firstes that really forced us on every dollar that we put out to make sure there's going to be a dollar that came back and it was okay like you know when we built our business we would build like a profitable business line and then we would take the dividends from that profitable business line reinvest them into a new unprofitable business line subsidize it and we had to come with a point of view of like how long were we willing to let that business line be unprofitable for and like go through a J curve because it

42:59felt like it was our money that wasn't coming out like if I you know if I decided to open up a new asset class or a new investment business then like those were dividends that I could have otherwise given to myself and my family or just kept on the balance sheet of the business and instead we were like taking that and reinvesting it and like when you feel like there is this Capital constraint it does force you to like make very very like ruthless decisions or like create like a forcing of that of those decisions and you know there's this story that that I remember with one

43:27of our Founders where he had he had just raised like a a nine fig financing and he had like a couple hundred million doar of cash in the balance sheet and he were he was telling me he goes you know it used to be so easy to say no to stuff because we just didn't have the money to say to say yes but now that we have the money kind of do to do anything I'm constantly battling people for my nose because they know we can do it I have to like out witht them to explain why we shouldn't and when you have this like natural constraint of not having raised

43:55money like it makes all the conversations a lot easier it's like there's no paralysis by analysis like we have the money for that or we don't have the money for that and it's not our very best idea it might be a good idea but it's not our best idea and we can only pursue one idea at a time um and then and then like the The View that we came to is like well maybe what we could do is we could offer some sort of preferred return and you know the negative about something like debt you know even if you have the iida to to um to take on debt

44:24is you have a term and you know the money is going to have to get paid back at some point and and if when the money needs to get paid back um Capital markets have changed and you can't just refinance your debt and the debts not willing to roll over like for example if you if you borrowed money at a 8% interest rate or a 12% interest rate and now rates our 500 basis points higher and suddenly ow 17% you might not be able to afford that especially if you're a cpg business and next thing you know like you're kind of in this like sticky situation if you raise preferred Equity

44:53you know what you get mostly is you don't have a term on the investment you know you don't own owe the money back at any given time but you can still maybe like acrew an 8% dividend or a 12% dividend and meet them in the middle you know so for example let's imagine your business does $10 million of vitah you raise like a $5 million Equity financing because you want to you know invest in some new form of growth if you only own owe eight% on that $5 million that's $400,000 I mean gez that's that's pretty easy to pay if you want to take $50 million of fin need to

45:27really swing for the fenes you can still do that eight you know 8% of $50 million is $4 million so now you have this $4 million dividend you owe on $10 million of profits and there's no like specific time that you need to exit that position um those are ways where if you're willing to offer a preferred return you can ask for like either a higher conversion price or valuation or something similar and I think those are all reasonable you know I think a lot of venture capitalists like they play this game with Founders where it's like I think your company's worth this and the founder think companies worth something

45:57else and all the VC is trying to back into is how do they 3x their fund you know or whatever I feel like a lot of VC's or investors could just be a little bit more like look this is what I need from your business I need an 18% return a 20% return how about I contractually obligate it so it's less risky but then we're not playing a game and you know exactly what I want exactly um damn you know your stuff that's why that's why you're here I want to um I want to end off with you telling us a little bit about your business like

46:31more about your business and and like the business of you starting it you know like why did why did you see the opportunity because in a lot of ways like I brought you on here not because you're an investor more because I feel like you're an entrepreneur so talk us through what you actually do what your business is and why you think it's an opportunity well first off I'm whatever you want me to be um you know that's for sure for sure for sure um I'm I'm 100% sure I'm going to end up like investing in that company at a much higher markup at some point now ex um

47:08and I'm gonna like think back at this moment and it's gonna be embarrassing um sweet our business so we started the business about 10 years ago and you know when I when I was in college I did a startup and I caught the bug and you know I was kind of building apps and and web applications for people and um and wanted to start Angel Investing with some of the money that I had saved and wanted to be a venture capitalist I feel like everybody who does a startup and fails wants to be a VC next like that's like the the right of passage and and I

47:38was no different um and you know I made a couple of Investments and I thought well gosh AR isn't everyone going to realize how how great I am at this and that's not what happened um it takes a really long time to see if your startup investment is going to go well and and one of the ways that we've been doing it too is we also like taken some of the money that we were going to invest we hired a bunch of developers and we're starting to like code applications for non-technical Founders we wanted to be called a VC fund everyone called us a Dev shop we just we did whatever we

48:02needed to do to be in business but the business model was hard collecting Equity is not a very good high cash flowing business um and and we got lucky that a couple of the companies that we invested in um were fintech businesses that were lending money out and our view on asset back credit at the time was um you know mo most asset classes get crappier and crappier the older they are you know if you think about student loans or consumer Lo loans or auto loans like if you see a car commercial and you're like oh you can like drive this car off the lot at 0% financing you

48:33might be like well how um one of the reasons is like it's a highly subsidized loan in an incredibly efficient Capital markets where like auto loans just don't earn that much but you know they've been around for a long time rating agencies are comfortable with them which means Banks and insurance companies can hold them and a lot of understanding credit is understanding the liabilities and how how assets are priced unlike equity in credit assets aren't always priced based on risk they're often based on who's allowed to hold them and so if you think about it like when you put money into a bank you don't expect a very high yield

49:05on your deposits if you buy a retirement annuity which guarantees your retirement you probably are only going to get four to 5% yield on that security or on that policy because the the insurance compan is guaranteeing it and like you know Insurance compan like quasi government backed and so it's like not a lot of risk so as soon as an insurance company can hold like an established asset class like Auto or student or consumer all the yield all the return Falls away but we were finding a lot of technology companies that were like unearthing brand new asset classes altogether and financing stuff that had never been

49:38financed before where there was always an analogy um you know uh where you could compare it to something that always existed and you could look at the default rate and you could come up with some Assumption of how the risk worked um but you would get paid a lot because rating agencies weren't willing to rate it insurance companies and Banks couldn't hold it and so the only people left to hold it would be like a fund um that that wanted a high return and on top of that the thing that we felt like we knew how to do was take origination risk and origination risk is the same as

50:09taking startup and Venture Capital risk except you're not risking principal you're risking your time and so we would do is we would say well you know everybody else in credit what they're trying to do is they're trying to run around and like figure out the best Residential Mortgage back security to buy and at what part of the capital structure they should buy it at and how could they possibly be a little bit smarter you know if you're at uh KKR doing it how could you be a little bit smarter than the person at Blackstone doing it and that felt very competitive what we wanted to do is we wanted to

50:38find stuff that nobody cared about today because it never really existed yet you know we don't do income share agreements for some of the reasons I mentioned before but that would be an example of something new and how do we predict whether or not that'll take off and if it doesn't take off we didn't lose any money but we wasted a lot of our time in a way that somebody like black rock or Blackstone or Angelo Gordon isn't willing to do but if it did take off we'd be the only institutional player in the room and we'd be able to crowd everybody else out of the market and

51:03build like buying power in that market and pricing power in that market so we ended up building an asset Back Credit business to find these fintech companies and go pursue those opportunities from doing that we ended up investing billions and billions of dollars we became an established investor in the tech ecosystem we built credibility with Founders that you know I had built a business our colleagues had built a business together we had learned how to invest Capital we understood how Capital markets work which sometimes matters sometimes doesn't matter in stter but we really loved backing companies and so we ended up launching a venture capital fund and you know we tried really hard

51:36to make it a generalist fund so even though we felt like we had fintech backgrounds we don't think it's an accident that the best VC funds are often journalists um we wanted an opportunity to be relevant to a lot of people and we felt like you know a lot of the experiences we had span more than just credit markets we felt like we in my business when I raised LP Capital as an Enterprise sale you know I have a recurring Revenue stream it takes me 18 to 24 months to off and close and build a relationship I want to then account manage that relationship and upssize it

52:03I run a you know asset management businesses are kind of like SAS companies um with you know with margins and recurring revenue and everything else and um and so we built a successful Venture Capital business that's done well and and and we've had a lot of fun doing it we've had an ability to partner with a lot of great entrepreneurs and then more recently we launched a fund that we call hybrid and um and there we do um what we call non-distress special situations we're looking for complicated situations ations or situations where a founder and investor can't agree on price or the market can't agree at the

52:31founder on price and we'll offer them a security that has elements of equity and elements of debt and usually what we're doing is we're looking for the downside protection of debt but we're willing to take some Equity upside like warrants or something in exchange for not taking all the interest in current pay that way a Founder can take the otod that they're earning and invest it back into the business as opposed to just paying a ton of Interest with it and that just curious like what is the stage of a comp you know what are we talking are we talking like series B series C yeah so

53:00so often these are founder own companies so they couldn't be staged with a round uh around but you know to give you an idea that the perfect business for us does something between 50 and $150 million of revenues you know their cash flow positive they do seven eight figures of IAH they're growing above 10 15% probably under 50% you know they're over 50% the business might be growing out of control or they're probably being chased by ACH growth Equity investors where people don't care about picking the right price because even if they get the price wrong the company will quickly grow into the price anyway um and you

53:36know usually the company has bootstrapped itself where we feel like the fact that the company's bootstrapped itself to that scale demonstrates the quality of the business and their ability to generate cash flows if you raise a $100 million to generate $80 million of annualized Revenue that's not that impressive to us if you raise five million of equity to get to 50 million of Revenue we're like wow you're clearly doing something you are using very little Capital to generate quite a lot of value and we're looking for that capital or at least Equity efficiency I like it yeah I mean it's different you know it's different than what I normally hear

54:11uh in the in the VC sphere which I like and um where where could folks I guess find you on the internet and learn more about you or potentially partner with you I I respond to most cold emails I get I don't you know there there's sometimes short responses but uh what I'll try to do is at least route them to the right person in our organization it's just Ali at coov venture. VC um especially if there's a pitch or some company like you know we we find that companies can come from anywhere um I'm on Twitter at Ali B Hamed I used to tweet more it's kind of

54:47scary to Tweet now I feel like anything you could say uh it's it's difficult to to communicate Nuance but but I like it when I do um and uh and then you know those are the main two places cool yeah don't what we ask people not to do is not just to show up to the office you know showing up to the office cold is a bad idea totally don't give up on tweeting you know I think uh tell the people how you feel I'll get i'll get back into it I I don't um I feel like I've spent most of my career so far realizing how wrong I am about a lot of

55:22things that uh you know it's hard to Proclaim stuff on the internet and and I used to find a lot more joy in it when nobody read them you know now there's the accident of somebody might actually read it you only need one thing to be right per year and if you just that's all that's all you need that's definitely Venture Capital yeah yeah I mean I being a venture capitalist is awesome you know you can make a time being in credit is like being a professional free throw shooter you know it's like there's not there's no Glory or professional penalty kicker whenever I'm watching a soccer

55:59match everybody loves PKS and I'm looking I'm like this reminds me of my job this sucks you're out it's like yeah Fair all right man well good good hanging out and I'll uh I'll see you around Greg thank you so much for the time really appreciate it and uh and we'll talk soon this is fun

56:25later