SPEAKER_00
Anything 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 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 I first started off, like that was my first reaction, it was like, gosh, that would be amazing. Surge pricing might actually save lives. And surge pricing, by the way, of helping people with like temporary housing or seasonal housing or 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.
SPEAKER_01
Ali Hamed is in the house. Great, thanks for having me. Good to see you.
I listened to you on Patrick O'Shaughnessy'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, we're making this happen.
SPEAKER_00
Well, I'm gonna do my best to live up to that expectation.
SPEAKER_01
Let's just jump right in. What sort of ideas and opportunities are you thinking about right now?
SPEAKER_00
So the two main themes that we've been spending time on are one, the lack of housing, 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.
You know, 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 areas to go into? So I would say if it was a type of startup company or sector that we're looking for, it may be 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 trouble agreeing on price.
SPEAKER_01
Let's dive into affordable housing. I'm like selling my apartment right now. So that's sort of top of mind.
I saw that Joe Gabia, 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 startup around small prefab houses. What's your thought on the whole prefab housing opportunity?
SPEAKER_00
We're looking for a company that doesn't use a ton of money to figure out how to make it work. And the problem with a lot of these businesses is you're taking a really big bet that prefab housing is gonna 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. From a financing perspective, it's sort of a weird credit problem because let's imagine I wanted a fund construction. I could fund regular way construction like general contractors.
And 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. 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, I don't know Joe Geviev, but let's imagine he came to us and he said, hey guys, 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 wanna do is I wanna go raise debt financing and I want the debt financing to finance the construction of the homes and construction financing is a thing that exists.
My reaction to that would be, well, Joe, what if your business goes bankrupt? What do I do with all the parts of the prefab homes that like whatever robots and whatever technology you're using to build these things, it goes away. It's not like I'm gonna go into the factory and 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 on operating losses because you had this capital intensive startup.
So does that mean that I have to also fund your technology company to recover the debt that I just lent you? And so what we would look at that as sure is the likelihood that anyone home is gonna get constructed higher on time and on budget, yes, but if we lose money on one home, we're probably gonna 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 more financing assets, is ensure that if we lose money, we only lose a small amount of it. So if I were to lend to a bunch of general contractors to build 100 homes the old school way, sure, maybe they'll go a little bit over budget and maybe 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 gonna get built, I'm gonna lend $80 against 100 homes, $100 of homes that way if 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 risks that the whole thing might go poof. And so we hope somebody, we 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 gonna lose money along the way and we'd rather just kind of wait to see the winner emerge.
SPEAKER_01
So, first of all, I like that you think it's inevitable. It means like, there's something here. If you were an entrepreneur and you were started and you believed in the space, you saw the opportunity, obviously trillion dollar plus market asset class, how would you go about building, this company's called Samara, how would you go about building a Samara that might fit your model a little bit more?
SPEAKER_00
By the way, Samara might work, I'm talking about some business that I've never even looked at. So gosh, hopefully Joe Gethi is not listening to this and be like, what is this idiot talking about this business that I've never talked to him about? I apologize. No, but yeah, one, he may have some insight that I don't know about where he's gonna be able to build it in a more capital efficient way.
The second is, there might be a fund that is like a two, three billion dollar venture capital fund where they can take many different bets of 2030, 40, $50 million equity financings. And a few of them don't work out, but the TAM on the outcome is so big that how great would it be if one of them works? 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. For the founder, by the way, it might still be a good idea, even if for the venture capitalist, they end up getting so diluted or they have to put so much money in that the only outcome they could possibly have after getting 150 million dollar cost basis into the deal is 10 times their money. If they fund it coming up, it becomes worth five to $10 billion.
They own 10, 20% of it. For the founder, that's still a great outcome. And so the answer might be do exactly what he's doing.
And by the way, he's got this great background and I'm sure people are gonna give him capital and he's credible and he's more credible than the average founder. And also, so what Joe Gebbia, 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 should go build a business like this.
It 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 capital, I would try to find ways to build more capital efficient companies in the space, build credibility. Airbnb was more capital efficient 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.
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, and then use that credibility to go raise a lot of capital out of the gate for a capital intensive 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 at Founders Fund with Varda, like he had to be Delian, you 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's steps.
But there's a lot of capital efficient things to do. I mean, the space that we've talked a lot about is the ADU ecosystem. And so, you know, ADUs, which some people know about and some people don't, it was basically came out of this idea that California had, which is that you needed to rezone a lot of single family lots and make the multifamily lots.
And by doing so, you would increase housing supply. Historically, that zoning process was complicated because local municipalities would wanna block it because they don't want more housing supply in their specific neighborhood. It brings property prices down, same demand, more supply.
And so they took those zoning laws out of the hands of the municipalities, put them in the hands of the states and forced them to approve those. 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 just said, yes, parking is an example. So maybe companies who can solve the parking problem, tick financing might be an interesting idea, you know.
So these businesses are financed differently. It's not like a regular way mortgage. And so, you know, it's a way to finance multi-tenant properties.
You probably need a new form of property management. You probably need development of ADUs. You don't have to be prefab 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. You know, I think there's a lot of businesses that you can go build that have a really, really big TAM that, you know, aren't just finding new ways to build in the first place. And, you know, just to give you an idea of the quantum of the opportunity set, you know, most studies are 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 $300,000,000,000,000, that's a $500 billion opportunity. That seems like a pretty worthwhile opportunity, even if you get a small part of it in LA.
SPEAKER_01
Yeah, I mean, and that's kind of, I 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 consumer software people have this moment where they're like, but I just want to build something that I could touch, you know? It's very common in entrepreneurs like that.
SPEAKER_00
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 risk on betting on him, because he has a level of credibility. You're taking more technical risk in 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 a more credible operator than if you're going to consume very little for a much higher multiple, you know, on the investment.
SPEAKER_01
I think there's probably an opportunity to do prefab houses, like luxury prefab houses, like buying them, setting them up in like the Catskills, Upstate New York, something like that, and also setting them up in like Sonoma and Napa, a bunch of like places that a lot of people want to go to, and then you buy like a SOA 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 Gebbia 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 and recurring revenue.
SPEAKER_00
How do you solve the utilization problem? You know, the challenge is you want to make sure that it's, you know, the inventory is available so that like you can consistently go to Sonoma or Napa or the Catskills or wherever you want to go, but you have to have some minimum utilization and 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've seen a lot of these sort of like nomadic, I think half of them were called nomad or something.
We like nomadic startup companies where like, you would 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 it got tough. Even Soho 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. Have you seen anybody solving that an interesting way? The utilization and occupancy rate piece?
SPEAKER_01
Well, I think there's a bigger trend at play, which is dynamic pricing on the internet. So there was a huge backlash. I'm sure you saw recently with like Wendy's tried to do search pricing.
Did you see this?
SPEAKER_00
The, oh yeah, I did see that. That was awesome. Good for them.
SPEAKER_01
Yeah. They tried it and got blessed them for trying. They clawed it back, I believe.
SPEAKER_00
But didn't Uber get a bunch of backlash for it? Remember like when Uber did search pricing and everyone thought it was just bananas? Imagine Uber without search pricing.
SPEAKER_01
I can't. I cannot, you know, I would, I cannot.
SPEAKER_00
You would be thinking of the other startup that got created where the key differentiators that they had search pricing.
SPEAKER_01
There's a huge opportunity to create search pricing as a service to a bunch of businesses. That's another business I'm interested in. I like that idea.
SPEAKER_00
What would be your favorite industry that needs search pricing? I think by the way, this is the solve. This is the solve for the, if anybody is doing this and they want to apply search pricing to it, I'd want to take a look.
SPEAKER_01
Exactly. Exactly.
SPEAKER_00
I don't know how much time you have on your hands, but in the event you have some extra weekend space.
SPEAKER_01
There's always nights and weekends, you know? I live for it. So I do think that I saw a business recently, actually it's called Plus Grade. Have you heard about this?
SPEAKER_00
No, I don't have good deal flow. What is it? Plus Grade?
SPEAKER_01
Plus Grade. Canadian company. 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 airlines so that there's a bidding for the first class. So they make it easier to get, 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 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. It's fun to do. And the airline industry, it makes a lot of sense.
There's a lot of money changing hands. So yeah, I mean, oh, go ahead.
SPEAKER_00
I mean, anything where it brings efficient pricing, where efficient pricing doesn't already exist, like it's probably a good idea. 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 at all employees for like infinity pricing on whatever their first class ticket is going to be.
I can imagine that being like a hilarious outcome where someone like airline takes down like a $23,000.
SPEAKER_01
Is it like British Airways flight? Totally, I think that 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 your customers.
SPEAKER_00
I think there's a charm in a line though. So one, you start differentiating, you know, like, as if we don't have enough issues to associate economic disparity and like lines, waiting in line is like one of the last equalizers that exists, you know, and 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 of like restaurants. It's kind of sad in New York.
Like, you know, you can pay, whether it's like a concierge service or some service to like just make sure that you can get a table to great restaurant, but because of that, it's taken away like all serendipity and it's taken 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 access, 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 a reservation at midnight, 30 days before the reservation opens, which is like a pretty crappy experience.
So that would be like, I guess the counter argument.
SPEAKER_01
Yeah. I mean, I'm not saying it makes the world a better place, but I do think that it probably optimizes revenue. Now, I think that we as entrepreneurs, I think we can start with here's a business opportunity and then, okay, now we have this business opportunity.
How can we make this beneficial for all parties? And I think that's the way to look at it.
SPEAKER_00
Yeah. I mean, the thing that I always loved about Uber surge pricing was there was like some like need. And it was like more, less of a need of like, ooh, I want to have like a slightly better pasta dish.
And 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 I first started off like that was my first reaction is like, gosh, that would be amazing.
Like surge pricing might actually save lives. And kind of running it through that thought exercise. Even, and surge pricing, by the way, of helping people like with like temporary housing or seasonal housing or just sort of spreading people out to kind of where there's a lot of empty homes, we do have like a major issue.
So I could imagine that making the world a better place. Surge pricing has applied that housing supply.
SPEAKER_01
Yeah, I mean, because I think, I mean, everyone is feeling that it's just become unattainable to buy a house, you know?
SPEAKER_00
And there's also policy shifts that could happen. Like one of my favorite policies 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 childcare and elderly care, like embedded residentially, like geographically.
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. I always thought, I always thought like interesting policy changes like that could be kind of fascinating.
SPEAKER_01
Yeah, I also think, I wish there was an easier way where I could just get like alerts around like your 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- 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 opportunities to people so entrepreneurs can actually-
SPEAKER_00
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?
SPEAKER_00
I don't know that that exists. 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 forgot where the, where I heard the idea or maybe it's something that's already 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 we're under supplied in a certain type of workforce, you should get a student loan 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 reprice 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.
Something like that I could imagine feeling obvious.
SPEAKER_01
Yeah, I mean, and also like imagine not taking a loan and you just get paid to be in school, like the reverse of it.
SPEAKER_00
Yeah. Yeah. The, I mean, we looked for a while of vocational schools 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 and my life because of some of the investments we've made, but also the, you know, not everybody can be a YouTuber, sadly. 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, you know, new people, it feels, it feels like that's obvious. The thing that we haven't really figured out is how to like kind of get around 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.
SPEAKER_01
Yeah, I'm trying to think like who, who's the most successful private vocational school like who's done really well?
SPEAKER_00
I mean, it's obviously like the University of Phoenix is 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 sort of where they hit their like constraints 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. I don't know how Lambda is doing. I mean, obviously Lambda had seemed like it was having a lot of success in the beginning.
SPEAKER_01
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 right. And but they would just take a percentage of your salary for a certain amount of time.
SPEAKER_00
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 either either it's free as long as you end up getting like choosing to take a job in that space, or like as long as you graduate. But I feel like if you give someone something for free, like they end up treating like it was free and it becomes like this free option as opposed to like a dedication or like a, like if you're a doctor and you go through like however many decades of schooling you need, like you're going to end up being a doctor. Like very rarely be like, well, you know, now that I've done that, I'm going to 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 in 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 $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.
SPEAKER_01
Yeah. There's something there. I think that this space was really, really popular 2020, 2021, maybe even 2022, like the lamb does.
I was seeing like the lambda for X pop up everywhere and it sort of fizzled out. Fizzed out. And a lot of people thought like, oh, this model doesn't really work, but for people listening, I actually think that income share agreements are interesting.
I also think that I think lambda raised a bunch of money too. So there's probably a way you can do this more bootstrapped, at least to start.
SPEAKER_00
Yeah. I mean, 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 had 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. I don't know that you need one, but let's imagine I gave you one. What are you going to 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 serviced in? 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 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 can underwrite the efficacy of the school and like your background and like your likelihood of, by the way, you know, maybe maybe 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 precedent of really trying to like foreclose on these income share agreements. What is the term on the income share agreement? Like you need to give some people 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 costs. But knowing that like 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 were getting paid either the same or slightly less. And you had headline risk.
SPEAKER_01
So if you're Lambda, what's your next move?
SPEAKER_00
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.
Like 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 and like a decision framework? And so you're raising a ton of money.
You'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, but 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 hyper growth 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 probably wouldn't do a space as hot as developing or development because, you know, I think there's been a lot of dev schools that think founders want to solve their own problem. They have a hard time hiring engineers that probably go into an industry that was a little bit less competed for. And I'd probably partner with a handful of employers.
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 and how quantitative is a truck driver? You can track your mileage, you can check their safety, you can check their insurance premiums.
How are they driving? Are they driving safely? Are they not driving safely? And I bet you'd feel a little bit less pressure to raise tons and tons of money into that business and grow a hyper speed because it's just going to be less, you know, competition.
SPEAKER_01
Makes sense. I got two ideas for you, two thoughts. And I want your, you know, you're the finance with, so I want your feedback on it.
So one is, okay, so we've got, we own a few agency businesses. And one of our businesses 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 interest rates have gone up and they're struggling right now. Sure. So they have, we produce some work for them and they love the work, but they've gone to all their vendors and they 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 was like, hey, do you know like a collection agency or something? Like we never have, you know, this never happened 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 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 for more of a digital native entrepreneur?
SPEAKER_00
Yes. Do you know J.K. Han?
SPEAKER_01
I don't think so.
SPEAKER_00
Yeah. I hope I'm pronouncing his name right. Kahan. Right. So he's got a business that does this. And it's basically trying to like reinvent bad debt collections because it is important.
And by the way, bad debt collections is all kinds. My favorite kind of bad debt collector is a bounty hunter. And do you know how bail bonds work?
SPEAKER_01
I've just seen them on science.
SPEAKER_00
So so I think it's coming called January.com, changing debt collection for good. So it is a good idea and so is 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. Oh, I mean, you know, we see, we see each other around sometimes, but I'm not that close to how the business is doing, but I've always been impressed by him.
OK, so bail bonds, I think, are this like insane product where basically what happens is like you get arrested and you 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, 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 swear to God, I didn't do it. And I probably shouldn't make light of it, actually. That does happen to people and it's tragic.
They do end up spiraling. So what happens is you go to a bail bondsman and the bondsman will basically like if you owe $20,000 or whatever, you pay the bail bondsman $2,000 or $1,000 or whatever, they give the judge $20,000 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 you. And it's like literally these 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. And, you know, that was like not so like that's like 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 still exists, I think allegedly it does. So you have like this Macy's credit card and, you know, Macy's isn't going to like ruin its brand efficacy by like chasing its customers for like money. That's owed.
And so they sell that debt to bad debt collections agency. And then even worse, some of these bad debt collections agencies commit fraud. And like, even though like they will call you as a, hey, Greg, you owe Macy's like, you know, 1400 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 paid the wrong 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. You know, and with the e-commerce company, you know, that also just demonstrates that e-commerce companies are difficult to lever.
I mean, or CPG 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 or anything, you know, planning and stuff. But CPG businesses, like think about how those businesses operate.
If they make $100 revenue, they're probably spending $10 to $15 of the revenues 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 of hundred basis points that revenue going to returns, but let's ignore that for a moment. And then, and then by the way, your SG&A is usually like 10, 15% of your revenues.
And so you went from like, you know, a hundred minus 10 to 15 for ads. So you're at 85 minus 40 for pick and pack warehousing, everything else. So you're at like 45 and then you're like overhead was like 10 to 15%.
And so, you know, you're now at like 30%. 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 you have to tighten all of that.
And if you're really, really good as a CPG business, you're earning 10 to 20% EBITDA margins. And by the way, here's the other fun thing about a CPG business is you have inventory and you got to, 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 inventory, you'll need more tomorrow because you're going to need more of because you're growing. And then on top of having wonky EBITDA to cash conversion, you're going to have volatility during 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% EBITDA margin business that has seasonality and your EBITDA margin, your EBITDA doesn't convert to cash fully. It usually converts it like 50 to 60%.
And so really, you know, on your revenues, you can only withstand five to 6% interest and you can only lever your EBITDA so much. You know, you can't really lever it. Like if you leveraged your EBITDA five times, you know, $10 of EBITDA, 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 a normal, you know, a software company could on the same EBITDA margin. So the best way not get, not need a debt collector is to not finance a CPG business with debt.
SPEAKER_01
That's true. That is true. But, you know, you look at it and as the vendor, we're like, this is a household brand.
Of course, they're going to, you know, I didn't even cross the team's mind, 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 where it's going to come from, I guess.
SPEAKER_00
Well, the other challenge, and by the way, this is like one of the things that makes some lenders better than others is understand where you want in the utility stack. You know, and if you're a vendor, like 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.
You know, if you're the CRM, you have a capability of getting paid. 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 and those working capital lines. And so there's like this ongoing utility.
When we think of actually consumer credit, we think of it very similarly, like if I wouldn't 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 going to pay me. So I turn the fridge back on.
You know, there's like a company called Payjoy that we think is like especially compelling where, you know, if you don't pay your phone bill, they'll like lock your your phone. So like you can see stuff coming in like calls and messages, 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.
SPEAKER_00
That's why I know it's all your problem on this payable.
SPEAKER_01
Well, you know, Jan, first of all, January dot com. Incredible, incredible brand name for business. Like the idea, first of all, they got the dot com so kudos to them.
And also, like the idea of January, it's like a fresh start. I think it's so smart. So they did a good job there.
SPEAKER_00
Yeah. Oh, yeah. It's an awesome as soon as I saw that's what they were called now.
It's like, of course.
SPEAKER_00
Right. Right. Actually, I think the best branding redo or name redo is E Ventures training to headline. I didn't see that.
Isn't that just an incredible name headline? I'm so jealous. Oh, I've been happy for them. That's how jealous I am.
SPEAKER_01
You gotta be happy, man. You gotta be happy. It's like, I'm kidding.
I'm kidding.
SPEAKER_00
I wouldn't say it if I wasn't. But it felt, it made it a more compelling comment.
SPEAKER_01
You know, that's fair. That's fair. I mean, names matter, 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 I actually think it's undervalued relative to, you know, a lot of things.
And we've been actually buying up domains, which actually leads me to my next sort of idea for you. I'd love your feedback on. So we bought the domain recently.
I think it's startupdividend.com. And we're seeing a lot of, you know, internet entrepreneurs, solo printers, people building these, you know, GPT wrappers, SaaS tools, that sort of thing. And they're not going the venture capital route.
SPEAKER_00
They're actually, they're building like businesses that make money without losing a lot of money first.
SPEAKER_01
Exactly. It's exactly what they're doing.
SPEAKER_00
Yeah. Oh man. As a credit professional, that makes me feel so good.
SPEAKER_01
Exactly. Exactly. So I'm sure it's Ali.
A lot of these business services are Ali approved. And 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 venture at this point. And maybe it's not even afraid is the right word. They're just kind of like, I don't know if this is a venture scale opportunity.
I might not, you know, I might live in, you know, Slovenia and I don't know any venture capitalists. 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 from, from them.
SPEAKER_00
Yeah. I mean, I think, I think there's like a lot of benefits. I also don't think it's like all one or the other.
I mean, when we started our business, we're like pseudo bootstraps, pseudo, not bootstraps. Like 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, cause 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, the number one job is to make as much money on the investment as possible. And they sometimes have aligned incentives.
They sometimes don't have aligned incentives. They 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 piece.
And so there was like this initial want to raise money, cause 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 raised money from like big institutions that would just give us like, they weren't like motivated to back up the truck and give tens of millions of dollars more. They only wanted to give us more.
If like, it felt like it was like an obvious ROI and, and it created some level of discipline in two ways. The first is it 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 felt 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 force, you know, that of those decisions. And, you know, there's a story that I remember with one of our founders, where he had, he had just raised like a nine figure financing and he had like a couple hundred million dollars of cash in the balance sheet.
And 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 with them to explain why we shouldn't. And when you have this like natural constraint of not having raised money, like it just 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. And then, and then like 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 EBITDA to take on debt is you have a term. And, you know, the money is going to have to get paid back at some point. And when the money needs to get paid back, capital markets have changed and you can't just refinance your debt and the debt's 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 are 500 basis points higher and suddenly you owe 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 were raised preferred equity, you 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 a crew and 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 EBITDA. 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, oh, 8% on that $5 million, that's $400,000. I mean, geez, that's, that's pretty easy to pay. If you want to take $50 million of financing to really swing for the fences, 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. Those are ways where if you're willing to offer a preferred return, you can ask for like either a higher conversion price or evaluation 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 thinks their company's worth something else. 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 VCs 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 obligated so it's less risky, but then we're not playing a game and you know exactly what I want.
SPEAKER_01
Exactly. Um, Dan, 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 more about your business and, and like the business of you starting it, you know, like why did, why did you see the opportunity? Cause in a lot of ways, like I brought you on here, not cause you're an investor more cause 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.
SPEAKER_00
Well, first off on whatever you want me to be, um, you know, for sure, for sure. Um, I'm, I'm a hundred percent sure I'm going to end up like investing in that company in a much higher market. And I'm going to like think back at this moment and it's going to 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 was no different.
Um, and you know, I made a couple of investments and I thought, well, gosh, aren't, isn't everyone going to realize 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's going to go well.
And, and one of the ways that we've been doing it too is we had 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 needed 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, most, most asset classes get crappier and crappier the older they are. You know, if you think about student loans or consumer 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% of financing, you might 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 is 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 on 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 insurance company is guaranteed it. And like, you know, insurance companies like quasi government backed. And so it's like not a lot of risk.
So as soon as an insurance company can hold a 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 unearthly brand new asset classes all together and financing stuff that had never been financed 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 taking startup and venture capital risk, except you're not risking principle. 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 structures that they should buy it at. And how could they possibly be a little bit smarter? You know, if you're at a KKR doing it, how can it 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 find 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 BlackRock 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 build like buying power in that market and pricing power in that market.
So we ended up building an asset-backed 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 learned how to invest capital. We understood how capital markets work, which sometimes matters, sometimes doesn't matter and start.
But we really loved backing companies. And so we ended up launching a venture capital fund. And, you know, we tried really hard to make it a journalist 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. We wanted an opportunity to be relevant to a lot of people and we felt like, you know, a lot of experiences we had were spanned more than just credit markets. We felt like we, in my business, when I raise LP capital as an enterprise sale, you know, I have a recurring revenue stream.
It takes me 18 to 24 months to often close and build a relationship. I want to then account manage that relationship and upsize it. I run asset management businesses that are kind of like SaaS companies with, you know, with margins and recurring revenue and everything else.
And so we built a successful venture capital business that's done well 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 there we do what we call non-distressed special situations. We're looking for complicated situations or situations where a founder and investor can't agree on price or the market can't agree at the founder 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 EBITDA that they're earning and invest it back into the business as opposed to just paying a ton of interest with it.
SPEAKER_01
And I'm just curious, like what is the stage of a company? You know, what are we talking? We talking like series B, series C?
SPEAKER_00
Yeah. So often these are founder owned companies. So they couldn't be staged with a round, a round, but, you know, to give you an idea that the perfect business for us does something between 50 and 150 million dollars of revenues, you know, they're cash flow positive.
They do seven, eight figures of EBITDA. 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 a bunch of 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. And, you know, 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 hundred million dollars to generate 80 million dollars 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.
SPEAKER_01
I like it. Yeah. I mean, it's different, you know, it's different than what I normally hear in the VC sphere, which I like. And where could folks, I guess, find you on the internet and learn more about you or potentially partner with you?
SPEAKER_00
I respond to most cold emails I get. I don't know, you know, there's some short responses, but what I'll try to do is at least route them to the right person in our organization. It's just Ali at Coventure.
vc. Especially if there's a pitch or some company, like, you know, we find that companies can come from anywhere. I'm on Twitter at Ali B.
Hamad. I used to tweet more. It's kind of scary to tweet now.
I feel like anything you could say, it's difficult to communicate nuance. But I like it when I do. And then, you know, those are the main two places.
Cool. Yeah, don't 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.
SPEAKER_01
Totally. Don't give up on tweeting, you know, I think. Tell the people how you feel.
SPEAKER_00
I'll get I'll get back into it. I don't. I feel like I've spent most of my career so far realizing how wrong I am about a lot of things that, you know, it's hard to proclaim stuff on the internet.
And I used to find a lot more joy in it when nobody read them. You know, now there's the accent of somebody might actually read it.
SPEAKER_01
You only need one thing to be right per year. And if you just that's all you need.
SPEAKER_00
See, that's definitely venture capital. Yeah. Yeah. I mean, I told me being a venture capitalist is awesome. You know, you can make it.
Being an incredible 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 match, everybody loves P.
K.'s. And I'm looking, I'm like, this reminds me of my job. This sucks.
SPEAKER_01
You're out. It's like, yeah, fair. All right, man.
Well, good, good hanging out and I'll see you around.
SPEAKER_00
Greg, thank you so much for the time. Really appreciate it. And we'll talk soon.
SPEAKER_01
This is fun later.