354. The VC Networking Playbook, Credit and Pricing Risk in New Asset Classes, and How VC Market Hype Should Impact Stage Focus and Net Buy/Sell Positions (Ali Hamed)

Ali Hamed of CoVenture and Crossbeam Venture Partners joins Nick to discuss The VC Networking Playbook, Credit and Pricing Risk in New Asset Classes, and How VC Market Hype Should Impact Stage Focus and Net Buy/Sell Positions. In this episode we cover:

Building an LP Network from Scratch
Platform Economies and Their Future
A Multi-Disciplinary Approach to Investing
And more!

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Transcribed with AI:

0:00
Ali Hamed joins us today from New York City. He’s a Co-founder and Partner at CoVenture and Crossbeam Venture Partners. CoVenture invests across the capital stack of emerging technologies in new asset classes, and Crossbeam focuses on new internet economies and novel fintech applications from pre-seed to Series A. Ali, welcome to the show.
0:21
Thank you so much, really appreciate it.
0:23
Been a big fan of yours for a long time. You know, I think you were kind of covert in the early days, but you wrote some really great stuff. And Ali, actually recall reading an article a few years ago about the crazy hustle you went through to break into the industry and build your network and, and raise your first capital. That might be a fun place to start. Can you take us back to those early years when you’re sort of still in school? And what the inspiration was behind sort of your efforts?
0:52
Yeah, totally. So you know, venture capital is a pretty hard industry to get into, if you don’t already know a bunch of people. And it’s really easy to get to know more people once you already know some, but very hard to go from, like zero people to 50 people. And that was the nut that was hard to crack. And, and I talked to students in college all the time still about, like how to get into venture capital. And my answer to them is always, “I don’t know how to get you into venture capital in next three to four months, but I’m pretty sure I know how to get into venture capital over the next three to four years. And what I’m almost 100% sure of is you won’t do any of these things that it takes”. So there’s just there’s no silver bullet or magic, it’s just hustle and not even hustle -like I think that word has been perverted now, just like lots and lots of rote, terrible, annoying work. And so my strategy when I was an undergrad in undergrad was, I used to do these like research projects, with actually now a colleague of mine named Brian Harwitt, who’s a Partner on our team. But before that, he and I were just friends in college, and we put together these research reports and PowerPoints about certain industries, you know, the elderly care industry, the staffing industry, marketplace infrastructure. And we would write these reports and put them in PowerPoint forms, actually still on SlideShare, believe it or not, and then we would cold email all these different venture capitalists, and we would just guess at their email addresses. It was like first name dot last name, first initial last name, first name at. You know what most students do is they email a VC and they say, “Hey, do you mind helping me figure out how to get a job in venture capital?’ It’s like this like impossible question to answer. It’s very vague. It’s like, oh my God, how do I explain that to you in an hour. So instead, what we would do is we’d say, “Hey, we did this research project, we actually noticed that you had two or three companies in our deck that we just made, we’d love to talk to you about the industry”. And actually, even before we did that, if we did one on like the travel industry, for example, what we would do is we cold email the Corp Dev offices of a bunch of travel and hospitality companies, because venture capitalists were busier than corp dev officers, because they just have more deal flow to look at. And so getting introductions to corp dev officers was getting our cold emails responded to us faster. So we would first build like a network of like five or 10 different large companies who had corp dev offices, and by the time we were talking to these VCs, who we’d cold emailed, we said, “Look, we’ve done a research project about an industry that you’re invested in, we’ve actually named two of your portfolio companies in it, and you wouldn’t believe it but we actually know like, 10 different companies that may want to buy your portfolio companies, would you ever want to meet any of them?” And it was like the most differentiated, like sophomore in college conversation they probably had, because it wasn’t, “Hey, you know, how great would it be to have me as an intern”, it was like, “Hey, let me teach you a lot about an industry that you’re already in and try to connect you to either other VCs who are also invested in it or corp dev offices”. And I’d say like one out of 30 VCs responded to us. So we picked a lot of people, but then by the time we finally got in the room, it was really useful. And what we would do is we try to meet five or six of these different venture capitalists and then start introducing them to each other. And just inviting ourselves, you know, like, if you can’t get invited to a party, create your own party. So we would introduce two really baller people who wanted to meet each other and be like, “Oh, the three of us should get drinks”, you know, and then I’d just be there while the two of them were talking. And we’d all be like, quote unquote, friends. And what I started to do is go to these people’s LinkedIns. And what I found is most people on LinkedIn don’t know most of the people that they’re connected to, or at least, if not half of them. You know, I think people are pretty liberal about who they’re willing to accept. So I’d go through their entire LinkedIn, I’d build an Excel sheet. And it was really annoying, because LinkedIn doesn’t really let you export some of these contacts. Like, Nick, if I went to your LinkedIn, I would have to go through every single person you know, 10 people at a time, and if you have like 4000 contacts, or whatever it is, it might take me three hours to go through it. And I’d try to come with a list of 20 people that you knew that I thought were useful, and a top five, and I’d send you five separate emails. I’d say, “Hi Nick, It was really nice to do the podcast earlier today. I noticed that you know X person, and I would love to meet X person for X, Y, and Z reason, and in case you forward this email, here’s a little bit about me”. And then I’ll email you a sixth email and say, “Hey Nick, I just actually sent you five forwardable emails for five specific people. Would you mind sending that to two of them, whichever two you know the best?” Because I assume that you don’t know most of the people on your LinkedIn, I assume you know about 40% of them. And I would never ask you, “Nick, hey, do you mind introducing me to somebody in your venture capital network?” Why? Well, one, you’re not going to connect me to the best person. You’re going to connect me to the easiest person. And also I’m asking you to do me a favor. And I don’t want you to do me a favor. But if I email you and I put the person’s name literally in it, all you are is the messenger. Like, Nick, if you email me and say, “Hey, I’ve got this kid who wants to meet people in venture capital. Ali, would you want to take the meeting?” You know, like, Nick, are you serious? Like, I’m so busy, I’ve got all these board meetings, like, really, you’re gonna make me do that? But if you’re just forwarding me an email from somebody who literally put my name in it, like, I’m not blaming you, you’re just a messenger.
5:26
Yeah.
5:26
So I did this, and my whole point of view was, I needed to make sure that the average person I met introduced me to greater than one person. So that might mean that three people introduced me to nobody, but I meet one person that introduces me to five. And I just viewed as a social network where I needed to create virality, my own network. And so I spent a lot of time trying to build these favors for people and build a good first impression. And then the last one was, we just became IOU collectors. So we didn’t really care about who we knew, we just cared about who we had helped. And then just building this network of people who owed us a favor for having helped them once. So I think that’s like the way I initially kicked off the network.
5:59
Got it. And how did that lead to the first capital raise? I think you had a target of $400,000 and you’re doing some angel investments, you know, how did you get the LP flywheel spinning?
6:10
One way to get the LP flywheel spinning is to only raise $400,000. You know, so I always joke with, especially when I go back to college campuses, that everyone started raising money when they were a freshman in high school, you know. So if you think about it, you know, think about your high school class, there’s probably like two or three kids that you went to school with who are like the smartest in the grade, you might have been one of them, or maybe somebody else going to class with, we had a girl in our school, now she’s, you know, a woman in our school, who was by far the smartest kid in our grade, and I used to take her pencil for tests. And I used to call it the elder pencil, like the elder wand from Harry Potter, and I just assumed that if I could use her pencil like I’d do better. Her first name is Christina. I was like, if Christina ever starts a company, I would just see it, like, I don’t even care with the idea is. And you know, I spent a lot of time trying to be.. in high school, I wasn’t super studious, I was more of an athlete. In college though I tried really, really, really hard in school. And, you know, at Cornell you can get a 4.3 if you get an A plus. Like my freshman, sophomore year, I had like a 4.18. I really studied hard, and ended up having like, really good friends who are also doing pretty well. And I joined a bunch of clubs. And I know this stuff sounds goofy, but like I was, I like to think my friends generally thought I was ambitious and hardworking. And a lot of the money that I raised was like, this is gonna be crazy. I raised like, $5000, $10,000, $25,000 at a time. $25,000 being from alumni who I just stayed in touch with. And like, I remember I had an LP literally just wrote $1,000 check, I had no ego, all I wanted to do is raise $400,000 because that was the minimum that I thought we needed to raise to build software for equity in startups. And we only ended up raising $391,500. And the reason is such an odd number is, one person, one of my friends invested $1000. And then one of my friends tried to invest $5000 and but then ran out of money and only wired $500. But these are all accredited people, it’s their parents or something like that, you know, but you it’s really challenging. But that was how we raised it. And almost everybody we raised the money from had known me for at least two or three years, and it probably had nothing to do with the idea. It was just that I was this kid who never went out and I just studied a lot, and I worked my butt off and the things I was trying to do.
8:18
So how did that lead to, you know, you getting into venture capital? Was this sort of the seedlings of these firms? Or was this kind of precursor to that?
8:29
Yeah. So, you know, I tried doing a startup that didn’t work out in college, but I caught the bug. And I wanted to be a venture capitalist, probably for like, all the worst reasons, you know, I thought, gosh, like, these VCs seem so cool, and how much better is it to like, give people money than to ask for the money, not realizing that to start a VC fund, all I’d be doing is asking people for money. And so I realized that nobody was ever going to give us capital to invest because we have no track record or resume. And so we raised this small, small amount of capital, and started hiring engineers to build software for equity and startups. And the idea was, there were gonna be all these non technical founders who wanted to build a company, they didn’t know how to build their MVP, and so we’d go build it for them. So we would raise the money, use that to pay engineers, and get equity in exchange for the engineering work we did. And it was, like, good for our investors. We made everybody money, except for ourselves. And the problem was, you know, seed rounds started to get bigger and bigger and bigger, so nobody really wanted to outsource the product development for their MVP; technology was getting easier to build. And so it was a way to get started, but it didn’t end up being an ultimately successful business model. Everybody who invested early, you know, we’re really proud of it. You know, we made everyone money, but it wasn’t going to scale. And we needed a way to earn cash flows, because it was like a not cashflowing idea. And a lot of our portfolio companies, you know, they needed debt financing so that they could originate assets. One of the first companies that we built software for equity and was a business called ProducePay and ProducePay was financing perishable produce. Today they’re, you know, a real company, they finance a huge amount of produce that comes to United States, and what they needed was they needed debt financing to go finance all these assets. So it wasn’t venture debt. It was asset-backed credit. And we needed to pay the bills, and we always joke that it was credit that was so good that even we could figure it out. And so we raised an SPV and SPVs are really useful to raise because, you know like when somebody gives you money for a discretionary fund, they’re assuming a handful things: they’re assuming you can find deals, win deals, underwrite deals, and help the companies once you’ve already invested. When you raise an SPV, they don’t have to take a bet you can find the deals because you’ve already found it, and they’re relying on you a little bit less to underwrite it, because you have a specific thing that you’re already showing them, like, you’ve already figured out what you’re gonna invest in. The third is you don’t have to prove that you can win the deal, you’ve already won it, you’re raising the SPV at this point. What they’re really betting on is like once you’ve invested, you’re not gonna mess it up. So you take way, way, way less bets when you’re giving money to somebody for an SPV than for an actual fund. So we started raising all these SPVs to finance ProducePay and a handful of these other deals. And we thought that we were just building this SPV business to pay the bills, so we could one day build an actual venture capital fund, and billions of dollars later, we ended up building a pretty big credit business. And, you know, actually in credit, it was much easier to decide if we were good or not, because the feedback loops in credit are much quicker. You know, in venture takes 8-10 years to generate any cash flows and a track record. And in credit, it takes a few years. I mean, you generate cash flows immediately because the interest payments and stuff. But you kind of know if the loans working or the credits working in a much shorter period of time. And so for somebody with a really big resume, long feedback loops are fine, because you can write off your resume for a while. I had no resume, I needed short feedback loops and credit really served that purpose. So we ended up building a pretty big credit business quickly, used that credit business to generate deal flow, reputation, and access to LPs. And then the LP access and everything else, allowed us to then go build Crossbeam, which is our venture capital business. So CoVenture today is our credit business, and our venture capital business is called Crossbeam.
12:03
So Ali, what was the gap in the credit market? You know, I just got off the phone right now with an LP that purchased a massive grain elevator in the South. And he was talking about a revolving line of credit and how that’s really important, because they’re purchasing, you know, lots of ag-commodities and turning those in 60 days, and I’m not sure what kind of rates he’s getting, but I’m curious, you know, what was the major gap in the in the market that allowed you to build this fast growing, seemingly thriving credit business?
12:34
Yeah, sure. So I mean, there’s a lot of parts to private credit, you can do real estate lending, you can do regular, you know, kind of what Lending Club used to do, or still does I guess, which is consumer lending, you could do student loans, you can lend against commodities, like grain. Actually, importantly, storable commodities that won’t go bad, you know, the thing that’s actually interesting about ProducePay is that produce is perishable. And so there’s so many different types. What we’re most focused on, primarily, is asset-backed credit. You know, what corporate credit is, is you find a company, you make a loan to them, and usually underwrite to some debt to EBITA, you know, if the company is making a million dollars of EBITA, you might lend 3 million bucks to them. And if it’s three times that the EBITA, there’s a debt service covenant, and there’s a loan-to-value. You know, company doing a million of EBITA, you might say, well it’s worth about 5 million bucks, I make a $3 million loan at three times debt-to-EBITA, and it’s 60% loan-to-value. And there’s venture debt, which is also corporate credit. You know, a startup company raises 20 million bucks from Bessemer at $100 valuation. Some, you know, venture debt lender says, Gosh, Bessemer’s so good, they probably won’t go bankrupt, so we’ll lend to a Bessemer-backed company, partly because of the loan devalues like, you know, 20% if they do another $20 million, and probably because it’s Bessemer. So like, you know, most Bessemer deals or a lot of Bessemer deals work. That’s all corporate credit. What we were looking for is asset-backed credit opportunities and asset classes that hadn’t really existed for a long time, or ever. And the reason that was so interesting to us is because we felt like there was an inverse correlation between the excess yield you can earn in newer asset classes versus older asset classes. Something like auto loans or consumer loans or residential mortgages, I mean, these things have existed for long enough where people think they understand them. And every year, the terms of those asset classes gets more and more compressed more and more efficient. And what’s also important about that, is that regulators understand it; regulators can look back at years and years and decades of data and say, well, the housing market looks like this in a recession and it looks like this in not a recession and you know, a FICO score for a consumer buying a home in the city worth a million bucks or half a million bucks or $200,000, like they get that. So what happens is, they can regulate institutions, and rating agencies can rate those assets, assuming they kind of know what’s going to happen in different market environments and so therefore, regulated institutions with cheap capital, like banks and insurance companies can finance those assets. You know if you think about the cost of funds for a bank, they have their equity capital, but really is depository capital. If you think about what you’re getting in your pocket, it’s not a lot. If you think about the capital that an insurance company has, they gotta pay out liability. So it might be a retirement annuity, a life insurance policy. But all those costs of funds are really, really low. It’s like low single digits across their whole portfolio. And, you know, so they can lend at cheap rates. But those regulated institutions can’t fund novel asset classes or new ideas, because they don’t fit within the regulatory frameworks, and they therefore don’t serve normal financial services markets, or ABS markets or other securitization markets that rely on just using precedent in comps.
15:46
So what are some of the novel asset classes and why hadn’t they, you know, been addressed?
15:53
So, perishable purchase is one that I started with. So no one ever lended against perishable purchase before, or financed perishable produce. And the reason is, it’s perishable. So you can’t really securitize something that’s gonna go bad in two weeks. But it turns out that there’s programs called PACA that actually protect title holders to produce. So you have all these farmers in Latin America who have no access to credit, have all this valuable produce that they’re shipping United States and then ProducePay has this apparatus where they can track the inventory in real time. They can track it in the warehouses, they can finance it, they can take title to it, they can provide liquidity to these farms have never had liquidity before. We have another company called Spotter that finances YouTubers, and they financed the YouTube catalogs. No one had ever financed YouTubers in a substantial way before. And so you know, we do Amazon third party sellers, Spotify revenues, you know, we’ve done Airbnb hosts. Yeah at one point, I was trying to buy playlists from Spotify, because they view them as radio stations and aren’t allowed to, but I was trying. You know, so we look for the weird, novel, and esoteric asset classes that have never existed before where we think we can earn excess profit margin on the novelty and newness, not just the fact that we’re levering it a little bit more than one else is.
17:01
How do you even begin to figure out the pricing and, you know, the underwriting and the risk in some of these cases?
17:06
So we often talk about doing unpriced, not mispriced, assets. And so mispriced assets might say, well, there’s been a market pullback, so auto loans really aren’t priced appropriately right now. We’re looking at stuff that’s never been funded at all. So to your point, yeah, it’s a hard question. So what we’re normally doing is we look at an asset type, and we’re trying to ask ourselves, like, what does this look like? You know, and so YouTube is a good example, like, a YouTube catalog is kind of like a music royalty; it’s a media asset, it’s got revenues associated with it. Or, you know, Amazon sellers are just small business loans. I’m simplifying it, but kind of, and so we say, Well, let’s take that analog asset class and figure out what the default rates normally are. And then let’s look at the thing that we’re looking at and say, does the data that we’re seeing in this new asset class check out compared to the analog we think makes the most sense? And if it doesn’t, if the data doesn’t match the narrative, we don’t know what we’re doing. But we can build that analog, we think, Okay, we have a base case, is it a fuzzier base case than something that’s more established, but it’s still a base case? And then what we’re trying to do is structure the deal; we have a loss coverage ratio that’s pretty significant. We’re gonna say, Well, we have the humility that established asset classes don’t have in that we’re not so confident in underwriting to like a one and a half, two times Loss Coverage Ratio. We’re looking for a loss coverage ratio, which is defined as what is the base case, and how many times worse can it get before we lose income or principle, we want to underwrite to a much greater loss coverage ratio than that. And then the more data we have, the shorter feedback loops we have, the more vintages we have, the more granular the data, the more diversified it is. It tilts us one way or another on risk. And then we’re taking that analog asset class and trying to figure out how that credit is priced. And then we’re adding hundreds of basis points of risk based on the fuzziness of the data, the accuracy of the data, and how confident we are relative to the unpriced asset.
18:48
Goti it, I want to come back to this. But before we do so, Crossbeam as well, right. So you’re doing more traditional venture capital investments. You know, tell us about the focus at Crossbeam and what you’re doing on that side.
19:03
So you know, we had always had a love for new technology companies. It’s why we were providing credit to them. And on the side, we’ve been doing angel investing or SPV investing and we as individuals thought that we might be good at it, and we started to see some exits and stuff, where it had worked. And we had built a level of trust as individuals with the LP community where we earned the right to then say let’s go start another business called Crossbeam that does venture capital investing. And it’s something we were passionate about. It’s something we’ve felt we’ve had to deal flow for. And we got really lucky, we got close to the group called Moelis Asset Management, and a couple other large investors, and we got them all to collectively co-anchor a fund for us in March 2020. And it was as much of a shit show as you can imagine a first close in March 2020 was, but we were crazy, crazy lucky. We got the close done. We made about five investments in March and April of that year. And so it gave us the confidence to go out and raise more capital, and we hired a full team. So the investment team, and the team broadly, that’s full time, you know, we’ve recruited over the last couple of years, and we’re really proud of the talent level that we’ve been able to bring on. And, you know, we’re investing into one or two deals a month, we’re in Fund 2 right now, it’s a $70 million fund two. We were able to, you know, find a bunch of companies that we had seeded, they’ve been doing really well, we wanted to participate in the follow-on rounds, we raised SPVs to go do so. And it’s a fairly generalist fund, but there’s some themes that we like a lot. You know, one theme is we love platform economy. So I think a lot of people talk about creator economies, and we talk more about platform economies. So the idea being that, you know, there’s like the two memes of Oh, my God, you know, venture capital is creating socioeconomic disparity and tech is taking all the jobs. There’s a Silicon Valley meme, which is no, no, don’t worry, tech just creates new jobs and ever existed before. One, we think it’s a complicated topic that we don’t know the answer to. Two, we think these platforms are at least helping solve the problem, which is that the small business of tomorrow is not really a drugstore or dry cleaner on the corner. It’s something that lives in the YouTube ecosystem, the Amazon ecosystem, the Shopify ecosystem, the Thumbtack ecosystem, etc. And the creator economy is one subset of that, but it’s not really all there is there. And it used to be that the platform’s capture all the value, but they’re having a much harder time doing that, because the second thesis we have is that network effects matter less than they used to. What do I mean by that? Well, one is that social media isn’t social. Nick, I’m curious, do you have Tik Tok or Instagram?
22:02
I do.
22:03
What percent of the content do you think on your social media platforms is created by your friends versus professionals?
22:12
Percentage by friends, 40.
22:15
Okay, what about YouTube? Do you ever see any videos posted by your friends on YouTube?
22:18
No.
22:19
What about these are social? I don’t really know anymore. And so the whole idea was that like network effects really matter because these were social media platforms with peer-to-peer content, I think these are media companies. And you’re starting to see that same trend line across all these different platforms. You know, Amazon has Shopify as a competitor and Squarespace as a competitor. And now Walmart and Jet as competitors and Target third-party sellers as competitors. So these platforms are losing that leverage they used to have, at the same time, people are looking for alternative careers. And there’s this huge platform economy that people aren’t really thinking about, that you can build really big companies on. Venture capital is built on the idea that the internet might be worth a trillion dollars one day; Amazon’s worth 1.4 [trillion]. And so you can actually build really big companies in these ecosystems. And we like anything that has anything to do with fintech. And we’d like anything that has a balance sheet. So in venture capital, you know, we’re a fairly generalist firm, but you know, we have theses and themes that we really like.
23:10
Do you still have a studio aspect to your model where you’re doing some building alongside the founders?
23:17
We don’t. I think it’s possible to build that, I think people have done a good job. I think we realized though, we were having a very hard time fighting a battle with entrepreneurs that could be more cost-efficient, if they just got their first product built by an outsource firm quickly and efficiently. And we stopped trying to fight that fight. You know, I think at the same time, we’ve realized that seed rounds were just getting so big that the need for a few 10s of 1000s of dollars of software help was just getting smaller and smaller. There are more engineers. And I think it’s important that any investment firm doesn’t get dogmatic about their thesis or what they do. If we’re still doing the exact same type of investing 10 years from now that we’re doing now, either we were prodigiously genius in our current thesis, or we’re stubborn and dogmatic and we’re about to lose all the money.
24:09
Okay, so Ali, we got Crossbeam, we got CoVenture, broad strokes on both. You know, in an industry where focus is dogma, why run two firms with different strategies?
24:20
So we think investing across the capital stack of companies makes us better investors. And it’s for a whole bunch of different reasons. One example is that, you know, if you look at a bunch of venture capital deals, you’re probably pretty good at picking one venture capital deal versus another, but should you be doing venture capital at all during that vintage? You know, and so by investing in multiple asset classes, one you don’t feel the pressure deploy, in any one given asset class. And two, you can start looking at things in 3D. As an example, you know, last year when SaaS companies started trading like 50 to 100 times revenues, we could anchor that against getting you know, low double digit net yields, like cash-on-cash yields on debt securities that were secured by assets. Why would I ever buy something at 50 to 100 times revenues, when I could take different dollars and deploy them in a secured asset at like 10 times cash flow, just made no sense. And so by being able to compare stuff, you don’t get lost in your own little world, and you don’t lose the forest of the trees. So I think that was one that was really important. The second is, I think venture capitalists have gotten pretty good at figuring out what technology might change the world, but it’s a pretty blunt tool, and they try to get all the companies to kind of fit within that one tool that they have. And I think by being relevant to more people at different parts of the company’s life, we get better deal flow, we can win differently, we’re differentiated. You know, I think trying to out all the venture capitalists is hard. But if you have something.. knowing something a little bit different, and taking a cross-disciplinary approach, I think gives us a competitive edge, whether we use it or not.
25:54
Do the teams with each firm work with each other? Is there you know, cross pollination here, or is it two separate entities and separate fund vehicles?
26:03
They’re separate teams and separate people, but they of course, know each other very well, and they’re affiliated entities. But we have to be really careful about getting them to be too close for a few different reasons. The first is, there’s not a lot of venture capital funds that have been super strategic and won. You know, Bessemer is, you know, associated with Bessemer Trust, I think, and Google Ventures obviously has done really well, and those are like the two examples I can think of. Other than that, most of the best venture capital funds that you know, have been independent enterprises, and I don’t think that’s an accident. And there are good, you know, corporate venture capital firms and offices, and you know, it’s true. But broadly, when you think about the best VC funds in the world, you know, Benchmark, First Round, Andreessen Horowitz, Sequoia, like they’re not attached to anything else. And I don’t think that’s an accident. And we didn’t want Crossbeam to be built and have this impression that people thought, Gosh, are we just investing in a company because we think it’s a good credit, or because it will lead to other opportunitie. We’re trying to align ourselves to the founder, but what the founder wants to do is they want to build a really big company, and they want to make a lot of money, and so do their employees. And we want to be in the exact same shoes, we want to be in a company, because we think it’s gonna make a lot of people a lot of money, and do good things to the customers and everything else. But we don’t want to have all these like ancillary things that we’re trying to achieve. So that was probably the main reason we kept them separate. The other, though, is conflicts of interests. You know, it’s really dangerous when you have two different entities, two different funds back in the same company, where people are doing things for the other side of the house. You know, a lending LP wouldn’t be very happy with us, if God forbid, we invest in the equity of a company, and our debt capital was too lenient on them, because you’re trying to save the equity and vice versa. So it’s really important that there’s some separation. I sit on both ICs, but I’m the only one.
27:47
What do you think’s most different about Crossbeam in the greater venture capital community?
27:53
So, you know, we have a handful of things that we think make us unique. And I think that part of it is our focus on themes, part of it is sort of how we do our work, and then part of it’s our cultural values, you know, so I think we go into investment opportunities with a point of view on the world. And what we think about is, it takes 50 B’s to recognize an A. And so what we try to do is look a lot of companies in a similar space pretty proactively. And usually, by the time we’re able to look at a deal, the reason we’re looking at due diligence quickly is not because we’re doing less diligence is because we’ve proactively done a lot of diligence on a space. And so we think that we have a unique ability to move fast, but also be very thorough in our work. And then usually, when we’re building a second thesis, you know, if we’re looking at 50 B’s in a space recognize an A, but we see 10 to 15 deals that all have a similar theme to them. That’s how we build that next thesis. And so we’re very thesis-oriented, we’re very proactive, but we worked very hard not to let our thesis get in the way of making good investments. A strong thesis might make a mediocre company look like a great company just because it’s your thesis. So you know, we try to be a little bit sober about that. The second is, we always joke we’re trying to bring investing back to investing. You know, I think venture capital as an asset type has been very Twitter-driven, very marketing-driven, very sales-driven. And, you know, we really try to have a point of view on a company and what’s gonna happen next, so don’t think we’re making a bunch of YOLO bets on good founders and cool markets. You know, I think one of the things that we take a lot of pride in is on the companies that we’ve invested in that have done well, if we went back and we looked at our investment memos, we kind of made money for the reasons we thought we would, and by the way, there’s companies that have pivoted, and we’ve gotten really, really lucky. But we don’t take a lucky pivot and say, gosh, we’re really good at this. You know, I think we actually try to know what’s going to happen, or at least have a point of view on a hypothesis. I would say also, we’re broadly kind of ABC investors, more so than AMZ investors. What I mean by that is, I think a lot of people in venture capital are very market driven, and they know what A is, and they know where Z is, and they couldn’t sing the rest of the alphabet. I think we’re kind of options-oriented in that we’re very good at figuring out what A, B, and C are going to be and we’re not quite sure what Z is but we know by the time we get to C, we’ll have more cash, more track record, or more traction in a company and we’re backing a good operating team and a reasonably good market, that option value will lead them to D, E, F, all the way to Z. And I think a lot of investors are A and Z. And we work our butts off. You know, from a cultural value perspective, we care a lot about you know, hiring people with a chip on their shoulder, we also care a lot about hiring people were working at Crossbeam is their first choice. You know, this is gonna be a goofy thing. But if we feel like, you know, somebody was applying five places, and we were like the third or fourth place they wanted to work, and they couldn’t get the other jobs and now they work at our place. They’re just not going to work as hard. When people have their dream job, they work like it’s their dream job. And so we’re looking for people who are on our team are working that job that they want to keep for the rest of their lives or close to it. And it comes out in how we help companies, how hard we work, how quickly we work, and the fact that we really give a shit about how this goes.
30:46
How do you source that sort of talent for your own team?
30:49
So we do a lot of farming. And what I mean by that is, you know, we go back to either campuses, or we go back to employees of companies we’ve backed in the past. And when we find somebody who’s really talented, we just stay in touch. You know, when we do coverage, you know, we have a Google sheet and in that Google Sheet is the people that we’ve met over the last five or six years that we think are just crazy, young and talented, and then we just stay in touch with them for a long time. And, you know, if any of those people are listening to this, like, suddenly, it’ll suddenly make sense to them like, why I’ve emailed them every few months, just to catch up broadly. You know, there are probably 10 to 15 people who are between the ages of 20 and 24, that I just try to call every few months to see how they’re doing to try to track their careers and see how well they’re accelerating. And when we hire, we sometimes use headhunters, we sometimes use, you know, full processes, but often what we’re doing is we’re calling people we’ve known for a long time, and saying, Hey, are you ready to join the firm?
31:46
Got it. And then after you’ve made a hire, you know, how do you think about developing these young folks into high performing investors?
32:39
So I’m curious how the last couple of years have played out for you guys. Right, the credit markets have changed significantly, the venture markets have have changed quite a bit. We went through kind of peak of the hype cycle last year, you know, talk us through how your philosophy and approach has adapted over the past sort of 12-18 months.
31:55
So we definitely don’t think about it on a two year program. And I think some people have had success with a two year program, and they’re committed to it, and we think that’s great, but it’s not what we do. You know, we’re trying to bring people in and use the first year or two to teach them everything we know, so that they can add a lot of value to the firm in years three through 100. But that’s not to say that these people aren’t having a big impact early, and it’s because we’re a small team. You know, we have one individual who is on our team, his name Sakib, you know, he was the first employee of the Crossbeam firm, and he led like, half the deals out of the fund. And he was just put on the floor, and we didn’t have like tons and tons of infrastructure around him and he had to learn. And so you know, for a while, you know, we’ll do calls where every call I’m on, somebody else is on so they can see how we’re talking to founders and how we’re helping founders. And because it’s a small team, you get a lot of that interaction. And then, you know, we’re working really hand in hand. But the more we can put these younger individuals on the front line and let them try and let them try, and then where they fail, we can step in, the faster they learn. But we’ve had a lot of success with that.
33:32
So during hot markets, we want to go earlier, and we want to do more complicated things. And during cold markets, we want to go later and do more simple things. So let me explain why. If you’re in private equity, what you would want to be in a hot market is a net seller. And if you’re in credit, what do you want to be in a hot market is a net issuer, so long as you’re in self liquidating assets, you’re not gonna get blown out if somebody tries to default on you, so you want to go down the capital stack. In venture capital, the closest thing you can be to being a net seller, is not taking your pro-rata, you can’t control the outcome of the business other than that. And so the earlier you go, and the less pro-rata you take later, the more you’re a net seller of your assets. So we had to go earlier because by the time a company was a Series A, B, or C company, the valuation was so ridiculous that it didn’t really make a lot of sense for our fund to keep taking the pro-rata. And we had to be more complicated because all the quote unquote, checklist companies were getting over-bid. You know SaaS companies are great businesses. The problem is everyone knows it. And the other problem is are not that hard to underwrite. I mean, you have to underwrite the market, you have to underwrite the retention. But if you go through like the same 15 to 20 metrics, like there’s a reason everybody in the planet wants to do SaaS deals. The reason we like FinTech so much is almost every company in FinTech sucks. And so you have to be pretty discerning about which companies in FinTech you actually like or not, you actually have to know about fintech. And so, you know, like lending companies are a great example, most VCs don’t know why some lending companies are valuable and some are not. Like why is Square worth what it is, and they’ve got software and they’ve got all these other parts of the business, they’ve got a pretty big capital component. So why are some financing businesses valuable and some aren’t? Well, it’s because in finance, you have to have an advantage on one of four places. You either need to have an origination advantage, like a firm might by originating through a POS or Square might. You have to have an underwriting advantage: do you have data that nobody else has, are you financing and asset classes never existed before? You have to have a servicing advantage. Once you finance an asset, are you good at getting the money back, you know, that might be payroll deduction loans or something like that. And you have to have a capital advantage like Yieldstreet might have of accessing retail customers, or Stoneridge, or one of those businesses where we access retail an interesting way to bring down your cost of capital, so you can finance at a lower cost of capital to your customers. And most financing businesses don’t have any of those four things. So we’ll never have big, enduring competitive advantages, and therefore big, enduring margins, or cash flows. We love the nuance of that. We love the framework we built and it’s why we think we’re actually good at that complicated business model. During cold markets, valuations are low and you don’t need to be that creative. You can go do the SaaS deals again, because less people are doing them, the valuations aren’t crazy, the marketplace companies you can do. So absolutely, we think differently during the hot market and cold market. Those are the broad strokes about how we think about it.
36:16
Anecdotally, are you seeing the valuations come down, and on what order?
36:21
Not much. I think, you know, I think founders and investors still have a pretty wide bid ask. And I think the thing that shocks people largely during downturns is how long it takes to actually see that show up. And patience is a really, really hard thing. It’s better to be a little too late than a little too early during a downturn. And so, you know, when I’ve talked a lot of my friends in venture capital, this happened by the way during COVID, during like the height of the pandemic, and it’s happened a lot now, too, where you have all these kind of like people with lots of hubris, say things like, well, you know, we don’t really care about the market, when people are scared, that’s when we want to be aggressive. And you know when the markets down, we want to go hard and all that stuff. And I remember during COVID, I was talking with one of my friends like dude, like you shouldn’t stop investing because the markets down, you should stop investing because no one can go outside and everyone’s dying. Like that’s a really good reason to stop investing, like the market’s not down for a stupid reason. And now when I talk to people, they’re like, oh like, we don’t really care about the market, and like when people are scared, like, the markets not down for stupid reasons. One, the market was hot. And now it’s like normal-ish. And also there’s a land war, supply chains suck, we have inflation, we have high rising interest rates, like the country is now populous, there’s populist governments that are taking over all over the world, Europe’s more of a mess that we are. Like, the markets not being stupid. Like if the market was irrationally down right now, and there was no news driving that I’d say yeah, go for it. The markets down for really good reasons. And so I think that there hasn’t been a compression of the bid ask because there’s that still, that euphoria hangover from last year. The other thing that we think a lot about, you know, this is an example of just sort of taking a point of view from different asset classes – different asset classes react to different paces, you know, during COVID, private credit markets didn’t really have as much opportunities as everyone thought they would, but venture capital did. Why? Well, in venture capital, people didn’t have as much cash then as they do now, because we hadn’t just gotten to such a hot bubble. And in venture capital, if you had six months of runway left, and you were in the pandemic, you weren’t going to wait until you had two months of runway left to go race. But in credit, like if you were a private credit investor last year, and you were secured, like you were lending to a hotel, what were you gonna do, if you took over the hotel? You don’t want to foreclose on that loan, you couldn’t change the pandemic, you weren’t gonna be a better hotel operator. And so there was more opportunity in venture capital and very little opportunity in private credit. And then you start to think about duration. So the shape of recession really matters. So if you have a very sharp duration recession, you actually want to be in long duration assets, not short duration assets. Here’s what I mean: if during COVID, you were doing a bunch of 30 day factoring of receivables, and somebody missed their one 30-day payment, you lost 100% of your money. If you got a five year loan with 60 payments once a month, and say you miss three of them, you got 57 out of 60 bucks back, that’s not so bad. So the shape of the curve really, really matters. And what we’re going through now is a much like, you know, more moderate modest shape. And so short duration assets are better than credit compared to long duration assets. Plus, we have no freaking clue where interest rates are gonna go in the long term. And in venture capital, I think we just said Be patient. So the answer is, everybody wants to create this narrative of like the markets down so now’s a good time to be investing in, it’s better, but I don’t think it’s been like this eureka moment that everyone’s been waiting for. We’re not going faster suddenly.
39:35
Where do you think we’re headed in the next 6 to 12?
39:38
Probably worse than we are now. I mean, you know, consumer has been okay for the first half of the year but, you know, consumer prices aren’t inflation adjusted. So, flat has meant down. You know, I think people are still working through their savings and working through the cash reserves they built up, but you know, gas is expensive. It’s not like that’s probably gonna get a lot better and we don’t live in a political environment where people are comfortable with nuclear, they’re not comfortable with the US controlling its energy destination. And so that’s probably gonna be a pain. But I don’t really know what I’m talking about, I’m not a macro guy, but like, you know, just intuitively. The consumer hasn’t been as weak as we thought it was going to be, default rates haven’t picked up as much as we thought they were going to. I don’t know, I don’t see a lot of good news on the horizon. The reason I hesitate to say it is, the number one way to sound smart is being negative, like being negative is a super cheap way to sound intelligent, and being positive is a very challenging way. So everything I’m saying it’s sort of like a cheap cop out. But, I don’t know, it feels like I don’t see a lot of positive things happening right now.
40:38
Ali if we can feature anyone here on the show, who do you think we should interview, and what topic would you like to hear them speak about?
40:43
It’s super easy, his name is Roneal Desai. He’s maybe one of the smartest people on the planet. And he’s also one of the hardest working people on the planet. He’s a hedge fund investor who invests in technology companies and I just think he’s just ridiculously thorough, ridiculously deep. And you should try to pick one thesis, and you have to clear your entire day because he can talk for 20 hours about any one idea that he’s working on. But he’s probably one of the best investors I’ve ever met. He’s one of my best friends. But he’s just, he’s like, he’s a two sigma event as a person.
41:15
Amazing. Ali, give us a resource that you found really valuable that you would recommend to listeners.
41:23
Just read about both sides of an argument. If you’re convinced of something, make sure you stop being convinced of it. You can have a point of view, you can think it. But the minute you think you’re convinced of something, try to read contrarian views.
41:36
Love it. Ali, do you have any tools or hacks that are a secret weapon?
41:41
I have two: the forwardable email and three available times. The first, on time forwardable email, a well-constructed forwardable email is an email sent in a brand new email thread. It’s not a response to an email, it’s not something like oh, you can copy and paste this when you get home at your computer. It is a new email and a new thread that you send, that somebody can forward from their phone and write to whoever you’re trying to get an introduction to and say see below, let me know if you want a connection. If you send me something I can copy and paste, that doesn’t help me that much, I still need to wait till I get home at my laptop to do the paste and match style. I promise it’ll take a lot longer for me to help you. Not because I’m a bad person, I’m just at home. The second is saying three available times, and it’s a thing of respect. So Calendly is a much more obvious and efficient and rational tool to use. It makes all the sense in the world. You send someone a Calendly link, they can go in, they see their calendar, they see your calendar, and it’s beautiful and marvelous. The problem is, there’s this implicit, like, I don’t want to spend as much time, like I don’t care enough to spend the time to look at my calendar and offer you available times. And I get that it’s irrational. And I get that this makes no sense. And there’s some like engineer listening to this being like, Oh, this Ali guy is an idiot, he’s got such a big ego because he wants to be sent three available times. It’s just a little bit of a respectful thing. And you can you can hate it all you want, you will get more meetings, if you send three available times.
43:00
Love it, love it. And if I could add on the forwardable email, every email you write, think about it being forwarded at some point. And so write with the intent that everything will be forwarded at some point, and it’ll serve you well over email.
43:17
Yes, completely.
43:19
All right, sir. And then finally, what’s the best way for listeners to connect with you and follow along with Crossbeam and CoVenture?
43:27
Um, my email address is Ali at CoVenture.vc. Pretty easy, or Ahamed at Crossbeam.vc. And if it’s personally written and has a call to action, and I think I can help, I’ll respond. And if it’s spam, or if it’s like, you know, something that I don’t feel like was, you know, at all relevant to me or if it’s not something I can help with, I’ll just write back I don’t know that I can help even though I want to, I want to help anyone. And then I’m around on Twitter at Ali B Hamed. Either way, I’m a pretty good responder for the most part.
44:00
Awesome. He is Ali Hamed, the firm’s are Crossbeam and CoVenture. Ali, been a big fan for a long time. I’m glad we got you here on the show and the rest of the audience got to hear more about what you’re building.
44:09
Thank you so much, Nick. I had a lot of fun. And I hope that nobody takes anything I said too seriously, and they just build their own views.
44:17
Thank you, sir. Take care.
44:18
Thanks.

Transcribed by https://otter.ai

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