The Exchanges

Q I want to walk through a little bit of what your investment process looks like. So let's just start at the top of the funnel where, where do these ideas come from?

A What we often talk about is that it takes 50 B's to recognize an A in a certain asset type. We don't go from financing an Amazon seller to trying to go back some vertical SaaS AI business and construction. The path to different deals ends up actually being a little bit more obvious than you might imagine. So, you know, one of our earliest investments was in a company called ClearBank that's now called ClearCo. And that taught us a lot about paid acquisition and taught us a lot about e-commerce. And that made it a lot easier for us to go finance Amazon third-party sellers. Amazon third-party sellers taught us a lot more about e-commerce even more so, and so it let us invest in e-commerce enablers. Amazon also taught us a lot about platform economies. It gave us a whole framework of what makes a platform investable and what makes a platform not investable. It also taught us the value of shifting from the platform to the people on the platform. So what happens is we take the deals that we've done. We try to see as many of the deals in that same space as possible so that we can recognize a B from an A. And then once we get really smart on that idea or that space, we try to find adjacencies. And we start telling people about the adjacencies. We often talk about being sonar learners, which means you say something to somebody, you hear their feedback, you, you kind of debate with them…

AI assessment note: “once we get really smart on that idea or that space, we try to find adjacencies”

Q What are some of the newer new asset types that you're looking at?

A So some of the spaces that we're spending time on that might not be institutional yet, but could be in the future. One is we're looking at yield farming and the way yield farming works is you have a decentralized exchange, like a unit swap or a sushi swap. And unlike a centralized exchange that holds inventory, a decentralized exchange doesn't. So what they do is they rely on the inventory from other knuckleheads like me. When I do it personally, I was just lending my Ethereum or Bitcoin or whatever to a liquidity pool. And what happens is Ted, you come to Uniswap, you want to buy Bitcoin because I'm lending my Bitcoin. To Uniswap, like it has inventory, can make the trade. And in exchange for me, providing that liquidity to them in this pool of Bitcoin and Ethereum, whatever it might be, the pool ends up getting commissions off of it. Another space that we're spending a lot of time on is user-generated games. So anything that sits in Roblox or Minecraft or Fortnite, we're investing in a company called Infinite Canvas. That's essentially a quasi-game publisher of user-generated games. And what will that one day look like? If you think about what the music publishers are, they're essentially financiers and musicians. I bet you that the future of game publishing is not spending years and years coming up with a game and trying to distribute it in metal CDs, metal boxes at people's…

AI assessment note: “One is we're looking at yield farming”

Q I want to turn to these four categories of the investments you like to learn and dive in a little bit more. So you started with FinTech. What aspect of FinTech is most interesting?

A Today, we're most focused on financing businesses. We've done a handful of consumer application businesses, and we've gotten more excited about international fintech than we expected ourselves to. I'll give a theme that we think is really incredible, which is the international buy now pay later thesis. International buy now pay later is so powerful, maybe even more powerful than in domestic buy now pay later, because you're actually creating a credit profile for a consumer that's never had credit before. And what it does is it gives you a relationship with that borrower. That's an order of magnitude better. Than anything anyone else can provide. That's different than a domestic buy now pay later that might have incrementally better data points. But at the end of the day, they're still incremental. You can lend 10,000 dollars instead of the borrower being able to get 9000 dollars. Internationally, you can lend 500 dollars to somebody who was previously only able to get 50 dollars. And in the playbook, you know, and this is across multiple companies, is as follows. You basically advertise to a bunch of consumers and you make loans to all of them. Some people pay you back and some people don't. The people who don't, you leave a loan. The people who pay you back, you make another loan to, and you make a bigger loan, and then you make a bigger loan, and a bigger loan, and so on and …

AI assessment note: “a theme that we think is really incredible, which is the international buy now pay later thesis”

Q What did you find the tipping point was from that third group, the LP community?

A A few different components. The first is on a personal basis, I had proved to people that I could make money. We invest institutional size capital in our credit business. And we had been making money for people for enough years where I was able to have a conversation with institutional investors who very much understood credit, where I could have a sophisticated, rational conversation with them about credit. And then after having that start telling them about venture and they believed me, Cause they had first built trust with them and credit. The second is time. We just took a really long time to have our first exits, to have realizations, to have a lot of those markups bear fruit. And the people who came into our firm, our different pools of capital and the different strategies we had known for years, the average check that we've ever gotten from an LP took us 26 months of knowing the person to get it. It's a long sales process. And I think, you know, a lot of people, when I talk to them, they say, well, I want to start a VC fund. And I often tell them I can help you figure out how to do that in three years. But I don't know how to help you figure out how to start a fund within six months. Cause it takes two, three years of helping people, introducing them to managers. I mean, a lot of the people who are invested with us, I introduced them to other firms that they invested in …

AI assessment note: “A few different components. The first is on a personal basis... The second is time.”

Q Why don't we start with your background? Because in another life, I could be sitting in front of a professional baseball player.

A Yeah, I grew up in Southern California, and baseball was a much easier way to get into a four-year college than school, you know, where I grew up. And everyone we played with was either, like, an All-American or played minor league baseball after high school or college. My Instagram's gotten really interesting because, like, a bunch of my really nerdy high school friends are now major league baseball players. You know, these are the types of guys who I knew they couldn't even talk to a girl, and now they have, like, a thousand comments on their Instagram of, you know, take me to prom. But, uh, yeah, grew up in Southern California playing baseball. Went to Cornell to play baseball, and while I was in high school, I fractured my back in a couple places. So I went from being a pretty good D-one player to an average D-one player, and realized that I was just gonna be better at startups, and it wasn't worth continuing to pursue.

AI assessment note: “Went to Cornell to play baseball, and while I was in high school, I fractured my back”

Q So once you had this idea that you could build software for equity, how did you turn it into a venture business?

A In a really unglamorous way. I took a little bit of capital I had, and I partnered up with another guy, and we sort of pulled it together and hired some engineers and tested out whether or not this would work. And once we had some basic conviction, so this was my senior year in college, I basically went to anyone I had ever done consulting for, I had met, I had shared an elevator with, And said, hey, this is the idea. Will you give me 10, 25,000 dollars, 50,000 dollars, et cetera. And we scrapped together 396,000 dollars. A thousand of it actually came from my little and my fraternity. That's why it was three 96 and not three 95, and he Venmo'd it to me. And then we ended up continuing to invest in businesses that started to actually become quite successful. And I partnered up with two other people. One is a guy named Thatcher Bell. And Thatcher was a Cornell alum who had Spoken in one of my classes, and he was the type of person who, when he would come back to school, all the undergrads would be like, I want to be like Thatcher when I grow up, and I continued to bug him over and over and over again until finally we were at sort of this party at South by Southwest, and so we were having this conversation, and I was telling about the things that we invested in, and I convinced him to work with us a day a week, and we'd pay him pro rata because I couldn't afford to pay him more t…

AI assessment note: “I took a little bit of capital I had, and I partnered up”

Q Well, Leah, I want to make sure it takes some time to turn to some closing questions I didn't ask you the last time around. So what is your favorite hobby or activity outside of work and family?

A This is going to be an answer that'll give me a hard time. Right now the hobbies work, you know, at a point in my life and we're in a point in the market where I don't think anyone who's worked in tech that I've talked to has seen something quite like this and seen the amount of activity and deal activity and everything else. And I think work-life balance is a really important thing. I don't have it right now. Honestly, like I'm not that embarrassed about it. We are working our butts off because we are in a once in a lifetime moment. We wake up at seven and we work till about 11. And there's gonna be a lot of people who think, gosh, what a terrible firm, or that's not a good example or whatever. That's fine. Like I don't need other people to do the same thing we do. I don't have hobbies right now. I just work a lot.

AI assessment note: “I don't have hobbies right now. I just work a lot.”

Q And once you have a company in your portfolio, how do you try to help them out?

A So it's really bespoke company to company. To back up, a lot of VCs, especially early VCs, oversell what you're offering. They talk about strategy, they talk about vision, they talk about helping you with future financings. In the beginning, the company needs to make something and sell it, and there's like not a ton of strategic vision in those first 365 days. There might be product decisions that you can help with, but our number one job in the beginning is to help them hire people, Help them find their first large customers. And importantly, by investing, give validation of the company so that customers want to work with them. Employees want to work for them and other investors want to invest. You know, in venture capital, people often talk about it as a contrarian business. It's sort of a contrarian business, but what it really is, it's a contrarian business that you're really working hard to turn into a consensus business. If you invest in a company and 12 months later is still contrarian, the company's gonna run out of money unless you can keep funding it. The term that most people in venture capital wouldn't want me to use Is that we're sort of merchant bankers. We run around, we invest some of our own capital. And then our job is to tell the rest of the market that they should invest at a higher price. And so that is the number one job. That is the number one thing that …

AI assessment note: “our number one job in the beginning is to help them hire people”

Q So I want to take a step back and ask you about what you've experienced in these different iterations of having a venture capital fund, and particularly in an environment where you're doing something that's a little bit different, but there's robust interest in venture capital. What have you found as you've gone out into the market?

A One of my biggest learnings is when we started the business, we tried to be really contrarian and we thought, oh my God, we found a diamond in the rough. This is going to be amazing. The founder can't really tell their story. We'll be able to tell the story for them. We're the only ones who understand the complexity of the business and gosh, aren't we so smart to see something that nobody else can. And we forgot that we didn't have signal either because we were so new. What we found is we needed to work a lot harder on marketing ourselves and marketing. Why we like a space before we were going to invest in a space that didn't already have a lot of interest. Your union square ventures. If you're Sequoia, the fact that you did the deal is the reason it's no longer contrarian. And because we haven't been around for as long as them. We had to take more of a blocking and tackling approach. We knew that if we were going to back a company that would not be in a space that everybody had been in before, we would need to do 50 phone calls to prepare them so that when we finally brought it to them, they knew what made it different and why the thesis was interesting. And we had to know that if we had 20 of those calls and all we were getting was blank stares, no matter how cool we thought the space was, we just wouldn't be able to finance it because we're not a multi-stage fund. That was a…

AI assessment note: “What we found is we needed to work a lot harder on marketing ourselves”

Q What are you finding the environments like when you've done your work, you're excited about a company and you want to get in the deal?

A It's hard. Venture capital in many ways, it is a sales business. I have a lot of friends ask like, oh, how should I think about investing in a VC fund? One of the points that we've often made is when you talk to a venture capitalist, would you ever wonder, do you want them on your board? Is this the person you'd try to go take money from? And we try to be that for the founder, even before we know we're going to invest. And a lot of VCs, they answer this question. We have big networks. We can introduce you to a lot of people. We just do it. We show up prepared. We move really fast. We're texting with the founder. We're emailing the founder. We try to be as fast responding to them as they are to us. The earliest days, like if it's taking us more than a couple hours to get back to somebody, either we're thinking really, really hard about something or we're not moving fast enough, or maybe we're just not that interested. So I think it's a combination of speed. How much can we help the company during the process? Do we reference well? And we expect that all of our founders reference us when they talk to us. And luckily we have enough founders who tell people that we're the ones who help them land their biggest customer. We're the most important one. We were the one who gets back to them the quickest. And so I think a lot of it is just winning with actions instead of winning with wor…

AI assessment note: “It's hard. Venture capital in many ways, it is a sales business.”

Q through everything from portfolio accounting to reporting to reconciliation, trading, compliance, and more. In the AI era, asset and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now back to the show. How do you find these kind of unique opportunities?

A We now have over a hundred ADLPs and these people or institutions are usually people who are getting pitched themselves. They are entrepreneurs. They're former heads of banks. They're former heads of private equity firms. They own sports teams. They are VCs. And so a lot of them are pitched, see things that don't fit their sort of investment criteria, but because it's weird or it's different and they send it to us. We're like the home of misfit toys now for a lot of these people, as long as they're high yielding misfit toys. The other way we do it is other venture capital firms send us deals. So in traditional venture capital, most VC firms who lead deals won't share their best deals with other VC firms who lead deals, because there really can like only be one. For us, though, because we offer something differentiated, because we're helping founders build their product, a lot of the best VC firms in New York or the Valley, et cetera, send founders to us when they like the founder and like the idea, but the company is still pre-product. And so that's become another way that we see deals that we think is really high quality. And when we think about deal flow in general, we think that there's actually this really hard dichotomy that people have to fix. And it's as follows. Series A investing is a B to B business. You're investing in a company that's already a company. Seed investi…

AI assessment note: “We now have over a hundred ADLPs and these people or institutions”

Q It is an incredible insight that there's an asset that no one's thought about and priced. What are you doing with that?

A Right now, we're really, really focused on businesses that we're in, but it's indicative of the type of stuff we'll probably get into one day down the line if we ever feel like the market opportunity is there. But we feel like we're structurally in a place that we could underwrite that asset. Better than other people from traditional finance. One of the things that we've newly become enamored with is again, sort of illiquidity in the venture market. And so we have a portfolio company called SecFi, and what they do is they lend against the stock options of private company employees. So if you're an employee who's been in a business for a really long time, first of all, you want to exercise your options early if you're able to, because you get capital gain tax instead of ordinary income at the IPO. So it's immediately a product that's healthy for employees because now they're getting a tax advantage. You can also get a really, really high return and a high yield on those products because banks have provided liquidity to founders all the time with PGs, but there's no one who's really been serving employee 20 through 2000. The company's building a technology product that allows us to do that, and again, we think it's an unpriced asset. We think it's something that's new, you know, it's a new credit-ish type product that's being invented by technology that's allowed them to observe …

AI assessment note: “Right now, we're really, really focused on businesses that we're in”

Q I know a lot has changed on your end from when you were last on the show, so why don't you walk me through what's happened with CoVenture over the last couple of years?

A I wouldn't be surprised if last time we spoke, we had something like called a hundred million of AUM. I think now we're probably investing closer to a hundred million dollars a month. It's certainly been a much different experience this year than it was back then. And just to back up and remind you, when we started the business, we started my senior year in college. I had just done a startup. I caught the bug. I wanted to be in venture capital. We had this crazy idea to build software for equity and non-technical founders. And it really taught us investing in how to think about businesses. Cause we had to pick and choose which companies we're going to build software for. And it was a tremendous experience for myself and for our team, because it was a way to kind of leg into venture capital. And a lot of the companies that we did this for, they were lending companies and they need debt capital. And so initially we had this whole marketing story that we tell about, we had this great thesis and asset back lending and how all these asset classes were going to explode. Like a lot of things, our first investments really taught us what the thesis was going to be. We had this early company produce pay that was financing perishable produce that had never been done before. And so we started setting up as a fundless sponsor, just SPVs to finance the debt of each deal. And whereas it took …

AI assessment note: “now we're probably investing closer to a hundred million dollars a month.”

Q What information do you read that you get a lot out of that other people might not know about?

A The two filters of what I read, I try to read stuff where the agenda setting is democratic and where I'm paying for the content, so I'll explain both of those things. So Facebook ends up being just sort of this kitchen sink of stuff that you already agree with, Because it's trying to help reaffirm stuff that it knows that you're interested in and provide it to you. Whereas Twitter, one of my favorite things is I follow people and try to make sure that if I'm following 50% Republicans, I'm also following 15% Democrats. If I'm following people who work in tech, I'm also following people who work in arts and finance and healthcare and everything else. So by creating sort of a democratic feed or a democratic agenda setting, I try my best to sort of get different disciplines of information. Because I think it's a lot easier to know something different than more of the same. And I always try to make sure that I'm paying for the content, or I'm going through a paywall, and the reason is that's how I know the content that I'm reading is meant for me. So if I'm reading something that's free, it means that I am the product that's being sold to advertisers, and the content I'm reading is just a marketing tool to attract me to the website. I think it's really important that I know that the writer is concerned about how I feel and the quality of the content that I'm receiving, because it's …

AI assessment note: “The two filters of what I read, I try to read stuff where the agenda”

Q And where is it today? Because if you look at the venture capital world, there definitely is a notion of a first year venture capital firm. Those firms have the supply of as much investor capital as they would like to take. They also themselves are fabulously wealthy and could invest as much of their own capital as they want. Are you seeing that in the pricing of deals today?

A No, not really. And I think it surprises me a bit. I mean, maybe Andreessen Horowitz a little bit, right? Like they just have so much capital or they've Probably have some level of confidence that they'll be able to continue to raise more capital. And I don't think it's consciously going into the thought process, but maybe subconsciously of look like if we return, you know, one and a half X, two X the money, we're probably still going to be able to raise another fund. And so we're playing a different game than everyone else is. But, you know, I think that a lot of people in venture capital for better or worse view it as an art, you know, and they like view their IRR as like their multiple uninvested capital as like the holy grail. And I think it's like a massive sense of pride or What's happening is many of them are becoming so good and so wealthy that they're becoming such a large percentage of their own fund. They're thinking less about the fees and the AUM than they are about what are the generated returns overall, and what is my IRR. So, I don't know. I think it'll just sort of depend on the manager, the manager's background, the manager's motivations, and what ways they're trying to earn their economics. But it's just something that we're sort of fascinated by and are a little confused of why it stayed so static.

AI assessment note: “No, not really. And I think it surprises me a bit.”

Q And what's the time horizon for these investments?

A It's getting longer, and it's a problem. What's happening is you had a lot of the people who came into these seed funds. They were family offices or high net worth individuals who could afford to commit two 50 K to 500,000 dollars into a fund, which was less than any series A or larger fund was willing to accept. And this was their first ability to really invest in venture capital. The problem, though, is those people are less tolerant of severe illiquidity. And severe liquidity is exactly what we have today. And that's getting worse and worse as series A and growth funds are getting bigger and bigger. And now we have the soft bank vision fund, which is like the replacement of the IPO, right? Like the goal used to be, I want to IPO my company. And now they're like, the goal is I want Masasan to like, give me more money than anyone could ever imagine. So it's bad and it's getting worse. And so what happened is a lot of these seed investors are going to their LPs and basically saying, sorry, it'll get better later. And I think that's a really bad answer. I think the answer has to be the market change. So we're going to change our strategy with it. I know at CoVenture, so we have a deal. The company's raising another round. It's going to be a very oversubscribed round. And at the new marking, it's going to be something like a 30, 40 X return for us, which will be great. What we're…

AI assessment note: “It's getting longer, and it's a problem.”

Q The two examples you used, podcasting is an obvious third one, where today the content's free for the reader. So if you have two competitors, you have Yelp and TripAdvisor, and one of them starts to effectively charge through the tokens, the other doesn't, doesn't that dramatically decrease the scale and network effect for the competitor that's trying to charge for the first time?

A I don't know. It depends. Right. And you can charge with both money and you can charge by, you know, sort of motivating people to be better participants of the platform. And so I'll just sort of spitball and these are probably bad ideas, but like, for example, on podcasts, you could get issued tokens for every minute you listen, which means you're a more engaged listener. And so now more people are motivated to have a podcast because they know that the people who listen on Apple's, you know, app store are more engaged than people who listen to some other medium. And so now you have more people like coming to that platform. So There's ways, I think, to create positive incentives where, sure, you might have less people in the network, but the network might be stronger, and maybe you capture more economic value via a more tightly wound network of people who are better participants than a loosely bound network with many, many nodes.

AI assessment note: “sure, you might have less people in the network, but the network might be stronger”

Q that I could make that this whole crypto world is a bunch of really, really smart programmers trying to capture value for themselves. And it's not yet clear what the use case is. So you have this sort of financial world of looking at this and the technology world that's building it. How does someone in the financial world get comfortable that this is something that they should participate in?

A There's both a positive and a negative spin on it. It's positive that the creators of these networks are the ones who are actually generating the wealth. You know, at the end of the day, the people who made money on the dot-com era were like the same people who made money on every other era, which were like the people who capitalized these businesses. Hold the shares. And as the economic value became greater, like it was the entrepreneurs and the VCs who made the money and the engineers who actually built all this technology, like actually are a bunch of people who make reasonably good low six figure salaries. But even though they're creating all this value, they're not capturing it in crypto because the economics are actually shared with the people who are building the protocols. I do think that it is good that the builders are actually capturing the economic value. The negative spin on that though, is you have a lot of people Who are experts in crypto because they've happened to know about it since 2008. So if you're a really hardcore crypto person, you've been involved since 2010 11. You have six years of your incredibly long experience of the space. And by the way, like one year's experience isn't necessarily an analog to the next because it's changed so dramatically. And you have a lot of people who sort of fashion themselves as hedge fund managers, even though they have n…

AI assessment note: “There's both a positive and a negative spin on it.”