The Exchanges

Q Why don't you take me back to where this all started? I would just love to hear your story.

A I was born in Sri Lanka to a family that was, I think, relatively middle class, upper middle class. My father's family made tea chests, so like, you know, chests that you keep loose tea leaves in. He grew up in the south of the country, and then my mom was born sort of near the capital, and they were sort of the administerial class, mid-level to senior mid-level executives in the government. Long story short, at the age of seven, I moved to Canada And we stayed because of the Civil War, and even though my parents were part of the Sinhalese Buddhist majority, my dad got into a little bit of an issue, and he filed for refugee status and stayed in Canada, and that's where I grew up. Very much a byproduct of the social safety net in that country. My father struggled with a bunch of personal issues, alcoholism, depression, diabetes. My mom struggled with English, but the social safety net really allowed us to not fall through the cracks, and I Went to a very good high school, and I was able to go to a very good university. Graduated in electrical engineering with relatively minimal debt, and I worked at an investment bank for the first year out of college, where I had worked actually for the preceding sort of two years on and off during college, and I was a derivatives trader at Bank of Montreal, Nesbitt Burns, and that's really where I fell in love with taking risk and managing ris…

AI assessment note: “I was born in Sri Lanka to a family that was, I think, relatively middle class”

Q 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. What's the proposition to these people about what SC will do for them effectively, other than here's a little bit of capital, you get a chance to run it?

A I think that there's a lot of administrative stuff that is sort of a little bit table stakes, but I think can go a long way. So an order management infrastructure, a prime brokerage infrastructure, a legal infrastructure, and a compliance infrastructure that makes running other people's capital and capital in general turnkey for them. So they don't have to deal with any of that overhead. That's number one. So that, I think, allows them to then focus on the substance of the job. Then number two is an educational framework. Again, what I talked about earlier, that building that camaraderie with a group of people, teach-ins, learning sessions, idea dinners, where they can learn the cycle of investing and in a safe way, in a safe space, can put their best foot out, present business ideas, get feedback, and learn. The third is a compensation model that will actually make it very difficult for them to decide whether they want to scale or not. So just to talk about that, the way that we have structured the compensation, all the way up to about fifty million, basically you take 30% of the profits, and there's no hurdle. Over fifty million, we start to impose this logic of a hurdle, and the reason is because at that point, the quantum of capital, you start to look like a traditional hedge fund where folks can basically get the market beta. Right. If the market beta is sort of eight, nin…

AI assessment note: “an order management infrastructure, a prime brokerage infrastructure, a legal infrastructure”

Q So as a concept, sounds great, and I know you took your first step publicly and announced that you were doing this, looking to give some capital to people in the public markets, US public markets. What did you find with just that initial announcement?

A It's really inspiring. It's been about a week and a half. I think as of last Friday, we had about 350 applications. I would say about 200 of them have already been sort of read. We're trying to feverishly read these as quickly as possible. I would say of those, what I've heard so far is about a hundred of them are really compelling. And they're incredibly diverse. There's a, you know, I'm not going to say who these people are, but we had a mother of three teenage boys apply, and her application was amazing. She had left the workforce. She had raised these kids, but she had always been investing, had always had a passion for investing, and her explanation of risk management, some of her ideas, her process, We're really inspiring. We had this young woman who works at a mutual fund complex supply, and she talked about all of her psychological pitfalls and how she uses journaling to mitigate risk management issues. Incredible application. We had a gentleman who's in his, as far as I could tell, I think, in his late thirties, who has basically built up his own portfolio, very eclectic background growing up in Soviet Russia, and then emigrating just Building himself up by his bootstraps. And you read these things, and I don't know, I was just so happy. I was so proud. Like, I was just like, these people are exactly the kinds of people that we would want to see succeed in the world. S…

AI assessment note: “I think as of last Friday, we had about 350 applications.”

Q How far off are we from seeing that in any kind of scale?

A One to three years. That's why I think like getting access to some of these things are really important. Now, do I want to own the battery storage technology? Not really. Do I want to own Resi Solar? Not really. Those are kind of meh businesses. But do I want to own infrastructure that is the software layer? Absolutely. Because that could be a very, very critical resource for the future. It could be. A different example is that if you think about what we've seen in terms of technological advancement from 2005 Through 2011. In those six years, some critical ingredient technologies got to a certain amount of scale. Amazon AWS, Apple's iOS, and Google's Android. And if you think about the trillions of dollars of value that's been created, it's been enabled by those three layers of infrastructure. If you take that analogy and apply it to Biotech, we're actually at a similar point, because we are seeing now improvements in delivery mechanisms like Carti, in implementation mechanisms like CRISPR, and all of these things set us up, I think, for a renaissance in biotech, and so I would be very interested there in owning some very critical resources that I think will be very beneficial for the future. And so I want to buy operating companies that I think can generate large amounts of current cashflow by improving the state of the world, but then feed those back into social capital, who …

AI assessment note: “One to three years.”

Q people were investing in, and you mentioned the possibility of doing this down the road in venture capital or crypto or some things like art and trading cards, but you're starting in U.S. equities, which is kind of interesting because even if you find people from diverse backgrounds, it is the most competitive market for talent, probably in the, in the world, certainly in the capital markets. Why start there?

A To be honest with you, we had to start with a V 0.1 that had manageable guardrails, and it had a cycle time that was fast enough to justify us underwriting this as a fully standalone business unit. So if we had started in venture capital, the guardrails are relatively well-defined, meaning we know what the assets are. We know what private securities are. We know what the deal docs look like, but the cycle time would fail. You can't wait 12 years to know whether this product is successful. If we had started in crypto, the cycle time is fast, but the guardrails are completely undefined. You could be investing in DeFi, you could be investing in Ethereum, you could be investing in some shitcoin or Bitcoin. It's too unwieldy, Ted. If you look at trading cards, the cycle time is fast, but the asset class and the guardrails are indeterminate. If you look at art, The guardrails are indeterminate and the return time is indeterminate. We just basically prioritize them in a spectrum. And we said, where can we start where we get the fastest return on feedback and the ability to say it goes from that third leg of our social capital stool, meaning experiments into one of these two primary legs as a standalone fully fledged business where we could see allocating billions of dollars. And so that's why we started there. Debt is another area where I think we could do some stuff soon, but my comm…

AI assessment note: “we had to start with a V 0.1 that had manageable guardrails”

Q There's a degree to which you describe this as effectively, they're going to be a bunch of people who you select and your team selects that are learning on your dime. How have you thought about cost of capital or required rate of return or however you want to think about it in this endeavor?

A That's a really good question. The way that we thought about it is that we will run a best ideas book on top of them, and we are not going to allow them to run any leverage. What we'll give them is one to five million dollars, and they'll run it, and they'll know their P&L, and we take 10% and contribute it to a pool and give it back to folks so that there is a little bit of, like, sharing and evening out amongst the cohorts. But then, to your point, that money, best case, we're going to run nine percent if we're generating 20% returns. So what do we get from it? I think we get the chance to identify talent and get them into an ecosystem. That's worth something for us. So that's now a bridge to the 20% that we would otherwise underwrite to. In fact, the reality is, you know, this year, actually, I'm not going to front run my returns, but they're going to be somewhere between 30 and 40% on many, many billions. So we had a really good year this year. So I would say we're actually getting better at scale Our hurdle is actually going up. So the bridge between nine percent and whatever that number is, call it really 25 to 30. So some percent of it is we would ascribe to identifying talent. We think that that's a really good thing. Another is that we will learn from them ways of thinking about problems, ways of managing risk, ways of investing better, and so that has some value. But …

AI assessment note: “So the bridge between nine percent and whatever that number is, call it really 25”

Q How do you view that level of the balance sheet?

A Operating companies that we can own forever, that generate cash flow, that we can then reinvest back in social capital, but that is advancing a worldview that we believe in. Like, for example, in climate change, one of the most interesting things that I believed in for a while, and I've talked about this publicly around Tesla, is that we are going to disrupt utilities. Because if you can have residential solar Combined with residential storage, combined with software that allows an individual person to very simply understand how much energy they've generated, understand the economic value of that energy, and then contribute it back into the grid at times where you don't have to build peakers and you can do load smoothing. You're going to take a trillion dollars of power infrastructure and just incinerate it. And it's going to drive incredible numbers of bankruptcies amongst utilities. PG and E will have been the tip of the iceberg. You're going to see hundreds of billions of dollars of debt basically just go sideways. So it is incredibly, incredibly disruptive. And so, you know, I am very focused on buying businesses that I think will disrupt the utilities.

AI assessment note: “Operating companies that we can own forever, that generate cash flow”

Q Yeah, if we go back a little bit, so many people, after they have operating experience and land in a venture capital firm, really never leave, and Mayfield, such a great one for so, so long. What did you learn in your time there that led you to leave to go to Facebook?

A I wasn't very excited about how institutionalized blue chip investing was because very quickly you learn that there are meaningful pitfalls in actually putting too much of your own money in the game because the game is really about fees. It's not really about carried interest. And so all of a sudden the business is just to not go out of business and to not go out of business. It's actually to not take risks. And so what I saw was a microcosm of the broader investment community, which is that whenever you start off small, you have nothing to lose. That was Mayfield back in the day. It was Sequoia back in the day. It was Blackstone back in the day. But if you really want to get to mega scale and run hundreds of billions of dollars and make it a business, you have to over-orient and over-index on fees and not really focus that much on carried interest. And there, the business is obviously to not take a lot of risk. It's to minimize embarrassments. It's to maximize predictability of the revenue flow to the organization. And so I just learned about what institutionalization does to capital allocation, which is that it moves it away from investing and moves it towards not going out of business.

AI assessment note: “I wasn't very excited about how institutionalized blue chip investing was”

Q describe this as an experiment, most people think of the public markets as something, as you said, you understand what the guardrails are, you understand what the benchmarks are, maybe you're a long-only, maybe you're a hedge fund, but all of that is definable. How does that fit into the lens of where you came from in operating businesses and venture capital applied to this business in the public markets?

A This may not be the right answer, but I actually think that companies are basically just, they're all the same. Meaning a two day old company or a 200 year old company are all the same. The variables are the same. It's just that the weights are different. And I actually think that there are really only three or four weights that matter. And I think good investing is about figuring out What the weights are at any point in time. So the four things that matter to me are number one is product market fit. And you could have a product on day two or year 200 that has Zippo product market fit or absolutely incredible product market fit. And so what is that weight in any point in time is an important consideration. The second is the integrity of management, and again, it's just the weight, and it's either high or low or in between, and it can change, but it exists at a two-day-old company or a two-year-old company. The third is sort of what I would call headwinds or tailwinds, which is that, is it working on something that has better future prospects and is poorly described by the past? And then the fourth is political infanticide, which is how dysfunctionally fucked up is this company? And you can get that by looking at things like Glassdoor, listening to the political correctness of the CEO in their earnings calls, or in more candid situations, trying to get a read on their body langu…

AI assessment note: “I actually think that companies are basically just, they're all the same.”

Q When you worked your way through that, and so you're still sitting on social capital, what was it that you decided you wanted to do with your assets, with your business?

A I wanted to build Berkshire And that was always my ambition. And the problem with wanting to build Berkshire two point O is many people don't respect capital allocation. They don't think it's a skill. And many people think it's not doing anything. And when Warren Buffett describes his job every day as reading and thinking, I think a lot of people think what a checked out dilettante, how dare he read and think all day. That's not a job. And I just think it's so further from the truth. Because in many ways, what Buffett was able to do, and this is me imposing my own narrative now looking backwards, but he was able to use capital to accelerate his worldview. And a lot of his worldview was around American exceptionalism and American GDP and the belief in the American consumer and the American economy. And so whether that's precision cast parts or BNSF or Geico or seize candy, he's done incredible things to move the American economic engine forward. He was voting with his dollars around businesses and ideas that were really critical parts of the American infrastructure for American middle class success. I would like to reimagine what that means for the next 50 years. So from 20 20 to 20 70, how would I answer my version of that? How can I use my capital, compound book value in a way that accelerates my version of what ideas are really critical, what American exceptionalism should me…

AI assessment note: “I wanted to build Berkshire And that was always my ambition.”

Q Let's dive into SC a little more, and I'd love to start with where did you come up with this idea to be backing emerging managers?

A It was really about how can we generate a predictable return stream? How do we predictably return 20 to 30% book value every year? And one of the things that I realized is that, you know, manager concentration always drives decaying returns. And the problem is either the surface area of their skill becomes very rigid and fixed, and so you force them to go out of their sweet spot. Or even worse, they become risk averse because they have not refined their own psychological biases, going back to repetitive compulsion. They haven't yet worked on themselves enough to psychologically abstract them away from their repeat behaviors. All of those things decay returns over time at scale. And so the best way to mitigate that risk is to always be onboarding new emerging folks Who won't come with that baggage. And so maybe the right answer to running five hundred billion dollars is to have 500 people running a billion dollars. Versus trying to have three people run a 150, a 170 each. It just seems like a very impossible task. And so the emerging managers program is part of feeding this grist for the mill is about feeding a procedural ability to onboard people, give them meaningful incentives so that they want to be either part of our ecosystem or independently on their own, but have had been affiliated with us. In that model, we can find a way to sustainably compound book value in private a…

AI assessment note: “It was really about how can we generate a predictable return stream?”

Q And how many people in total are there as you describe it in the social capital ecosystem?

A So then the company itself is about 30 people. We have a really dedicated group of folks in the middle office and back office. We have a young emerging group of two guys who I think are really incredible up and comers who I think can grow into these five guys in terms of their seniority. And so we're growing the team slowly. Again, optimizing for apolitical people, super, super high integrity. And then I have partners. So on the IPO platform, I have two critical partners that I work with, Ian Osborne. He has an organization called Hedis Sophia and Conat, great bankers. I have a partner in David Hermer at Credit Suisse on the IPO. I have a partner in Adam Bain and Dick Costolo on the IPO. I'll do the same thing on the biotech side. I'd like to find a group of folks to partner with there. So the other thing that I've learned is that Creating non-zero-sum outcomes is really healthy. You can come to a place in your life where you can say, I'm going to capture every single last dollar of profit here. Or you could say, you know, I'm going to be a little inefficient. And in that inefficiency, what you actually find is you aggregate a group of people who are deeply loyal, also apolitical, who then want to build the business because they also have so much ownership that they feel it. So I've been very lucky that I can work with those folks.

AI assessment note: “So then the company itself is about 30 people.”

Q that you've accumulated. You can invest that with the idea of furthering some of those goals, or you can invest it in a certain way And have spending from that. You think about an endowment or a foundation and pursue some of those objectives with the spending from a corpus that's going to last for a long time. How have you thought about how you want to structure your portfolio?

A I think it's important to talk about foundations in the following context. I think foundations and charitable investing is largely an outcropping of Western guilt. And the reason is because everything here has to have a name. Everything is branded. Every dollar that's given by rich people has to come with a label attached to it. But when you look at the middle class in America or North America or Europe, or you look at Every other form of giving in every other part of the world, Asia, it's anonymous, and people don't need the branding or the social validation or, in many ways, the greenwashing that comes with money. So I have a very skeptical view of most foundations. I also think in a separate vein that most of the true innovation that's going to happen over the next 50 years will be technological in nature. And so at a very practical, pragmatic lens, you're going to need to hire product managers and engineers and designers, material scientists, chemists, biologists, physicists, and all of those people will have for-profit alternatives. And so in order to compete for that human capital that can really move the world forward to find truly scalable technological solutions, you have to be a for-profit business. So my entire worldview is oriented towards this idea that all of our capital is best served in a for-profit context. At some point in my nineties, I do think that I'll tra…

AI assessment note: “all of our capital is best served in a for-profit context”

Q All right. We're going to go with just a few more questions and then for, uh, premium subs, and we'll go from there. What's your biggest investment pet peeve?

A My biggest blind spot is that I still have these inherent ideas of these weightings in a company in my mind, and sometimes I do confirmatory diligence to underwrite what I already believe, and that's one of these very, very pernicious things that if I don't slow things down, And I stop myself from making decisions I won't catch. And so one of the guardrails that I've developed for myself is whenever we're close to an investment decision, I really detach away from everybody else, and I basically take an extra week, and I delay the decision. And I try not to think about it for a couple days, and I think about it. Then I try not to think about it for a couple days, and I think about it. And there have been a few times where I've realized that I've just re-underwritten my own bias, and I've come back and I've had to restart the process again, and then three or four weeks later, I've come to a very different outcome. So it can be a very complicated process, but I really think that that's one of these very prickly issues that a lot of people suffer from that I do as well.

AI assessment note: “My biggest blind spot is that I still have these inherent ideas”