I asked a $2B investment genius for his best startup ideas

I’m joined by Ali Hamed, Founder of the investment firm CoVenture. We discuss some of the best (and worst) investment opportunities for entrepreneurs in 2024, how to navigate debt collection as a digital entrepreneur, and Ali’s top tips for funding a startup.

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Episode Timestamps

00:00 Are prefab homes the future?
12:13 Best strategies for efficient pricing
19:37 How to leverage policy changes
23:59 Challenges with income share agreements
29:56 How entrepreneurs can navigate debt collection
40:34 Win-win funding strategies for startups
47:02 Building an investing firm
54:51 Where to find Ali

Creators & Guests

Host

GREG ISENBERG

I build internet communities and products for them. CEO: @latecheckoutplz, we're behind companies like @youneedarobot @boringmarketer @dispatchdesign etc.

What is The Startup Ideas Pod?

This is the startup ideas podcast. Hosted by Greg Isenberg (CEO Late Checkout, ex-advisor of Reddit, TikTok etc).

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Greg Isenberg [00:00:00]:
Ali Hamed is in the house. Welcome, Greg.

Ali [00:00:04]:
Thanks for having me.

Greg Isenberg [00:00:05]:
Good to see you. I listened to you on Patrick O'Shaughnessy's podcast and you were spitting like 40 insights a minute. And I was like, I need this guy. I need to understand the business of finance with this guy. So selfishly, we're making this happen.

Ali [00:00:23]:
Well, I'm going to do my best to live up to that expectation.

Greg Isenberg [00:00:26]:
Let's just jump right in. What sort of ideas and opportunities are you thinking about right now?

Ali [00:00:35]:
So the two main themes that we've been spending time on are, one, the lack of housing, and two, the price discovery between founders and investors. And one is sort of like a capital market structural problem, and the other is a thematic problem of like, here's an industry or a sector. Those are some themes that we're trying to invest along. And then there's just broader stuff of what types of asset classes should we try to get into and how do we find those asset classes? What philosophies do we have about where to invest and what areas to go into. So I would say if it was a type of startup company or sector that we're looking for, it may be lack of affordable housing and the shifting labor force. And if it was a type of investing, it would be along the lines of founders and investors having trouble agreeing on price.

Greg Isenberg [00:01:26]:
Let's dive into affordable housing. I'm like selling my apartment right now, so it's sort of top of mind. I saw that Joe Gebia, the co founder of Airbnb, is building. He raised like, I think like $50 million or something to build 40 or $50 million to build these startup around small prefab houses. What's your thought on the whole prefab housing opportunity?

Ali [00:01:55]:
We're looking for a company that doesn't use a ton of money to figure out how to make it work. And the problem with a lot of these businesses is you're taking a really big bet that prefab housing is going to be the future. They raise a ton of money and they consume a lot of capital, but we haven't really seen any of them kind of go through that J curve and get out of it. And we're looking for a more capital efficient way to approach the space. From a financing perspective, it's sort of a weird credit problem because let's imagine, I wanted to fund construction. I could fund regular way construction like general contractors. And that seems like it might be risky because have you ever heard of anybody having a good experience with their contractor and feeling like they didn't go over budget and pass time and get the permits done on time and all that stuff. I haven't.

Ali [00:02:43]:
And so the prefab homes might be easier because they're sort of copy and paste. The problem, though, is, like, your severity of loss on a prefab home is quite high. So let's don't, don't, I don't know Joe Gabia, but let's imagine he came to us and he, you know, I agree with you. Starting these companies is incredibly capital intensive. It's really difficult to get a venture outcome if I'm going to have to raise hundreds and hundreds of millions of dollars to go build all these homes. So instead, what I want to do is I want to go raise debt financing, and I want the debt financing to finance the construction of the homes, and construction financing is a thing that exists. My reaction to that would be, well, Joe, what if your business goes bankrupt? What do I do with all the parts of the prefab homes that whatever robots and whatever technology you're using to build these things, it goes away. It's not like I'm going to go into the factory and restart your business for you.

Ali [00:03:37]:
And by the way, if your business went away, there's probably some reason for it, which is like you were probably losing money on a monthly basis on operating losses because you had this capital intensive startup. So does that mean that I have to also fund your technology company to recover the debt that I just lent you? And so what we would look at that is, sure, is the likelihood that any one home is going to get constructed higher on time and on budget. Yes, but if we lose money on one home, we're probably going to lose money on all the homes all at once, and the severity of loss is quite high. And what we try to do in debt financing, especially when we're financing assets, is ensure that if we lose money, we only lose a small amount of it. So if I were to lend to a bunch of general contractors to build 100 homes the old school way, sure, maybe they'll go a little bit over budget and maybe one or two of them might not even get built, but it's very unlikely that they're all correlated to each other and that they would all not get built at the same time. And it's a lot easier to basically just say, okay, 100 homes are going to get built. I'm going to lend $80 against 100 homes, $100 of homes. That way, if they go 20% over budget, I'm still covered.

Ali [00:04:47]:
It's very difficult to apply some loan to value or advanced rate or however I might finance the stuff if there's binary risk that the whole thing might go poof. And so we think it's inevitable that that will become a space where there are successful winners. We think a lot of people are going to lose money along the way, and we'd rather just kind of wait to see the winner emerge.

Greg Isenberg [00:05:14]:
First of all, I like that you think it's inevitable. It means there's something here. If you were an entrepreneur and you were started and you believed in the space, you saw the opportunity, obviously, trillion dollar plus market asset class, how would you go about know this company is called Samara? How would you go about building a Samara that might fit your model a little bit more?

Ali [00:05:42]:
By the way, Samara might work. I'm talking about some business that I've never even looked. Gosh, you know, hopefully, hopefully, Joe Geffy is not like, listening to this and be like, what is this idiot talking about this business that I've never talked to him about? I apologize. No, but yeah, one, he may have some insight that I don't know about where he's going to be able to build it in a more capital efficient way. The second is there might be a fund that is like a two $3 billion venture capital fund, where they can take many different bets of 2030, 40 $50 million equity financings, and if a few of them don't work out. But the Tam on the outcome is so big that how great would it be if one of them works? There's a reasonable investor out there for this type of business. We're just not it. And so the answer might be, do exactly what he's doing, which is go build this really capital intensive business.

Ali [00:06:32]:
For the founder, by the way, it might still be a good idea, even if for the venture capitalist, they end up getting so diluted or they have to put so much money in that the only outcome they could possibly have after getting $150,000,000 of cost basis into the deal is ten times their money. If they fund a company that becomes worth five to $10 billion and they own 1020 percent of it, for the founder, that's still a great outcome. And so the answer might be, do exactly what he's doing. And by the way, he's got this great background. Know, I'm sure people are going to give him capital and he's credible, and he's more credible than the average founder. And also what Joe Gebia, who I don't know, should do is also very different than what a normal founder should do who's going to have less access to capital. I mean, he's the type of person who should go build a business. Like just, it turns out that in my little part of the world, I mostly do debt financing, and in debt we can't really take binary risk.

Ali [00:07:21]:
But if I was a founder who didn't have access to insane amounts of capital, I would try to find ways to build more capital efficient companies in the space, build credibility. Airbnb was more capital efficient than this endeavor. And it was the success of Airbnb that gave him the capability of raising a lot of capital before he had a lot of validation. So I would go do the same thing that he did, which is go find another idea that's housing related, that is more capital efficient, build and sell that company, and then use that credibility to go raise a lot of capital out of the gate for a capital intensive one. And if you think about the founders who have built really major capital intensive businesses that make a lot of sense for them, specifically like Delinquette founders Fund with Varda, he had to be know. The average founder can't take that as a learning. They have to first work for Kosala and then founders fund and then become kind of pseudo famous and have a lot of access to capital and be a genius and then go start a space company. There's steps, but there's a lot of capital efficient things to do.

Ali [00:08:24]:
I mean, the space that we've talked a lot about is the adu ecosystem. And so Adus, which some people know about and some people don't, basically came out of this idea that California had, which is that you needed to rezone a lot of single family lots and make them multifamily lots. And by doing so, you would increase housing supply. Historically, that zoning process was complicated because local municipalities would want to block it because they don't want more housing supply in their specific neighborhood. It brings property prices down, same demand, more supply. And so they took those zoning laws out of the hands of the municipalities, put them in the hands of the states and forced them to approve those. And I think most people think that's probably a good idea. But there's complication.

Ali [00:09:05]:
If it was an obviously good idea, people would have just said yes, parking is an example. So maybe companies who can solve the parking problem tick financing might be an interesting idea. So these businesses are financed differently. It's not like a regular way mortgage. And so it's a way to finance multitenant properties, you probably need a new form of property management. You probably need development of Adus that don't have to be prefab businesses. It might be repurposing of a garage, repurposing of something that. A structure in the backyard, adding a structure in the backyard.

Ali [00:09:40]:
I think there's a lot of businesses that you can go build that have a really big tam that aren't just finding new ways to build in the first place. And just to give you an idea, the quantum of the opportunity set. Most studies or sort of research projects on even the city of LA would say LA needs like over a million new homes. And if you assume a starter home is 300, 400, $500,000, that's a 500 billion dollar opportunity. That seems like a pretty worthwhile opportunity, even if you get a small part of it in LA.

Greg Isenberg [00:10:16]:
Yeah, that's kind of, I think, why so many entrepreneurs are drawn to the space, I think, with respect to Joe, I think it's funny because the grass is always greener, right? He did the asset light thing, the marketplace thing, and then he was just like, a lot of consumer software people have this moment where they're like, but I just want to build something that I could touch. It's very common in entrepreneurs like that.

Ali [00:10:45]:
And I don't think it's wrong. I mean, he also earned the right. He earned the right to go do something like that, where you're taking less risk on betting on him because he has a level of credibility. You're taking more technical risk and capital markets risk by betting on the company. And it's completely irrational. But you can't take both operator risk and capital markets risk. That becomes a bad investment idea. And so I think if you're going to consume a lot of capital, then you have to be more credible operator than if you're going to consume very little for a much higher multiple on the investment.

Greg Isenberg [00:11:22]:
I think there's probably an opportunity to do prefab houses, like luxury prefab houses, like buying them, setting them up in the Catskills, upstate New York, something like that, and also setting them up in Sonoma, Napa, a bunch of places that a lot of people want to go to. And then you buy like a Soho house type membership for access to if. To me, that's more interesting. As an entrepreneur, I would less like to be in the business that Joe Gebby is in, but I'd more rather be in the business of like, I'll be your customer, I'll buy a few of these, but I'm going to build a brand and recurring revenue.

Ali [00:12:13]:
How do you solve the utilization problem? The challenge is you want to make sure that the inventory is available so that you could consistently go to Sonoma or Napa or the Catskills or wherever you want to go, but you have to have some minimum utilization. And there's always going to be the peak seasons, which is like during the holiday season, people are going to want it even more or less. And during certain working periods, you're going to want it more or less. And we've seen a lot of these sort of like nomadic, I think half of them were called Nomad or something, these nomadic startup companies where you'd buy a subscription and you could go to live in Bangalore and live in London and live all over the world. And it became like an even know, remote work made it an even better idea. Developers being able to work from anywhere made it a pretty good. And. And it got tough.

Ali [00:12:58]:
Even Soho House, by the way, which know the example you gave, like they had to cut off Miami and New York City memberships because those got too crowded. Have you seen anybody solving that in an interesting way, the utilization and occupancy rate piece?

Greg Isenberg [00:13:11]:
Well, I think there's a bigger trend at play, which is dynamic pricing on the Internet. So there was a huge backlash. I'm sure you saw recently with like Wendy's tried to do surge pricing. Did you see this?

Ali [00:13:26]:
Oh, yeah, I did see that. That was awesome. Good for them.

Greg Isenberg [00:13:29]:
Yeah, they tried it and God bless them for trying. They clawed it back, I believe.

Ali [00:13:36]:
Didn't Uber get a bunch of backlash for it? Remember like when Uber did surge pricing and everyone thought it was just bananas? Imagine Uber without surge pricing it.

Greg Isenberg [00:13:46]:
I can't. I cannot.

Ali [00:13:51]:
You would be thinking of the other startup that got created where the key differentiators that they had surge pricing.

Greg Isenberg [00:13:58]:
There's a huge opportunity to create surge pricing as a service to a bunch of businesses. That's another business I'm interested in.

Ali [00:14:05]:
I like that idea. What would be your favorite industry that needs surge pricing? I think, by the way, this is the solve. This is the solve. If anybody is doing this and they want to apply search pricing to it, I'd want to take a look.

Greg Isenberg [00:14:20]:
Exactly.

Ali [00:14:22]:
I don't know how much time you have on your hands, but in the event you have some extra weekend space.

Greg Isenberg [00:14:28]:
There'S always nights and weekends. I live for it. So I do think that I saw a business recently, actually. It's called plus grade. Have you heard about this?

Ali [00:14:42]:
No, I don't have good deal flow. What is it? Plus grade?

Greg Isenberg [00:14:46]:
Plus grade canadian company. I think they ended up raising like 200, $300 million. And they had this great idea, which was people want. Obviously, a lot of people want first class on airlines. Sure. So what they did is they created a widget integrated with a few airlines so that there's a bidding for the first class. So they make it easier to get. Everyone's happy because people are getting into these first class seats, sometimes at a discount, and the airline is happy because they're utilizing, they're making more money versus giving it away or something like that.

Greg Isenberg [00:15:36]:
And I think it's really interesting. It's got that dynamic kind of approach where it's like a bid based system, it's an auction system, it's fun to do. And the airline industry, it makes a lot of sense. There's a lot of money changing hands. Go ahead.

Ali [00:15:55]:
Anything where it brings efficient pricing, where efficient pricing doesn't already exist is probably a good idea. I guess my reaction is the competition is for other people who are making their decision to bid on pricing, and there need to be some delayed response. So if you're an employee of a business that has a policy where if you fly overseas or something, you can fly first class, you have infinite price elasticity. And so then you just have whatever, two Sigma employees competing against Citadel employees for infinity pricing on whatever their first class ticket is going to be. I can imagine that being, like, a hilarious outcome where some airline takes down, like, a $23,000, like, British airways flight.

Greg Isenberg [00:16:41]:
Totally. My guess is those whales. That's probably where the majority of that revenue comes from. Similar to in the gaming industry, the majority of your revenue comes from 5% of your customers.

Ali [00:16:59]:
I think there's a charm in a line, though, one you start differentiating as if we don't have enough issues with socioeconomic disparity. And waiting in line is like one of the last equalizers that exists. I'm trying to figure out which industries you could pull that off with without kind of damaging that last piece. Like restaurants. It's kind of sad. In New York, you can pay, whether it's like a concierge service or some service, to just make sure that you can get a table at a great restaurant. But because of that, it's taken away all serendipity and it's taken away all the wonderfulness of a last minute plan or the wonderfulness of a special night out. And if you belong to a business or you have some level of access, you can just spend money to have access to great food.

Ali [00:17:48]:
And if you don't, you're stuck trying to apply for a reservation at midnight, 30 days before the reservation opens, which is like a pretty crappy experience. That would be like, I guess, the counterargument.

Greg Isenberg [00:18:00]:
Yeah. I mean, I'm not saying it makes the world a better place, but I do think that it probably optimizes revenue. Now, I think that as entrepreneurs, I think we can start with, here's a business opportunity. And then, okay, now we have this business opportunity. How can we make this beneficial for all parties? And I think that's the way to look at.

Ali [00:18:26]:
I mean, the thing that I always loved about Uber surge pricing was there was some need, and it was less of a need of like, oh, I want to have a slightly better pasta dish. And it was a need of, if I needed to get to the hospital on New Year's Eve in New York, I'd want to pay for surge pricing. And I'd feel grateful that surge pricing existed, no matter really who always, like, I remember when that first started. Like, that was my first reaction is like, gosh, that would be amazing. Surge pricing might actually save lives and kind of running it through that thought exercise and surge pricing, by the way of helping people with temporary housing or seasonal housing or just sort of spreading people out to kind of where there's a lot of empty homes, we do have a major issue, so I could imagine that making the world a better place. Search pricing as applied to housing supply.

Greg Isenberg [00:19:24]:
Yeah. Because everyone is feeling that it's just become unattainable to buy a. And there's also policy shifts that could.

Ali [00:19:37]:
Like, one of my favorite policies is in Singapore, where you're economically incentivized to live closer to your parents. And the idea is the government's going to save money because you have childcare and elderly care embedded geographically, and so you could make it less expensive, but then you could lower your tax revenue or something to have it be more affordable, or you could have more buying power if you're also going to save money for society in some other way. I always thought interesting policy changes like that could be kind of fascinating.

Greg Isenberg [00:20:09]:
Yeah, I wish there was an easier way, and I don't know if you have a system for this, but I wish there was an easier way where I could just get alerts around here are policy changes in spaces that I care about real estate countries. I care about United States. And based on like, that'll help me come up with new ideas to build.

Ali [00:20:37]:
Yeah.

Greg Isenberg [00:20:43]:
Because otherwise you have to get lucky, right? It's like, oh, I was at a dinner and someone told me that in Singapore, and then I looked into know, how do you open up all these opportunities to people so entrepreneurs can actually.

Ali [00:20:58]:
How do you systemically see what are all the policies of every little municipality and state and government that have been implemented to increase housing supply?

Greg Isenberg [00:21:06]:
Yeah.

Ali [00:21:10]:
I don't know. I don't know that that exists. But I think it also continues to go back into where are we directing our workforce and how are we incentivizing people to take majors that are going to help them add to different parts of society. I forgot where I heard the idea. Or maybe it's something that's already being implemented, where student loans should be priced based on the major you're going into. And if you're going into a major where we're undersupplied in a certain type of workforce, you should get a student loan and you can still go into some other major that has less application. But if we've decided that we need more construction workers, maybe we should reprice the student loans for construction workers, both on a quantum basis and also a cost basis to incentivize them to go in the right direction. Something like that.

Ali [00:21:57]:
I could imagine feeling obvious.

Greg Isenberg [00:22:01]:
Yeah. And also imagine not taking a loan and you just get paid to be in school. Like the reverse of it.

Ali [00:22:09]:
Yeah. We looked for a while at vocational schools where you'd partner with the employer, and we recently made, like, a really big investment into an accounting firm. And one of the ideas was like, should we start partnering with that accounting firm to create more accountants? And it's like this sort of. So YouTube has been, like, a really great impact on my career and my life because of some of the investments we've made. But also, not everybody can be a YouTuber, sadly. And so, sort of like, as more and more people only want to be YouTubers, less and less people want to be accountants. And so the pricing power of accountants has gotten higher and higher and higher. And as we think about shifting labor forces and the incentives for those labor forces, what are the ways that you could create them? And a school where your education is paid for? Because an employer is so desperate for new people, it feels like that's obvious.

Ali [00:23:02]:
The thing that we haven't really figured out is how to kind of get around the negative stigma that for profit education has, because so many private equity firms and so many people who have run these organizations did just such a poor job, and there's just a reputation that's really hard to get around.

Greg Isenberg [00:23:21]:
Yeah, I'm trying to think who's the most successful private vocational school? Who's done really well.

Ali [00:23:30]:
I mean, there's obviously like the University of Phoenix, but really there's the dev shops. And I'd say, like, general assembly at least had an outcome. And I don't know enough of the story of what happened and why it didn't become bigger and sort of where they hit their constraints, because I remember at one point they ended up pivoting from being sort of like a school to being like a B to b business, where they were like, consulting for big organizations. And I think they kind of just became like a consulting firm at some point. I don't know how Lambda is doing. I mean, obviously Lambda seemed like it was having a lot of success in the beginning.

Greg Isenberg [00:24:05]:
I mean, the idea of lambda was really smart, which was basically for folks who don't know, you signed up to a boot camp, essentially, they taught you to be a developer. And then there was an income share agreement. Yeah, it was free to go, right? But they would just take a percentage of your salary for a certain amount of time.

Ali [00:24:26]:
And I wonder if they need some level of incentive where it's not quite free, but you don't have any cash outlay, except maybe either it's free as long as you end up getting, choosing to take a job in that space, or as long as you graduate. But I feel like if you give someone to something for free, they end up treating like it was free and it ends up becoming like this free option as opposed to a dedication. Or if you're a doctor and you go through however many decades of schooling you need, you're going to end up being a doctor. Very rarely be like, well, now that I've done that, I'm going to be a YouTuber, right? You're pretty pot committed. I feel like there needs to be some skin in the game. And maybe one of the ideas is you have a loan, but the loan gets forgiven and it gets put in some retirement account and it compounds over some period of time where it turns into some sort of pension. Imagine instead of paying $200,000 for school, you took a loan at a 4% rate, and then you were forced to escrow it in some retirement savings account and it compounded over a really long time. And instead of being in debt, you ended up having this nest egg.

Ali [00:25:35]:
I don't know, there's got to be some flip.

Greg Isenberg [00:25:39]:
Yeah, there's something there. I think that this space was really popular. 2020, 2021, maybe even 2022. Like the lambdas I was seeing, like, the lambda for X pop up everywhere, and it sort of fizzled out. And a lot of people thought, like, oh, this model doesn't really work. But for people listening, I actually think that income share agreements are interesting. I also think that. I think Lambda raised a bunch of money, too.

Greg Isenberg [00:26:12]:
So there's probably a way you can do this more bootstrapped, at least to start.

Ali [00:26:18]:
Yeah. The challenge we have with income share agreements is I don't think that they can be viewed as, like, a replacement of tuition. I think they have to be viewed as a subsidy, because the financial product we've always thought was sort of cuspy. And the reason is, let's imagine I give you an income share agreement, Greg, I don't know that you need one, but let's imagine I gave you one. What are you going to do if you move to Spain? How do I go get the money from? Like, how do I service it? And then what jurisdiction does it get serviced in? And how do I approve the pay stub? And if you go to your employer and say, hey, can you pay me in one account with half the money in another account and other half, or can you pay me a base comp and a consulting fee? Basically, the underwriting was sort of possible because you can underwrite the efficacy of the school and your background and your likelihood of. By the way, maybe it would have required some skin in the game, so it didn't feel like a free option. But then if you leave, what am I going to do? I'm going to come after you for this income share agreement that's going to hurt the reputation of the school. You can't really pay it.

Ali [00:27:21]:
You might be hiding the money from me. How would I know if you're hiding the money from me? There's no precedent of really trying to foreclose on these income share agreements. What is the term on the income share agreement? You need to give some people a capability of getting out of it. Perpetuity is not a legal concept, and so there's a lot of these issues. The financial product itself, where I thought it was best applied when it was thought of as a way to subsidize cost, but knowing that the school, for example, would have to subsidize the capital provider, the capital provider, by themselves, with just the income share agreement, wasn't getting properly compensated for how much risk they were taking. It was basically a mediocre or crappier version of a consumer loan, but you were getting paid either the same or slightly less, and you had headline risk.

Greg Isenberg [00:28:05]:
So if you're Lambda, what's your next move?

Ali [00:28:15]:
I think one of the challenges is if you raise a lot of money, you have to grow before your feedback loops come back. And at the risk of talking about a business that I wasn't really there for, so, sorry, lambda. Now, I would imagine that you're educating students. You then have to make a decision before you actually know how they're going to do, and then how are you supposed to possibly make a data driven decision framework? And so you're raising a ton of money, you're building out a school for needs that you don't even know you actually they need. And then, like four to five years later, you figure out if the first students were any good at what they did, not just because they got a job, but did they stay retained at the job? Did they get promoted at the job? Did they successfully pay the income share agreement back? And I'm sure Lambda has some data now about it, but it feels like they were forced into this hypergrowth period before they could really know how the students were doing. And so I would probably just take a more rational, cost efficient approach. I probably wouldn't do a space as hot as developing or development because I think there's been a lot of dev schools. I think founders want to solve their own problem.

Ali [00:29:18]:
They have a hard time hiring engineers and probably go into an industry that was a little bit less competed for. And I'd probably partner with a handful of employers. So there was one that I thought was really compelling, that was like partnering with trucking companies. They're teaching people how to be truck drivers. That, to me, seems more compelling, less crowded. And by the way, the feedback loops are probably a lot quicker because how quantitative is a truck driver? You can check their mileage, you can check their safety, you can check their insurance premiums. How are they driving? Are they driving safely? Are they not driving safely? And I bet you'd feel a little bit less pressure to raise tons and tons of money into that business and grow at hyperspeed because there's going to be less competition.

Greg Isenberg [00:29:56]:
Makes sense. I've got two ideas for you. Two thoughts. And you're the finance wiz. I want your feedback on it. Okay, so we own a few agency businesses, and one of our businesses works with a very large CPG company. They do about 500 million a year in revenue. However, they're highly levered, and I guess interest rates have gone up and they're struggling right now.

Ali [00:30:31]:
Sure.

Greg Isenberg [00:30:32]:
So we produce some work for them, and they love the work, and they thought it was amazing, but they've gone to all their vendors, and they've basically said, we're not paying you based on how, for whatever reason.

Ali [00:30:51]:
Yeah.

Greg Isenberg [00:30:54]:
Collections. I don't know. The first. So my team came to me and was like, hey, do you know, like, a collection agency or something? This never happens to us. And I was like, no, I don't. I don't know what to do. And my thinking is there's probably other agency owners or Internet business owners that deal with collections, but there's no beautifully designed stripe atlas for collections type thing. I wouldn't even know where to go.

Greg Isenberg [00:31:29]:
So my question to you is, is there an opportunity in creating a collections type business for more of a digital native entrepreneur?

Ali [00:31:41]:
Yes. Do you know Jay Cahan?

Greg Isenberg [00:31:46]:
I don't think so.

Ali [00:31:47]:
Shoot. I hope I'm pronouncing his name right.

Greg Isenberg [00:31:50]:
Cahan.

Ali [00:31:52]:
So he's got a business that does this, and it's basically trying to reinvent bad debt collections because it is important. And by the way, bad debt collections, there's all kinds. My favorite kind of bad debt collector is a bounty hunter. Do you know how bail bonds work?

Greg Isenberg [00:32:08]:
I've just seen them on signs.

Ali [00:32:13]:
I think his company is called January changing debt collection for good. So it is a good idea, and someone's pursuing it, and people should find out more about it because I think he's a really smart guy. I've lost touch with him. We see each other around sometimes, but I'm not that close to how the business is doing, but I've always been impressed by him. Okay, so bail bonds, I think, are this insane product where basically what happens is you get arrested and you may have done it, you may have not done it, and so you post bail in between then and the trial date. And one of the reasons that you want to post bail is you want to go back to your job. If you can't post bail, you can't call your employer from jail and say, hey, I'm taking, like, a two week sick leave until my court date. But I swear to God I didn't do it.

Ali [00:32:55]:
I probably shouldn't make light of it, actually, a lot that does happen to people, and it's tragic. They do end up spiraling. So what happens is you go to a bail bondsman, and the bondsman will basically, like, if you owe $20,000 or whatever, you pay the bail bondsman $2,000 or $1,000 or whatever, they give the judge $20,000, and then they put a bond on some asset, and it might be a car or your house or whatever. And the reason bounty hunters exist is like the bondsman doesn't come get you, they hire a bounty hunter to come get you. And it's like literally these civilians who just physically chase you around to try to physically come get you to go to the courthouse and the bondsman gets his money back. As long as you go to the courthouse eventually for your trial. And that's like the worst kind of bad debt collections. Then there's like the middle of the road bad debt collections, which is like your, or if me, I don't know if Macy's still exists.

Ali [00:33:48]:
I think allegedly it does. So you have this Macy's credit card, and Macy's isn't going to ruin its brand efficacy by chasing its customers for money that's owed. And so they sell that debt to a bad debt collections agency. And then even worse, some of these bad debt collections agencies commit fraud. And even though they will call you and say, hey Greg, you owe Macy's like $1,400 or whatever, you owe us. But they actually never had the claim. They just saw that it was being shopped. And then when the actual bad debt collections person comes to you and tells you 1400, you're like, no, I already paid.

Ali [00:34:23]:
It turns out you paid the wrong person. It's like a really messed up industry. And so you're right to think that there's actually something to do there with the ecommerce company. That also just demonstrates that e commerce companies are difficult to lever or CPG businesses. I think one of the nice things about software companies is that you don't move stuff around the world and you'll have inventory and cash flow oriented planning and stuff. But CPG businesses, think about how those businesses operate. If they make $100 of revenue, they're probably spending ten dollars to fifteen dollars of the revenues on ads. And then they're probably spending another like $30 to $40 of the revenues on pick and pack, warehousing, shipping, stuff like that.

Ali [00:35:04]:
There's probably a couple of hundred basis points of revenue going to returns, but let's ignore that for a moment. And then, by the way, your SGNA is usually like 10% of your revenues. And so you went from like 100 minus ten to 15 for ads. So you're at 85 -40 for pick and pack warehouse and everything else. So you're at like 45. And then your overhead was like ten to 15%. And so you're now at like 30%. Very quickly, if these businesses do a really great job.

Ali [00:35:35]:
They end up at like, oh, and then your cogs, sorry, your cogs are usually 30% of your revenues, and so you have to tighten all of that. And if you're really good as a CPG business, you're earning 10% to 20% EBITDA margins. And by the way, here's the other fun thing about a CPG business, is you have inventory. And if you're growing, the faster you grow, the worse your cash flow dynamics. Because if you're growing, you have to spend money today, which you have less of on the inventory. You'll need more tomorrow because you're going to need more of because you're growing. And then on top of having wonky EBITDA cash conversion, you're going to have volatility during the year, because in Q four, you're probably going to sell more. Or if you're a popsicle business, you're going to sell more in the summer or whatever.

Ali [00:36:16]:
Almost every CPG business has some level of seasonality. And so you end up having this, like, ten to 20% EBITDA margin business that has seasonality. And your EBITda doesn't convert to cash fully. It usually converts at like 50% to 60%. And so, really, on your revenues, you can only withstand 5% to 6% interest, and you can only lever your EBITDA so much you can't really leverage. Like, if you leverage your EBITDA five times $10 of EBITDA, of which you're only collecting $5 of cash, and you've taken $50 of debt against it, no wonder they can't make their interest payments. And so that's also one of the reasons that these CPG businesses have to lever less than a software company could on the same EBITDA margin. So the best way to not need a debt collector is to not finance a CPG business with debt.

Greg Isenberg [00:37:10]:
That's true. That is true. But you look at it, and as the vendor, we're like, this is a household brand. Of course they're going know. It didn't even cross the team's mind, which I think is fair. But it is. The reality of the service business is that you will have bad debt. And sometimes it's hard to predict where it's going to come from, I guess.

Ali [00:37:39]:
Well, the other challenge, and by the way, this is like one of the things that makes some lenders better than others, is understand where you are in the utility know, and if you're a, you're, if you're Amazon and you're lending to an Amazon seller, and the Amazon seller owes you money, you have a lot of power. You might be junior in the capital stack, but if you turn off the person's account, you suddenly became senior in the capital stack. If you're the CRM, you have a capability of getting paid for ramp. I feel like that's one of their benefits, is like they're senior in the capital stack. Or if you're Brex or any of these card companies, what you'll notice is they still get paid because people rely on those cards and those working capital lines. And so there's like this ongoing utility. When we think of actually consumer credit, we think of it very similarly. If I lend somebody money to go get a tattoo, like they got a tattoo, they may not pay the bill.

Ali [00:38:28]:
If I lend money for a fridge and I turn off their fridge, they're probably going to pay me. So I turn the fridge back on. There's like a company called Payjoy that we think is especially compelling where if you don't pay your phone bill, they'll lock your phone so you can see stuff coming in, like calls and messages. You're probably going to go pay that. And so one of the things as a vendor is realizing, try to like, do I have an ongoing utility to this business? And making sure you get paid before your ongoing utility is sort of not fully rendered yet.

Greg Isenberg [00:39:02]:
I like it. That's why I don't know if it.

Ali [00:39:06]:
Solves your problem on this payable.

Greg Isenberg [00:39:11]:
First of all, January. Incredible brand name for a business. First of all, they got the.com, so kudos to them. And also the idea of January, it's like a fresh start, I think is so smart. So they did a good job there.

Ali [00:39:31]:
Yeah, it's an awesome. As soon as I saw that's what they were called now I was like.

Greg Isenberg [00:39:35]:
Of course, yeah, I'm in.

Ali [00:39:37]:
Right? Actually, I think the best branding redo or name Redo is e Ventures turning to headline.

Greg Isenberg [00:39:46]:
I didn't see that.

Ali [00:39:48]:
Isn't that just an incredible name headline? I'm so jealous. I'm not even happy for them. That's how jealous I am.

Greg Isenberg [00:39:57]:
You got to be happy, man. You got to be happy.

Ali [00:39:59]:
It's like, I'm kidding, I'm kidding. I wouldn't say it if I wasn't. But it made it a more compelling comment.

Greg Isenberg [00:40:07]:
That's fair. I mean, names matter, especially now, I think. Especially as things get more and more commoditized. I talk about that often around how important the brand and the name is. And I actually think it's undervalued relative to a lot of things. So we've been actually buying up domains, which actually leads me to my next sort of idea for you. I'd love your feedback on. So we bought the domain recently.

Greg Isenberg [00:40:36]:
I think it's startupdividend.com. And we're seeing a lot of Internet entrepreneurs, solopreneurs, people building these GPT wrappers, SaaS tools, that sort of thing. And they're not going the venture capital route.

Ali [00:40:59]:
They're building like businesses that make money without losing a lot of money first.

Greg Isenberg [00:41:04]:
Exactly. That's exactly what they're doing. Yeah.

Ali [00:41:08]:
Oh, man. As a credit professional, that makes me feel so.

Greg Isenberg [00:41:15]:
So, uh, I'm sure a lot of these business owners are Ali approved and a lot of them are starting to get good unit economics. But you can't blame them. They just don't have some of the money to scale. But they're afraid of raising venture at this point. And maybe it's not even afraid is the right word. They're just kind of like, I don't know if this is a venture scale opportunity. I might live in Slovenia and I don't know any venture capitalists, so there's that as well. And so I wonder if there's an opportunity to fund some of these entrepreneurs.

Greg Isenberg [00:42:03]:
And I don't know how you'd structure it. I'm curious your opinion, but that you'd get some dividend from them.

Ali [00:42:11]:
Yeah, I think there's like a lot of benefits. I also don't think it's like all one or the other. I mean, when we started our business, we're like pseudo bootstrap. Pseudo, not bootstrap. I couldn't afford, when I started the business, to hire a bunch of investment professionals. So I raised a few million dollars from individuals. And it was important to me to raise from individuals and not firms because I didn't really want to feel like I was being forced on an exit horizon. And I'm in the business like a professional investor who's institutional.

Ali [00:42:41]:
Their number one job is to make as much money on the investment as possible. And they sometimes have aligned incentives. They sometimes don't have aligned incentives. They can't just say yes to things, even if they feel like it might be good for the partnership because they have an obligation to their third party institutional LPs. And so there was like this initial want to raise money because we had to, but not raise more money than we needed to. And then there was like this discipline that came with it because it wasn't like we raised money from big institutions that would just give us, like, they weren't motivated to back up the truck and give tens of millions of dollars more. They only wanted to give us more if it felt like it was like an obvious ROI and it created some level of discipline in two ways. The first is it really forced us on every dollar that we put out to make sure there's going to be a dollar that came back and it was okay.

Ali [00:43:28]:
When we built our business, we would build, like, a profitable business line, and then we would take the dividends from that profitable business line, reinvest them into a new, unprofitable business line, subsidize it. And we had to come with a point of view of how long were we willing to let that business line be unprofitable for and go through a J curve, because it felt like it was our money that wasn't coming out. If I decided to open up a new asset class or a new investment business, then those were dividends that I could have otherwise given to myself and my family, or just kept on the balance sheet of the business. And instead we were taking that and reinvesting it. And when you feel like there is this capital constraint, it does force you to make very ruthless decisions or create a forcing of those decisions. And there's a story that I remember with one of our founders where he had just raised a nine figure financing, and he had like, a couple of hundred million dollars cash on the balance sheet. And he was telling me, he goes, it used to be so easy to say no to stuff because we just didn't have the money to say yes. But now that we have the money, kind of to do anything, I'm constantly battling people for my no's because they know we can do it.

Ali [00:44:35]:
I have to outwit them to explain why we shouldn't. And when you have this natural constraint of not having raised money, it just makes all the conversations a lot easier. It's like there's no paralysis by analysis. We have the money for that, or we don't have the money for that, and it's not our very best idea. It might be a good idea, but it's not our best idea. And we can only pursue one idea at a time. And then the view that we came to is like, well, maybe what we could do is we could offer some sort of preferred return. And the negative about something like debt, even if you have the EBITDA to take on debt, is you have a term, and the money is going to have to get paid back at some point, and when the money needs to get paid back, capital markets have changed, and you can't just refinance your debt, and the debt is not willing to roll over.

Ali [00:45:22]:
Like, for example, if you borrow money at an 8% interest rate or a 12% interest rate, and now rates are 500 basis points higher, and suddenly you owe 17%, you might not be able to afford that, especially if you're a CPG business. And next thing you know, you're kind of in this sticky situation. If you raise preferred equity, what you get mostly is you don't have a term on the investment, you don't owe the money back at any given time, but you can still maybe, like, accrue an 8% dividend or a 12% dividend and meet them in the middle. So, for example, let's imagine your business does $10 million of EBITDA. You raise like, a $5 million equity financing, because you want to invest in some new form of growth. If you only owe 8% on that $5 million, that's $400,000. I mean, jeez, that's pretty easy to pay. If you want to take $50 million of financing to really swing for the fences, you can still do that.

Ali [00:46:15]:
8% of $50 million is $4 million. So now you have this $4 million dividend you owe on $10 million of profits, and there's no specific time that you need to exit that position. Those are ways where, if you're willing to offer a preferred return, you can ask for either a higher conversion price or a valuation or something similar. And I think those are all reasonable. I think a lot of venture capitalists, like, they play this game with founders where it's like, I think your company is worth this, and the founder thinks their company is worth something else. And all the VC is trying to back into is, how do they three x their fund or whatever. I feel like a lot of VCs or investors could just be a little bit more like, look, this is what I need from your business. I need an 18% return, a 20% return.

Ali [00:46:56]:
How about I contractually obligate it so it's less risky? But then we're not playing a game, and you know exactly what I want.

Greg Isenberg [00:47:02]:
Exactly. Damn, you know your stuff. That's why you're here. I want to end off with you telling us a little bit about your business, like, more about your business and the business of you starting it. Why did you see the opportunity? Because in a lot of ways, I brought you on here not because you're an investor more because I feel like you're an entrepreneur. So talk us through what you actually do, what your business is, and why you think it's an opportunity.

Ali [00:47:39]:
Well, first off, I'm whatever you want me to be.

Greg Isenberg [00:47:43]:
That'S for sure.

Ali [00:47:48]:
I'm 100% sure I'm going to end up investing in that company in a much higher market now. And I'm going to think back at this moment and it's going to be embarrassing. Sweet. So we started the business about ten years ago, and when I was in college, I did a startup and I caught the bug and I was kind of building apps and web applications for people and wanted to start angel investing with some of the money that I had saved and wanted to be a venture capitalist. I feel like everybody who does a startup and fails wants to be a VC next. That's like the rite of passage. And I was no different and I made a couple of investments and I thought, well, gosh, isn't everyone going to realize how great I am at this? And that's not what happened. It takes a really long time to see if your startup investment is going to go well.

Ali [00:48:35]:
And one of the ways that we have been doing it too, is we had also taken some of the money that we were going to invest. We hired a bunch of developers and we're starting to code applications for nontechnical founders. We wanted to be called a VC fund. Everyone called us a dev shop. We did whatever we needed to do to be in business. But the business model was hard. Collecting equity is not a very good, high cash flowing business. And we got lucky that a couple of the companies that we invested in were fintech businesses that were lending money out.

Ali [00:49:01]:
And our view on asset backed credit at the time was most asset classes get crappier and crappier the older they are. If you think about student loans or consumer loans or auto loans, like if you see a car commercial and you're like, oh, you can drive this car off the lot. At 0% financing, you might be like, well, how? One of the reasons is it's a highly subsidized loan in an incredibly efficient capital markets where auto loans just don't earn that much. But they've been around for a long time. Rating agencies are comfortable with them, which means banks and insurance companies can hold them. And a lot of understanding credit is understanding the liabilities and how assets are priced. Unlike equity in credit, assets aren't always priced based on risk. They're often based on who is allowed to hold them.

Ali [00:49:47]:
And so, if you think about it, like, when you put money into a bank, you don't expect a very high yield on your deposits. If you buy a retirement annuity, which guarantees your retirement, you probably are only going to get 4% yield on that security or on that policy, because the insurance company is guaranteeing it, and insurance companies like quasi government backed. And so it's, like, not a lot of risk. So as soon as an insurance company can hold an established asset class, like auto or student or consumer, all the yield, all the return falls away. But we were finding a lot of technology companies that were, like, unearthing brand new asset classes altogether and financing stuff that had never been financed before, where there was always an analogy where you could compare it to something that had always existed, and you could look at the default rate, and you could come up with some assumption of how the risk worked, but you would get paid a lot because rating agencies weren't willing to rate it, insurance companies and banks couldn't hold it. And so the only people left to hold it would be like a fund that wanted a high return. And on top of that, the thing that we felt like we knew how to do was take origination risk. And origination risk is the same as taking startup and venture capital risk, except you're not risking principal, you're risking your time.

Ali [00:51:01]:
And so what we would do is we would say, well, everybody else in credit, what they're trying to do is they're trying to run around and figure out the best residential mortgage backed security to buy and at what part of the capital structures they should buy it at. And how could they possibly be a little bit know? If you're at KKR doing it, how could you be a little bit smarter than the person at Blackstone doing it? And that felt very competitive. What we wanted to do is we wanted to find stuff that nobody cared about today because it never really existed yet. We don't do income share agreements for some of the reasons I mentioned before, but that would be an example of something new. And how do we predict whether or not that'll take off? And if it doesn't take off, we didn't lose any money, but we wasted a lot of our time in a way that somebody like Blackrock or Blackstone or Angelo Gordon isn't willing to do. But if it did take off, we'd be the only institutional player in the room, and we'd be able to crowd everybody else out of the market and build, like, buying power in that market and pricing power in that market. So we ended up building an asset backed credit business to find these fintech companies and go pursue those opportunities. From doing that, we ended up investing billions and billions of dollars.

Ali [00:52:02]:
We became an established investor in the tech ecosystem. We built credibility with founders that I had built a business, our colleagues had built a business together. We had learned how to invest capital. We understood how capital markets work, which sometimes matters, sometimes doesn't matter in startups, but we really loved backing companies. And so we ended up launching a venture capital fund and we tried really hard to make it a generalist fund. So even though we felt like we had fintech backgrounds, we don't think it's an accident that the best VC funds are often generalists. We wanted an opportunity to be relevant to a lot of people, and we felt like a lot of experiences we had spanned more than just credit markets. We felt like, in my business, when I raise LP Capital, it's an enterprise sale.

Ali [00:52:41]:
I have a recurring revenue stream. It takes me 18 to 24 months to often close and build a relationship. I want to then account manage that relationship and upsize it. Asset management businesses are kind of like SaaS companies, with margins and recurring revenue and everything else. We built a successful venture capital business that's done well, and we've had a lot of fun doing it. We've had an ability to partner with a lot of great entrepreneurs. And then more recently, we launched a fund that we call hybrid. And there we do what we call nondistress, special situations.

Ali [00:53:11]:
We're looking for complicated situations or situations where a founder and investor can't agree on price, or the market can't agree with the founder on price. And we'll offer them a security that has elements of equity and elements of debt. And usually what we're doing is we're looking for the downside, protection of debt, but we're willing to take some equity upside, like warrants or something, in exchange for not taking all the interest in current pay. That way a founder can take the EBITDA that they're earning and invest it back into the business, as opposed to just paying a ton of interest with it.

Greg Isenberg [00:53:38]:
Just curious, what is the stage of a company? What are we talking? Are we talking like series B, series C?

Ali [00:53:46]:
Yeah. So often these are founder owned companies, so they couldn't be staged with around. But to give you an idea that the perfect business for us does something between 50 and $150,000,000 of revenues, they're cash flow positive. They do seven, eight figures of Ebitda. They're growing above 1015 percent, probably under 50%. They're over 50%. The business might be growing out of control, or they're probably being chased by a bunch of growth equity investors where people don't care about picking the right price because even if they get the price wrong, the company will quickly grow into the price anyway. And usually the company has bootstrapped itself, where we feel like the fact that the company's bootstrapped itself to that scale demonstrates the quality of the business and their ability to generate cash flows.

Ali [00:54:33]:
If you raise $100 million to generate $80 million of annualized revenue, that's not that impressive to us. If you raise 5 million of equity to get to 50 million of revenue, we're like, wow, you're clearly doing something. You are using very little capital to generate quite a lot of value, and we're looking for that capital, or at least equity efficiency.

Greg Isenberg [00:54:51]:
I like it. Yeah, it's different. It's different than what I normally hear in the VC sphere, which I like. And where could folks, I guess, find you on the Internet and learn more about you or potentially partner with you?

Ali [00:55:12]:
I respond to most cold emails I get. There's sometimes short responses, but what I'll try to do is at least route them to the right person. In our organization, it's just Ali at Coventure VC, especially if there's a pitch or some know, we, we find that companies can come from anywhere. I'm on Twitter at alibi hamid. I used to tweet more. It's kind of scary to tweet now. I feel like anything you could say, it's difficult to communicate nuance, but I like it when I do. And then those are the main two places.

Greg Isenberg [00:55:48]:
Cool. Yeah.

Ali [00:55:49]:
What we ask people not to do is not just to show up to the office. Showing up to the office cold is a bad idea.

Greg Isenberg [00:55:56]:
Totally. Don't give up on tweeting. I think, tell the people how you feel.

Ali [00:56:03]:
I'll get back into it. I feel like I've spent most of my career so far realizing how wrong I am about a lot of things, that it's hard to proclaim stuff on the Internet. And I used to find a lot more joy in it when nobody read them. Now there's the accident of somebody might actually read it.

Greg Isenberg [00:56:23]:
You only need one thing to be right per year. That's all you need.

Ali [00:56:30]:
That's definitely venture capital.

Greg Isenberg [00:56:33]:
Yeah.

Ali [00:56:36]:
Being a venture capitalist is awesome. Being in credit is like being a professional free throw shooter. There's no glory or professional penalty kicker. Whenever I'm watching a soccer match. Everybody loves PKs. And I'm looking, I'm like, this reminds me of my job. This sucks.

Greg Isenberg [00:56:53]:
You're out. It's like, yeah, fair. All right, man. Well, good hanging out. And I'll see you around.

Ali [00:57:00]:
Greg, thank you so much for the time. Really appreciate it. And we'll talk soon.

Greg Isenberg [00:57:04]:
This is fun. Fun. Later. Bye.