David Gardner (Cofounders Capital): We have a joke that if we don’t understand something in the first 2 minutes, we won’t invest.
30 Jul, 2021
Peter Pham is Founder and Managing Director at Phoenix Capital. He is an author, international fund manager, and a registered financial director by the Cayman Islands Monetary Authority (CIMA). In 2013 he published his first book entitled The Big Trade: Simple Strategies for Maximum Market Returns. He currently manages the portfolio of a global hedge fund and runs an asset management company.
I came from a finance background. As you can see now, at these pandemics times, many people were affected, in some places you can see things like riots and uprising. What happens for finance people, when they witness something like that, is basically 2 pathways. One is they continue to trade stocks and invest in stocks. The other way is that people could be drawn into real businesses, operating businesses. And when people from the finance world enter startups, VC, private equity on a very material level, these people aspire to do something that makes them feel like they’re doing something tangible. I should say here, that people like Mark Zuckerberg, Jeff Bezos or Jack Ma, despite doing rather intangible things and being really detached from the material world, are much more than people, they are a real impact on the material world, especially in times like now, during the lockdown, because there is a limitation towards scalability in the Natural world. And that’s why and how people from finance move toward VC or PE.
In terms of startups someone’s favorite should be some of the better-performing ones. So my favorite investment so far has been a digital marketing agency, because it is a proxy related to technology, the business that encapsulates so many different crossroads, helping to promote the products and services, creating sales funnels and ultimately turning that into potential real-world transactions.
In the year 2019 the many startup investors were interested in brothers and cousins of Bitcoin, of cryptocurrencies that are, probably, not working anymore. What’s more important is the fact that the risk profile about what you’re hearing about is completely out of the field. In the year 2019 I’ve heard about F&B franchises, about alcoholic beverage companies, I’ve heard about the crypto of the crypto of the cryptocurrency, about office coworking spaces on par with WeWorks – everything that, in 2020, I want nothing to do with. In 2019 I was interested in things like precious metals, treasury bills which is basically cash, USD. The only interesting asset to me in the year 2019, which works extremely well in 2020, is streaming. I was buying intellectual property related to streaming, and ironically when everyone was in lockdown the only thing we could do was stream content on Spotify, Apple Music, Netflix and all the other streaming services. This is what I’ve been doing now – building a portfolio of streamable content. Most of those transactions were private and not even official companies, but rather people that have a bunch of content. I just aggregated a portfolio of them, acquiring the rights on this content.
I’ve found that when you’re in the field of private equity with a lot of people, after you got a deal, it’s more than likely it’s been passed around the block. If someone had a pitch, it’s more than likely it’s been circulated around me, so my own network is the best deal generator. You start to get into conversations with people, they ask you about some previous investments – and that’s how it starts. Teasers and pitch books are too refined in terms of presentation, I’d rather talk with someone that has a whole bunch of contacts or content. I ask them about the cash flow of that content, how is this person doing, what does he or she aspire to do – and then it happens organically. I believe that might change, especially this year, when basically everything is on sale. But this report with a content owner, company or entrepreneurs that you’re going to work with is the best form of deal generation and then ultimate transaction.
I think this is a key point because at the end of the day we need ROI. I’m interested in sectors I can scale. Our economy, particularly the US economy, is based on fiat money which is, ultimately, debt. When we have a barter system or gold as a basis for the economy, it put limitations on how much debt a country could have. But debt also means growth. Facebook couldn’t be where it is now without borrowing a lot of money or without investors that provided it money and, maybe, borrowed all that money too. Investors need to understand that debt means growth and debt are fuelled by currency expansion. Therefore the Finance sector is the biggest aspect of our economy. But another sector that benefits from this situation and is easily scalable is Technology. And it is not a part of the material world, of a kind, but heavily grounded in our minds. Think about social networks, for example, they are not tangible but have a mental value that can transcend into the material world, helping these companies to achieve their fantastic evaluations and attracting risk-takers, like entrepreneurs, innovators, or inventors, to pursue those risks in hope to capture this accelerated growth and potential revenues. The US capital market, particularly Silicon Valley, is one of the few economies in the world that would offer that level of bandwidth in debt. Somewhere else, like in Russia, the economy is heavily based on government-given money. It limits the market because overall GDP doesn’t allow to absorb a losing money business that can ultimately have a valuation of $100B pre-IPO. What’s ironic is that Russia, just like the United States, have financialised their economy too much greater rates than what you see in the real economy. Back to your question: people with technical skills, technocrats – the central bankers, the guys that are making space rockets and electric cars, those who make social media – all who understand math and can turn technology into capital and, maybe, purchasable things are winning. Our world is redefining the term “essential workers.” If you’re working at the convenience store, you’re an essential worker, but if you’re working for this big tech company, if you’re doing VC, if you’re a banker or you’re working on Wall Street – you’re an essential worker as well. Everyone else, which is basically the middle class, has been deemed non-essential during this crisis.
About a year worth of operation. I want to see some proof of concept. It doesn’t necessarily have to be a revenue stage; what I examine is the structure of the business model – a little bit of a structure on how the financial statements, the balance sheet, the income statement could ultimately look like.
It is a very big distinction between 2019 and 2020. In 2019 it would be emerging markets, and the reason is that it was no volatility in our market, which inspired more risk-taking. A dirty little secret about emerging markets that not too many people know about is that you need to see Morgan-Goldman-Sachs all-time high in order for a small startup in an Asian emerging market that can make me rich. You could clearly see it during COVID-19 crisis: while small companies in emerging markets were struggling to survive, huge technology companies, like Netflix or the whole streaming industry, were doing very well. And when you’re investing, you need to consider your priorities from a prospective risk. During the crisis, I guess, you’ll prefer to invest in some AAA assets that can only be found in some super-developed economies. When everything is stable, say, in 5 years from now, when things look like they totally recovered and are going towards all-time high, that’s when you can go to some beach resort in Cambodia and make an investment there. Therefore, in 2020 and in several more years I’m going to be focused on low-risk markets, as the US market.
This is a philosophical question. As I make the decisions myself, I come down to this: you should scale ideas and capital, but you shouldn’t try to scale thinking. When we’re looking at an investment, the way I see things might be very different from the way that you see. I think that in a VC fund the key decision-maker should be the one that really looks at some of these things, because, ultimately, he has the fiduciary responsibility to ensure that. And such a decision, especially at very early stages, can be made within 2-3 meetings or it may take a hundred meetings with a lot of DD check and forensic analysis of financial statements. The decision-making process is about the dichotomy of 2 individuals. The team behind the world’s greatest investor Berkshire Hathaway consists of 2 people – Warren Buffett and Charlie Munger, the rest are just administrators. So, as I’m the only person responsible for the success of the investment and hadn’t yet found a person who shares my thoughts, and ideas, and my philosophy, I remove all the red tape and try to find a deal that works.
It can go from negative all the way to positive. It can be some kind of synergy economy of scale somewhere within the business model, like me providing the company digital marketing services that ultimately provides them the revenue that they need – in exchange for equity. Or it can be just straight-up financial investment. Anything is possible.
It really depends on 2 parameters – country and performance of comparable companies in the same industry. The country is the benchmark: you need to check how well the comparables perform on that market, and you cannot expect a company from, say, Vietnam to perform as well as a company from the Valley, founded by successful serial entrepreneurs. And if there is no or just several companies that bring 100x on the initial investment, I’m sorry, I cannot guarantee that your exit will be that big. Therefore you need to evaluate each company and each market every time. There is no answer to this question. It is pretty much the same as with the previous one I don’t have a certain deal size because it depends on the economy I invest in and the level of risk it involves, and if you cannot afford it, just stay out. A lot of big funds tend to have this “check size” and “number of Xs” parameters like some outlandish figures. They may look at some IT-company, for example, in Ukraine and say, “This deal is too small for us.” So, stay out! You’re in Ukraine, you should know better!
I know a lot of VC guys from, like, Harvard who go around emerging markets and think that squeezing the life out of the company means that they’ve done something amazing with their fancy education. And they, despite all those efforts, are still unable to master out some adequate multiple expansion – exit or ROI. This is probably going to be the first time you hear me reference it, but, basically, that’s inhumane. If you invested some money into stocks, you can be pragmatic, because there is some detachment there. But when some PE guy tries to squeeze the life from a startup, that guy is doing something wrong, which could ultimately be exposed – sooner rather than later. So, I’m trying to figure out a way to work with an entrepreneur, in which it is a win-win, not just get into the deal and just exploit the entrepreneur, but take it to the next level in a way that everyone feels like he or she is really winning.
When the COVID pandemics started, one of the things China was unable to deliver is to be the inner part of the value chain for them to deliver the goods for the world when it needed. So the answer is back again to where the country is in terms of capital development. If I’m going to invest in an outsourcing company that specializes in making apps for global companies, situated somewhere in India or in Asia, I should assume that someone with good technical knowledge is also a good hirer and his team is going to be helping him. And when I’m looking at teams, I look for people with wisdom – this is what our world is missing. In times of uncertainty, like just we are in now, it is only people that have wisdom that will be able to supersede the knowledge workers that have ultimately been able to render the world’s useless in this period of time. That’s not to be seen in a profile, and when you are examining the company, you need to look at the leader, but you need to have a conversation with the people, otherwise, people are doing things with their technical skills without questioning what they are doing – they are doing, basically, good things, right things.
Assuming that Steve Wozniak brings the technical skills and Steve Jobs is more of a prophet, a visionary. The key here is what you mean by “work with.” If we’re talking about being colleagues, Steve Jobs is not the nicest guy. Still, as an investor, I know that he has a very clean record, and the people who invested in Apple at the very start, never regretted it. Also, I would say, that Steve Jobs was devoted to Apple much more than Steve Wozniak. He was ready to be fired (and was fired) but still stood for his believes. Steve Wozniak is a person who was looking for personal comfort all the time. He even still walks around with a backpack. I remember watching a documentary about Steve Jobs, and he said that when he walked to present Apple, he put on a suit, took a briefcase for the first time, and shaved because he was wise enough to understand the rules. I get it – people want to be comfortable with a tech startup, but the objective is to raise capital, you’ve got to be professional about it. If I’d have Steve Jobs, he would never turn his back on me, because I’m committed to him and he’s committed to his objectives and wise enough. Ultimately, he became more successful than Steve Wozniak.
Yes, absolutely. Would you support 100 superior people or Steve Jobs? Our world is obsessed with a volume of people in a team and titles. I’ve come to realize that our world should be more obsessed with ideas, unfortunately, that’s not the case. We are more concerned about the source of ideas, but I’m more interested in how those ideas are being used by people. One person can change the entire world, therefore it would be so silly not to
consider that person, basing on some bureaucratic views on how a company or a team should look like, especially now, when even mainstream media companies look like startups. It is weird because it allows bureaucratic institutions to remain in power, while startups, by definition, are anti-establishment organizations looking for disruptive growth and disruptive technologies. We need to put more focus on ideas, onto how it’s going to scale, how were going to plug into the realm of mathematics, technology, and mind, and make it grow. Steve Jobs was anti-establishment.
In the case of investment, it is all about integrity and honesty. I need to know will they be honest with me, how they get to handle problems, are they going to try to cover things up? Unfortunately, knowledge workers get a lot of ethics training and paper writing in order to get PhD diploma, still knowing little about what is moral. So, honesty and integrity are going to be very important when you consider an investment. Once I’ve made in investment and I’ve asked it back immediately because I found out that the person was dishonest. Also one of the major flows in entrepreneurs is that they don’t know how to speak the language of finance. They may be full of good intentions, but these innovators are still focused on being the knowledge workers, disconnected from the numbers that are important, so it very much affects the way that they communicate about the business with you. The issue is that many entrepreneurs don’t understand that finance is the language of business. When I meet these kinds of people and they don’t allow me to help to bridge these inefficiencies and these harsh realities (because that’s what numbers present), it becomes an issue.
I’m not a big fan of Real Estate. And I’m not a big fan of anything that’s easy. As I’ve already mentioned, in pre-COVID world bank managers were fond of tangible things, like opening a coffee shop that you always aspire to open, or investing in a piece of land. But now we can see that the way the economy is moving on is not going to be designed for easy money to be made through easy business models. If you’re part of the technocratic elite, you shut down all those initiatives that are too easy. Imagine hotel chain owner these days, when the occupancy is, basically, in single digits… I’m pretty certain that if it’s not technical, it’s more than likely not going to work anymore.
Absolutely! The whole paradigm has changed. COVID is going to accelerate the end of a lot of countries. People don’t know this, but the majority of countries failed – just like the majority of startups fail. I’ve looked for the last 100 years – 80% of countries failed, 80% of currencies failed. When you have these pivots in history that have accelerated everything, then clearly the whole paradigm has changed. A lot of people value companies based on the potential revenue that they can make, but I don’t know if you forecast the revenue of a travel tourism business startup anymore. How can I predict revenue for some, say, Ukrainian tourism startup that uses technology to accelerate the interest to travel, if I cannot predict the future of a monster like Delta Airlines? And it is the time for Steve Jobs now because you need the visionaries at times like these, and there is not that many of them. There are many denialists even among the entrepreneurs, who are unable to admit that there’s no clear path because their ego has been so attached to the models they’ve already chosen. The big picture is that everything has changed and all the easy money is off the table. The whole world has changed, and we will see the results of these changes in the near future.
One book that is very important is Smartcuts: How Hackers, Innovators, and Icons Accelerate Success by Shane Snow. It is about how people can accelerate growth out of nothing. There are many people that became presidents of the United States, which is the most powerful position in the world, came from nowhere, like a reality star billionaire or a social worker coming from nowhere in Chicago as a minority, or an actor. It is exactly the same with entrepreneurs, when a group of students may become really powerful persons. And this book is talking about these unconventional paths that allow you to accelerate your prospects in normal human time. People who take normal pathways, probably, don’t reach the same height as the guys that are going the unconventional ways. Time is the most valuable thing that we have, that’s why it is so important to figure out the pathways for accelerated growth. Another thing that I do now is to reprogram my brain as I follow a lot of interesting ideas on Twitter, and I turn on notifications about these people’s activities in order to be bombarded by these ideas. This is something we haven’t had before and it was brought to us by technology. Everything has become so competitive, and a great way to broaden your horizons is to find people that you think are really smart and let them bombard you with ideas. A well-settled RSS feed also helps to get rid of the censorship and political agendas by social networks and search engines like Google. And I am fascinated by Dostoevsky and the social commentary of his material. I’ve been looking to buy first editions of his works – that’s a great investment.
This could be not even companies, but rather ideas that are so reflective of the real world and so important to our world, that became a manifestation of some bigger ideas. Let’s say Boeing and Lockheed Martin which can be understood as the military-industrial complex. What is interesting about the military-industrial complex, which is so vital for our world, is that the pillar of it (which is related to Aerospace engineering) is related to mathematics, and mathematics transcends our understanding of physics allowing us to create all the things that we created, got us things like NASA, fantastic innovations in aviation, and then ultimately will get us to the Moon landing, like it or not. What I marvel at is that the mathematics is extremely real and lead things which can ultimately become some of the greatest companies in the entire world, and it is man’s ability to extrapolate using numbers, then create the fantastic companies. Isaac Newton wasn’t looking into the skies because the technology wasn’t ready, but he was able to calculate everything and understand the entire universe, pushing mankind so much more forward. The aerospace and the military-industrial complex in form of NASA outsourcing companies like SpaceX and inspiring billionaires like Jeff Bezos and Richard Branson to go to Aerospace.
The number of possible combinations for the chess game, after we made our first 4 moves, is 288 billion. In poker, the odds to drow 5 cards in any combination are 1:2.59 million. If you take into account every possibility for a company, ironically, there are fewer permutations that in chess. Everything you can put in the chart – revenue, sales, net income – there are fewer trajectories than in chess. Basically, these indicators can move up or down. Obviously, what the entrepreneur can do to develop his business or catch a client is much more than a chessboard can hold, but the manifestations of the valuation of the business have fewer permutations, what I can put into numbers in arithmetic for business has fewer possibilities, which means that, potentially, it is easier to grasp and comprehend the business than it is to play chess or poker. All these games have an endpoint, the key question is how well will you do before you ultimately reach the end. The truth is that even the biggest companies reach the end or change, therefore the most important question is what is the peak, and would you be able to get to that peak.
I think the beauty of working in financial services allows you to explore all these things, at least you can talk about these things and it can be said as part of your overall research. It is a field that allows you to be practical, but then also be philosophical and theoretical and think about how you can extrapolate that information to become a better investor. The best investors, for example, are very well-read, because VC business encourages you to read all the time – that creates your edge, which is the key thing in investing. I cannot pick up a field that allows you to think about all these things and monetize that. That’s why big investors make more money than technology startups.