SIP008: David Kim on Private Debt and Startup Investing - Sure Dividend Sure Dividend

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SIP008: David Kim on Private Debt and Startup Investing

Today’s conversation is with David Kim, a venture technology portfolio manager and Assistant Vice President at Square 1 Bank. David spends his time working with small private companies in the technology sector to assess their growth prospects and determine whether his firm should extend debt financing to them.

I’m really excited about this interview for three reasons: one, David is our first guest with experience investing in private businesses; two, David is also our first guest whose expertise is on the debt side of the balance sheet, and three, David is a thoroughly interesting person an excellent conversationalist. Please enjoy this conversation with David Kim.

Full Transcript Below

Nick: so today’s episode is a little bit different because I’m speaking with someone who is familiar with not just private businesses but also the debt side of the balance sheet for private businesses.

So, David, I thought we could just get started by hearing a little bit about what you do and your work at Square One Bank?

David:I am an assistant vice president and portfolio manager at Square One Bank’s Seattle office and I’m responsible for overseeing the credit quality and also the client relationship for about a dozen companies in this in this particular market.

And the interesting thing about what I do is our bank works specifically with startup companies so they are venture-backed startup companies, meaning there are early-stage businesses that are growing very quickly with the aid of venture capital.

Nick: so I guess two questions to spin off that. You say they’re growing very quickly. How quick would the typical growth rate be of the company that you lend money to? And then, additionally, tell us about the typical company that your firm will lend to?

David: so when a company takes on venture funding, it’s not a hard written rule, but almost an expectation that they’re growing exponentially and that tends to mean that the company is essentially doubling each year its annual revenues.

That’s a goal – not all VC-backed companies will grow double and most will grow somewhat slower but the idea is we are not talking about a mature business that has a mature market. The company that is growing at a single digit percentage each year and even a double-digit percentage will not really do. Just the way the funding cycle works for the venture capital investors and their limited partner investors to make a decent return. Given the risk that they’re taking these companies have to be adding a lot of customers and really growing their revenues.

Nick: so these are definitely unconventional companies, way smaller than anything that most investors have experience with. I guess that would kind of suggest that the loans that you provide to them are unconventional as well.

I’m curious about the structure of the typical loans you provide to the. Are they fixed rate or variable rate, are they amortized, are they bullet payments? I’m just curious about what that typical loan looks like?

David: sure I can I can add some color and let me step back by adding a little bit more context around these companies. So they’re fast growing they are early-stage businesses the interesting thing about them about startups in general is when people think about startups and entrepreneurship people may have two images in their minds.

One might be companies like Facebook that just you’ve only heard about them recently and then all of a sudden they’re huge and they’re everywhere Spotify, Facebook, Dropbox these are all good examples Uber might be another that comes to mind.

Then there’s another class of startups or small businesses that people may think well they’re kind of like lifestyle businesses or private businesses that’ll stay private for a very long time there are companies I make great products an example might be Trello I think they were acquired but it’s company that was a private company maybe couple dozen employees and they were making a lot of money and doing fine and had real no real goal to go public or be acquired.

But for the most part vc backed companies will always have a goal of finding an exit and that exit could involve going IPO couple years down the road.

So that that’s just one color and it’s interesting because in when we think about investing as investors we’re looking at public companies. These are the proto public companies so to speak right and for me for us the ideal company that we lend to are in those early stages.

Our loans typically range in size from anywhere from 1 million to 20 million I would say is our sweet spot in some cases we do bigger loans. But these companies will typically have a top-line revenues that are growing in the in the single to double-digit millions so that that loan facility relative to their stage is appropriate.

The specific loans that we make now we tend to make both term loans as well as formula based loans. A term loan means that there is a lump sum that goes out with an amortization period just like just like a mortgage for a house you receive let’s say $200,000 from a bank and then you pay it back over 30 years.

In our case that amortization period is much shorter it’s a business loan our formula loans on the other hand are tied to collateral and there is a formula for how we lend against that collateral hence the term formula alone so what that means is for example we may lend against the accounts receivables of a business or in some cases startups don’t have a lot of receivables.

They have revenues that they generate and their recurring monthly revenues so then we may tie the formula to the monthly recurring revenues of a business as I shared earlier our businesses may range in size from pre revenues to companies that are doing tens of millions in revenues each year. So our loan really and the structure of it depends on both the life stage of the business as well as the scale that that particular business is reached.

Nick: so that gives us a great sense of the size and kind of financial characteristics of the business as you lend to. I’m curious about the sector concentration of the portfolio that you manage. So is it mostly it sounds like it’s mostly in the technology sector is that is that correct?

David: that’s correct my particular focus is in the tech portfolio. We as a bank also lend to life sciences companies life sciences startups. The way we assess risk and also the funding cycle for deals and the life sciences is quite different because of the regulated aspect of it.

Nick: and what about interest rates I presume that there’s some sort of a liquidity premium that you guys receive for lending to these companies because there’s no active market in these private business loans. So which interest rates be in the double digits or high single digits or what would I guess the blended interest rate of the portfolio that you manage you look like?

David: sure it varies very it varies based on the risk premium but I would I would share that the risk premium is not as much as people may think. Specifically, we lend based on a prime plus structure and currently the banks’ prime rate is at four and a half percent.

So that’s our baseline and then we add to that couple percentage points depending on the type of loan were making and the stage of the business. That puts us squarely in the middle-upper middle single-digit percentage rates which if you really think about the businesses that we’re lending to be quite low.

It’s not to say that everybody qualifies for a loan from us we certainly want to lend to good companies that we can partner with there are companies that are growing at a certain rate which mitigates a lot of risks. Because if you are growing that says it’s a very strong signaling mechanism for the future of that business.

So that accounts for why our rate may appear low to some people but it’s because we are being selective in what we do mitigating our risks.

Nick: and what metrics would you and your team use to determine the solvency and liquidity of these businesses to understand whether it’s appropriate to extend them alone or not.

David: so many of our I’m laughing because many of our core customers when they have an external auditor comment out of their financials they’ll always carry a qualified opinion for going concern our business is tend to be companies whose future is uncertain they tend to be companies that are cash burning. So liquidity is always a challenge it never really goes away so that’s one area that we are looking at.

The company’s balance sheet when they’re an early stage technology company tend to be primarily tied to cash that they cash from the equity finance that they have raised and from receivables of the business. So it’s a fairly thin and simple balance sheet there might be some PP&E; for the equipment or internally developed software some companies may carry some goodwill is from other teams or businesses that they acquire along the way.

But by and large it’s a cash plus AR type of balance sheet analysis so that’s what we are monitoring. We’re really monitoring not the liquidity balance sheet figure but rather the runway the cash flow aspect of the business how fast are they burning through that cash pile. How much runway does that give us and that allows us to manage to that particular risk and understand gain a line-of-sight to what the company’s next milestone is.

What does the company have to do or how much revenues does it have to generate in order to raise its next round of financing or or to restructure the debt appropriately and at what point are we seeing an exit for this particular business.

Nick: interesting thanks for providing some insight there. now you’re based in Seattle so when people think of Seattle plus technology they’ll usually think of one Microsoft and two especially recently Amazon.

David: Amazon they were all startups at some point they’re huge now.

Nick: yeah exactly. So obviously if you have a whole private debt business based in Seattle there’s a lot of a lot of potential opportunities to the smaller businesses as well.

I’m curious as to how you identify these businesses and I guess what your deal flow funnel looks like? Where does the company go from needing funding to finally closing funding with Square One?

David: we partner with the VC market the venture capital market locally there are a handful of VCS that invest in in this market and our debt tends to be not as tend on that but rather a runway extension to the equity investors capital. That allows the management team the team to execute better because they have more capital flexibility and their runway is longer. And does that answer your question?

Nick: yes definitely. So it sounds like you partner with a lot of companies that whose venture capital backers have a relationship with you and they’ll send you along through that relationship.

David: that that’s right and once you have those relationships like any business we try to cultivate a strong partnership with that business and to do right by our customers and hopefully they’ll refer us to other people that they talk to.

The start-up market in general I think you can pick any region but it tends to be a fairly small world. So I think the word of mouth is very important we value our referrals.

Nick: I just want to spin it completely on its head. so that’s how you source new business I’m curious about how Square One reacts in the event where a company does go bankrupt then you need to go through bankruptcy proceedings what does that look like for you guys?

David: yeah so actually we can step back and start with what happens when stuff hits the fan. What happens when a company’s troubles because many businesses do. I mean as far as the bankruptcy goes were the bank so we ultimately may reach an impasse where we can’t do anything else in which case we may sweep funds and that’s the bankruptcy.

But by and large we try to avoid going there and it really starts with the selection upfront picking only the right businesses that we think we can lend to and having the right partners in the ecosystem good investors who was tend behind the investment and not just run out of capital when at the first sign that the business is struggling.

That said business is deuce trouble and what we do is as a lender and a partner we get involved we have a fairly close relationship with the management teams with to whom we lend and once they begin this trouble will get involved through our specialty asset group to kind of look at alternatives.

So that alternatives could mean restructuring the current loan facility or restructuring the covenants to help provide more flexibility for the management to find a way out. Sometimes there are still no easy ways to dig out of trouble. In which case we might be looking at conversations with different partners’ maybe it acquires additional capital from the investors or perhaps it involves further concessions from the bank to make sure that the team can stay afloat.

There is a point in time where we find that the business really is not a going concern at which point we have options. It’s like any asset you can buy and sell whole businesses. So we can enter a process in conversation with other partners where we are looking for buyers to that business at and then the buyer at the time of the acquisition would repay the debt so that takes us out of the picture. And then and then the company runs in any new hands of a new management.

Nick: so in that situation the acquiring party would have all the equity and they would also pay off all the debt is that right?

David: that’s correct, yeah I mean that would be part of the discussion.

So I think the short answer to your question is bankruptcy is really the very last resort and for the most part we try to avoid it. We try to help everybody win but bankruptcy really just means in beyond the legal aspect of it basically means that management has run out of options.

There’s no more business to be done and we simply kind of shutter the doors and sweep cash where they are.

Nick: now you mentioned that part of the proceedings that occur before you go through bankruptcy is working with the management team to explore alternatives. I’m curious as to whether an outstanding management team could help you to overcome some concerns you have about the business model of a company that’s applying you for funding or said another way I guess how much weight do you place on the competency and character of a management team when you’re assessing whether to extend them financing?

David: yes so that goes back to your earlier question how do we how do we identify opportunities deals and I would say it’s very important to invest in the right people. Especially in the early stages of the business the business model is self-made change so in that sense we are not that different from the equity investors the VCS.

However I will say that we tend not to be a where the finance experts were but we are not industry or segment experts so we tend to take cues from the investors who’ve done their diligence in identifying the right management team to execute on a certain opportunity. As I said earlier we partner with the VCS and come alongside their investment rather than rather than leading leading the round.

So we’re really a partner more than more than a leader in that sense and but among the attributes that matter to us when we think about who to lend to management is very important the companies traction is very important. It’s one thing to have an idea it’s another thing to have customers and then it’s yet another thing to have a million dollar plus contract with enterprise customers.

Those are all different signaling mechanisms that we pay attention to and then beyond attraction and the management team again what are the partners that are in the in the in the deal the investment the investor syndicate that that matters quite a bit to us.

Nick: are there any red flags where upon seeing them you would completely remove yourself from a potential financing deal?

David: ah red flags it’s an interesting question I think the converse of everything that I just said would be a good starting point so a company may seem very promising but somehow it has failed to attract capital from high-caliber investors. Now that’s a big potential challenge another one is to find seemingly competent and strong management team that that through one reason or another fails to get revenue traction. Because that means they’re either not tackling the right market or unable to find the product market fit either way it’s basically asking for trouble down the road.

Oftentimes though, and in these conversations that applies to the very earliest stages but if you apply that lens to a going concern a company that’s been operating a while then then what we look at is if the company is not growing fast enough what’s behind that or if the company’s margin gross margins are eroding year over a year. Those are some of the simple low-lying fruit, flags for us to dig deeper into and sometimes there’s good explanations behind it.

At other times it actually is a early indicator of trouble with a business and that allows us then to have conversations and be proactive rather than reactive to potential trouble. I think that that type of monitoring financial risks and especially looking at growth and looking at margins to a large extent I think of applies to public companies as well.

When a company is shrinking its tuck line I think that’s a an area for concern because it either indicates that the company may be losing to competitors or it could be that the entire marketplace itself may be shifting so for instance from traditional retail to e-commerce and then for any given business regardless of the size and the robustness of its market looking at the margins also may signal if the itself is not quite delivering the value to its end customers.

If you see margins eroding year over a year that may signal the fact that perhaps the customers are not seeing as much value and are able to have more leverage in contract negotiations. And in our early-stage businesses we so we tend to focus on the margins and another outcome that we look at is kind of the customer retention and some of the profitability metrics around the unit economics and seeing those indicators go in the right direction it is important but again it’s a little bit tricky because any early-stage business there are so many variables they’re very it it’s you’re going to find a lot of fluctuations a lot of variability in the short-term.

Nick: one of the things that we really like to look for at Sure Dividend is high levels of insider ownership and it’s interesting because we’re public equity investors so literally the opposite of what you do you’re a private debt investor.

I’m curious as to whether you and your team place much emphasis on high levels of insider ownership at the firms you lend money to and it’s I’m interested to hear your response because for us when we see firms that have high levels of insider ownership it means that they’re going to participate in the upside if we experience it. But for you it’s kind of the opposite because as a debt investor you’re more concerned about the downside than the upside because what your upside is at the time that you issue the debt so it’s instead of the inside team having participation in the upside.

It’s more of the captain goes down with the ship it’s more of that kind of phenomena.

David: yeah exactly we are where we’re interested in understanding our downside risk for sure. And so it’s the two sides of the same coin and by default early-stage businesses have at high insight high insider ownership percentage the biggest donors of any startup companies will be the management team the founding management team rather and their early investors series and Series B investors they’ll own a sizable chunk of the business.

And the investors will all sit on the board and they’ll take a very activist stance in fact it’s very important for the management to approach the right kind of investors that can help them with their next stage of growth. That’s all part of the success story of startups that you see finding the right investor that can aid in the growth of the business and that itself is a skill and it is also a validating signal to us that the business has a bright future.

Nick: now you mentioned that the investors usually get a board seat which I knew that about equity private investors I guess but not so much about debt investors. So does Square One usually get a board seat when they extend financing to a business?

David: we don’t so I’m speaking about the equity investors and our view of who is sitting on the board and who has invested.

Nick: understood. Now you mentioned you have a portfolio of companies and along with sourcing new deals you play a pretty active role in monitoring the financial performance of the companies that you’ve already extended financing to so you have a lot on your plate in other words.

I’m curious about what your day-to-day business flow looks like and how you manage to keep your finger on the pulse of so many different businesses at one time?

David: yeah I think as I shared they tend to be the financially speaking they tend to be simple businesses. the assets are fairly limited to cash and AR and really our focus is on cash burn trends or cash flow trends rather and then a lot of it is just the relationship management the qualitative aspects that we spoke to the signaling mechanisms as well as the day-to-day discussions or short-term discussions about what is the next milestone our next goal.

And what is the management’s strategy to tackle it if something comes up in the marketplace what are the investors and the management talk saying about this new threat for instance and this does that make sense to us as a lender and how should we get involved in that partnership discussion.

So I think the volume, it is manageable because they’re simple businesses rather than large corporations may be my I start my day by just doing a high level snapshot of where the companies are. Checking their liquidity levels and then also just making sure that I’ve they talk to either the management or the investors so that we’re not falling behind.

These companies are our customers oftentimes our trailblazers in their market which means their their ideas aren’t static. Corporate strategy last year may look very different this year a company that did not have any competitors last year all of a sudden may be running into very strong competitors this year so because of that it’s very important for us to have routine check-ins with both the management and the investors.

Nick: so that last comment you made reminds me of Peter Thiel’s book Zero to One where he talks about investing in companies that are market leaders in a very small but rapidly growing market. Would you say that that description categorizes the companies that you and your team extend financing to?

David: that’s the goal.

Nick: to give the listeners some background here I know I met David through his writing on Seeking Alpha. So David has a day job as a venture debt portfolio manager and he also writes equity research on seeking alpha and what stood out was equity research is that it was very thorough and it came from the perspective almost of someone who is a business owner and cared very much about fundamentals.

So David my question to you now is how has assessing the credit risk for start-up technology companies helped you become a better investor personally?

David: well I appreciate the kind words Nick and that’s a huge compliment and I would say that working with startups but working with smaller businesses in general has been a huge addition to my mind knowledge and wisdom in understanding investments.

I said that because I started out with as a public company auditor for E. Maguire, Ernest, & Young and that’s where I was able to gain skills in financial analysis and understanding kind of the internal processes of large corporations. And I’ve had some stints working for fortune 500 companies inside of their finance team.

But the scale of these businesses are often so large it was really difficult to have an owner mindset but working with small companies and working in particular with startups and having the opportunity to talk to the CEOs of these company picking their brains about how they’re tackling a competitive market and how they’re tackling setting goals and tackling execution to get to that next milestone.

Helped me understand that at the end of the day that’s what all businesses are trying to do even big businesses it’s just that the processes really change as you scale and the complexity just goes up exponentially. But it’s interesting to understand that really what you’re trying to do is have a simple goal and to create a competitive advantage in the marketplace that delivers value to your customers.

It’s an interesting tie back to sort of the general wisdom that Warren Buffett or Charlie Munger may share that they’re looking for companies with a wide moat that’s what all businesses need to try to do and you’re going to see that financially in in the margins for instance of a business.

Can it maintain its margins you may see that in the growth rate of a business unless it just happens to operate in a very mature business in which case you’re not going to have a lot of top-line growth.

I think in short working with small businesses has been very enlightening for me and it’s a great way to add to the sort of the latticework of knowledge that I gained working for the public company industry.

Nick: given your experience as a public company auditor and as a lending officer for private startups you clearly have a pretty fundamental knowledge of accounting and financial statement analysis as well as a broad range of other topics.

So when it comes to learning I’m curious as to whether you have any recommendations on books or strategies that you think people can use to help themselves improve as an investor and just as a business person in general?

David: there there’s a book called eBoys and it’s by author named Randall Stross. It’s a fairly old book now but it actually speaks about the arrival of Netscape and the early internet web 1.0 world and it’s an eye-opener because it speaks to how venture deals come together and also how they tackle and disrupt existing markets.

I’m sure many people listening probably read a a wide variety books like Crossing the Chasm, Innovators Dilemma but I think eBoys tells a very personal kind of human perspective rather than an analytical perspective of people who grew businesses like eBay for instance or web then and what happens behind the scenes.

And it’s interesting for I think investors to read a book like that because it gives them a kind of a perspective on what can happen or what could go wrong to good investments that they’ve held on for many decades. Because disruption can happen and it can happen rather simply by a couple people coming together with an idea and with some venture funding starting a business and we’ve seen that more and more in the past two decades I believe.

Nick: that’s very interesting one of my favorite things about doing these interviews is asking people what books they like to read and it’s actually pretty rare that I get a book recommendation I’ve never heard of before.

But this is an example of that and I’ll definitely have to add it to my reading list.

I’m curious next about the way you invest money personally so I can tell by what you’re right on seeking alpha that you analyze public equities and I don’t think it’s far-fetched for me to say that if you’re analyzing them you’re probably investing them in them as well so.

David: that’s correct.

Nick: your business portfolio is private debt and it sounds like your personal portfolio is public equity. So I’m curious as to what your personal investment strategy looks like and if it’s any different from the way that you do business at Square One?

David: it was a way for me to diversify my career and my investment portfolio. I for example I didn’t want to invest in and in startups they’re risky as is my career is tied to the future of this part up in VC industry.

So when it comes to my retirement portfolio for instance I tend to be fairly conservative and I tend to follow the tenets set out by folks like you in your Sure Dividend dividend growth investing and how to identify good businesses for the long term.

So among my biggest holdings I mean my by far my biggest holdings are our index funds that are tied to S&P 500 but I have a sizable financial services exposure because I understand financial industry.

So Berkshire (BRK.A) (BRK.B), American Express (AXP) and my own bank for instance are among the largest equity individual equity holdings I have beyond that I also hold a sizable equity holding in my portfolio in boring industrial businesses like Altria (MO) and Walgreens (WBA) which I have written about. Because I think they’re relatively simple businesses to understand and they’re easy to evaluate given their long-term history.

Nick: now here’s an interesting spin-off from that if you had to buy one stock right now let’s say you go and you get a scratch ticket and you win $5,000 in the cashier says great congratulations but you have to buy one stock with it right now let’s say a ten year time horizon what would it be?

David: probably Coca-Cola (KO). I hate to be unoriginal here but I enjoy drinking the thing I’m pretty sure the company’s going to be around 20 years from now and it’s not a stock that I would have to monitor regularly the business model will not change that much.

Now like anything else there is a disruption in that particular market – but I think Coke is in as good a position as any – to adapt and change to different consumer tastes,

Nick: you mentioned that your biggest holdings are ETFs. I think that ETFs are by and large a huge win for consumers on average they’ve reduced the fees paid to the investment management industry by a factor of 66% ish from what I’ve read they’ve cut them by a factor of two thirds. The returns have been on average better than your normal actively managed mutual funds so it’s a huge win for investors.

I’m curious as to whether you have any thoughts on the future of the ETF industry there’s people who have postulated that we might be in an ETF bubble right now we’re huge inflows into passive strategies have driven the market averages up with no heat to valuations I’m curious what your thoughts are on those comments?

David: I don’t I don’t have an opinion personally on whether ETFs have peaked. I think Jeff Bezos had an interesting insight that he shares with people during his talks which is one of the ways he built Amazon and his consumer focus was to think ahead and imagine a scenario where what will consumers want 10, 20, 30 years from now. He could not envision a scenario where a consumer said I want to pay more for delivery or I want to pay more for product.

On the other hand it was very easy for him to envision a scenario where 30 years later customers have said I want a cheaper the same product same value but pay less and I want to delivered for less and quicker.

So I think the same kind of dynamic and common sense applies long term in any investment vehicle whether it’s an ETF or mutual fund I think the force competitive force of driving down fees will continue. I think that if anything things will become more efficient and cheaper with application of technology.

That’s about as far as I can comment on that I think there remains I do have an opinion about the activist approach to investing and I think there’s value there because clearly we’ve we all know that market goes into these periods where there’s sort of gross miss pricing and if you if you happen to understand the industry well enough and if you happen to understand the company well enough because you have reviewed it and researched it then I think you can feel confident at times you could definitely get a value by investing in individual stock.

I think the challenge becomes just knowing your circle of competence and being focused because if you’re not focused and I’ve read articles by folks who – they’re all apparently quality stocks – but they have a portfolio of hundred stocks and I mean first of all I guess you can you can debate can you have hundred quality companies from one thing. but suppose that’s your strategy or you did even 50 companies I’m at which point you might wonder is it just better and cheaper and less stressful to just buy S&P 500 and my personal opinion would be yes but now if you follow a few stocks and you feel like they’re very undervalued I think you are going to get a good long-term return by investing in those companies that have a stable business and a strong competitive advantage that are shareholder friendly and that can expect to grow their dividends over time.

Nick: an investor by the name of Shelby Davis who generated twenty plus percent annualized returns over a very long time period by investing in insurance stocks. He has this great quote where he says:

“you make all of your money in a recession you just don’t realize it at the time.”

What are your thoughts on that quote and how it relates to the way you approach investing?

David: well that’s a very contrary and perspective right and I think I think for many long-term investors that I can see that quote is very appealing and I largely agree with some of the insights that are embedded in that comment. But in general I think I think you win in the investing game by thinking very long-term regardless of recession or not and also investing in quality businesses.

It’s very hard because the problem with investing only in recession is that you can’t predict them. I mean people love to talk about leading indicators and right now we are in an environment where interest rates are rising and credit cycle seems to be tightening and with the Fed signaling further interest rate rises.

People are also trading more on the margins and that in the past usually spells a potential coming of a recession or a market correction for instance.

But these are these are all speculations nobody knows the future and so I personally like Warren Buffett’s admonition or advice where he just looks for great businesses doesn’t pay much attention to the macro but waits patiently for time when things are cheap and then and then buys great businesses when they’re mispriced.

Nick: you’ve mentioned Warren Buffett or Warren Buffett / Charlie Munger twice I think now on this call and one of the as I wanted to ask you later on but now it’s timely is whether there’s a certain super investor or prominent investor that you identify with and that you would say has had the largest impact on your investment approach.

David: nothing original in saying this but definitely Warren Buffett I I follow his teachings or follow his wisdom. I think it’s hard to argue with the common sense of what he is getting at it’s hard to hard or harder to practice in in in actual money because largely because one is one of scale and then another is one of intensity.

I can’t imagine that I have a day job here managing startup companies that we have relationships with I don’t have the same intensity that I can bring to the game that Warren Buffett has over his lifetime. So I can follow and learn from his wisdom but I don’t know that this tile other than investing in Berkshire which is one of my larger personal holdings it really applies to me.

My investing style I think I have been influenced by they don’t really write about investing but they acted out people like Larry Page at Google (GOOG) (GOOGL) and Elon Musk at Tesla (TSLA) because what I see these investors or these businessmen do is well let me so let me let me answer it that way I.

They have had a huge impact on the way I think about businesses in the world because it’s true that 20-30 years ago some of these largest businesses now or not around. But they have taken rather than a managerial route they’ve taken a kind of a creation path. They’re visionaries that are able to execute their vision. But what they’ve really done is understand a gap in the market and understand a solution a secret that they understood right that’s something that Peter Thiel would speak to in his books you’re at one a secret.

About the world that other people don’t know there’s a kind of a collective blind side to it and they’re always thinking in exponential terms human beings are not very good at thinking if something compounds even six seven 10% a year what that’s going to look like 20-30 years from now I think Warren Buffett understood that very well.

In the business world people like Elon Musk and Larry Page understand that very well they have a very long term investing horizon so those folks have had a big impact on just way I think about the world in general about my career about the businesses that I work with and the companies that I want to invest in.

Nick: that’s very interesting when I ask people about investing leaders I’ve never gotten the answer Larry Page or Elon Musk before but I can definitely appreciate the reasons why you would give those answers.

I want to kind of wrap up by asking you a few questions that I would say fall more into the fun category or the philosophical category.

The first is this if you had to give your money to one investment firm or an investment corporation or a fund manager or invest in an individual stock right now with say a 20 year time horizon who would it be and why would you choose that investment?

David: yeah I think I’d split it between Berkshire and between Elon’s ventures I say that because both managers are very long-term and they’re also they understand how to capture value in the marketplace and they understand how to do that over the long run.

And at the end of the day, that’s what you need your money to do that you need your money to be earning a return that’s beating the market average and you need to do that by creating value both investors know how to do that in different ways.

I would of course argue that Berkshire would be a safer bet in that in that they invest in kind of understood well-known business models. But I would also say that many of the traditional business models are under attack and so investing in Elan or his ventures is a way to hedge that because he is always thinking 10x and what would this look like if it were ten times better than the current business model and so far he seems to show a pretty good traction in executing.

Nick: yeah I can definitely agree with that it sounds like your bet on Elon is a bet for change and your bet on Berkshire that against change would you say that’s correct?

David: right it’s a little bit contradictory right but I say that the investment in Berkshire is a bet against change because I think I think that for Berkshires a bet for an incremental improvement I mean they’re always looking for the lowest cost provider in the market.

So they’re all about efficiency and being the best in the card market what they’re not doing of course is disrupting they’re not really anticipating what’s coming next and so I think a good way to hedge that is to invest in a company like some of Alliance ventures or a company like Google for instance I think it’s also doing that.

Nick: here’s another question from the fun bucket for you. What is the most memorable day of your professional career so far?

David: well I you know I was working for a start-up team in San Francisco and I was working as a relatively new to that team that was it was very exciting it was long days but we were creating something new around coding and technology education it was very exciting one day I got called in actually and then and then was told that I would no longer be needed and that’s very memorable partly because of the emotional you know the kind of the emotional energy that attached to being let go,

But it’s also memorable to me because it’s an it’s a nice reminder that in in the earliest age business world there’s a lot of unknowns and you know it you don’t really have control over a lot of things.

All you can do is do your best and be prepared but you can’t really count on longevity you can’t really count on security and if you do then you might be surprised. So it was a nice reminder for me not a pleasant one but a good one to be alert and to just understand that that’s how life works and how a career works.

Nick: it sounds like it was a difficult day for you. So I’ll change the tone here by asking you a different question. What is the kindest thing ever done for you?

David: I’m a recipient of many kindnesses over the years. I think following when I was down and out I guess you could say some of my managers from previous career connected with me and supported in a new job search for example and provided a lot of good guidance that led me to where I am today.

I think also people working is all about not just about the outcomes at the job but more about the relationships that you build with the people along the way for example one of my best friends now is a guy that I used to work with and who reported up to me little did I realized that we would have a lifelong friendship. but you know we often look back and talk about some of the difficulties at work of working late hour for instance while this co-worker of mine you know he had to sacrifice time he could spend with his family in order to get a project done we look back on that and kind of wonder well did we make the right balancing act and you know there’s no easy answer to it but it certainly gave me perspective over the years that it’s not just about getting the job done.

But you got to have fun while you’re doing the work because that’s the point of living that’s the point of why you do what you do and how it manifests itself is the quality of the relationship that you’re building with the people around you. so yeah so it’s sort of a wake up and smell the roses but I’ve appreciated the friendships it’s not necessarily kindness I guess you could say but you know the friendships that I’ve cultivated over the years and the realization that the relationships is at the end of the day what matters.

Nick: yeah that’s definitely a solid reminder for having a healthy work-life balance I can’t remember who said this quote and it’s kind of bugging me but there’s a really actionable quote that I think of sometimes then it says this before you create a business plan create a life plan you weren’t meant to just work your life away.

David: I’m guessing that many of us and at least I could say for myself our I’m continuing to work on my life plan that it’s a work in progress.

Nick: yeah I think we all are. my last question to you is this as someone who has experience in public equities index funds and private debt. If you had to give one piece of advice to an investor who is beginning today what would it be?

David: start early and often and get your get your feet wet that’s the best way to learn.

Nick: well thank you for your time today David it was a pleasure having you and I really enjoyed her conversation.

David: thanks for having me Nick appreciate it.