New Types of Businesses Being Built Within Platform Economies | Ali Hamed

Patrick O’Shaughnessy: So, this is a cool cool background story to having Ali Hamed on stage with me. At, I think, the first event that we ever did here in Missouri, he was on stage and I asked him to talk about the most esoteric investment that he was excited about that he could. And at the time, he had not made this investment yet, and he pitched effectively going and buying the back financing the purchase of the back catalog of a lot of the big YouTube channels. And I remember a lot of people thinking, you know, super interesting, but like kinda out there.

So it's 4 years later now, maybe 3 years later?

Ali: Yeah. About 4.

Patrick: Yeah. About 4 years later. Ali is the biggest investor in a business called Spotter, which I don't think I'm allowed to say like just how much capital you've deployed, but will probably be 1,000,000,000 like before too long.

Ali: Like 100 and 100 and 100 and 100 and 100 of 100 of 1,000,000 of dollars in catalog.

Patrick: And, Ali is the person that I know who has invested in and financed the most unusual and interesting things. If anyone's had fruit in the last day or so, there's a 20% chance that piece of fruit was financed by Ali. About 20% of the fruit that comes into the country, YouTube channels, all sorts of just absolutely fascinating things. And he's probably the guy that I trust most at evaluating some novel thing that's emerging in the world and being putting himself and his firm and his investors in the right position to benefit from that thing before others see it. Certainly, no one was as excited about YouTube back channels as Ali was 4 years ago.

And it's gonna it's probably one of the many haven't heard of it, but it's one of the great venture investments that's been made. They own 20% of the business that they're the largest investor. The list goes on and on and on. So it's a it's a real treat to have Ali here. Maybe we can begin with, like, a similar question, which is back then you were talking about something no one else was.

What are some things today that no one's talking about that have you excited?

Ali: Yeah. So, and you guys can hear me. Okay. Good. So I think a lot of it comes on, like, how to look at an investment, or look for investment opportunities.

I think one of the things that we've learned how to do is really learn how to hang around the hoop in an opportunity. One of the spaces that we're spending time on, for example, is the ADU market in California. If you guys live in California, you may have spent time looking at it. And it's not like a great investment right now because it's just where rates are and where more, you know, housing prices are and where labor costs are and where cost of goods sold are. And so it's a big headache for everybody.

I can tell all of you guys about the ADU market. I'm guessing, like, all of you guys are gonna ignore it because it's gonna take 3 to 4 years for it to work. And then I'm gonna, like, make a ton of money, and you guys probably won't, on it on that investment. But basically, it's like pretty easy. Like, you can basically take single family lots.

So so, you know, the state of California thought like, gosh, homelessness actually is a big problem. And, and what the reason is like all these municipalities, they were in charge of like their zoning. And so they would say, well, no more homes in my backyard, because I don't want my house to be worth less. And so finally, the state basically took that decision making away from the municipality. They now force you to accept a permit within, like, I'm giving you the whole thesis, you're still not going to do it.

60 to 90 days to, to approve the permit, as long as you're within 500 feet of like public transportation, which is basically all housing in Los Angeles. And it turns out Los Angeles is like under house by like 1,500,000 homes. If you assume they're going to be like $300,000 that's about $450,000,000,000 of market value, and just like the housing crisis. And that's going to be a trade that all, like, like right now, like my wife and I are running around and buying, and probably losing a bunch of money on buying like all these rinky dinky houses just to try it, like see how it works or whatever. And like spending a little bit of money to figure it out, not investing the money spending it.

And eventually when the trade works, we're just going to pile like f tons of money into it, and that'll be the franchise. And that's a lot of what we've done. You know, I think one of the other examples of that is, there's sort of like 2 tech companies that we feel like have like epically failed at the most too obvious trades of all time. I'm not like a web 3 guy or crypto guy. We've we've done some investments there.

But, like, I think DocuSign is, like, it's like atrocious. They never figured out decentralized identity and never became a payments company and never figured out, you know, how to, like, do title insurance, like, all the things crypto was supposed to do. The second one is that Shopify should have become, like, the iOS app store for b to b software. You know, many of you, like, run your own businesses. Imagine how hard it is to, like, identify like some point solution for your like returns management.

Like if you're gonna pick something off the internet, it might get hacked. You know, that's a space where when we think about all these different platforms and ecosystems ecosystems that will have been built, where are the investable opportunities? The failings of the Shopify app store to me is like a huge place that I'm spending time on. We have an investment there and, that's just been like that. The next time we're at one of these conferences, we'll be quoting some insane stat about that company.

Patrick: How do you find one of these big, what I'll call like a big market, emerging market, changing market idea, whether it's LA housing market or Shopify apps app store, like, what what are the antecedents to one of

Ali: those things? Yeah. I mean, I can give you like a a narrative and then try to build like the frameworks around it. You know, the the first is, you know, the first frame, like, the I guess the narrative on the app store is we we invest in, like, a ton of e commerce companies. At one point, we were the biggest investor in a company called ClearBank, which, you know, actually, it it was an incredible outcome for us based on where we went entered and and where we got out.

And then, you know, we are invested we're pretty heavily invested in the Amazon 3rd price seller ecosystem, which has been totally imperfect. But But the winners have made up for the lose there, which is very lucky and kind of how venture works. But because of that, what we used to do is we went to all of our portfolio companies, and we said, hey, can can we see all the different like, can we basically see your payables? And we, like, looked at all the different transactions they were making. We looked at what they were spending money on, because we thought, oh my god, we have, like, all this proprietary data about, like, what the e commerce companies of today are spending money on, and like what services they need, and which ones are crappy, and which ones are good.

And so in that trade specifically, we ended up convincing this guy named Yoda, who is the head of vendor services. His name is Yoda's. It's because his parents are fans of Star Wars. So it's the reason you think. And, basically, he was like the head of vendor services at Amazon.

We thought, gosh, like, this is the guy who really understands what point solutions and vendor selection matters. We convinced him that he'd be like the best in the world of buying these businesses and turning them into this huge company. And so a lot of that came with this, like, basic idea that, okay, Shopify screwed up the app store. You know, we knew that actually because we had invested in Returnly, which sold to a firm for $300,000,000 which is fine, but it wasn't like, like, we made a lot of money on it, but not like as much as you want to make in venture. And we said like, oh gosh, like from that experience, the app store is broken.

From the e commerce experience, we thought, well, we know all these businesses that should exist and should be purchased in the world and should be integrated together. And because of the Amazon experience, we knew who the right person at Amazon was. And we kind of just packaged the whole thing together, and we helped them start the business, we gave them all the equity capital, we gave them all the debt capital. So so what were the takeaways? Well, 1, you know, operating the scale matters and deal volume matters.

You know, I think a lot of people like scale for the aesthetic of scale, but it turns out scale is like a really high utility function, like, you can actually see a lot of information, you get a lot of deal volume, you get a lot of insights, you can use those insights like invest in different ways. And by investing out of many different funds, we always can package something and make sure that like, the way our firm is set up is like any company in the world, we can get them any type of capital. And so like, it's flexibility, it's data insights from scale, it started with like a macro framework, it's finding like a right person, and it's learning how to execute on it. And those are some of the frameworks that we use for a deal like that.

Patrick: What do you think about prices today, price levels, just across asset class? You deal in all sorts of parts of the capital structure, so maybe like a word on

Ali: Yeah. Each part. So one of the things that we joke about in venture capitals, like, the the easiest way to sound smart is by being negative. Like, think about how much easier it is to explain why something won't work and why by explaining why it might might, be great. So, like, every good investor is, like, ah, like, all these founders are so stupid, like, prices are gonna come down because, like, you know, it's good for my business, and it sounds really smart to, like, sound pessimistic or whatever.

And I don't I don't know. Like, I don't think prices are probably, like, way too high anymore, and I don't think prices are way too low anymore. I have no clue. And and actually having no clue is like a really good strategy. When when you have no clue, you do 3 things.

It's like really clear. I don't I don't actually know why most investors don't know this. You invest in short duration assets because you want the money back quickly. So as the world becomes more obvious, you have the money back. You wanna invest in self amortizing assets.

So highly profitable companies, that self amortize, you know, because they can pay off the debt without getting refinanced, or assets that, like, are self amortizing, like a YouTube catalog or something like that, because you can't rely on capital markets. And the third is you don't pick price. So you try to invest in companies where you're willing to give up a little bit of upside because you have less certainty, and then you contractually obligate your return through things like pick interest or like participate in preferred or whatever. And then you go to a founder, and you're like, yeah, I'll give you a valuation more similar to the one you want, because I'm not going to try to argue about it. I just know that the return I need in a market like this like, if I'm doing a special situation to you on a growth company, Okay, I know where direct lending is pricing right now.

It's like 3 and a half times debt to EBITDA, 12% yield to maturity through current pay, and like OID and PIC and fees and stuff. Okay. Non sponsored back direct lending is 14%. If I'm going to have a little bit more flexibility on duration, and, like, I'm not going to have many covenants or whatever, I need a handful of 100 of basis points to spread on top of that. It's like, I need about 18% to 20% right now.

And I'll just have, like, a really rational calm conversation with the founder about that. I I was like, that's what I need. I'm going to contractually obligate it. I'm going to make it a short duration trade, because that's what I need. And I need to only invest in profitable companies.

And you have all these like crazy Silicon Valley people who are like investing in these like structured equity rounds of these like formerly high flying SAS companies that are like finally going to learn how to be profitable. I've never been good at telling 27 year old Stanford alone they're not billionaires anymore. I don't think I'm about to start being good at that. So, like, I'm not trying to be in the business like giving somebody money and hoping they come profitable. So So what happens if they don't become profitable one round?

I either get layered on top of, my structure gets wiped away, and I'm stuck funding the company over and over again. Like, what a terrible idea. So that's an example of, like, getting the idea of, like, duration right and not taking pricing risk right, but getting self amortization wrong. So, yeah. So so we have no clue, and we have a strategy for that.

Patrick: Do you prefer credit investing or equity investing?

Ali: I think they're both like shitty and good in their own ways. You know, I think credit investors don't spend enough time thinking about the company, and are overly obsessed with the structure, the security, and the credit metrics. I think venture capitalists, as an example, are way too obsessed about the founder of the market but forget to invest in good companies. You know, we always talk about them as wrapping paper companies. We're, like, it's the right syndicate.

It's the right founder. It's, like, the right market. But, like, there's like a lot of really big markets that don't generate cash flows. Airlines are a great example of that, and there's many others. And so a market being good is not an, a market being big doesn't always mean the market's good.

But I also think it's really important to be in both because you can take the best and the worst of both. So for example, like in our credit business, I'm pretty sure we're as good at credit as like most other credit professionals. Like, I'm I'm a 100% sure of that. But but we're not like it's hard to like out credit the best credit people. Instead and what credit people do is instead they're like, oh, like, you know, in credit, you got to win by, you know, with scale because, like, as an AUM business, because, like, you don't make money on carry, you got to make money on fees.

So what they do is they do this really stupid thing, which is, like, they try to go after big markets. And the reason it's so stupid is, like, the only structural way to win in credit other than, like, proprietary originations is is a structural advantage to scale. Like, Spot is a great example. Like, we're the biggest center of YouTube catalogs. And so what we can do is we can buy the catalogs.

We can sell direct ads against them at a premium, and so they're worth more to me than to any of you. So if any of you tried to compete with us, we just like outbid you, and we'd still win. So it's like a structural advantage. But like, I'm big in YouTube. I'm not like big in like real estate.

Like Blackstone's big in real estate. So so what do I have to do to have like structural alpha and credit? I have to take my venture capital mindset of figuring out what markets don't matter today, but will matter tomorrow, like the Shopify app store, like the ADU market, or whatever. And I need to become the at scale player in a subscale market, and take the bet that the market will grow. And every once in a while, it doesn't.

I take origination risk, but I don't risk capital. I just risk my time, which I do a lot. I'm like pretty good at risk of my time, as you know. And then I just like grow with the market, and I just become this like structural dominant monopolistic player in the market, and then we end up having like 200, 400 basis points of edge forever.

Patrick: There's a ton of people here that are business builders, both building investing firms and operating businesses. Ali started his business when you were 18.

Ali: 20 21 and a half.

Patrick: 21 and a half, from his college dorm room at Cornell. And his story is remarkable. I mean, again, not not a lot of 20 1 year old, 21 and a half year old starting firms that are now, you know, multibillion dollar firms across asset classes with incredible performance. But but the I've watched it. The co venture story has been like any business story.

It's not straight up into the right story. There's been a lot of tumult. There's been tons of hard times, tons of great times. What how would you sum up what you've learned about building the business of Co venture?

Ali: So, in the you know, how to build a business in 2 to 3 pithy sentences. I think I think though though but I think I know what you're getting at, which is, like, sort of like what are the things that we've changed our mind about or kind of frameworks that we've started to develop. I think the biggest change is I used to think about our business in the, through the lens of compromises. Because, like, we use you made so many compromises. We have, like, all these different funds to, like, invest in different companies across different asset classes.

And like, you wouldn't believe how many SPVs we have and how many legal entities we have. And I think we file something like 4,000 k ones each year or some crazy number. And so that sounds like a lot of compromises. But the reason we did that is we're like massively uncompromising, and about like a few very specific things, and like the one that we're most proud of is just being good investors. And we figured the best way to be a good investor is to be able to look at a company and be able to invest in any company we wanted to invest in.

And if you're only in venture capital, like, some companies just don't need venture capital. Many of you are building incredibly wonderful businesses that don't need venture capital. Like, how much would that suck if I had to meet somebody with a wonderful business here and be like, ah, it's just not the thing I do. And so what we did is we tried to build like a bunch of different types of funds for a bunch of different types of companies, so whenever we saw something that was wonderful, we could try to be a partner in it. And also, we wanted many shots on goal with the company, because, you know, so many companies, you know, they they have, like, one obvious round.

Like, Spotter's first round was not obvious, but the second round was, like, really obvious. And, like, it was there was a reason it was all insiders, and we only announced the company even existed because we were so afraid of someone trying to say that they were doing it first. I mean, like, people were, like, staffing their recruiters outside of our offices, trying to recruit away the employees of the company at one point, because it was going so it was crazy. So we finally said, like, fine. Okay.

We'll announce it. But, like, in that company, it was so great to be able to invest it in many different ways and pick the right security. So what we did is we said, well, we're incredibly uncompromising about wanting to have a lot of surface area with companies, and the spirit of wanting to be very uncompromising about being great investors. And so we were willing to compromise on our time, and on complexity, and on a weird story, and like a bunch of different stuff. You know, in in our business, you know, we raise funds, like my customers and my clients are LPs, and I gotta go out and like, you know, sell.

It's like enterprise sales, like many of you know. And, and when you raise a fund, you can really raise it on the back of 1 of 3 things. Good data. So like that's a track record and what you're doing, A good story. And that's why you have all these like cockamini, like, you know, regional funds and sector focused funds and whatever.

Like I there's and and by the way, there's a few good sector focused funds, But there's a reason that the best venture capital funds are like benchmark and Sequoia, and they're all generalists. And the third is, like, people you already know. And I think what we were unwilling to do is, like, come up with some fake story about any of the funds we were gonna raise, and so we just were willing to go a little bit more slowly. And also, we were willing to basically raise more, narrowly focused bonds. And so this goes to the next framework.

In our business, there's 2 rate limiters of how fast we were going to grow. The first is, if you raise money for a very specific thing like a company, they don't really need to trust me as much. They're just like doing the trade. So that but but it's like really complicated. You don't want to raise money for every deal you do.

So you build like a thesis, like a prop tech fund, or early stage fund, or an asset backed fund. And if you wanna, like, grow the business with very high quality and simplicity, you would have full discretion. But it's like a lot harder to raise money and say, like, I can take the money. I could do anything with it. And so we constantly battle this like this dynamic of like, we could grow faster with more complexity, which we're sometimes willing to, you know, a compromise on to be uncompromised about being great investors.

But in exchange for doing that, like that allows to grow faster, but it'll take simplicity away and whatever. So that's like, so understanding that is like one of our, you know, as far as I say, our rate limiter. The second is people. We're kind of now at a point where like we can raise money from most of the things that we do. We can find a lot of good deal flow.

The limiter is like our people. The easiest thing to do to grow fast is you make a lot of senior lateral hires. And a problem with senior lateral hires is not that they're good or bad, they just have their own decision making style. And like, we haven't had actually kind of similar decision making style, Maybe because, like, I I met you really young, and you've had such a big impact in my life, and 70, and a couple other people. But, like, I used to be much more compatible with way more people when I was 24.

And like, I'm still really young, and I'm like 31. Like, I still am molding my my thesis, but like, I'm a little bit more stubborn. Like, I have a way of doing things, and I have a risk tolerance, and I I kind of think I know what I'm doing now. So I'm probably obnoxious, but whatever. But like, like I have a a decision making style and framework, and so I would be like a crappy senior lateral hire for a lot of people, even though I'm I'm good at the job I'm currently doing.

The problem is you need to make those senior lateral hires if you want to grow quickly. Or the perfect way to grow is you build your people internally. You know, you hire young people, you mold them into the decision making style that's compatible with you, compatible with the needs of the firm, and and I'm sure so many of you can relate to this. Like, that young person where you helped build their career and they became great in your organization, it was frustrating because of how long it took them, and how much you needed to micromanage them, and train them, and teach them everything they know. But when they got good, they got so much better than the people you hired who are senior.

And if you think about it, like, there's it's not an accident that John Gray was, like, basically born at Blackstone. It's not an accident that Mark Rowan was born at Apollo. It's not an accident that the great Goldman partners, and Goldman was what it was, were born and grew up at Goldman. And so the firms that have become really great iconic firms, Citadel. You know, those people were born and grown at Citadel, the senior executives there.

So it's not an accident that the people that have built those great firms and those great firms, really are led by, you know, Apollo's great status, that their average partner has been there for 18 years. And I I personally wouldn't want to work at Apollo, but people seem to love it, and it's a culture that's right for some people. It's objectively and epically good firm. And so that's how we think about it. The more discretion we give ourselves, the more simpler our lives are, so we have to decide what we're going to compromise on.

We've decided we're uncompromising about wanting to grow quickly, So we've accepted the compromise of complexity, but we're pretty uncompromising about, like, loading up with a bunch of non compatible decision thinkers or decision makers who are great senior lateral hires. And that's probably the clarity that I didn't have when I first started the business.

Patrick: If you could think from the perspective of an operator, someone that owned a business that wanted to sell it, And they were speaking to investors, some lineup of investors, and they were evaluating those investors. Since you've been on the other side of that trade a lot, how would you encourage operators to learn about an investor, and what do you think matters or should matter about an investor if you're selling your business?

Ali: Yeah. They should be like 5 foot 9, initials Ah, work at a firm called Co Venture, Wonderful, charming people. No. I think I think you should see if they understand your business. You know, like, I think we come up with, like, all these crazy things.

So it's funny. We, our venture team was, like, we should hire a recruiter, because, like, all of our founders need a CFO. And how great would it be if we, like, could introduce in this great I was, like, we're gonna have 1 recruiter trying to, like, out recruit, like, the companies for their job. Like, can you imagine, like, that you joined a venture capital firm with your full time employment because they happen to hire, like, one recruiter on there. Like, that's a great that's great.

And by the way, there are recruiters who are epic, and they they totally change things. But it's not the reason, in our opinion, that, like, someone's gonna work with a certain venture capital firm. You know, benchmark is like the anti everything. Right? But people would work with benchmark.

So I think there's 2 things. You wanna you wanna work with somebody who understands your business because you want somebody who's going to know when they should care and when they shouldn't care. The sign of a new board member is somebody who either cares when they shouldn't care or doesn't care when they should. And the sign of a great board member is the one who cares very, very rarely, but when they do care, it's about the right thing. And you have to understand a company really well to believe in that.

And then the second is, I'll just answer this for venture capital, because it's different in other asset classes. In venture capital, we're just merchant bankers. We hate calling it that because venture capital is like this cool name, and merchant banking's like got a little bit less, like, you know, pizzazz around it. But we take a small little balance sheet, we put a little bit of money into a company, and we try to sell equity to, like, all of our friends at a higher valuation. And so, like, what does that take?

You know, you wanna work with a company or or a firm that but that the fact that they invested gave the company the benefit of the doubt. Fred Wilson has the best business model of all time. He takes an unobvious idea, and literally the fact that Fred Wilson is the investor makes the security worth it, because these did risk capital markets, and customers are gonna work with the company more because it's backed by Union Square Ventures. And, like, people are gonna wanna work for the business that are higher quality. And, like, all those investors, that you like, that, like, down the road who, like, didn't like your idea, suddenly like your idea because Fred Wilson's invested in it.

And so it's, like, made it easier to raise capital. And so he's derisked the business. And so you want to work with somebody who understands your business well enough to know when something matters, and know when it doesn't, because you're not looking for somebody who's, like, just gonna say yes to everything. You want someone who's constructive and a partner, and then you want somebody who will let your business have the benefit of the doubt with the rest of the world. And I think most v VCs are lying if they say they're anything more than that.

Patrick: Maybe in closing, since we're already out of time somehow, if you could encourage everyone to go study one of these areas that has you excited, Which one do you think stands to teach people the most interesting things?

Ali: I think the housing crisis is real. I I think you should go after it because it's important, and I think it's a great way to make money. But I'm freaked out. Like, I have no idea how, like, my generation is gonna buy their first home. I I pay our team, like, incredible amounts of money, and like, even they struggle to buy, like, a really nice 4 bedroom, 4 bathroom home for the for them and their families.

I think we screwed it all up. And so I think you should all focus on the affordable housing crisis, because it's important.

Patrick: Can you just frame that up? Maybe just describe it in 30 seconds, like like like big frame perspective on what the crisis is and what caused it.

Ali: I'll give you one stat. We used to build 300,000 starter homes in the seventies, and now we build 70,000 starter homes a year, and it turns out the population's bigger.

Patrick: Simple. Supply and demand. Ali, thanks for your time, buddy.

This transcript was generated with Transistor AI