Episode #212: Eric Satz, “I Want Everybody To Be Able To Invest In Alternative Assets”
Guest: Eric Satz launched his startup, AltoIRA in 2018 and since then, he and his team have set out to democratize alternative asset investing by delivering an easy-to-use platform to invest in alternative assets in retirement accounts.
Date Recorded: 3/11/2020
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Summary: In episode 212 we welcome our guest, Eric Satz, the founder and CEO of AltoIRA.
Eric shares the frustration he experienced trying to make private investments in his retirement account, and how that led him down the path of solving the problem and ultimately the launch of his company, AltoIRA.
We discuss alternative investments and the case for holding them in retirement accounts. We get into the nuts and bolts of how AltoIRA works and where it is going in the future.
As we wind down, we chat about having an understanding what is out of your control and shifting focus to doing your absolute best on what you can control.
All this and more, in episode 212 with Eric Satz.
Links from the Episode:
- 0:40 – Intro
- 1:35 – Welcome Eric Satz to the show and the scene in Nashville
- 2:39 – Founding of AltoIRA
- 5:29 – Why people would want these in their retirement accounts
- 8:51 – Actual process for investing out of your IRA
- 14:09 – Setting up your AltoIRA
- 14:14 – How I Invest My Money (Faber)
- 18:24 – Investing in a friend’s company through an IRA
- 20:59 – Main uses case for this platform and potential changes to accredited investor definitions and crowd funding
- 24:45 – Current investing landscape and how people are using Alto
- 29:28 – Business model
- 31:26 – Eric’s career path before Alto
- 38:06 – Building the company
- 43:23 – Alto’s fundraising efforts
- 46:50 – Biggest challenges
- 50:04 – Outlook for Alto
- 51:38 – Most memorable investment
- 52:59 – Best way to learn more: AltoIRA website and Help Center
Transcript of Episode 212:
Welcome Message: Welcome to the Meb Faber Show where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the Co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: Welcome, podcast listeners. We’ve got a great show for you today. Our guest is a serial entrepreneur with both Wall Street and start-up experience. He launched the start-up Alto IRA in 2018 and since then he and his team had been blazing a trail for investors delivering an easy-to-use process to invest in alternatives in retirement accounts. In today’s episode, our guest shares the frustration he experienced trying to make private investments in his own retirement account and how that led him down the path of solving the problem and ultimately, the launch of his company, Alto IRA. We discuss alternative investments like real estate, and farmland, and angel investing, and the case for holding them in retirement accounts. We get into the nuts and bolts of how Alto IRA works and where it is going in the future. As we wind down, we chat about having an understanding what is out of your control and instead shifting the focus to doing your absolute best on what you can control. Please enjoy this episode with Alto IRA founder, Eric Satz. Eric, welcome to the show.
Eric: Meb, it is awesome to be here, man. Really, really excited about this.
Meb: Eric, you have boots on the ground in Nashville. Before we get started, what’s the scene like in Nashville right now? Last time I was there, I mean, cranes everywhere, booming town. How are things going in Tennessee?
Eric: Well, still booming. Probably even more cranes than when you were here last time. It is a very different city from the one that I moved to 17 years ago, sort of consistent with my life philosophy that it’s better to be lucky than good. The one little sort of hiccup last week in Nashville, you may know, is that we got hit by tornadoes in East Nashville, which had been kind of devastating to the East part of Nashville and a little north of us. And so, we have some team members still without electricity but the good news is that nobody in our immediate sort of team family was hurt and nobody suffered any property damage that won’t be recovered from. So otherwise, Nashville’s crushing it.
Meb: Glad to hear y’all safe. All right. Let’s jump right in. You are founder of Alto IRA. Let’s hear the foundation’s idea. What was the origin story?
Eric: It’s sort of that typical entrepreneurial story, which is that I had a problem, I didn’t like the solutions in the marketplace, so I went about trying to figure out whether or not this was a large-enough market opportunity to fix. And what I found was that as a national community, we have $30 trillion sitting in retirement accounts, less than 2% invested in alternative assets when I would expect to see 10% to 20%. So just high-level filter, that sort of feels like a large enough opportunity to fix. And so, then the next question was, “Am I the only guy with this problem or are there more people like me?” And what I found was that there were actually three obstacles to adoption of individuals accessing their retirement funds for purposes of investing in alternative assets. The first was just plain and simple, they didn’t know they could do it.
So that’s pretty straightforward. The second was just deal complexity. The industry largely hadn’t changed from a people in paper burden process since Orissa created this opportunity in the early 1970s and it was just do it yourself, figure it out on your own, you do all the work and write a big fat cheque to the custodian at the end of the process. So that was no fun. And most people would just throw up their hands and say, “I don’t have the time to do this.” And then if you decided that you did have the time to do it and you really wanted to make the investment, the third obstacle was cost. Because these were people and paper burden processes, custodians would charge an arm and a leg even though they’re asking you to do all the work. And so, unless you were writing a big cheque, it was hard to rationalise the ongoing account maintenance IRS reporting of making that investment because these are 7 to 10 year-time horizon investments.
Meb: It’s funny, this is such a classic start-up founder entrepreneur story where it’s this just like frustration arbitrage where there’s something that the technical term, something that sucks and it just doesn’t work. I was laughing because I had a tweet probably three or four years ago where I asked a question where I said, “Hey, what’s a good place for an IRA where you wanna put private investments?” And everyone’s just like, “Nothing, nothing, nothing.” A couple of people were like Midland or millennium, and it was just this such like an antiquated process that you obviously came to the same conclusion. Talk to me a little bit about what it actually is. So what is Alto IRA? What is this process of putting and why would anyone ever want to put these sort of investments into a retirement account?
Eric: So I’m gonna take the last part of the question first. And so, when we talk about alternative investments, we’re talking about big picture, non-registered securities, so assets that you can’t buy and sell on public stock exchanges. So that could be an investment in a private company, whether it’s early-stage venture capital or a later stage private equity. It could be real estate, it could be a loan or credit product, it could be cryptocurrencies for that matter. And because these are illiquid assets that oftentimes you’re not gonna see returns or liquidity from for a longer time horizon, 7 to 10 years, it makes the most sense to use your retirement funds because this is the money that you can’t touch by definition, at least not without paying a penalty, until you retire. So in a certain sense, and actually not a certain sense, a very real sense, you are duration-matching or asset matching. You’re taking cash that you can’t use anyway, not without penalty in your retirement account and you’re matching that with an investment where you’re likely not gonna get the cashback anyway for some 7 to 10-year period of time. And so, it makes perfect sense that you’re using long-term dollars to invest in long-term assets.
The other piece there, of course, is that your retirement funds are tax advantage. If it’s a Roth IRA, your returns are tax-free. If it’s a traditional or SEP IRA, your returns are tax-deferred and can be reinvested again without paying capital gains until such time that you withdraw funds from your retirement account. So lots of good common sense and real hard currency benefits from using your retirement dollars.
Meb: I wanna make a quick comment there because I think, listeners, there’s three very real use case examples that I think illustrate that this is not just a theoretical exercise but a practical one. And the media has caught onto this over the past 10 years. The most famous was probably when Mitt Romney was running for office probably almost a decade ago and revealed that he had $100 million IRA and more recently with the PayPal mafia spin-outs, Peter Thiel and Max Levchin who had both invested, I think Teal had Facebook shares in his IRA and Max had Yelp in his. And this is a great example if you have an investment in a private company that rocketships, you can end up with not just a $10,000 IRA, but a massive one. And if you have a such a huge gain, the 100 bagger or 1,000 bagger, you really don’t wanna be paying taxes on that. And so, it’s particularly a good use case.
The first question is, okay, so how does it actually work? So we get this idea of it would be nice to shield gains from the IRS. Nobody likes paying taxes today for something they may hold for 50, 60 years and 99% of planners say, “Hey, let’s put bonds in there, which now yield half a percent, so you don’t have to pay income on it.” There’s no more yield or put stocks in there because of the appreciation but now you mentioned a lot of these alternative ideas. So how does it actually work? Alto IRA, what is the actual process? Because pretty sure 99% of people have never heard of this concept in general.
Eric: When you invest out of your IRA, by IRS rules, you have to have a custodian who is responsible for reporting the assets that you’re holding and the value of those assets to the IRS on an annual basis. And so, if what you wanna do is take retirement funds and invest in private company X, you can’t just withdraw cash from your IRA account at Fidelity and then invest it in the company without having a custodian serve as the actual record holder of that particular interest. And I say that because neither Fidelity nor Schwab nor TD Ameritrade is going to allow you to invest out of your Fidelity IRA and into company X with them being part of that transaction because they’ve done no due diligence, no homework on company X and they don’t want liability associated with this investment that you’re making because they likely have a broader financial advisory, economic relationship with you.
And so, we step into the process as your custodian of record. We do not provide advice, we do not do due diligence, we simply allow you to execute on the investment that it is you’re looking to make and we serve as the record holder, record keeper, and we provide that annual report and valuation to the IRS. So if you invest in company X, it doesn’t say you have invested in company X, it says Alto IRA custodian for the benefit of Meb’s IRA invested in company X. And so, that’s the what I would say commoditised role that we play is. What I think is the more interesting thing about what we do and the more important thing in what we do is that we’ve built a transactional platform that makes it really easy and cost-effective to invest in what it is you wanna invest in, to invest in what it is you know.
And so, we connect investors with what we call issuers or companies raising money. And we do that on our platform, we automate the process. And by doing so, we’ve removed the heavy lifting or burden from the investor and we’ve stepped in and we’ve filled that transactional execution role to make it really stupid simple, and easy to follow. And that was missing historically. And so, that’s what we’ve done. And in addition to allowing just say a single company come onto the platform and work with a single investor, we have a many-to-many capability, by which I mean many investors can be investing in the same company and we make it really easy for all of them to execute in a streamlined way. Or we work with investment platforms like AngelList who have lots of companies that are raising money and lots of investors that are investing in those companies.
And so, we have been building in a certain respect, the platform of platforms or network of platforms, connecting investors to issuers. And just to come back to your Peter Thiel comment for a second, because there’s a really famous investment because it was his Roth IRA, it was $500,000 and he generated a billion dollars from it. Now, people say, “Yeah, but I don’t have $500,000.” And to focus on the $500,000 is actually, I think, the wrong thing to focus on. What you should really focus on is the return generated by his investment. Because whether you start with $500,000 or $5,000, that return is still incredible and it can still be tax-free and that’s why we like investing in alternatives with retirement funds.
Meb: So we’ve done a lot of podcasts, we’re over 200 now where we talk about alternatives. You know, I just did a post on the blog talking about how I invest my money. And a lot of investors would see some of those allocations as fairly alternative-like so Farmland being one and then I’ve been describing my private investing journey all the way back to 2014 is it now or 2013. I can’t remember at this point where I’ve invested in over 100 companies, including Alto IRA. By the way, listeners, I’m like the hair club for men, not only a client but also a shareholder. I’ve moved two of my IRAs over and maybe a third TBD, but have seen the evolution of the platform and gone from the early days, years ago where I was like, this is such an antiquated process to using you guys. And in the beginning, you know, it was better but not nearly like it is today, which is almost seamless.
So walk us through kind of how it may work. So if someone wants to allocate, you can use AngelList, you can use, I think we’ve done about three or four podcasts with platforms that you guys integrate with. We did AcreTrader. I think you guys do Wefunder or AngelList is kind of the main one, but walk us through how the experience may work. So if you’re an advisor, you’re a high net-worth investor, you invest in Pier Street. That was one of our first guests. Just take an example, walk us through how it might work.
Eric: As I mentioned earlier, Fidelity is not gonna allow you to invest on AcreTrader out of your IRA account. So what you will do is you will come to Alto IRA, you will create an account, and then you will execute, all online by the way, and should not take you more than 10 to 50 minutes. What we call a transfer of asset. The transfer of asset form gives us the ability to move cash from your Fidelity account to your new Alto IRA account without penalty. And if it’s IRA account to IRA accounts it’s referred to as a transfer, if it’s 401k to IRA, it’s referred to as a rollover. But no matter which it is, there’s no tax penalty associated with that movement of cash.
Once your money is at Alto, you have the ability to execute an investment either with a company that you have invited to the platform or introduced to the platform or from one of our investment platforms like AngelList, Wefunder, AcreTrader FarmTogether. You can begin an investment from one of our partner platforms and in that, we’ll call it the checkout flow or investment confirmation process. You’ll have the ability to choose to invest with your Alto IRA and then when you do that, there is a seamless flow of documentation that happens electronically with our integrated partners so that we’re not asking you to download documents from one place and upload them to another. That just happens seamlessly between us and our partners. All we’re asking you to do is to checkboxes confirming the company you’re investing in, the amount that you’re investing, and then to provide an electronic signature, all online.
So we’ve taken what can otherwise be a four to eight-week process and we’ve actually turned it into a few minutes. Now, it’s gonna get even way better than what it is today and part of that will happen as we get our broker-dealer license. So we’re in the broker-dealer registration process and once we are an introducing broker-dealer, that gives us a certain set of additional capabilities that we don’t have today that will fully automate the transfer process and just make things even easier than we’ve made them today. And so, while we may have raised the bar, we don’t feel like we’ve raised it high enough. It’s good, we want it to be fucking awesome. So that’s what we’re looking for.
Meb: It’s pretty slick already. So I will say having done it dozens of times, I’m excited to see what the future brings. So one more question. I understand all the platforms, it’s pretty seamless if somebody wants to use those. Is it something you could do if like my buddy spins up a SPV or I have a farm in North Dakota that I wanna toss on there, is that something you could do on a one-off or is it, do you have to be going through one of the platform channels? How does that work?
Eric: No. You can absolutely do it on a one-off basis. And so, the way it works is, let’s say you already have the relationship with Alto because you have your investor account. But the thing that we introduced to the industry that didn’t exist before was actually having what we call an issuer account. So you tell us about your friend’s company that you want to invest in. And when I say you tell us about it, you literally give us the name of the company, your friend’s name, and his or her email address and then the form takes over from there.
So the platform will email your friend and say, “Hey, great news. Meb wants to invest in your deal. He’s gonna use his IRA. Would you please come create an account at Alto IRA and upload the deal docs?” So this takes your friend maybe 10 minutes to just upload the deal documentation and maybe some stuff about the company, like what’s the EIN, which is the employer identification number and maybe a copy of the bylaws, certificate of incorporation, things like that. Things that the company has but the investor likely doesn’t have or doesn’t know ever exists or has never heard of. And those are examples of things that custodians used to ask the investor for, which we’ve said that’s a little bit silly, we’re gonna ask the company for those things.
And then once those things are uploaded, again, the platform takes over and we’ll coordinate the review of the necessary documentation and the collection of electronic signatures. We also collect bank information from the company that will be receiving the cash. So as soon as you’ve signed off on having reviewed the documents and said, “Yes, good to go and this is how much I’m investing,” we then have the authorisation to wire or ACH the funds to the company that’s doing the raise. It’s nothing more complicated than that.
Meb: Interesting. And so, what has been the main use case to date? Is it high net worth individuals? Is it family offices? Is it financial advisors? Because I could see all of these at some point kind of, “Getting it and wanting to move to Alto.” What’s been the main uptake so far?
Eric: Yeah. So it’s largely accredited investor and qualified purchasers. So, you know, I’ve listened to your podcast before and my guess is the majority of your listeners know what accredited investors and qualified purchasers are. But for those who don’t, accredited investor is gonna have a million dollars of liquid net worth and/or has made $200,000 over the last two years or 300,000 at filing taxes jointly married and filing taxes jointly. For qualified purchasers, that’s $5 million of liquid net worth. So right now our main focus is on the accredited investor and north of that, but at the same time, investing is a habit like anything else and we want to be accessible to those who, what the world sort of describes as Henrys. So high earners not rich yet. I actually call them Henry Bomways. So high earners, not rich yet, but on my way.
And that’s part of the reason that we wanna integrate with as many investment platforms as we can, including the regulation crowdfunding platforms. So the Wefunders of the world, I actually don’t know of AcreTrader and FarmTogether are Reg CF or not. But Republic is another good example of a regulation crowdfunding platform. The point is we have set up our pricing to be as transparent and straightforward as humanly possible and we set it up in a way so that we can help the largely younger investors, those who are earning money but aren’t rich yet build and develop this habit of investing in alternative assets. And so, the pricing structure is really created so that those on the high end are paying less and those who are new to the process find it cost-effective and accessible.
Meb: Yeah. You know, it’s funny, I always shake my head when I hear the accredited requirements because I know plenty of accredited individuals that don’t understand a damn thing about a lot of investments and plenty of people who aren’t accredited to do and the way that we can invest in anyone can go buy a microcap stock or cryptocurrency with 20 bucks, but can’t invest in some of these offerings is an odd regulation and at some point, I would, my soapbox is, I would love to see it move to almost more of like a driver’s license. You like take an online test and say, “Look, this is more of an education requirement than anything but whatever.” Now, the point of what we’re talking about.
Eric: Let me jump in because I agree with you 100% and the good news is that the SEC is actually moving in that direction. And so, we’re gonna see a number of changes coming down the pike both in terms of how an accredited investor is defined, who qualifies to be an accredited investor as well as the rules around regulation crowdfunding. And I think, Meb, we could go out and have a very big bottle of wine talking about this for a long period of time because it drives me absolutely insane that we define accredited investor based on balance sheet rather than capability. And I think the two things are entirely different.
Meb: Yeah. It’s frustrating. Well, good. I got a spot for us if you ever come to LA. Talk to me a little bit about…here’s a challenge that I think is going be a big tailwind for you guys over the next decade and that is as a quant, looking at the opportunity set in the U.S. in a lot of the big shops, AQR, and research affiliates, and us among them have talked about starting maybe a month ago, things are improving a little now for some assets, worse for others, but about how this 8% sort of target that a lot of institutions are targeting and from an individual’s it’s 10, you know, with traditional stocks and bonds is gonna be a challenge. Could you talk a little bit about kind of the current landscape as you see it, as well as what most investors are investing on the platform today? Is it mostly private start-ups, is it a lot of real estate stuff? Is it farmland? How are people kind of using Alto so far?
Eric: So right now I would say the majority of activity is around private companies and private companies of various stages. So that’s the majority of activity. The AcreTraders and FarmTogether are relatively new to the scene and I think especially in this environment going forward, I think Farmland should be more attractive over time. When you talk about the institutional professional investor endowments pension fund managers and you look at their portfolios and you say, “God, these guys are 50% or north of 50%,” they have very, very, very, very long time horizons. Individuals don’t have that same horizon duration. And really, what I think about, and I know you’ve spoken about this in the past as well, is portfolio diversification and what is true diversification. And so, sure, you could actually build a diversified portfolio with an allocation of 50% of your portfolio in alternatives so long as the alternatives are diversified across asset classes.
But in terms of what’s accessible to most people today, I think 20% is a great target goal. And I say that because you can get access to private companies across stages of development, you can get access to real estate without having to buy the building or the home. You can get access to real property without a building on it. You can get access to credit product. And I think it’s really important to do that from a diversification standpoint. And by the way, in that mix is current pay assets, right? That could be the credit or long product. I think to build a portfolio of 50 or north of 50%, you’re gonna be spending all your time doing homework on these investment opportunities and the majority of us who aren’t doing a Mebisode don’t have time to do that much homework because we have other jobs to do. So there’s this sort of struggle between how much time do I have to put into diligence seeing these opportunities that are interesting to me versus how much time do I need to spend doing my day job?
Meb: You guys have mentioned, I think I saw in passing at one point is the Alt asset world of crypto, something people can get involved with currently or is that something you guys are adding in the future?
Eric: Actually, I think the landing page for the Alto Crypto IRA went live today, which is March 11th. I know this podcast won’t play on March 11. The email announcing the product being generally available will go out tomorrow and we’ll get some experience kind of driving the car for a couple or four weeks and then we’ll actually do some marketing behind that. So we’re pretty excited to see how that plays out.
Meb: A lot of crypto people over the last few years were surprised to find out that, yes, indeed, no surprise, IRS was certainly interested in their gains and their trades and everything else. So wrapping that in IRA as is certainly understandable. I forgot to mention, can you guys do quoted securities in the IRAs yet or is that something you could never do or will do?
Eric: We will do, but we’re waiting for our broker-dealer license to do it.
Meb: Makes sense. What’s the business model? How do you guys charge people? I’m assuming this isn’t all free, is it basic points? Is it per trade? How’s it work?
Eric: Yeah. So it’s actually fixed fee-based on investment size and based on account size and it’s all on our pricing page, which is altoira.com/pricing. Sorry for the commercial. But we lay it all out there. There are no other hidden fees, right? There’s no wire transfer fee, there’s no cheque-writing fee, there’s no paper invoice fee, none of that stuff. It’s just every time you make an investment and there’s a fee based on the size of the investment you made, and then we charge a monthly fee for annual account maintenance and reporting. And the monthly fee goes from $5 a month at the low end to $30 a month at the high end and we cap it unlike others who will charge a minimum fee plus basis points based on the size of your account. And we don’t do that.
Meb: Yeah. I remember being somewhat aghast when I did my research three or four years ago into the current state of affairs and what a lot of these platforms charged. The interesting part and a lot of listeners, depending on when this comes out, can certainly relate with public equities and quoted securities on how they trade. It’s really hard to stay the course and be a long-term investor. Everyone says they are, but with markets going up and down 5% a day, it’s hard in the beauty of a lot of these alt investments, particularly in your IRA, which kind of duration matches. Like you mentioned, hey, when I turn 50, 60, 70, 80, 90, I’m gonna have these securities that I don’t even know if they update once a year or maybe they do or sometimes you won’t know for 5, 10 years the outcome that it ends up being a much better behaved sort of decision then when you know you’re stuck in something and can’t check the prices for 10 years. So it makes a lot of sense. Eric, I’d like to go back, I’d love to hear sort of the pre-origin story, a little bit about your background. What was the windy road that led you kind of down the path to pre-Nashville and starting this company?
Eric: I’m a serial entrepreneur by disease, so…
Meb: I’m gonna steal that. I love that phrase.
Eric: Feel free. It’s the first time I’ve ever said it, by the way. So it just came to me and sounded good. So I’m gonna continue, you and I can trademark it, copyright it, whatever you do and sell t-shirts. So that’ll be good. But I left school and went to Wall Street because I didn’t get the job I really wanted. And so, I was an investment banker for a few years and may be worth backing up just for a second to say, growing up in high school, I sold frozen lemonade out of a unairconditioned van in Miami, Florida. And it was just a really simple, easy to understand business model, which was the more lemonade I sold, the more money I made. You know, I had to cover gas and cost of ice and some syrup, but other than that, pretty straightforward.
And so, then when I went to school, I took over the distribution of “The Boston Globe” and “The New York Times” on campus and it was the exact same thing, it’s like the harder I work, the more I sold, the more I made. And my only cost was to “The Boston Globe” and “The New York Times.” So I was reading an “Ink Magazine” during my senior year and I reached out to a company that was based in Philadelphia because I really liked…at least I liked what I read about the CEO and went through this interview process with them, but didn’t get the job, but did get a job with Donaldson, Lufkin & Jenrette, DLJ. Still the greatest investment bank ever to exist.
Meb: Were are you based in San Fran at the time or New York?
Eric: No. I was based in New York initially, but San Francisco would come later with DLJ. So I was an investment banker with DLJ in New York and I left actually to start a coffee company. This was before… So Starbucks was around, it existed, but it didn’t exist in New York yet. I’m gonna skip over that part of the story and tell you that for the first time ever, I failed. I started the coffee bar, I made every fatal mistake in retail and really, there’s only one mistake which is location and they say the three keys to retail are location, location, location, and I got them all wrong. I mean, I just totally screwed the pooch. So I ran back to Wall Street for cover and eventually made my way back to DLJ in San Francisco in early 1998, actually, April fool’s day 1998 and helped jumpstart the internet investment banking effort for DLJ. And that, I mean, it was just an absolutely crazy time out there. Nineteen ninety-eight was the beginning of what would become the bubble and so sort of lived through the bubble and then came out the backside when the bubble burst.
And while I was still at DLJ, I co-founded another company in the internet-based business called Currenex, which was an online foreign currency exchange business, which State Street eventually bought for close to $600 million. So I started that company in 1999, I did not run it. I wanna be clear, that was a board position, but State State eventually bought it in 2007 for a whole lot of money and that was a good outcome. I eventually left San Francisco, went to Nashville where my wife was from and while here I co-founded, with her actually, an online organic grocery business. So home delivery, before Instacart, before all the other grocery delivery businesses. But timing is important and 2008 absolutely crushed us. And we were about a $5 million top-line business at the time and then the bottom just fell out at the end of 2008.
So had another failure in the retail sector as an entrepreneur. And so, I did what any entrepreneur who has just failed would do, right? I started a venture capital fund, which I had been running for about 10 years in Tennessee. State of Tennessee was my solo LP. I had a couple of partners and it was in that process where I wanted to invest personally alongside the funds in our portfolio companies where one day I was looking at my retirement account, I was like, “The light bulb just went off.” It’s like, “Oh, my God, I can’t just touch this money until I retire and I’m not gonna see the returns of these investments until I retire. This is money I wanna use.” And so, I called my advisor and I said, Hey, I wanna make this investment in this portfolio company.” He said, “Great.” I said, “I’m gonna use my IRA.” He said, “Great.” And I said, “So will you just send the cheque?” He said, “No.” I was like, “What? Why not?” And that was my introduction to the self-directed IRA industry. I had to go figure it out. And after doing it three times, that’s when I was like, “This is just crazy. I got to fix this.” So that’s how it happened.
Meb: I think you nailed the whole disease for the people that have been through various markets and regimes and bubbles, but as well as entrepreneurial start-ups that succeed and fail. There’s a very real agony and ecstasy to how these things work. And until you’ve been through both the good and bad side, it’s hard to sort of translate that experience to people that haven’t. And I think a lot of the younger investors as a good analogy are starting to experience that different environment wherein 2020 versus the prior 10 years. But you hit on a couple of places and times that brought a smile to my face. I had moved to San Francisco directly in the wake of the internet bubble bursting, so I caught the backside of it when I moved there in like ’01, ’02. But certainly a lot of fond memories. Talk to me a little bit about the actual experience of building Alto. So you get the idea, you’re a very different place today than you were in the beginning. Kind of walk me through the actual growth of the company, any of the main sort of waypoints on how that has evolved over the past, was it three years? You guys got started 2015, 2016? When was the start date?
Eric: Yeah. So I actually raised the money in early 2016, late 2015, early 2016. And we didn’t launch until April/May of 2018. So that’s a really long time and it was really just two of us and a parched just me for a part of that time. And what I thought was going to be the easiest part of the equation turned out to be the toughest part, and that is I thought I was gonna be able to rent our custodial powers from some of the existing self-directed IRA custodians because that had actually been a thing in the industry where you could go to a company with the trust charter and you just pay them a small fee on some basis in order to rent their powers. And when people began to understand what it is we were building and what we were going to do, the price at which they were willing to work with us didn’t make sense.
And so, we went down the path of getting our own trust charter with a partner two different times. And in both cases, at the 11th hour, the process blew up. In one instance, it’s because our partner became the target of somebody else’s acquisition, which didn’t work out for them, but it blew up our deal. And then the second instance, the state of Tennessee actually said, “We know we told you it would cost you $1-1/2 million to get your trust charter, but it’s actually gonna cost you $2-1/2 million.” So that was a bit of a curveball. And so, that rug got yanked out from under us.
And so, it just took me a long time to find the right partner, which I eventually did for our trust powers. And it’s been an incredible relationship. The other thing was that I come back to this statement of it’s better to be lucky than good. And I’ll say it until I’m blue in the face. Anyone doing a startup, you have to get lucky at some point along the way. And that doesn’t mean hard work doesn’t matter, hard work does matter. But you gotta make your luck to a certain extent, I believe. And you gotta be looking around, you got to be open to identifying it and seeing it.
I’ll tell you that late 2017 I was having a conversation with the head of corporate development and strategy at AngelList and was showing him how what we were doing was different and how we would work with them. And on our very first call, he said, “I totally get it. This is different. Let’s do it.” And if he didn’t say that, I’m not sure what the path would have looked like, what the road would be. But he did say it, which gave us instant credibility when we launched come April 2018, not only with investors on the AngelList platform but it gave us credibility with all the other investment platforms. And if that doesn’t happen, it’s just a very different path, it’s a very different road. It’s not to say that we wouldn’t have made it happen anyway. Maybe we would have, but we got lucky when he said, “Oh, yeah, I get it. Let’s do it.” And that’s just not in anybody’s business plan. It just doesn’t happen that way. But it did for us and so, I’m really grateful.
Meb: I think it’s a wise or experience comment you make on getting a little luck. I think almost every entrepreneur, particularly that’s at it for the first time or young will say something like, “Look, I realize most start-ups fail, but we’re gonna succeed.” And then doesn’t really believe that, of course, everyone obviously believes that otherwise, they wouldn’t do it. But the role of luck certainly plays a large influence, whether it’s timing, you look a lot of the stories that you probably worked with in the late 90s that flamed out and everyone made fun of, then a decade later are billion-dollar unicorns. So a lot of it just had to do with timing and obviously many cases execution as well, but luck certainly plays a huge role.
There’s an old phrase from the famous hedge fund manager, Julian Robertson of Tiger, when he was talking to a younger hedge fund manager, one asked him for advice and he said, “What should I do? I’m a new start-up hedge fund. What’s the best advice you can give me?” And he’s just like, “Be lucky.” Because you print a good first year or two, everyone’s gonna think you’re a genius and anoint you the next Warren Buffet and throw tons of money at you. But, basically, it’s partially out of your control. Can you talk to the extent you can, what’s the funding process like? You guys have raised money a couple of times. I don’t know if you’d characterise it as seed or series A or what they call them these days, but was it mostly VC, was it friends and family? How was kind of that experience? Was it a easy story? Was it a hard story? Was it like AirBnB where everyone, 50 funds, said no? How was that experience?
Eric: I don’t know what order I’m gonna answer those questions in, but I’ll give it a go. So we have raised seed financing to date. Also, I hate the names that kind of the investment community has given to financing rounds. Before seed down there’s an angel and before angel, there’s a pre-angel. I mean, who gives a shit? It’s like, “Okay. I raised money. This is what we’re gonna do with it. This is where our business is. Can I cut that name too long? Does that work?” Anyway, but… Sorry, pet peeve. So we’ve done seed financing to date and we have both high net worth investors and we have professional institutional investors.
So on the institutional side, Tony James, who is the Vice-Chairman of Blackstone, his family office, Jefferson River Capital is a major investor. Moment Ventures out of Palo Alto is a major investor. We’ve got Foundation Capital. We’ve got Amplify.LA, Sequoia Scout, Lightspeed Scout, Alumni Venture Group family of funds. [Inaudible 00:45:00] missing another institutional investor too and I’ll just have to send a letter saying sorry. And then we have raised a considerable amount of money from our actual high net worth customer and we’ve done that by raising money on AngelList. And we do that because what’s a dogs eat the dog food exercise. We get investors on AngelList to use their IRA on AngelList to invest in Alto and we like that model. And so, we will likely do the same this year on some of the Reg CF platforms. It’s sure to raise money but more to promote the investment in alternative assets using your IRA. So I would say that’s probably something we’ll do this year because it’s good business, it’s good for us to do.
Meb: And you start to see a fair amount of people doing that. And I’ve never understood why more companies didn’t to the extent you have whatever Malcolm Gladwell calls like the real true 1,000 fans or the incentivised or motivated shareholders, evangelists, whatever you wanna call it, to be able to give them some skin in the game is the most obvious thing in the world and it’s also crazy to me that most companies don’t utilize that opportunity. I mean, as far as I know, we’re one of the only asset managers that ever did a crowdfunding round. We didn’t use one of the platforms, we just kinda did it on our own a few years ago and raised about 3 million. But for the same reason, it’s like, “Look, if people believe in your mission, they wanna be part of the opportunity, why would you not enable that?” And it applies almost every company anyway. End of rant, but it makes so much sense.
Eric: I cannot agree with you more.
Meb: What do you think has been the most challenging sort of part of the past handful of years in building this? Or it could be something that continues to be a challenge. Anything come to mind?
Eric: It never goes the way you draw it up on the chalkboard. And so it’s just… And I think this comes with some age and some experience. It’s having a bit of faith that whatever is happening is supposed to be happening. And we can’t control timing. So I’m a soccer player. I grew up playing soccer, I played soccer in college, I played soccer everywhere I’ve lived since college. And my high school coach used to say there are three things you can’t control. You can’t control the field, you can’t control the weather, and you can’t control the referees. And so, when I think about our business, I always try to think about what’s the field, what’s the weather, or what’s the referees. And that allows me to focus on the things that I can control, like the product we build, the customer service we provide, the people we bring onto the team, and the people we partner with.
Those things are in our control and it’s our goal to just do those things better than anybody else does. And sure we can keep an eye on what our competitors are doing and we can watch them imitate us and take our language and put it on their website and all that stuff. And then back to your funding question a little bit, I can go meet with 100 potential investors and 80 can say no, but that’s beyond my control. But what I can do is I can take their feedback and I can incorporate it into my own presentation and the way I talk about what we do and the product set we wanna build and offer. All of that’s within my control so that when I meet the other 20 investors who are excited about it, the foundation is there for a great conversation.
And so, you know, I feel like I’ve gone a little off-course in answering the initial question, but what I really try to do now is to focus myself and our team on those areas that are within our control and just do the absolute best that we can in those places. And if it doesn’t work out, then I’m okay because we did our absolute best on those things that we could control and kind of market timing is one of those things that I put into the weather bucket. The good news is that I don’t think our timing could be any better, especially as the public markets are melting down around us right now. But the fact of the matter is there’s the retirement crisis in this country and America’s going to retire. We need to include higher yielding, higher returning alternative assets in our portfolios. And we’re gonna help.
Meb: So as you look sorta to the next decade of the 2020s and take a really long-term view, what sort of the future look like for Alto? Is there an ultimate vision, sorta horizon that you guys are thinking about as we go out multiple years, even 5 or 10?
Eric: Yeah, there is. And so, look, if you ask me what I wanna be, I’ll tell you I wanna be the Charles Schwab of alternative assets. I want everybody to be able to invest in alternative assets and I wanna be the one that helps you do it and we want to control the center of that workspace if you will. So that’s my vision. And introducing you to opportunities, making sure that you can transact in those opportunities, making sure that you’re a compliant buyer when investing in those opportunities. And so, I think this is gonna be a really, really large business and so long as we execute properly, we’ll have a significant role to play in it. I do not imagine by any stretch that we’re gonna be the only player. I think this is…anytime you’ve identified a real opportunity, other people are gonna come into it and that’s okay by me because we’ll have our share of it and that’s fine and we’re gonna help kind of lead the way and pave the way. And I think that’s a good thing.
Meb: No bigger compliment than competition of the incumbents at some point coming your way.
Eric: I agree.
Meb: On a personal level, what’s been your most memorable investment over your career?
Eric: I mean, it has to be Currenex. I mean, it’s been my biggest win. So that’s kind of the most memorable one. But if you asked me what was the most important, you know, it’s the two investments in the start-ups that failed in Plumgood Food, which is the online grocery, home delivery business, and Ganymede’s Coffee, which is the coffee business. And I say that because you learn a hell of a lot more when you don’t succeed than when you do. When you do succeed, you just think you’re smart and good. And most of the time it’s not because you’re smart and good. That may be true, but that’s unlikely as to why you succeeded. So it’s the lessons learned and in the other two that are more valuable.
Meb: There’s a famous LA producer who talks about keeping her failure resume as a reminder and grounding to the real lessons and very real existence of failures and how it can go. And there’s an old Robert Downey quote where you guys can Google it, by the way he talked about remembering the stitches. It’s a very similar concept where the scars that help define us but it also give us a lot of the lessons that help during building the good times too. Eric, we’ve mentioned it, but as far as resources, best places to go to find out more about you guys, these ideas, concepts, what’s going on in y’alls world?
Eric: Obviously, go to altoira.com in the Frequently Asked Questions section. The other thing that I always suggest that people do is as much homework as they can to get smart on what it means to invest in a private company, any stage or in a credit product or in real estate and the things that you should be looking for. And I don’t have specific research books or notes or sites that I specifically point people towards. I think we have some resources on the website where you can find those, but do your homework, do your Googling, talk to Meb. The more questions you ask, I believe, the better off you’re gonna be, especially in investing. I mean, ask questions, ask questions, ask the questions.
Meb: I love it. Eric, thanks so much for joining us today.
Eric: Thanks for having me. It was a blast.
Meb: Listeners, we’ll post show notes at mebfaber.com/podcast. You can shoot us comments, feedback, reviews, firstname.lastname@example.org. Subscribe to the show, iTunes, Breaker, Castro, anywhere good podcasts are found. Thanks for listening, friends, and good investing.