Episode #390: Radio Show – Meb’s Thoughts on Angel Investing After Making 250+ Investments
Guests: Meb Faber, Justin Bosch & Colby Donovan
Date Recorded: 2/7/2022 | Run-Time: 43:04
Summary: Episode 390 has a radio show format. We cover Meb’s experience investing in startups, including:
- Why Meb started investing in startups
- His process for sizing investments
- The importance of making an investment plan
- Meb’s biggest wins
Comments or suggestions? Interested in sponsoring an episode? Email Colby at email@example.com
Links from the Episode:
- 0:40 – Sponsor: Masterworks
- 1:36 – Welcome to our co-hosts, Justin Bosch & Colby Donovan
- 3:14 – Journey to 100x; How I Invest 2022; Meb’s philosophy on startup investing
- 7:17 – How Meb sources deals
- 12:46 – Meb’s mindset for reviewing deals and deploying capital; Angel (Jason Calacanis)
- 19:46 – Whether or not Meb considers themes and sectors heavily before investing
- 21:13 – A Warning to Angel Investors (Phil Nadel)
- 22:41 – The Power Law (Mallaby)
- 24:26 – Parallels between trend following and startup investing
- 27:40 – What Meb’s plan is when a private company goes public
31:47 – Some portfolio highlights; Meb’s Deals
- 34:27 – Plush Care; Grove; Chipper Cash
- 36:32 – Meb’s take on private market valuations today
- 38:48 – What on Meb’s to-read list; The Power Law (Mallaby); All The Light We Cannot See (Doerr)
- 39:24 – What JB is reading; The Story of Silver (Silber)
- 39:43 – What Colby is reading; The Bond King (Childs)
Transcript of Episode 390:
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
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Meb: What’s up, everybody? Welcome to another edition of a radio show. Man, it’s been a long time since we’ve done one of these. We’re committing news resolution 2020 to doing these once a month, so hold us to it. Today, we have two co-hosts. Welcome, Justin and Colby.
Colby: I’m happy to be here enjoying the show and Meb I’m here just to make sure you do this all year. And I trust you, I’ve heard that before. And plus when you just said it, you just said you’re going to do this for all of 2020. So, you’re two years behind, but I’m going to make sure that you keep doing this year.
Meb: I’m still living in the pandemic. Well, the main reason to do the radio show is back in we used to do it with Jeff, we used to ask listeners if they like the podcast to leave us a review or send us a thank you gift. We used to get smoked salmon from Norway, we got bottles of tequila, all sorts of fun items in the mail. So, listeners, we won’t say no if you send us something, by the way, but all right, 2022 I commit to doing this once a month. We’ve had Justin as a co-host on the past before. Welcome, Justin.
Justin: Hey, thanks. Great to be here.
Meb: So, the normal format listeners we just kind of rip and roll. If you want to send us questions, we started doing this on Twitter. But also if you do feedback at the mebfabershow.com, we’ll include those in the show usually at the end. Today, we thought we’d get into a topic which we’ve gotten a lot of great responses from which is not sort of my normal wheelhouse day job line of business, which is managing Cambria, and we’re starting 2022 with almost 100,000 investors, which is pretty awesome. We may have crossed it by the time this publishes, I’m pretty excited about but rather some different topics. So you guys want to lead us in what are we going to talk about today?
Justin: Today, I wanted to get in a little bit into your world of startup investing. So you wrote a great piece on this, I believe it was back in 2021. So, last year, “Journey to 100x”. What are the things that really kind of hooked you into startup investing?
Meb: This is like a pullout companion piece of a longer piece, which will hit the podcast at some point. But you can find on the blog, and I’ve been doing it for years called “How I Invest” and this one that most updated is How I invest 2022, which gives sort of a world view of the allocation of a portfolio manager. And the reason we’ve been doing it for years is a really sad state of affairs where the average mutual fund manager in the U.S. doesn’t invest in their own fund. And that used to really bother me for a long time until I kind of realized they’re probably smart for not investing in their fund because a lot of mutual funds are high fee and tax-efficient. But really this concept of not having any skin in the game just rubs me the wrong way. And so, I invest almost all my public assets into our ETFs and strategies, but one of the areas that’s been growing over time and been doing it since I think 2014, 2015. So what is that? seven, eight years now, has been the startup investing journey. And so, the longtime listeners, I think what, how many episodes we’ve done now 300, 400.
Colby: Almost 400.
Meb: Man oh man. So, the longtime listeners will have been familiar with this topic because we’ve been doing startups series where we have entrepreneurs, and founders as well as angel investors and VCs. It’s kind of funny, what vintage if you come to the orbit of our content, because if you go back far enough people know us as trend followers, and then maybe circa 2013 you may know us as value investors, and more recently talking about some things like Africa and space. But startup investing the original intent, which we said at the time, when we started doing it said, look, like many areas of life, if you want to really understand something, you really need to immerse yourself in it. One of the best ways to do it, of course, is also teaching, but to really write about something or I think, importantly, our world put some real money behind it. And so my thesis was, “Hey, this is an area of investing, I don’t have much experience.” So, I want to start to learn how all the sausage is made, and the goods and the bads and everything in between. And I’m going to do this thoughtfully. So, I’m going to write down ahead of time, sort of my goals, which were to start small, both in bet size but to make a lot of bets. So, err on the side of more than less, commit to a full cycle. So five years plus. We haven’t really had a full cycle in terms of up and down markets. But we’ve had the full cycle in terms of time, almost. And I said, you know what, if I break even great, if I lose all my money, which I don’t think I will, but I’ll consider that tuition, and we’ll consider that a lesson learned. And then if we make money even better, but really want to go through this entire experience, so that was really the intent and what drew me towards it, the VC world of 10, 20, 30, 40, 50 years ago, much more opaque, much more of an old boys club still is.
I saw a stat the other day that said that 2% of VC funding last year went to women which is, I mean, it’s not even like astonishing, it’s just, it’s almost impossible how low that figure is, but there’s been a lot more transparency over the past decade. So anyway, that was what sort of led into the interest, obviously, the dream and the seduction of a potential life-changing investment is one that I’m sure really draws people the most, like, that’s the number one probably as they say, “Oh my God, somebody invested 10 grand in Uber and now it’s worth $100 million,” or something. So, that certainly is a part of it. But that was sort of the intent back in 2014, eight years now.
Colby: I know you’re not sourcing deals yourself, you talk about it in the paper, how do you go about finding deals to put money in, do you want to give like a brief overview of number of deals, where you’re doing it, how you’re doing it, what you’re reviewing?
Meb: We’ll start at the end, and then we’ll go back. I’ve invested in over 300 companies at this point. And if you go back to the very beginning, like almost any investor in the world, you have your cousin, your neighbor, your co-worker who’s got a great idea. I live in Los Angeles, so many of those are populated with, I got an idea for a new restaurant, or I got an idea for a script, a new movie. But everyone seems to have their new startup.com idea. This vintage is more Web 3.0 and Metaverse. But there was a pretty real shift around the time that I started as well, which is part of what sort of draw me into it is a lot of the online platforms started to be built that cater to this universe. So, AngelList, certainly the most famous, there’s others, Republic, Wefunder, OurCrowd, there’s some that target late-stage private companies like EquityZen, and we’ve had a lot of these on the podcast. And by the way, listeners, we have a YouTube channel, where it sorts all of these into topics. So, if you want to just go learn about farmland, you want to go learn about angel investing, we have silos for those. And so that became a big enabler.
And what AngelList did that I think is a bit unique, is they decided to have the people who source the deals be able to bring them to their own audience. So, created this sort of network effect where these were syndicate leads, as they’re called, were incentivized to find great companies, but also to build their audience and get a large enough syndicate size so they could source more deals and repeat fast forward. AngelList is this giant company that has hundreds of syndicate leads, I see something like 200 or 300 deals a month now, I’ve reviewed over the past decade something like 5,000 deals. And people will say, “Oh my God, that sounds terrible. That sounds like a lot.” But in reality, if you were to go back to 2014, this is a huge benefit for a lot of investors for a lot of reasons they may not understand. So first, you see this massive amount of deal flow. First of all, it tends to be way more optimistic than the public markets. So, if you’re a public market investor all day long, if you’re on Twitter, CNBC, Bloomberg, even if you read the newspaper it’s like, I don’t know. 80% negative news just bombarded all the time, geopolitical, the Fed, all this just junk worried about stock market crash. Whereas if you spent a lot of time in startups, like it’s all sunshine and roses. Everyone’s going to be $100 million company revenue in two years.
But many of the cases the ideas are world-changing, whether it’s biotech, whether it’s emerging markets or space. I saw one the other day that is a new strategy for launching rockets where it spins the rockets and shoots them out of a vacuum in space. That sounds like real, like venture capital startup idea, didn’t invest, by the way. But space has been a huge thing for me, there’s been a lot of space podcast, but you learn a lot is a big one. So, over the 5,000 deal memos and decks you read, you learn not only about the venture ecosystem and all the acronyms that you use but also about a ton of companies and what they’re doing. And one of the big insights in this isn’t a unique insight, but I think it’s an important one is that there’s no such thing as inside information in private markets. So, you have a private company, that’s telling you, “Hey, by the way, we had 50,000 in revenue six months ago was 50,000, then 75,000 and 100,000, then 200,000, then 500,000, a million, you see this very real trajectory and what’s working. And so it, A, can inform not just the investment in that company, which is the big one, but also other companies too. And trends across industries. That’s been a big secondary benefit that I didn’t quite expect from the get-go, that it’s not only optimistic but a huge learning benefit.
So even if you don’t do any startups investing to actually go review a lot of the deals, I think is pretty impactful. They creates some challenges and benefits of having the syndicate lead, some of these websites are only the company raising money, and the filter on what comes through on some of those versus if it’s a syndicate who’s bringing it in and does the due diligence can create some different incentives and you have to be aware of those. But that to me what has been a real positive extra of this whole process over the past. And there’s so many where podcast listeners probably heard me say, even a lot of the companies I don’t end up invest in, the people in the office are so tired of me saying, “Hey, check out this new website, or this company that’s doing XYZ, it looks pretty awesome. Can you try out their product or service. Maybe it’s something we incorporate into the company or my own life.” And there’s probably dozens of those that have saved us tens of thousands of dollars, or hundreds of thousand dollars. A great example of course is the main street one we’ve talked about on the podcast that saves the average company that we’ve passed along $70,000 per signup. That’s probably worth doing it all just to get through that one company.
Colby: So Meb, like let’s say right now you get a deal across your desk or a deal sheet. How long are you taking to look at it? What are you looking at it? How much are you thinking about valuations? Can you walk through your mindset for reading through those?
Meb: We tell the early investors, there’s a lot of resources we have on this post, a lot of books, Calacanis’ book “Angel” I think is a great start. A lot of the interviews we’ve done are great starts. I would go into this with eyes wide open and the intent of not necessarily feeling like you have to cannonball into the pool. So you can start slow and say, “Hey, look, here’s my budget. I’m going to commit to five years of this.” Because inevitably, we’ll have a down market. Over the past year, it’s been pretty bubblicious on the valuations and what companies are raising at. But you will see that throughout the full cycle. Commit to a certain budget size and say, “Look, I’m going to try to do 12 investments a year for the next five years. So after the first year, I’ll have around a dozen, after five years, I’ll have around 50,” which is a pretty awesome portfolio, 50 startups. And I think you really need to get to 50 to 100. If you listen to a lot of investors, they may say a lower amount. But as a quant the whole point of this game, and we’ll get into this unpack in a minute is this concept of the big winners. I think people intuitively get but then they don’t necessarily enact their plan in a way that sets them up for success. So, I think you probably really need 100 investments to try to increase your odds and can’t say guarantee but really hope that you’ll get the big 100 bagger, 1,000 bagger type of return.
And so, I think the bet sizing going to say okay, I’m going to have a bet size, doesn’t matter if that’s $1,000 investment $5,000, $10,000, whatever. Often some of the platforms, the minimum is around $1,000. So that would probably be by minimum. Come up with a bet size unit, as we used to call it back in the quantitative commodity trading days where you would try to equalize an investment in cotton versus say Bitcoin or S&P futures, but have a unit size. So, let’s say that unit size is $5,000. You say but you know what? I’m going to sometimes invest in a company where either I haven’t done as extensive due diligence, or I just want to track along and see how they do. Maybe it’s precede and it’s early and if they actually works at the next milestone I’ll invest another half unit, so maybe it’s $2,500 on the first one and if they make it in the next one, it’s another $2,500. The point of all this is to think through it, because what the allure is, people will see it they’ll be like, “Oh, my God, this looks amazing.” And they put, let’s say their budget is $50,000 for year one, they want to put it on the first investment, like Oh, my God, $20,000, $50,000. And then invariably, most startups fail. And I think people really understand that fact. But they rarely actually, like, truly believe that their investments or startups will fail. You talk to any CEO, the startup CEO they say most startups fail, and well, is yours is going to fail? They’re like, “No, of course not, you know, and here’s why.” And so they have to have that delusional optimism, otherwise, you’d never do it.
But actually kind of layout that framework and the problem, and I’ve talked to a lot of friends that do this is that they say, “Okay, here’s my plan.” And then month one, they’ve done like five, six investments. And I said, “Well, your plan was only to do about 10 or 12 in the first year, and you’ve just spent your entire bankroll.” So that’s a challenge, I think. And certainly, the deals don’t come just one per month. But to really try to reserve some throughout an entire period is a good use, and maybe bucketed by quarter. I’m going to do three a quarter and if I spend all my three, too bad, because there’s always going to be more. I mean, again, I said, I’ve reviewed something like 5,000 deals. And so, there’s always going to be great ones to come down the path. Now, the good part is starting slow and doing full cycles, you’ll gravitate towards certain types of investments. Some investors love pre-seed the true startup in a garage that doesn’t have a product or service yet, I don’t. That has a super high failure rate. I like to see some sort of traction, which puts me more into that sort of Seed Series A universe, which historically used to be $10 million roughly market cap, it’s probably lifted up to about $15 million, or maybe even $20 million at some point now. But for me, it’s that $5 million sort of market cap to $20 million in that range. I’ve done some as low as $2 million. And then some much later stage that I reserved for what I kind of call my Peter Lynch portfolio, which is companies that already have a successful product that I love that I use or a service that I think is just awesome, that I want to tag along for as well.
A good example that I don’t invest in that I’m sure is way too expensive now is Vuori, the men’s clothing. I think it’s both men’s and women’s athletics sort of like the Lululemon next generation, I would certainly invest in that. But I’ve done three or four of those. There’s other platforms, I think that are much more appropriate for those because a lot of the traditional syndicate models which charge 20% carry on the profits. And it feels kind of gross or icky to me, if you’re a billion or $10 billion company, why a syndicate lead would be getting carry. And I’ve seen them on $15 billion, $80 billion companies. Those are large-cap companies. So why you should be getting carried on that is beyond me. But there are other ones like EquityZen that do it where it’s just a brokerage fee. And so I’ve done a handful in there, Impossible Foods, Lyft and HotelTonight, which is now Airbnb, but that’s my style, your style may be totally different. You may say, “Look, I much prefer the company to have some traction already, I like seeing good investors in the cap table. So I’m going to invest in deals Sequoia does or I’m going to invest in Series B, whatever. Another thing to think about is, as you build a portfolio, you will see the companies then a lot of times, follow on round. So that little seed company did maybe having traction success and does a Series A or Series B. And do you then follow on and double down or triple down on that investment. That’s something to think about as you build a portfolio. And for me, I don’t that much, but a lot of people certainly do.
And so you’ll gravitate towards what you like. Some people say, “You know what, I only want to invest in Web 3.0 and crypto world.” Others say, ‘I’m going to go broad-based,” and some, it’s like purely a quant math approach of the economics. For me, it’s like more exclusionary, it’s like if I look at a deal, and it’s like, “Oh, this is going to help Google sell more ads.” To me, that’s just not something I care about. And so, I like the idea that it’s either a company that’s doing some really cool shit, or it’s a pretty novel approach to whatever. And there’s kind of like five or six main sectors or genres that I’ve intentionally or not gravitated towards. But it’s hard to know this ahead of time, until you’ve been through it. It’s like until you’ve actually started to put dollars or can go through the process, you may not know that you would really want to be a later stage versus early-stage and sector on and on.
Justin: How much consideration are you making in sort of you talked about genres a little bit, things like tech versus non-tech, various industries. Are you making heavy considerations into those concepts of going into this? Or do you sort of go your opportunities sort of dictate what direction you go?
Meb: It’s a little bit of both. There’s certainly some syndicate leads. And I joke was a few that we’ve had on the podcast that I invite back on. I said the other day on one, I said, “Anytime someone makes me a ton of money, they have an open invite to come back on the podcast.” So there’s a handful of syndicate leads were invested in a company and the company have done extraordinarily well or they do that multiple times. That if they send a new deal across, like, that’s definitely going to get my attention, then I’m going to dedicate 20, 30 minutes to reviewing the memo and the deck, no matter what, because in my mind, they’ve sort of earned that spot. But I’ve done investments probably crossing dozens of syndicates. So, every single one I’ll take a quick look at, if it’s a $500 million, billion company, it may be a short read. If it’s company, sometimes I’ll read the first paragraph and it’s like something that just doesn’t interest me at all, it’s move on. Again, there’ll be thousands more, so you don’t feel like you really have to do every one. But there’s some that come across your desk that to me are so obvious and so exciting. That’s when it really when you kind of dig in. Now, this all having been said, I did a tweet post about this the other day, along with Phil Nadel, who we’ve had on the podcast multiple times at Forefront Ventures where to look, it’s not all sun and roses. And you have to do your own due diligence where there’s a lot of bad behavior too. Some of it, probably mostly unintentional, or some of it being people new to the game, and some of it probably intentional and not necessarily like fraudulent or criminal, but doing in a way that either is omitting certain facts or…so anyway, Phil had a nice post.
And I mentioned a few things that once you start to review enough deals you start to see, okay, you see some pattern recognition on some of the bad behavior as well. But like anything, it’s always do your own due diligence. And so, one of the benefits of erring on the side of more investments than less is, even if you do end up having a fraudulent CEO, which happens in the public stock market, by the way, or company, many of these will go to zero like that is totally okay, because it actually is going to have probably no impact on your return. All that really matters in this game is getting the ones that really do have the big wins. And this is probably the most important topic of the entire podcast, which is you have to have these big winners. And for the public market investor that’s what determines all your returns. So, in the “Journey to 100x” blog post, we have some links. And don’t skip these listeners, the J.P. Morgan, the Bessembinder, that talks about the power laws and public market returns, which that’s like 5%, 10% of the stocks generate all the returns and public markets, which people often don’t realize. They understand it in VC investing but it’s hard to rewire your brain for that behavior. Because if you buy a stock and it doubles, you’re doing a happy dance. If it triples, like, my God, like, you’re telling all your friends, Thanksgiving is going to be exciting this year because you can tell them about this top stock you bought that doubled or tripled.
But as a venture startup angel investor, you actually don’t really want the doubles and triples and that sounds crazy. You say, oh my god, like I’ll have companies that will get bought and it’ll be double or triple. And I say, “Oh, that’s a bummer.” We had one recently that I think could have been 10x from where it was, which was Inkbox, which we talked a lot about on the podcast over the years, they do the two-week temporary tattoos. And look, they did great. They went from nothing to they sold to Bic, like, the pens, I think for $65 million. So, look, good outcome, life-changing outcome for the founders and everything. But I think that could have been a $600 million company. And of the math of the returns on the portfolio, it’s a good return, but it’s not going to determine what happens with the rest of the portfolio. It’s really these companies that returned 50, 100, 500 times, which has much more impact. Which is hard to rewire your brain because a lot of times you’ll see deals, you’ll go through the math and be like this is an amazing company. This could grow 10 times and then be like, “Wait, hold on, I actually don’t want that I don’t want a company that’s only going to be a potential 10 times return, because it’s not going to have outsized impact.” As funny as that sounds.
Justin: So many bells ringing for me as far as the parallels with trend following let’s traditionally apply to any market really. But when you think about the kind of classic commodities trend followers where they talk about portfolio construction and the structure of these returns, where there’s a lot of small losses, and a handful of really big winners that really drive the overall portfolio returns just kind of an interesting thing to me that seems a parallel so much.
Meb: This concept of long vol investing it’s the exact same thing where the trend followers they may be trading cotton with Swiss Franc. But what they’re doing is they’re making a lot of bets, and a lot of uncorrelated markets, so the same thing in my angel portfolio. And they’re doing it where they’re often going to be wrong. So, it’s a lower batting average, not necessarily, but let’s call it a Barry Bonds as batting average, as opposed to people who want to have 80% positive returns on their trades. This is probably lower than half. But it’s the really big winners that drive everything. And so, I talked about this on Twitter, and I scratched my head, often, because a lot of the VCs and trend followers I know, there’s not a whole lot of overlap on the Venn diagram. You don’t see people who say, “You know what, my portfolios half quantitative trend falling and a half venture and startup investing,” but they get it, they’re both doing the same thing. And oddly enough, they’re probably incredibly great diversifiers to each other, because the trend followers will be short anytime there’s a big macro crisis. I was talking about this on Twitter, and I was talking to Dave McClure of 500 startups because he was talking about investing in the VC. A lot of them love to talk about the market environment. But on our old tail risk piece in the appendix we talked about financial advisors are four times leverage to stock market. Well, VCs are like 10 times leverage to stock market, and it’s not only the stock market, often it’s like tech. And so, I was laughing because he says, “Well, most VCs don’t have a whole lot of cash sitting around.” I was like, well, then that’s either unsuccessful VC or they’ve just put way too much money in because they have their whole life lever to one outcome.
And as, like, if you remember, 2000, 2003, there are benefits to going through the full cycle. The deals will rerate, the valuations go down, but there are less exits, it is just like the circle of life of the VC world. So, the fact that most VCs and startup investors don’t hedge their portfolio, or have some sort of trend following or quantitative, zig and zag to it is crazy to me. When I posted how I invest my money, it shows that I have a huge chunk in startup investing, but also a huge chunk and tail risk too, for that reason alone. But the philosophy of both are very similar. The odd part is even the standard S&P 500 index investors too, because that’s what drives all the returns of the S&P 500, or market-cap-weighted index is that as the stock goes up, you own more and more and more Tesla, Walmart, Apple, Amazon. And as it goes down, Enron, pets.com, CMGI you own less and less, and then over time, that’s an amazing trend following portfolio, the big winners generate all the returns. And so, maybe we have listened to both sides of this on the podcast that will adopt it, but I doubt it.
Colby: So you’ve talked about, I don’t know if you’ve had this happen before. But so what’s the plan if one goes public? Are you letting it ride? Are you selling right away? Do you have a plan?
Meb: Ideally, for me, and there’s a lot of caveats here is that each person has their own life situation. Ideally, for me, it would be a scenario where I don’t ever sell any of them. And it becomes this just 500 company portfolio. That’s like, I think we made an analogy at one point to like a vineyard, you have lots of vintages, each year you’re producing wine, some years the wine may suck, some years it may be really expensive, some years there’s a fire, whatever, some years, it’s world-class. But you also then have these companies that not only range in maturity of how old they are. So, some of them have now are eight years old, but others are two weeks old and also from market caps ranging from $2 million on up to $10 billion-plus. But I think the question you ask is a lot more impactful than the simplicity of it, which is the good news on this side and we talk a lot about in public market investing. We say 90 plus per cent of people, they spend all their time on the buy decision and then they figure it out as they go along on when to sell and we say that’s crazy. You need to establish sell criteria, even if it’s just rebalance, even if it’s a trailing stop, whatever it may be on all your public market positions, because otherwise it gets emotional and that creates huge problems.
On the private market side. You can’t sell them, they’re illiquid so they may just go to zero, which is fine. But often, even the ones that are in existence may just continue to operate for an indefinite amount of time. Usually what happens is they go out of business, they M&A, they secondary liquidity, they get acquired, or they IPO. There’s been a handful of IPOs, there’s been a lot that have been acquired, there’s a few that have gone bankrupt, there’s a few that have secondary liquidity and a little bit everything in between. Now, I’m at the point where I’m trying to recycle a lot of the gains back into the investments. I also have a growing family. We just bought a house and so there’s renovating a house, so there’s other expenses moving around too. But I think an important point of your comment is, let’s say you do have a massive winner. Let’s say you hit an Uber or something. And let’s say you’ve got $100,000 portfolio. And all of a sudden, you’re making these $1,000 bets, $1,000 bets, and all of a sudden, you have one company that just goes moonshot, and now it’s worth $100,000 or $200,000. So, your portfolio is like 90% one company, how should you think about that? And there are different thoughts on that. One is you just let it ride, because the 100 bagger was one to 10 bagger. And so to get that 100-bagger status, it’s got to move on the way there.
Another probably thoughtful approach that will resolve a lot of the stress for many people is to simply scale out a little bit over time. So, if it goes 50x, maybe you’re going to take a little bit off of the table because 100x takes them off the table because 200x takes them off table. Because the psychological attachment to something becomes really hard, particularly when it’s your entire portfolio. In some cases, where the math gets big enough, it can be life-changing. If you put five grand in something, the next thing you know it’s $500,000, or $1 million for many people that could change the trajectory of their entire life forever. And so, that decision becomes extremely emotional at the time. And believe me, think of something worse than a $5,000 position going to $1 million, you’re having the chance to sell it. You say no, I believe in this and let it ride and then it goes all the way back down. That’s hard.
Colby: A lot of crypto people feeling that right now themselves.
Meb: Yeah, the basis quote regret minimization, I think is a good hack here on how to think about it. So I like the idea, you can always when in doubt, go halfsies, you can kind of split the baby on what to do here.
Justin: I’d love to hear, Meb, have you get into some portfolio highlights, some specifics of great successes, great failures, things that taught you the most and your myth.
Meb: The one thing I love from the founder’s side is and we saw this recently, it’s not a company I invested in because I actually invest in one of their competitors, are the real-time glucose monitors. So, we invested in NutriSense. And listeners, it’s a little patch, goes on your arm and it tells you throughout the day, you wear for a couple weeks, your exact glucose levels. And it’s fun and insightful to see what causes your metabolism to react to certain foods. So, I didn’t know 40 years plus of being on this planet that french fries cause a massive spike in glucose levels. But how you pair the foods and the order you eat them, I think it’s pretty interesting. So I invested in NutriSense. But there’s another one called Levels and Levels, interestingly, he has done a lot of public fundraising. Now you can do the crowd fundraising where you raise $5 million. And so they’re very transparent. And interesting way to have your fans or your incentivize shareholders invest in the company too and then they can be motivated spokespeople. And so they, I think did a crowd fundraise across three or four platforms. But within those lines, I love to see the ones that provide a lot of feedback. Everyone’s not always crushing it, the founders, you’ll see like tons of updates when they’re doing well. And then sometimes the ones that are doing poorly just slowly disappear into the ether.
And if you’re a founder, the best possible thing you can do is fail with grace and humility, and treat the investors with respect because the investors don’t care. It’s like, they almost would immediately fund you again if you did a great job you tried and you failed. Because then you have all this experience as a founder, you went through the bad times, you have probably even more motivation to succeed the second time. But what the investors hate is someone who does it and then just hides in the closet and stops updating people and just disappears. To me, that’s really bad behavior because a lot of times the investors could help too. So, I think going back man 2014 was my first acquisition for a company shout out to Howard Lindzon. And so there’s a handful I do direct to just friends and family now of investments, but in their early days, that was the first one through Howie was a company, but I’m looking back in some of my favorite ones, like I said, good outcomes, but not world-changing. The old picture frame we used to have in the office that is the digital frame by Meural got bought by Netgear, which a lot of these you just wish they would stay independent. For me, the vast majority, a lot of these are podcast guests, by the way, PlushCare got acquired. That was a great guest. We’ve had certainly the crew from Grove on the podcasts too, they’re going public via SPAC certainly over unicorn status. That was, I think, one of my first five investments.
On paper, certainly, at least, like this portfolio has done exceptionally well. I think the IRR is probably north of 40%. But again, like, I’m very aware that we’ve been in the kindest environment ever for startups. And this will not continue necessarily but I found a lot of opportunity recently in emerging markets, I kind of ran the stats on the portfolio of where the companies are based on what gender or what ethnicity, every founder and CEO was. And increasingly over the past three or four years, to me, there’s been a huge amount of opportunity. We’ve mentioned Africa many times, also LatAm and Asia as well, even our close neighbors, Canada, but Canada and Mexico. So, to me, people think you can only invest in Silicon Valley, but there’s so many companies doing cool things elsewhere that probably I think is if we reflect in a few years, some of my biggest winners will end up being outside the U.S. I mean, Chipper Cash, Ham, was on a podcast in the early days. They’re well into arguably one of Africa’s, if not the number one most valuable startup, it’s up there. So looking beyond the borders, I think we talked about this ad nauseam on the public side, but certainly on the private side too.
Colby: I think it’d be fun going forward, every show we do we talk about any updates you have on portfolio companies. You’ve invested in that sort of thing. I think that’d be a fun thing to touch on going forward.
Meb: A hundred per cent agree with you. You got to be a little careful on making sure you don’t disclose any inside information. It’s not inside information, but just confidential information because a lot of these, they don’t want to inform their competitors or whatnot, but many of them are public about it and we can certainly talk about rounds as they happen. And I was just looking, I mean, despite the fact that markets are off to one of their worst starts ever to the year, I think I’ve already done a dozen investments in January. So, the markets on the startup side are rocking and rolling.
Justin: When you look at the overall environment, how do you establish your sense of where we are? I mean, with public markets, we talk a lot about valuations and trends and things of that nature, but how do you grasp where the environment is and what part of the cycle you might be in and how does that work into your process?
Meb: I think one of the ways you get around that it’s just like the public market investors. Like, it’s very clear to me public markets are expensive. Currently, the Shiller CAPE hit 40. I think the next 10 years is 0% real returns or bagel. And someone asked me the other day and we do a mailbag feature on the Twitter y’all so if you have a question, email or DM me with word mailbag and answer it on Twitter. And I said, there’s a couple of ways to deal with it. One, you just dollar-cost average. Like, if you’re 20 and you’re not retiring for 50 years, you’re going to get a blend of the good and bad valuations. And the best thing could happen is the market goes down 50%, 80% for you, because then you get the gift of investing at low valuations. So you could do nothing. That’s one. And so at the angel investments, you invest over the course of 10 years. It’s not going to matter. It’s also not going to matter because a lot of these companies are $10 million, $15 million, $20 million and the outcome is if they go to $500 million or $1 billion or $10 billion in market cap, yes, it does matter if you invested at $10 or $20 million, but not a lot. It matters if you invested $100 million versus $10 million, but the rounding error on the smaller side I think is less important. And so I’m aware and I talk a lot about it. I mean, sometimes the deals are just so dumb on the valuation. You’re just like, “Okay, that’s crazy.”
I was joking that it used to be like a 10 times revenue multiple on a lot of the SaaS startups, which then went to 20x and then is just like had gone even higher. On emerging markets and foreign it’s always a lot cheaper. Not always, usually. And then in the U.S., every time the market starts to get jiggy and get volatile, it seems to start to maybe correct and all the VCs start to panic on Twitter. Yeah. Remember even though the SMPs near all-time highs, a lot of stocks are down 40%, 60%, 80% in the tech world. So. I think that that healing has already started to happen.
Colby: Well, listeners, if y’all have questions, shoot us an email feedback at mebfabershow.com and Meb before we go, you got any good book, shows anything you’ve been reading, watching lately?
Meb: I’ll tell you what’s on my nightstand that I haven’t read. We talk a lot about “Power laws.” So there’s a “Power Law” book that just came out. I’m excited about. I have “All the Light We Cannot See,” “The Old Man and the Sea,” And what is the third one on my nightstand? I can’t remember the name of it. We just gave away like 95% of our books because we’re renovating our house. So, I did a big liquidation recently, but I’m looking forward to those in the coming weeks.
Colby: What about you JB?
Justin: Right now I’ve got a book I started, I think it’s called “The Story of Silver” by William Silber, came out a while ago, but getting into it and already reading some interesting things I really had no idea. So I’m looking forward to getting through that one.
Colby: I got to give a shout out to Mary child’s book “The Bond King” you’re having around next month. It’s about Bill Gross, it’s really good. So that’ll be a good one.
Meb: Looking forward to it. It’s also on my nightstand. Love it. Guys, look, this has been a blast we’re committing to not only every month in 2020, but in 2022. So we look forward to doing this next month. Listeners, you can find the show notes at mebfaber.com/podcast. Leave us review. We love to read them, give us any questions on feedback at the mebfabershow.com. Thanks for listening, friends and good investing. Podcast listeners will pose show notes to today’s conversation at medfavor.com/podcast. If you love the show, if you hate it, shoot us feedback at the medfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe the show anywhere good podcasts are found. Thanks for listening, friends and good investing.