Inside Marc Andreessen & Ben Horowitz’s Multi-Family Office

0:00 Is it true this is the multi-family office of Mark and Ben? It's a multi-family office for [music] the principals here and a number of founders, the many in fact backed by the company. SpaceX is rumored and reported to to have nearly a two trillion dollar IPO incoming. How do you prepare early employees and founders for these large liquidity events? >> It'll be an interesting test of the markets if they can sort of I mean that would be the largest IPO ever for the markets to digest that. It'd be really interesting to watch. Most of the independent firms have spun out of the banks. Banks themselves don't train people to be professional investors.

0:36 These people are trained to be service providers. [music] They're trained to be responsive, helpful, but actual investment acumen when you're at a large bank sits in a separate group. You're rewarded as a wealth manager by how much you grow your book of business. You're never trained to be an investment person per se. So I'll see someone with their very very first liquidity, they take it and instead of doing something a little bit safe in case there's a rainy day, they turn around and they'll put it in a bunch of very early stage startups. You just sort of sit there and you're like, "Listen, if you're going to do venture, [music] at least try to do it in a systematic way. Do not take 80% of what you just got and hand it to your three friends." Almost always this ends in tears.

1:17 >> [music] [music] >> Michelle, welcome to sorcery. Thank you. I think this is one of your first podcasts in a very long time. Yep. First modern podcast. >> First modern podcast. And so you're the CIO of a16z Perennial. Is it true this is the family office or multi-family office of Mark and Ben? It's the multi-family office for the principals here and a number of founders, not necessarily being backed by the company but many in fact backed by the company. So what's the structure of Perennial? Okay, so I I think the reason why we built Perennial or why we're building Perennial, it's about four years in now.

2:03 Uh was a reflection on what's happening in the wealth management industry. I think for starters, the principals here, Mark and Ben included, um had been served by more traditional wealth management firms and they looked to the LPs of a16z and saw, you know, the big sovereign wealth funds, the the big pensions have very high-end professional investment teams come and then they look at the wealth management side, uh how they were being served personally and, you know, frankly I think most folks would agree they they felt sort of underwhelmed with the quality of the investment advice and the investment acumen. Not the whole service provision, everything, but specifically on the investment front.

2:46 I mean that was one issue. Another issue or another point obviously is to build a community around a16z. a16z is all about uh its community and so this is another way to help founders uh in a different dimension of their personal life, right? So if you can take that burden off their off their hands, you know, ostensibly they can focus even more on the business. Uh and and so it's it becomes much more of a a lengthier um relationship with the founders because obviously you start when you invest with them in their startup, but even post liquidity, uh instead of having sort of an artificial end point of your relationship with them, you can continue uh helping them think about life after liquidity event, right? In terms of philanthropy, asset management, legacy, all those kinds of things.

3:37 I want to get more into the Perennial strategy and structure, but I think before that it would be great to just dive even deeper into the state of wealth management today. What have been the biggest problems drilling down further into the issues that you've seen, how wealth is managed, maybe the different types of wealth over time, but structurally like what are the biggest problems there? It's really interesting. So there are basically there two approaches you can use to have your wealth managed if you're wealthy individual. One is you can go to the traditional RIA or wealth management channel.

4:08 And I'll talk about that in a second. The other one is you can go to traditional asset managers. Think, you know, the large asset management firms you know of, hedge funds, PE shops, things like that. And both those approaches I think have their own sort of problems when you're dealing with an individual that has an institutional amount of wealth or will and are taxable. Right? These two these two the confluence of these two effects uh means that the sort of the two standard approaches I just described aren't really great. So wealth management, traditional wealth management, most of these firms, the independent firms have spun out of the banks and the banks themselves uh don't train people to be professional investors, right? They these people are trained to be service providers. They're trained to be responsive. They're trained to be helpful, but actual investment acumen when you're at a large bank sits in a separate group. And you're rewarded as a wealth manager by how much you grow your book of business.

5:09 So you're never trained to be an investment person per se. And then when you spin out, therefore, you create your own large independent firm, it's again not a focus, right? And so if you are so the way I would characterize a lot of that product or that offering, I would call it mostly retail product but with a veneer of very high-end service when it comes to investing side. Of course there's all the ancillary services around, you know, household staffing and finding dog walkers and nannies and things like that, right? But um but but by and large the investment side of the function I think is is just not of the quality that someone uh with an institutional balance sheet should expect or deserves.

5:49 Right? So there's that that that side. By the way, there are also fee structure misalignments. So um and this is a tangent, but I think it's an important one, which is most of these firms rely on a relationship fee, which is a flat fee that you pay no matter what you do. And let me ask you the question. If I if you're paid the same to do something easy or something difficult, I think human nature is such that you'll do the easy thing, right? And so you look at a lot of these firms that have the the flat fee structure and you look at the at the portfolios that come to us. We we see a lot of them coming in and I would characterize those portfolios as very simple, not very sophisticated. Um very very focused on just standard market betas, stocks and bonds and things like that. Not a lot of focus on on alternatives.

6:38 And the reason being is for you to build an alternative offering, you're going to have to go hire professional investors. And professional investors are paid well. They have growth ambitions. It's very difficult for them to fit into an organization that's not focused around investment, too. So I think there's a lot of challenges even if you wanted to grow an asset management or investment function inside an RIA. I think it'd be very difficult. So so the the flat fee arrangement, you know, means that people do not invest in building out these alternative teams. It's a lot of work. It's a lot of effort and it's a lot of expense. And if you make the same 40, 50, 60 bips doing that or just buying stocks and bonds, you're going to buy stocks and bonds, right? So by and large, so that industry I think is not teed up for it, you know, a sophisticated portfolio that is deserving of someone that's got 50, 100, 200 million, let alone a billion dollars, right?

7:39 So that's one route. And then the other route is the traditional institutional asset management route. And those guys, their biggest clients are nonprofits, right? So they're pensions, endowments, foundations, sovereign wealth funds. All these people don't pay tax. So they are not at all focused on the taxable element and if you're an individual, uh you're paying, especially in this state, uh you're paying 50 plus percent tax. So the easiest alpha, to use a, you know, an investment term to get is a tax alpha, right? And they are not, these institutional asset managers, because most of their clients are not taxable, they're not even attempting to to optimize after-tax return. In fact, you could even argue that from a fiduciary perspective, they're not allowed to optimize after-tax return because they're the vast majority of their clients care about pre-tax return.

8:28 So they're structurally not able to serve you. So there's this weird no man's land where you have you know, taxable individuals that have and deserve and sort of an institutional quality portfolio build and an asset allocation and yet neither of the two standard channels really really deliver that. And I I would add in sort of subscale endowments and foundations also in the mix because they they uh while they uh can probably access the institutional, they may be too small and they may be cut out of certain elements. So having sort of a a different approach could also be useful for them.

9:03 Dave, who connected us and thank you to Dave for the connection, he wanted to hear what you've seen throughout the different generations of wealth. I mean we've come a long way. It was a lot of industrial, a lot of like big bank, big kind of industry types of wealth built over long periods of time to now what we're seeing and what is the bread and butter of a16z, very fast wealth, billionaires, billion dollar exits very quickly. And part of that is of course these different cycles of innovation in AI and the proliferation around there, but what have you seen throughout your career through these different types and how has management changed alongside that?

9:44 >> No, it's super interesting and I think I can tell when I meet a family what region they're from because these waves affected different areas, right? So the industrial wave was the Midwest. If I meet a Chicago family and these are I'm gross generalizations, but nonetheless, if I meet a Chicago family, very often they've sold their business maybe one or two generations ago and the family business has become managing the family's assets. >> Mhm. So, they're very well versed in all the terminology. They understand the asset classes.

10:18 Uh and they ask pretty sophisticated questions around that and they're very focused on the performance and so on and so forth, right? So, I would put that as like one of those earlier waves you're talking about, right? And then you come to the West Coast and your point, it's more recent wealth. Person who generated the wealth is the person you're interacting with. And so, that person is going to have a lot of business savvy, um intellectual insight into how things work. So, they're going to be very curious about this industry and about how to do things, but they won't necessarily per se have an interest in having studied it the way a multi-generational uh family that had a industrial exit two generations ago would have done because it's not their full-time job. It's not their passion.

11:00 Right? So, they're often facing the choice of either creating a single family office which I think is very difficult and I can get into that or joining, you know, a multi-family office. And then when they join the multi-family office uh they're facing a number of questions that I think are are not obvious to answer which is what am I paying for? What am I getting? What do I want? And because they're not necessarily knowledgeable about the industry, they focus on they fall back on things they understand. How quickly does someone answer my email?

11:31 Um how helpful are they when I'm in a pinch? Which are important things, but not the only thing, right? Assessing the investment performance is very important because just a couple hundred basis points of extra uh performance over the lifetime of someone could mean hundreds of millions of of dollar more that they could then go I don't create a charity to do something with or something like that. So, that part I think is lost sometimes in the in the translation.

11:55 >> I want to get to the family offices point, but I do remember when we were first talking, there is a big difference between these other wealth managers that do allure you with all the customer service that kind of takes part and takes you away from the actual performance of the portfolio. So, what have you seen there? Yeah, so this goes back to sort of that flat fee relationship fee kind of arrangement which and that flat fee is an AUM-based fee.

12:20 >> Mhm. So, if I'm selling you a bunch of services, why am I charging you an AUM fee? Uh and you know, I sort of I like to make funny analogies. One of One analogy is let's say you brought your car to get your car fixed and the mechanic comes out and says, "Well, to repair your car, it's 10 basis points of your of your balance sheet." Like I mean, I think we'd all react like what are you talking about, right? There's an hourly wage. You work 3 hours, multiply it by three, that's what you should pay me. So, these services in my opinion should be fee for service, right? But because that's of course less profitable than having an AUM-based fee on someone's entire balance sheet um you you charge that fee. You go through the motions of the investment management, but you view that as a cost center.

13:02 And it like you do the services, right? And so, that's why the portfolios often end up being sort of simpler uh and less sophisticated because you you're not incentivized to invest in building out the alternatives teams I mentioned. Uh these are people who are hard to find. You have to manage them in a different way than you would a more junior resource. Um and and you know, constructing these portfolios, the proof points take time. You're building a VC portfolio. You're not going to find out in two years whether it's done well, right? You're going to find out in 10 years. I don't know that um a lot of these firms have the patience for that, right? So, uh for me what was very important and by the way, if you don't build a professional investment team then you are you by default have to invest in other people's investment firms, right? So, it becomes a pure fund to fund approach. And so, there's two dual layer of fees, so it's very expensive to do, right? So, there are fallout implications from not building an investment team in-house. It forces you to become a fund of funds if you are going to do alternatives.

14:03 And so, that's a high fee uh kind of setup. So, very important for me from the get-go here to sort of hire people that were professional investors by trade first and and professional investors have a very specific definition in my mind. It's someone who at some point in their career was paid purely based on the performance of their investments, right? You Your investments are up 20% this year. Here's your money. Thank you very much, right? Um if you have those kinds of people on your team you now can underwrite your investments yourself or you can go hire a third-party manager, but you're not forced to just go down the third-party route. And so, you can save a lot of embedded fees for the things you decide to do yourself. And I'm not suggesting you should do everything yourself cuz it's too hard. There are too many things. But there are certainly some things you can do yourself and therefore really reduce the fee load. So, you increase the alpha to the client because, you know, you're you're not passing through these fees.

14:59 Like a standard sort of endowment style approach 50, 60, 70% alternatives on look-through basis, your fees will be 3 or 4% a year. So, that's a huge headwind. If you can get rid of some of that by having a professional team in-house and not always just hiring third-party managers, that can you know, maybe you cut that in half. It's a couple hundred basis points of alpha right there. So, the structuring is very important in my opinion how to do this right. And then on the family offices point, family offices are taking off.

15:30 They're becoming a new hype wave. They're They're all over the place, but you're saying single family offices are very difficult. Why is that and why should people avoid doing that as a first step? Um I mean, the allure is cool. I have my own family office. But you know, what are you trying to accomplish? So, if if what you're trying to accomplish is have someone help you a little bit with your sort of financial reporting and all that's you can call that a family office. I guess the definition of a family office is very broad, so it could include all sorts of things. But if you're trying to build a multi-asset class portfolio, global multi-asset class portfolio, you're going to need to hire a bunch of these sort of professional investors I mentioned. I don't know, you need five, six, seven of them. Different asset classes. You've got you know, you've got fixed income obviously, stocks which are, you know, more straightforward I say, but then you've got venture capital, private equity, real estate, real assets, credit. And all these things are specialties that require people. So, how are you going to do that and pay these people uh if your balance sheet isn't very big? And I mean, billions, right? Otherwise the compensation you're paying to this team is eating up whatever benefit you might be getting, right? The other challenge I found is that family offices have real trouble retaining the talent.

16:42 Because, you know, you hire someone, they're ambitious, they have a career path. The The principal of the family is signing up really to be a manager of an asset management company. That's really what they're they're signing up for. I don't think many of them actually realize what they're signing up for and I don't think they want to do that. Right? So, they don't want to manage me uh you know, meet me daily or twice a week, let alone a broader team. And so, it it's very difficult to attract the high-end professionals cuz they're just going to be sort of in a vacuum often not meeting the principal. So, it's a very um difficult thing to execute. Some people do execute of course, but they have very large balance sheets. Uh they have a long-term horizon and they're committed to building you know, a properly a proper bench on their team, right?

17:29 Uh so, I think that's one issue. The other issue is a lot of family single family offices you hear that the motivation is they build it to keep the family together. And and then you witness the statistics at least show that when the patriarch or matriarch passes away, very often the family office falls apart. Either the investments are completely turned around and the things are liquidated in a hurry that results in large losses by the way where the beneficiaries that sometimes we buy those things.

17:58 Uh or or the the kids or the heirs take their money and go their own way, right? So, the very sort of conceptual underpinning of why to create a single family office seems to fall apart a lot, too. So, there's multiple challenges with trying to do a single family office, I think. Again, it depends how you what you want to execute with the single family office. Sorcery is brought to you by Brex, the financial stack trusted by more than 30,000 companies including one in three venture-backed startups in the US. [music] Nearly 40% of startups fail because they run out of cash.

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19:46 At what level of wealth should people start thinking about going the wealth management direction? Wealth management as opposed to single family office. >> Yeah. Well, I mean for wealth management, of course there are firms that cater, you know, from small amounts all the way to larger amounts. But for a type of wealth management firm that I'm talking about, the type we're building [clears throat] here at Perennial that has a lot of investment expertise, 25, 50 million dollars would kind of be the minimum, really. But but I would say it's really more for the centimillionaires and billionaires who have, again, you know, uh an institutional time multi-generational time horizon. So, they're they're more like an endowment than they are like an individual. [clears throat] How many families are you working with right now?

20:32 Uh well, we're purposely keeping it small. Because another thing is we really want to be customized uh and focused on the individual needs of the families. What you'll find, again, in the industry is a lot of folks go by playbooks. So, they'll categorize you as a certain type of family in terms of your risk profile or your liquidity or your balance sheet. And then there's a standard program that's put into place. I'd say that's very common.

20:57 Right? We don't want to do that. We feel like the people we work with are people who have multi-generational wealth anyway. So, they're they should have a custom built asset allocation, custom built investment program. A lot of work around their concentrated stocks often they come with a lot of concentrated stock. And so, we built a team around that. Uh and so, we only have a couple dozen families that we work with in that sort of overarching quarterback of everything.

21:24 Right? >> Is that the main difference between a16z Perennial and let's say an Iconic? How does it fit within the broader theme of these Silicon Valley oriented firms? Um I think the Silicon Valley oriented firms, for the most part, again, are trying to be a full stack offering of all the services. Um and so, you know, with a certain amount of revenue, there's only so much you can build in-house, right? So, a lot of these firms do not have professional investors. So, I I often ask people as a quiz, um how many professional investors do you think are in, you know, RIA XYZ?

22:03 And uh and people will answer I mean percent, right? People answer me 20%, 50%, 30%. But uh the number often is zero or one or two people. Um and so, the that's the big difference between us and then many of these other firms. With so many large wealth creation events coming up, SpaceX is rumored and reported to to have nearly a two trillion dollar IPO incoming. Yep. One, what do you make of that? And two, how do you prepare early employees and founders for these large liquidity events? Well, look, I think I think it'll be an interesting test of the markets if they can sort of digest I mean, that would be the largest IPO, you know, ever, right? And so, for the markets to digest that would be really interesting to watch. And I think there's a lot of other very large startups waiting in the wings who will be watching this super carefully, right? Because if it works for SpaceX, maybe it works for me.

23:01 Uh in terms of preparing, I think, you know, again, if you're an individual with, you know, taxes, structuring your estate, structuring your trusts is very important pre-IPO. And then post-IPO, it's all about how do I diversify uh gradually? And I would not purport or claim to know more about SpaceX than someone that's worked there 20 years. So, I would work with that person and ask them, you know, what do you think the prospects of SpaceX are? I would not go in suggest they dump SpaceX 100% immediately and go buy stocks and bonds, right? Sure, part of their strategy should be to diversify, but part of it should be to hold on to that stock long-term and and think about how to maybe even monetize the volatility.

23:43 So, we've we've built some options programs and things like that for people here to monetize these stocks that are volatile by nature. And so, you can monetize that volatility without necessarily exiting the stock. So, there's lots of interesting strategies you can do with someone that has a concentrated stock solution a concentrated stock position. It's just so interesting cuz I I think um I I've talked to several people in LA pertaining to this IPO. I've talked to Shawn Maguire of Sequoia who they've invested billions into SpaceX and Elon companies. And then I've also talked to engineers and I've talked to people that have been at SpaceX. One of the themes that I've seen throughout this is that there are not enough wealth managers.

24:25 And there's not enough wealth managers with this family office type of expertise, either. And so, there's a little bit of like an incoming drought for a lot of demand. And I know SpaceX is not only LA, but it's also Texas. And there are definitely differences there. But in terms of that, what do you make up of like where should they go? Because a lot of these engineers and other professionals there are not in this world, they're ill-equipped to to assess the options. And so, often they end up in places they shouldn't, in my opinion.

24:59 Um and so, the challenge for them is to even if this is not your passion, please invest time enough to understand the space. One of the things I always suggest to people is look at the pedigrees, the education, uh the employment history of the people you're hiring. Right? If they've never really done, you know, been professional investors, then don't look to that firm for professional investment advice. Look to that firm for services. Right? So, I think just doing educating yourself enough about the industry is a really important first step to even try to attempt to to, you know, as often people say, they get a referral. Oh, my buddy uses so-and-so and they're a nice person. Okay, well, I'll go with that.

25:38 And and you know, I always like to make medical analogies here because it sort of highlights how sort of, I guess, ridiculous that decision-making process. Let's say you needed a you have a horrible cancer and need a big surgery. Are you simply going to ask your neighbor, "Hey, uh you do you know some a good brain surgeon?" And they're like, "Oh, yeah, you know, so-and-so down the road is a great brain" No, right? You're going to go read the hospital reports and find out which surgeons have done the surgery the most and, you know, do the same thing here. I mean, your your your wealth is the product of your life's work. This is not some it's a very important thing. So, invest the time, please, to sort of understand what you're buying before buying cuz I I'm at the receiving end of that a lot.

26:17 I see people they go somewhere and then they come to us. Mhm. And they say, "I don't like this." And you ask, "Well, why did you pick that?" And the answer always is almost always is, "Well, I I my neighbor or my friend or a colleague." Right? So, so if if you have any influence on this, tell people do just a little homework, right? How easy is it or how hard is it to switch over to different firms? Super hard. Really? And this is part of the the game.

26:47 So, um you're you're with a firm, you know, all your account numbers, you know, all your wiring instructions, they know all your different trusts, your trustees, your accountants. So, when you are doing something, they'll report back to the accountant. They'll you [clears throat] need to send money, they'll do the wiring instructions for you. The industry is set up to sort of trap you. Right? Even the large um uh the large custodian firms, I don't know if you it's hard for people to realize this, but if you're as an individual in these custodian firms, uh you know, the brand names, I won't name any names, but you know who they are.

27:22 You can sort of do a lot of stuff yourself, self-initiate, self-service. When you move under the RIA platform, those those features are disabled to sort of keep you more um locked into that ecosystem. So, it's very hard. It's daunting. And this is why there's such a race to be the first uh um firm that someone that recently had liquidity. The this is where the fight is. Like, "I heard you had a liquidity you're about to have a liquidity event. Me, me, me, pick me."

27:50 Because once you've picked the person, the odds of them moving again are extremely low. Right? And so, that's where the all the competition happens. When they essentially onboard, I'm just so curious about this. Like, what products do you show them? And where are their Where are their barriers for like, for instance, do you go into art? Like, for like these typical portfolios, how do you set them up initially? You said it's kind of like a gradual process, but like what are all the offerings and how do you balance it?

28:24 >> It is a gradual process. So, you know, I think we're a very open book and so, we'll tell people frankly that they don't need to necessarily put all of their assets with us, right? Which again is not what most people in the industry will say. Most people in the industry will say, "Hey, you should put everything with me because otherwise I won't have an insight on what you're doing elsewhere and therefore I won't be able to manage your things optimally."

28:48 But that's not true. You can have the firms communicate with each other and I do this regularly, right? But uh and and so, you you know, again, if you went to a traditional firm, they would start with more of the stock and bond mix. They might add a little bit of some sort of credit. Um we sort of tend to work with people more in a linear fashion acknowledging that their portfolio is going to change over time, right? So, we're not focused simply on, you know, exiting that position on day one, the the concentrated let's say it's SpaceX.

29:18 We're not just simply going to be like, you got to sell all of SpaceX. It's okay, SpaceX, if you hold onto it for 20 years, you know, here's what the outcome might look like. By the way, we built a lot of tools to help forecast these kinds of things, which is again empowered by the fact we have professional investors who know how to do that. Uh I mean, a lot of it I'm sorry to be repetitive, a lot of it falls back to that. And and then we we will do we will um customize based on their needs. Like, so yeah, strange alternative strange, unusual alternative asset classes are definitely part of the mix.

29:48 We have some clients who do a lot in the art space. Um I'm not an art specialist, but I know art specialists that can help you, right? So, so we're very very flexible. Um but the point is the whole mix of things has to make sense. Mhm. Right? And so uh I'm not simply going to be and this is where um giving advice is an important part. A lot of again firms will present you alternatives. They'll say you can do this or you could do that. You tell me what you want. And they're doing this for various reasons. One, they may not actually have a strong opinion. Two, uh it's liability. If I tell you do this and you do it and then you're not happy, well, I told you to do that. If instead I gave you three options and you pick B, I didn't pick B, you picked B, right?

30:32 So, so we're very much into giving advice. We'll tell you, look, if you're going to put a lot of art, you might want to counterbalance that with this and that to make the whole portfolio work, right? So, we sort of put ourselves out there, but I think a lot of people have desire and hunger for that. They really want they don't want to sort of have to learn all these things and make the decision. They want someone who tells them you should do this. Again, let's use a medical analogy.

30:57 You know, I have cancer, you know, okay, you need to do a surgery, right? Not well, you know, maybe you could do a surgery, maybe you can drink some herbal teas. You tell me. Now, you wouldn't be satisfied with that with the physician. Why is that okay here? Right? So, you want again a I think you want a a professional telling you no, no herbal tea for you. Like, the tumor's big. Herbal tea is not going to work, right? You need a surgery. Right?

31:24 So, that's one of the things we pride ourselves in. I'm so curious about your stance on the current markets and the current market volatility. So, one we have AI disrupting public markets, but we also have wars and geopolitics and I don't know, oil. And so, how do you manage through all this? How do you provide assistance to the families, to your clients? And one, are you actively managing their portfolios? Two, are you helping them navigate through this because I'm sure they're seeing their wealth go up and down in different directions.

32:00 >> Yeah, I mean, I always tell people one of my favorite sayings is volatility is not the enemy, right? A lot of people fret, volatility, I'm scared. Um but if you have a deep balance sheet and you've kept um your portfolio at least somewhat liquid, volatility is a huge opportunity. It's like a fat pitch, right? And so, you get assets that go on sale. You know, big equities, you know, stock markets every four, five years, there's like a 40% drawdown, right? Blue light sale.

32:29 You should have flexibility in your portfolio to take advantage of the blue light sale and you should have your advisor call you up and go, "Hey, these things are 40% off. It's time to back up the truck." So, yes, we do do very active um inner interaction with clients on that front. How much do you like to put in cash and real estate and all of these other kinds? Real estate's actually for taxable individuals is a really um very cool asset class because um it's uncor- So, if you're let's again, you're SpaceX person, right? You have a lot of stock market risk factor, right?

33:06 So, if you take real estate, real estate's pretty uncorrelated to that, so it diversifies you. And then a lot of wealth in this country, a lot of wealthy families made their fortunes with real estate, right? Including the president. And why is that? Because the the entire banking system and taxation system was built around real assets. When banks and and law and law all these laws were built in the '20s, '30s, '40s, all there was was real assets, right?

33:34 People weren't there were no internet companies. They were buying buildings, factories. So, the tax code is very beneficial to real assets and you can therefore get a solid teens return on a tax adjusted basis out of real assets and real estate. So, from to me it's a very again, if you've got the ability to stomach the illiquidity cuz buildings don't trade like stocks. Um you should be holding a lot of those in your portfolio. So, yes, it's a it's an important part. And then cash or very liquid bonds, um people don't like bonds for the return profile. They say, "Well, why would I own this thing? It returns 3 or 4%." And my answer to that is you're not owning it for the 3 or 4%. You're owning it because it gives you that flexibility.

34:20 It gives you that option value liquidate that uh and go into something else very fast. I remember during the the global financial crisis, you know, I worked at a at a hedge fund. The only thing we could sell was treasuries to raise money. Noth- nothing else was trading. So, having tre- a treasury kind of liquidity buffer, super important. You can go sell those treasuries even when there's a horrible war or something, someone will pay you cash for that. In fact, they may pay you more than they would have before because bonds is a safe haven asset. You take that cash, you go buy the distressed asset, right?

34:54 We should talk about taxes. Yes. Taxes are probably one of the biggest talks around town, especially in California. Some people are like, "Oh, well, you made so much money, like you get to choose where you live and if you want to live in California, that's the purpose of making a lot of money." Some people will say, "Oh, I made a lot of money. I need to go somewhere else so I can save, you know, a couple percentage points." And I don't know, live somewhere for three, four years, something like that. But what is your main stance on taxes and where you live cuz we can also get into this afterwards, but the billionaire tax bill, that definitely I mean, I don't know if this was based on principle or like a little bit of a protest, but I think it was over trill- a trillion dollars left the state of California.

35:40 So, how do you feel about taxes? Well, I mean, no one loves paying taxes unless they feel they're getting value for it, right? And I think when you hear people complain about it, it's I don't get value, right? You know, my schools aren't great, the roads are in disrepair, whatever. You hear these complaints, right? So, I don't think anyone's necessarily averse to paying tax if they feel they're getting value for it. And a lot of people who leave feel they're not getting value for it, right? So, that's one.

36:04 Um two, there's a sense that the the revenues are mismanaged and I'm you know, I'm not going to get into all the waste and fraud that happens, but we all know a lot of that happens, right? But there's a lot of and moving is a very draconian move, right? Because your family, your your friends and all that. So, some people can do that and and want to do that. And by the way, it's not easy. You have to sort of really move.

36:29 So, leaving your house here, your main house and moving to Texas or Florida for for a year or two with the intent of coming back doesn't qualify, right? If you do come back after a couple years, the tax authorities here say, "Look, you never sold your house. You never had the intent of leaving the state, so you owe us tax." So, you really have to sever ties. Like, you have to get your you have to of course buy your principal residence, sell your principal residence here. You've got to register to vote. You've got to have all your physicians there, all that stuff to really prove to the state that you've left and that you have no intention of coming back.

37:02 So, the move isn't easy and it's a draconian change. Some people though, if you have a really big balance sheet, it's worth it, right? Um but there's a lot of things you can do with your portfolio to mitigate tax, too. So, before jumping to, you know, I'm going to move to Puerto Rico or whatever, uh first think about how you structure your your investments, your portfolio. So, there's all sorts of uh very clever ways to use the qualified business uh tax exemptions, the QSBS.

37:29 So, you can create several trusts. Each of those trusts gets the now $15 million exemption. Before it was 10. So, you can you can do that. Married couples now can get both uh exemption. So, there's a lot of things that if you do on that remember we were talking about the pre- IPO on the pre- IPO prep, you can do things to really mitigate tax a lot. Uh then then you can use the proceeds and invest them in tax advantage things like real estate um if it's managed the right way, that is. A lot of real estate unfortunately is managed in a way where the buildings are sold a lot and that generates tax.

38:03 But if you hold the buildings for a long time, uh you can use the depreciation credits and never pay tax on the income you're getting. So, so there's a lot of things you can do like that um before you move. And we spend a lot of time obviously thinking about that. Pre-liquid event and post-liquid post-liquid event, there's also a number strategies you can use to generate losses um whether the market is up or down. There's some sophisticated strategies that use leverage.

38:29 Using leverage is not always easy because leverage can be dangerous on a portfolio. Luckily, we have a couple people in our in our team that worked at hedge funds and are used to leverage. So, there are things like that you can do before the pull the plug, I'm moving somewhere else. But I see a lot of people moving though, to your point. Really? A lot of people moving. In fact, there's been a bit of a boomerang. Some people have moved and then come back because they they in their minds they thought that saving several percentage points of tax was worth the move.

38:58 And then when they moved, they for personal reasons they're like, "Look, I saved money, but it wasn't the savings weren't worth the cost to me personally." Mhm. Right? And these are you can't it's very hard to predict how you're going to feel when you move somewhere else cuz you don't you've never lived there, right? So, it's I think it's very It's a valid point. VCX by Fundrise, the public [music] ticker for private tech, allowing investors of all sizes to invest in venture capital.

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40:31 Founders, ship faster on Deel. Set up payroll for any country in minutes, hire anyone anywhere, get visas handled fast, and get [music] back to building. Visit deel.com/sorcery. That's d e e l.com/s o u r c e r y. Chamath recently went viral for a tweet about capital losses because of the destruction his SPACs have incurred on people. What is your viewpoint on capital losses and how do you use them to your point of offsets? So, we use them a lot, right?

41:07 Capital losses are the are the core behind all those sort of liquid strategies I mentioned you before, the the leverage strategies and whatnot. Um there's some nuances in the tax code like you can't use a loss that comes to you personally unless you happen to be a professional in that industry. So, you can only use a small part of them. So, the way to use a loss is inside a fund vehicle that generates its own gains that can be offset by its own losses. Then you don't have to worry about extracting the losses and putting them on your personal balance sheet and not being able to use them.

41:42 So, if you owned a SPAC or something like that and it went to zero, you may not be able to write that off, right? But if it's sitting in a portfolio, in a fund structure, usually a partnership, you're going to have other things inside that fund that are going to be offsets naturally so that you can shield the total result of that fund from tax. And that's exactly uh I think the right strategy for real real assets and real estates where you you're generating these capital losses, you're generating depreciation losses, um and you use those to offset the income inside that fund. And then the total you get at the end has been tax mitigated.

42:19 Right? SPACs were a huge trend. Secondaries have taken storm. And so, with secondaries, we're seeing not only lots of volume in secondary transactions, which is good, I guess, for growth investors cuz that was really quiet for a while, but we're also seeing these multi-layered SPVs proliferate and cause sometimes scams. But in terms of secondaries, what are you seeing and what are you advising your clients on with these? So, it's it's a fascinating space, to your point.

42:49 Um it's a little bit like the comment I made before where if you don't have professional investors on your team, uh you have to build a fund of funds to invest. It's the same idea with these these uh secondary vehicles. I'd say be very, very careful what you're doing. Um attorneys love to use this term "perfect your ownership interest." So, I'd say we're going to use SpaceX again since we've been on SpaceX. Let's say you've been working at SpaceX years and you create your own Molly Corp and you put your SpaceX stock in that.

43:20 SpaceX doesn't want you, or most companies, I don't know the particulars of SpaceX, don't want you to transfer your stock to an external person, right? So, what you do is you transfer it to your own entity and then you sell shares in that entity other people, right? And it's not very clear and and you often charge fees, right? So, a lot I mean I mean it's sometimes quite egregious, to your point. You're being paid 2, 3, 5% for the right to buy something.

43:45 Um but the problem is the stocks are sitting in that entity and you are the manager of the entity, the employee is the manager of the entity. Um and so, they're the ones who ultimately, even though they've written a promise saying when there's a liquidity event, we'll sell the shares and hand you the the money, uh I've seen personally in cases where um the stocks are in that entity are sold by the individual managing the entity.

44:08 And they don't need their seek approval from the people who invested in it, right? So, be really careful when you go into these private entities. Any private company has its own set of rules. You can't sort of use intuition well, that's fair or not. Whatever's written in the contract is what matters when you go into private. So, and and the vast majority of the volume goes through these sort of questionable SPVs. Directly going on the cap table is what you should be trying to do, but that's extremely difficult, right? Obviously. Right? And so, that's where I would caution people really be very careful. So, we spend a lot of time when we see these things doing legal diligence, which is expensive.

44:47 You know, you're going to pay an attorney $20,000 to review this thing and make sure it's bulletproof. Do you really want to do that if you're going to be putting, you know, 500,000 into this? So, um beware. Will your clients take these SPVs to you to manage for them or do they just kind of do them on their own? We've helped a couple clients try to build some, um but most of the time we're actually trying to build one for our clients to get into a particular company.

45:16 >> Mhm. Yeah. Right. It's been interesting to see. I did an interview series at Anduril and one of the questions I asked Marc Andreessen and Brian Schimpf, the CEO, is there is like a dark pool of fake SPVs going around for Anduril. And so, with those, are you just going into deep legal matters and paperwork to backtrack and see if that is a viable vehicle? Have you seen any issues >> into a full-on fraud before, but, you know, the first thing we do is we pay a background check company to see, again, using you as an example, did she actually work at SpaceX? What did you, you know, So, that's step one. A lot of people don't even do that, right? Ask your friends and clients, how many of them have done run a background check on the on the person running the The answer's going to be no one, right? So, just to get this is back to my just do some basic homework if you're going to do these kinds of things, right? Or or get someone to do it for you.

46:13 Venture capital has gotten some heat for not having the best returns, not being the best asset class. How do you manage that kind of alternative within these portfolios? What's your view on venture capital as an industry? No, that's a great great great question. >> No bias, of course. Zero bias. Zero bias. Um look, if you look at the different asset classes and the dispersion of returns, >> Mhm. right? Like the worst manager to the best manager, venture is the biggest dispersion of all the asset classes, like compared to private equity, credit, or hedge funds, or whatever.

46:52 And so, to your point, that means that who you pick is super important, right? If if the dispersion was this narrow, it kind of wouldn't matter, right? You you kind of know what you're going to get out of that asset class and doesn't When the dispersion is this wide, um and and the stock market performs, by the way, somewhere in the middle of that. If you pick the bottom half, to your point, well, that's a problem.

47:14 You should have just avoided the illiquidity, avoid the fees, and bought, you know, QQQ or something. Right? And so, I think picking the right managers and and being exposed to right um people there is more critical than in any any other asset class. Um There's a couple of other interesting observations. I'd say by and large, the industry um has not tried to create entity value, right? What do I mean by that? They're often focused around one individual, and if that individual leaves, the firm is gone, right? Or the firm the firm will have to reinvent itself, right? So, and because the person has their name on it, they're the only one there, and they've not built sort of an institution around it, right? And so, the longevity of that entity is questionable, and therefore, it doesn't have entity value in and of itself, right? Of course, the funds have value, but the entity itself doesn't. And what's really interesting about a16z, personally for me, one of the things that attracted me here, this firm has entity value, right?

48:14 There's a lot of people who own this firm. Uh it's building, uh you know, a comprehensive set of products and services across different asset sub-asset classes, right? Be it crypto, AI apps, AI infra, whatever. Um and it also has expertise around fundraising, HR, systems, go-to-market. And so, the whole thing is highly valuable. It doesn't just revolve around It's not 10 or 15 people with one person, right? So, I would say if you're going to, you know, invest for the long term, try invest in firms that are trying to create entity value because that's a sign of longevity, right? The firm's not going to disappear when someone decides to hang up the cleats, right? Um I think the other interesting thing is as um the check sizes to to participate have gotten bigger, um scale has become more important, right?

49:05 All asset management industries have some scale benefits to them. Um venture traditionally had less and now has a lot, right? So, if you're going to back a new AI startup, you can't show up with a million-dollar check or two-million-dollar check, but it's useless. Or or let alone, you're going to build a an AI chip where the tape out for one chip is $100 million. And how are you going to participate in that, right? So, you need to have large funds. So, that's another thing I think all of a sudden it's become very clear that you need to have there's been this dispersion and you need to have a bigger fund, right? What's the biggest lesson that you've learned from Mark and Ben?

49:47 The biggest lesson I learned from Mark and Ben. Actually have an interesting one. So one of the biggest lessons I've learned from Mark and Ben, it's really interesting. It's about how to build a team and how to work with people. And they said something when I first got here that was interesting. They said we don't hire people for lack of flaws. We hire people for their their sort of their skills. And it was really interesting to me. At first I I didn't know what to make of this, but for a long time I worked you know in a large management consulting company.

50:21 And my reviews were all about addressing my flaws, right? So it's like well, they would gloss over the things I did well. It was not even worth mentioning. And it's just a list of things I had to fix all the time. And it's actually an incredibly demoralizing kind of thing cuz you you the things you did well, no one seems to care to mention. And then you're always being told every year after year these are the 18 things you got to fix to make it to the next level, right?

50:47 Here we've it's completely turned on its head. Like if you are great at something, let's let's celebrate that. And we're all people, so there'll be things we might not like with that, but that's fine. We'll learn to live with that and and hopefully the balance is is good. So there's there's there's this real embrace of you know, the talents of people have. And so as a result, everyone here at the firm which stunned me is every function I meet people are really excellent at their function.

51:14 The the the amount of talent in this firm is mind-blowing. And so it makes you really proud to be part of this of this place. So that's the lesson I learned from Mark and Ben. That's a great answer. Hopefully. Yeah. Okay. What's the biggest mistake people make with their wealth? So I'll I'll restrict my answer to the biggest mistake people make with their wealth to sort of founders Mhm. of startups. Um I think because they grew up in the venture industry and in the private asset industry, they automatically gravitate to that. And so I'll see someone with their very first liquidity their very very first liquidity, they take it and instead of doing something a little bit safe in case there's a rainy day, they turn around and they go put it in a bunch of like very early stage startups often referred to by their friends.

52:01 Right? And and you just sort of sit there and you're like listen, if you're going to do venture, at least try to do it in a systematic way and not take you know, 80% of what you just got and hand it to your three friends. And and almost almost always this ends in tears. I'm being exaggerating, but very rarely do those outcomes happen the same. And of course because the that individual who made it their experience was one of success.

52:28 It's hard for them to sort of visualize the statistics of the industry as a whole, right? So they're they're they're they're expecting that they do two or three of these things, at least one of them will work and often none of them. Right? So that's the biggest mistake I see is like you you finally got some liquidity, your hard work paid off. And what do you go and put it back in another sort of highly uncertain, highly liquid thing, right? For those founders that come to you, they're post exit, they're liquid.

52:57 Do some of them want to start on their second or their third company and how do you manage their portfolios to do that? Many do want to start a second and third company. Um especially nowadays, you're young. Are you going to retire when you're 35 or 40 and not do anything? I mean, I don't think anyone wants to do that. So a lot of people want to do and so if if that's the goal, we try to keep the portfolio actually more liquid because their hope is that they can finance more of it themselves, right? The idea is well, I did my first company and by IPO I owned 15% of it.

53:29 The next time I want to own 30% of it, right? And so I'm going to bootstrap it and use my own capital more. So we try to yes, is is a short answer. We change how we would suggest the portfolio based on those on those desires. A lot of founders though, I think want to stick with their company very very long term. They're not necessarily thinking you know, two years out I'm done. Uh they want to stay along I mean, this is their baby. They know it. They've grown it.

53:56 So it's not necessarily I'm going to completely detach. It's maybe my level and intensity will decrease. Maybe I won't be CEO anymore. Maybe I'll be chair or something like that, but flat out leaving, I'd say it's kind of the exception. You do see it, but yeah. I want to do a quick fire on some macro. Okay. Okay. Is private credit in a bubble? There's several flavors of private credit. One is sort of direct lending.

54:26 So the idea is FICO scores and things like that aren't the best indication of credit quality. Maybe we can develop a different way to assess credit quality and we'll lend directly to an individual often, okay? That stuff has been fairly resilient and in part because it's tranches out. So they they they they sort of take the equity tranche, sometimes called the first loss piece and they keep that on the balance sheet, the issuer does and then the other pieces are sold. So there's like a buffer, right? If there's a few defaults, you're okay.

54:59 Right? But there's more to sort of the the private credit lending to companies and mainly sponsor backed companies and when people say sponsor backed, they mean PE backed companies. Um and remember the PE companies, how do you PE coming private equity, they're equity investments, right? So how do you maximize the return on equity? Well, you use as little equity as you can, right? So you you buy a company and you lever it as much as you can so that your equity piece is small so that if the company improves the the the return on equity is magnified, right?

55:31 And so you're purposely leveraging these companies quite highly. And you're putting that into a vehicle and people are investing into that leverage. So if there's an economic headwind and those companies start not being able to manage their debt that's a problem. Right? So at the end of the day the question of whether or not private credit is in a bubble is really a question of are we facing some sort of long-term slowdown or recession whereby these companies can't service their debt the way they were before.

56:04 And that right now there's no indication of a slowdown in the economy really. There's a few you know, there was a bit of a surprise on the employment report. But but by and large the economy's growing you know, the long-term trend for growth is not even 2% and the the economy grows above that pretty regularly. So right now and the huge capex boom around AI is propelling the economy. So I don't know that there's an immediate sort of macro event that causes these companies to not be able to to support their debt. But it's a leveraged high risk strategy, right?

56:36 Is the IPO window open? We're going to find out with SpaceX. What about Open AI? Whoever goes first. Okay. Who's going first? I think SpaceX. But it depends if Anthropic and Open AI are going to have a heated competition even more. Cuz I feel like they're in a battle right now. And so that's a race. But look, I mean companies are still able to raise large amounts of money in the private markets as we've seen with Open AI and others. So the pressure to go public is not as high as it would be if they weren't able to, right? And then as I mentioned before, I think VC funds, growth equity funds have raised large funds. So there's capital available to do these things.

57:18 Um Yeah, I mean it's surprising how large fund raises, 10, 20, 50 billion dollar fund raises happen overnight, oversubscribed. So until that stops happening, there's you know, less urge to IPO unless you get to a size where the private market can't accommodate you anymore. So it's in some paradoxical way, right? If there's like a slowdown in the economy and less excitement about these companies, that's when they're going to be maybe more forced to IPO because the private capital then won't be available. I feel like Open AI already pushed the limits on how much private capital they can extract with a 110 billion dollar round. I can't imagine how many more But that was it.

58:01 No one thought before that that it would be easy to raise that sum anyway. It was easy to raise it. Okay. What is your information and research diet? What do you watch out for? I'm kind of old school. I like to read source materials. I know nowadays, you know, people watch podcasts and things like that. I I I like to read Fed data. I like to read Fred the Federal Reserve Economic Database that you can get free.

58:30 Um I like to read quarterly reports from companies, transcripts of the the analyst calls and those kinds of things. So that's what I spend a lot of time looking at and reading. And then of course, listening to my clients who are in the know on the private private market side. You do have a very good advantage there. >> a great >> [laughter] >> great advantage there, right? Right. So you know, I I think of private investing, there's like this two by two matrix which is like it's access and it's diligence, right? And so you know, we're in a real sweet spot here, right? Cuz I have access or we have access or clients therefore have access to all sorts of things because of the incredible network we have here. And then the diligence, it's a large firm. I can always find someone here that's worked with someone or knows someone that's worked with or been on a board or in a startup. So it's it's the amount of diligence I can do it it's it's very quickly I can sort of assert whether or not this is a quality investment. So on that two by two matrix, I like to think you know, I'm lucky enough to be up here which is I'm not going to complain.

59:32 Very lucky. Yeah. As we close out, what are you most looking forward to this year? So, there's been a big effort at the firm to be more outgoing with media. Mhm. And uh and this is part of that. Amazing. So, I'm very excited to to be out there speaking a bit more. I mean, traditionally a lot of wealth management firms tried to operate uh in multi families under a little bit under the radar. Um but I think for me personally at least, I I find that the way we set things up is so compelling and differentiated that I'm very excited to sort of present it to the world more broadly. So, that's Also, from what you've mentioned, it's clear that there needs to be more real information on these industries out there because there's a lot of traps.

60:15 Yep. A lot of traps. So, I'm my goal is to educate. I I long time ago I wanted to be an academic. I spent way too many years at Stanford. I still enjoy teaching and educating people. So, to to to me that's the biggest excitement of this job. Amazing. Well, I'm looking forward to that as well. Thank you so much, Rochelle. Thank you. Appreciate it. Hey, it's Molly. If you enjoy our interviews, check out our newsletter sourceery.vc, where we deliver a once-a-week top deals and tech headlines email, [music] and also go deeper on our podcast interviews. Subscribe to Sourceery today, and don't forget to subscribe to the podcast on YouTube, Spotify, [music] Apple, or wherever you listen. Link in description to sign up.