Stig Brodersen 6:01
Okay, so, you know, one thing I often hear, when I talk to other people about venture capital is that they always ask this sounds very risky because you’re working with sometimes debt and sometimes, you know, small companies because by nature it’s small companies. So do you think it’s a more risky game? Or is it just not always people knowing what venture capital really is?
Peter Gaudet 6:22
Well, it’s all about knowledge, and, and you know, when I was younger…
Preston Pysh 6:27
Bingo!
Peter Gaudet 6:29
When I was younger, and I was at DLJ back in the day, I left Merrill Lynch to go to work. Again, I was right place, right time. Alternative investments wasn’t even called alternative investments, not so long ago. 1996, I guess it was. And I looked at the older guys in the firm, and saying, “Well, I’m working 24/7. I’m in the office every weekend.” I said, “You know, this experience thing, I think it’s overrated.” Well, it is until you get experience, and you realize the value of it. And I really sound like an old man, but, but the bottom line is, you know, everyone says, “Oh, go out and throw money at 10 opportunities, and one of those or two of those gonna hit, you know, for, for venture capital model.” I don’t believe in that. I believe you do thorough due diligence on five companies, and you figure out. And you have the resources, where you got a network in place; and you’re talking to people that are like, “Hey, this is going on, and this is going to hit in this space. And these are the reasons why.” And then, it’s about things that are analogous to other space, say, “Okay, this looks like something I saw seven years ago.” And me, I’m a copious note taker. So I’ve got notes on everything, you know? Let me look at that deal that I looked at, and compare, and contrast it, and say, “Okay, well, where’s the cash flow?” You know, in the end, you want to clear away complexity. You want to focus on, all right, is it cash flowing now, you know? Is it bad? Is there a J curve involved? Where, okay, three months, four months, five months from now, it’s gonna pop and start being–had some net profit? Okay, then, where do you go? You have to get out in front of the pack, and you need more capital, capital infusion at that point to invest, invest in marketing and branding to make sure that you’re going to be the lead dog. So to answer your question it’s really specific. It’s case-by-case. And you’ve got to get in there, and do the hard work of figuring out what that business is because I think, you know? Preston, as we know, there’s no excuse using finance, or not rolling up your sleeves and doing the hard work of saying, “I don’t want to look at 10 companies. I want to have a system in place that gives me the opportunity to increase my probability success after looking at five companies and picking that one or two. So it’s not a one in ten rate. It’s a one in two or one in three hit rate.”
Preston Pysh 8:40
So it’s interesting that you, you say that because, I mean, it’s really all about risk mitigation and being able to identify, okay, yeah, this–these three things look great, but these other two things really offset that potential gain that I see. And so, I guess my question is this: What is the biggest mistakes that you see startups having? If you had to narrow it down to three like, when you hear somebody say one thing, or you see a specific thing? You’re just like, “Out the door like, okay, this ain’t gonna work.”
Peter Gaudet 9:07
Yeah, yeah. And it goes back to, you know, the more, the more you learn, and the more body of knowledge and frame of reference you have, the more simple–you, you gravitate towards. Simplicity, you gravitate towards. And I hearken back to the days of my plebe year at West Point, where my squad leader said, “You know, proper prior planning prevents poor performance.” And, and you talk with some of these guys who are building a business, and they fall in love with the technology. And that, I’m not saying that that’s, you know, bad. It’s a good thing to be passionate about what you’re doing, but they fall in love with it so much that they start being delusional; where it’s like, wait a minute, you’re not looking at where this company is going to be. It’s like you got to be taking care of not your company today; your company a year from now; your company five years from now. Like you’ve got to have that vision, and if you don’t have it now, you better get it quickly. Because if you’re not taking care of things, then you’re leaving your company and yourself susceptible to people that come in and basically steal your company; not give you a proper valuation. You know, there are bad guys out there. And, and like any industry, Wall Street has bad guys, and they’ll come in there and say, “Okay, well, we’re going to look at you for a while.” And then, they’ll tell you whatever you want to hear, and then they’ll come in and steal your business; say, “We’re, we’re going to take, you know, 51% of the equity or more for a fire sale price.” And, and that’s because there’s lack of prior planning. You’ve got to make sure you have that–you got balance sheet. You gotta have a war chest to take into any battle that’s going to be able to get your business through some tough times because any business is going to have tough times no matter how great the technology or whatever the case may be.
Preston Pysh 10:48
And so you’re saying they’ll come in and then take 51% of the equity ’cause they can foresee, “Oh my god, they’re going to run out of cash. At this point in time, they’re going to be strapped, and so then we’re just going to kind of swoop in like, like, you know, wolves, and snatch up all that equity, whenever that time comes.” Is that what you’re kind of referring to, Pete?
Peter Gaudet 11:06
Yeah, it’s funny you mentioned wolves. I call it “the antelope situation,” where there are lions in, in the Serengeti, and they’re looking at the antelope, and they’ll get them away from the herd. I’ll say, “Okay, so we’re gonna buy you next week.” And they’ll say, “Oh, great. Fantastic! I’m gonna get bought at, at 10, 10x multiple on EVA the (*inaudible*), and everything’s wonderful and, and then all of a sudden, it’s like next week comes like, “Okay, I’m ready to take that. Dump the cash on me, and then it gets drawn out. And then, all of a sudden, it’s a month and a second…(*inaudible*)
Preston Pysh 11:35
Yeah, war of attrition.
Peter Gaudet 11:36
Exactly. They got all the data. They know the cash burn rate.
Now, they know the debt service. They know everything that’s going on. So it’s like, and they can pinpoint, okay? Let’s talk to this guy, you know, three months from now, when he’s going to be in a hard, hard place. And then what happens? I’m not gonna say it happens frequently, but that’s, you know, if you don’t plan and prepare, and you’re not looking out for your company…
Preston Pysh 11:40
Yeah.
Exactly.
Peter Gaudet 11:59
Certainly, you can be susceptible to the antelope situation.
Preston Pysh 12:01
And yeah, it goes totally to your point of, if you’re not planning, and forecasting, and having that foresight of where you’re going, you’re gonna find yourself in that kind of situation. That’s a fantastic point. And, Stig, you had a question there?
Stig Brodersen 12:13
Yeah. ‘Cause, Peter, you know, I was, I was thinking about how do you determine the value of a company? And perhaps also through the, the glass of a…of a venture capitalist, is it, is it very different than when you’re looking at stocks for like bigger companies? Would you determine the value the same way?
Peter Gaudet 12:30
Absolutely (*inaudible*). It’s worlds apart. And it’s funny because that’s another lesson you learn with experience is, you know, you want to say, “Oh, yeah! I’ll value that company. I’ll throw a dividend discount model, or economic value added, or there’s a million other ways to value the company…NPV cash flows. But through the years, I found that the most valuable way of approaching it is looking at comps, you know? You want to compare it to other companies that have had liquidity events, and that’s real, you know? Nothing’s worth anything until it’s sold. So, you know, when you’re looking at these companies, and, you know, I had one company in the last couple of weeks that was like, “Oh, yeah, we had our patents valued at $3 million.” Kinda, kinda holding back the laughter, and I was like, “Okay, well, can you sell them tomorrow for $3 million?” And they’re (*inaudible*) like, “Uhh…well, the patent attorney told us that, that day we could.” So I’m like, “Okay, who is he? Who is he…?” (*Inaudible*)
Preston Pysh 13:28
Sell it to him, then? Yeah.
Peter Gaudet 13:30
Exactly! Is he gonna buy it from you? That was…that’s something I’ve heard many times over from great traders, you know? That’s like a Paul Tudor Jones thing, where it’s like, you know, it–it’s not about worth anything until you sell it. And if you’re selling it; selling to the person that sold it to you, then you’re in trouble as well.
Preston Pysh 13:51
Hey, Pete! I’m, I’m kind of curious. How many companies do you kind of see that come in and that are looking for, for venture capital that have a bottom line; have some net income? 50% of them? Or what would be would you say on a ratio? 50% of the people come in with a, with a green in their bottom line?
Peter Gaudet 14:10
Yeah, I would say that it’s a little bit more because they have the kind of hutzpah to go out on your own. You usually have confidence, and intelligence, and you know how to make money. That’s always the case. But I guess it’s…for me, through my network, if I’m getting introduced to a company, I’m usually getting introduced to intelligent, thoughtful business owners that are ahead of the game. I’ll give you my–I had a couple of calls yesterday, and one of them was with a guy that owns an engineering company that has a technology that…it’s his third technology. He’s been successful with the other two. So this is something that’s already cash flowing, you know? It’s already making money for him. It ran. It got so much traction early on that he’s run out of money because it’s gotten that big, so those are nice situations to be in. But to answer your question, Preston, I would say it’s more, I, I think when you’re talking 50% or less, it’s probably a lot less than 50% if you’re talking about all venture capital opportunities.
Preston Pysh 15:13
Oh, okay. Okay.
Peter Gaudet 15:15
Yeah, but I would say that..that, yeah, because, you know? Anyone who comes, who wake up this morning, and is like, “Hey, I’ve got an idea for a brand new birdfeeder.” In fact, I do have–I have a bird feeder that’s a school-proof bird feeder that was somebody thought up in the Midwest, and it’s made a lot of money. Because it, it’s activated that spins around the squirrel and throws them up the bird feeder.
Preston Pysh 15:36
Oh my god, that sounds awesome!
Yeah, so it’s called the Yankee, Yankee Flipper. I’m not getting any, any advertising, but I love the thing. It does work. But then they have a funny video, and it shows you, you know, the power–as you guys know, all too well–the power of media nowadays. It’s like you don’t need CBS, NBC, you know, big networks because they have this video on Vimeo or on…
Yeah, Vimeo and YouTube. Yeah.
Peter Gaudet 16:06
YouTube probably, it’s YouTube. And it’s called the Yankee Flipper Birdfeeder. And somebody sent it to me ’cause they knew I was trying to, trying to feed my birds and not the squirrels, and sure enough, it’s gone viral. So, so I’m really excited about every–all the opportunities that are out there.
Preston Pysh 16:22
Well, we’ll have a, we’ll have a link in the show notes for people to pull that up if they want to see it. I know I want to see it. I, I got a quick question for you. So you know, whenever we’re valuing stocks, Stig and I, if you look at the current market conditions here in November 2014, you know, the thing that–the discount rate I’m kind of trying to use and trying to find businesses on the market for as around 10%, but we’re dealing with large-CAP companies and things like that. When you’re dealing with venture capital, I’ve heard that the number is typically around 40-50% as the discount rate you guys like to use as kind of like a starting point, and I know each company that comes in is, is different, but are you really trying to get your money back within two years? Is that really kind of the way you look at it?
Peter Gaudet 17:01
Absolutely! I’d like it back tomorrow. I mean…But, but that, I think that, that goes back to the model I was talking about, which is what everyone refers to is, “Oh, the venture cap model.” I don’t understand that model. Each 10 (*inaudible*) companies pick. Pick 10 companies’ investments. Spread it. Diversify. And then get your one or two. And that one or two better give you the money back in two years ’cause you’re licking your wounds on the other nine.
Preston Pysh 17:26
Yeah.
Peter Gaudet 17:26
Or eight. So, so that’s basically why I think everyone’s like, “That’s where you have to get for, for your successful company. When it’s gonna pop, you don’t need a pop. You know, you don’t need a 2x or 3x. You need a 15-20x…
Yup.
…To get where you need to go; to pick up the pieces on all the, all the…loss; the sunk cost of investing in the other clunkers that’s gone.
Stig Brodersen 17:53
What–what’s the, what’s the typical characteristics of the, of the companies that you’re looking at; even though it’s like small companies and start-ups? I, is, I guess, you know, if you have a blog or something. It’s not like we can call up Peter, and ask him if he can fund us. I, I guess that’s not how it works.
Peter Gaudet 18:10
Yeah. Well, I’m excited. There’s a lot of other, you know, things that are popping up like crowdfunding type things. And I’m excited about that because, you know, I’m all about, “God bless the United States of America! Let’s build the economy.” And that means getting capital to people who have brilliant ideas. And, you know, the model that’s been around for so long on Wall Street is, you know, it’s either you’ve got to have the relationships, or you got to have whatever it takes to get that foot in the door, and get the meeting with the venture capital firm that will consider writing a check to you. So now, it’s just crowdfunding and everything else, you know? I think there’s a lot more opportunity for, for getting out there. If, if you got an idea…I think it is like social media is a–I’m a big fan. I have another company that…that’s doing a lot lot of flying around and meeting with and doing retail distribution, you know, and selling the whole wholesale (*inaudible*) channels. And I’m like, “Guys, let’s get–let’s look at the whole spectrum of opportunities for marketing. And let’s realize the power, and the potential, and the cost effectiveness of social media.” Get out there, instead of having somebody hop on a plane, and go to different cities, and talk to retail. Let’s at least test out going direct with social media because you can fire with a rifle instead of a shotgun, and, and you know exactly the demographics, especially with, you know, all the information we know or we could buy with data. I mean, I come from a structured credit background. So I’m about knowing everything about a person’s personal balance sheet and being able to loan on that. Same thing with being able to know, okay, that person loves to buy soaps, or perfumes, or whatever in Cincinnati. Okay, that’s a person you want to have on an email distribution list. That that’s a product that’s going to strike. It’s gonna resonate.
Preston Pysh 19:58
I know we’re seeing that on our side, just with our business, the, the importance and how social media can be used. And, and the most amazing thing with it is you have analytical data. So in, in marketing in the past, it’s been, “Hey, let’s send out a thousand flyers!” And you have no idea what the actual impact of those; of that capital that was spent on that marketing campaign or whatever. But now it’s, it’s amazing because it’s all digital. And you can actually see all the analytics behind it. I mean that’s one of the reasons Google’s just so phenomenal. But that’s, that’s a sidebar in itself. But…
Peter Gaudet 20:31
No, no, that’s a great point because, you know, I saw it early on in structured credit where you had Salomon Brothers putting together the models as far as prepayment risk, way back in the day. And it was like, “Wow, look at them!” They spent a hundred million dollars or more, whatever their number was, on building this incredible model. And it was a one variable model. It was like prepay or not prepay. And it’s like, and that was powerful enough back there relatively to put them way ahead of the game. And obviously, their alpha generation was phenomenal. And all of a sudden they spin off, and do long-term capital. And it’s like, but then, they got ahead of themselves because they were playing meaner version strategies, and use it a hundred times leverage. And that works until it doesn’t. When it doesn’t, it blows up.
Preston Pysh 21:13
It works until it doesn’t. I like that.
Peter Gaudet 21:16
Yeah. Yeah. So…so that was, that was fantastic. But that’s basically it, Preston. Exactly to your point, which is Google realized early on, it’s all about the data. If you can pull data, and get that data. That’s powerful information. And you can run the algorithms over that data that are going to give you–pull out real information, and useful information, and timely information. Then, you’re way ahead of the pack. And you’re going to be able to make a ton of money.
Preston Pysh 21:43
Yeah, it’s funny, when you look at Google and their acquisition of like Waze; of YouTube; all these big networks. It’s amazing because they–I think they have so much analytical data that they can see that one of these, you know, these these online companies, whenever they’re starting to like grow and build really fast, they have some type of model that’s giving them some type of tip off to snag up the YouTube; to snag up the…and I, it’s just fan–it’s, it’s amazing. I mean, like I said, we could talk about this for a very long period of time, and go off on a total tangent just talking about Google. In fact, Stig and I are reading a book about Google right now, so that’s probably why it’s on my head. But anyway…go ahead, Pete!
Peter Gaudet 22:24
It’s Google. It’s…I made an investment in a firm down in Baltimore called right on (*inaudible*) Yet Analytics, and, and that’s taken lessons learned in the war in Afghanistan and Iraq as far as big data; real time acquisition of big data, whether it’s communications or other things; and synthesizing that with incredible algorithms that pull that, that can give, you know, a Fortune 500 company, real time intelligence and information they can use to, to help companies.
Preston Pysh 22:53
So, Pete, this is a question that Stig and I like to ask at the end of every interview, and we find that we get probably the best, you know, information out of this question. And the question is: What is the best investment advice that you’ve ever received?
Peter Gaudet 23:09
Wow…there’s a lot of good investment advice. And now, I’m thinking about 20 years of investment advice, and I’m coming up with a couple of things. But I think if I had to pick one, I’d say Arthur Rock. Arthur Rock, I was blessed to have Arthur Rock as a client back at DLJ. And he was one of the founders of venture capital, really. He was at Harvard Business School, and, and really forward thinking; incredible man. So anyway, he said…it was, again, going back to simplicity. Genius is simple, right? And what Arthur Rock told me personally was what Warren Buffett tells the world which is, “Never be afraid to let an opportunity go by if it doesn’t feel right.” And I’ve actually learned to value what my gut tells me. And when I–I don’t, I don’t like using gut because your gut is your brain actually synthesizing all the data of 20 years of experience. And you know, whether you know what’s going on or not, you’re actually–I’m fascinated with the brain, too, you know? What your neocortex does is amazing, and you ought to listen to it because it’s actually synthesizing memories and patterns in a lifetime. And if your brain is saying, “Wait, something doesn’t feel right.” There’s something to that. There’s–maybe you can’t point at it, or you can’t quantify it. But it might be, you know, you can’t quantify it, but it is quantifiable. And it’s something that your synapses are telling you, and your axons, and dendrites, or, you know, or a machine, or a damn good machine. So you better listen to it, when you see an opportunity, and something said whether it’s a person that, you know, you’re like, “Wait a minute that, that seems unethical, or, you know?” Better look for little hints that are going to tell you, “No, I’m not going to deal with that person because of ethical issues or because of…you know, they’re not, they’re not building the business the right way, and they don’t want to get on track to do it the right away.”
Stig Brodersen 25:04
That was really a, a really great tip, Peter. As you probably also know, Preston and I are really big on books. Do you have any recommendation to a really good investment book? Perhaps something that you would use yourself?
Peter Gaudet 25:17
Well, it’s funny you mentioned that because I always do–Sunday nights, I do my mentoring. If somebody’s coming out of the military, they always get my time. And I used to tell them a list of books. And now, the first thing I tell them is: “Work with the right people.” And this goes back to, you know, your gut. If you think you’re working with the wrong people, you probably are working with wrong people, and you need to get out of there. So that’s the first advice I give to people. Now, when I go into books, I give them the Handbook of Alternative Investments, which is–the first thing you want to do is, is have that body of knowledge to understand the space. And, you know, I was lucky enough to kind of have the opportunity, you know, pop up to work on alternatives early on. But you got to keep your eyes open, and not keep your eyes open right in front of you, but look 360 degrees. And every area; that perspective, you can actually reach for to see new opportunities. And if I was in another department at DLJ, when I saw alternatives start to grow, and I basically did everything to transfer over to that group because I knew the promise of alternative investments was huge. So as far as a book, yeah, I start off with the Handbook of Alternative Investments And then I also say things like, Seven Habits of Highly Effective People. Just, you know, how to make sure you’re working well within a group. It’s funny on Wall Street, sometimes you, you get to come out of a meeting and you’re like, you know, “That person never played a team sport in their entire life.” The whole thing is this soliloquy of how great I am.
Preston Pysh 26:49
So you’re saying ego is big on Wall Street? That doesn’t sound true.
Stig Brodersen 26:53
No.
Peter Gaudet 26:54
Just a little bit. Just a little bit.
Preston Pysh 26:55
Pete amazing feedback. I mean, that’s just phenomenal. I know that everyone in the audience is definitely taking notes and listening to some of the things that you’re putting out here. So we would like to really thank you! For anyone that’s interested in learning more about Pete. He owns his, his bank, his investment bank that he owns is called Camp Fire Capital. We’ll have a link to the site on our show notes if you’re interested in, in visiting there and contacting Pete.
Peter Gaudet 27:20
The website is very boring. But boring by design because I’ve got enough people that are doing business with me. I’m not doing a lot in marketing, let’s say. And I have other, I have other interests as well. Quite a few other interests.
Preston Pysh 27:36
Well, that’s fantastic. Pete, thank you so much for coming on the show. We really appreciate everything that you’ve provided to our audience.
Peter Gaudet 27:44
Appreciate it! Great spending time with you, Preston and Stig! Great, great spending time with you.
Preston Pysh 27:49
Okay, so let’s go to our question that somebody from our audience had submitted to our website. If you want to submit a question, you can go to asktheinvestors.com, and submit your question. And this question comes from Raymond Sheedy, and Raymond says, “Hypothetically, if you buy all of a company shares outstanding, will you own the whole company outright? Or does the business keep some of the shares for itself, and therefore unavailable to the average investor? For example, when a business announces a share buyback, what happens to those shares?” So Ramin, this one’s pretty straightforward. If you own all the shares of the business, then you absolutely own 100% of the business. Where you might be getting confused is that whenever a company does a share buyback, that benefits if there’s multiple owners, but if you are the sole owner, and you and 100% of that business, there’d be no reason for you to be buying back shares from yourself because at that point, you’d be the only person that would own it. Okay, so that concludes our show for today. And we’d like to thank Pete Gaudet for coming on the show. I’d like to thank Raymond for submitting his question. We’ll put a free signed copy of the Warren Buffett Accounting Book in the mail for you. And thanks for joining us, and we’ll see you next week.
So one of the things that Stig and I are very strict about is not endorsing any kind of service or product that we don’t personally use ourselves. So with that said, we give our full endorsement of our sponsor’s content realvisiontv.com. Real Vision is a site that Stig and I personally use ourselves, and it has had a profound impact on the way that we view the financial markets. One of the most important things a person can do is seek the knowledge of highly successful investors and business leaders, and more importantly, understand their thought process and how they make decisions. And with Real Vision, you get exclusive and in-depth interviews and presentations from the world’s sharpest independent analysts, fund managers, geopolitical strategists, economists, and investors, all in the same place. And right now because you’re listening to this show, we have a special offer for everyone in the TIP community. If you go to realvisiontv.com, and put in our special offer code: T-I-P, which stands for The Investor’s Podcast, you get 10% off your subscription to Real Vision TV. And if you’re not sure if you want to get a subscription to the site without seeing the videos and content first, we completely understand that. That’s why Real Vision is offering the TIP community a free week trial to see if you like their service. So trust me, you cannot afford to ignore the value that Real Vision creates with these in-depth, full length interviews from famous investors like Kyle Bass, Jim Rogers, Tim Ferriss, and many more. The people being interviewed often have a net worth far exceeding hundreds of millions of dollars, and watching Real Vision is like being able to sit in the corner of a room, and listen to a conversation that you’re not supposed to have access to. So don’t pass up this amazing offer to tap into the world’s smartest investors all in one place, and go to realvisiontv.com. Don’t forget, use the discount code: T-I-P, for your free week and 10% discount, today.
Outro 30:47
Thanks for listening to The Investor’s Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.theinvestorspodcast com. Submit your questions or request a guest appearance to The Investor’s Podcast by going to www.asktheinvestors.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before commercial application.
