Building a Multi-Billion-Dollar Asset Management Firm with CoVenture's Ali Hamed
Top takeaways from our interview with CoVenture partner, Ali Hamed
Ali Hamed, Partner at CoVenture, joins Erik Torenberg to discuss the advantages of investing across asset classes, CoVenture’s inflection points, the importance of being liked in venture, and asset classes Ali hopes to invest in in the future.
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Now onto our top three takeaways from the episode:
How CoVenture diversifies beyond venture capital
Erik: Why don't you just do venture capital like everybody else? Why are you doing these other things? Why don't other firms try to copy your strategy? What secret powers do you have?
Ali: Every asset class is imperfect in its own way. In credit, people spend too much time focused on the security and structure of a deal and probably not enough time on the company itself. Venture capitalists spend too much time on the founding team and market, but they get the wrong company in the right market.
The best thing you can do is take your venture hat and look for new markets that don't matter yet but might matter a lot tomorrow. Be the biggest at-scale player in a very small market today, and just grow with the market over time and continue to dominate.
There's a very thesis-oriented asset class, and there is probably not as much rigor as there should be. An example of how a venture mindset might help credit is that credit is a weird business in that the best way to be a winner in credit is to be the biggest winner in the space.
But it's hard to be the biggest in credit—there are big firms. There's Blackstone, Apollo, and all these different firms. So, the best thing you can do is take your venture hat and look for new markets that don't matter yet but might matter a lot tomorrow. Be the biggest at-scale player in a very small market today, and just grow with the market over time and continue to dominate.
That's a very unique approach to credit that other credit investors don't have. And we only have that approach because we have venture DNA. In venture, there are a lot of good things about it, but I don't think rigor is one of them. I think people could do a lot more to underwrite the companies they're in.
In our credit business, we live, breathe, and die over every basis point, so it's too rigorous. So I think we benefit from the pluses and minuses of that. And also, in different vintages, different parts of the market are interesting. Right now, the hybrid business sees tons of deal flow because it's a huge bid-ask spread in investors and founder expectations.
I think for the last two years, everybody in venture has been wondering when valuations are going to come down. You know, ‘Oh my God, the market is destroyed. Why are people still raising their seed rounds at 20 pre, and they've never founded a company before?’ and it's pre-launch.
So when you're in only one asset class, you feel forced to invest, whether or not you should be investing, in every vintage. And when you're in multiple asset classes, it's not that you get in the market or out of the market, but that you slow down or speed up. And it's really easy to see the relative value.
Different companies need different types of capital. I mean, being able to invest in companies in a few different ways just triples our deal flow. We see a company, and we have three different ways that we can invest in it. And so instead of trying to force the company to work within the confines of our business or force ourselves to put money out in a vintage, maybe we shouldn't be putting money out the firm is always investing.
We're just going up and down the capital structure, depending on the vintage, the nature of the vintage, and what we should be doing. I think having a bit of credit heritage to our venture and telling them, ‘Thank God, you know, we went through a bus cycle, and I bet you were a lot more durable because we know how to do risk management, protect against the downside, and manage hard situations.
I think when we're at our worst in venture, we might be too linear thinkers. We do a little bit less of a job of imagining what could be because we're like neurotic credit guys. And, you know, we do, we were, we do diligence, which, you know, so we don't do deals when we meet companies after five days or whatever.
So, you know, we're idiots, or I don't know, whatever we are, but when we're at our best, it means that we can win in both boom and bust cycles, which we think we're doing. And it's been pretty good, you know, when things get hard, that's like our sweet spot. You know, I think people in venture probably struggle to have hard conversations.
We professionally have hard conversations all the time. And by the way, hard conversations don't mean mean conversations. They just mean intellectually honest ones like, ‘How do we get through this together as partners?’ So, I think there's a lot of benefits.
Private equity is a business where being liked and accepted is important
Erik: Which hard conversations are venture capitalists not having that they probably should be having?
Ali: It's a business where being liked and being accepted is important because the value of companies, in many ways, is often based on consensus, like in private equity or something. But the knock on private equity is that there is too much focus on the company and not enough on the market.
You know, private equity funds specialize in investing in good companies and crappy markets. Sometimes, I'm sure a private equity investor listening to this would say, ‘That's not true.’ But you know many of them do, and it makes sense. In private equity or credit, the reason you like a company is did it make money?
You want to write to a multiple, or you want to write to calm. So you underwrite to a discount of cash. You're basically underwriting data. You're not doing a deal because some famous venture capitalists say, ‘That's a great market. You should do it.’ And in venture, you know, it's such a scary business because you're kind of like investing in hope and imagination. You want a crowd of smart people who've done it before for a business, and you rely on a crowd to like you so that they do the next round. You know, like in venture capital, we’re all a bunch of merchant bankers, you know, we have a small balance sheet.
And in venture, you know, it's such a scary business because you're kind of like investing in hope and imagination. You want a crowd of smart people who've done it before for a business, and you rely on a crowd to like you so that they do the next round.
Ali: We put a little bit of our balance sheet into a company. We try to sell equity to somebody else at a higher price. And we don't get paid advisory fees. Instead, we get into a round of too-low evaluation if we're perceived to be able to help the company raise its next round and be accepted by the community.
And so, because all those things need to be accepted and liked, we say a lot of things to companies, not because it's the right thing for the company to hear, but because we think it's going to make people like us more. The other board members are going to like us, the founder will like us, and we'll get positive references.
There are all these blogs and forums where people write nice or mean things about the VCs that they've met. And they're very rarely like, we had this really good intellectual debate about the company, and it's like, they liked me or they didn't like me. So it's not because people are irrational or stupid: it's just a good way to be.
It's one of the popular ways to be good at venture capital and hard conversations. There were things like, ‘Hey, look, are you ever going to get beyond this preference stack? Do you really want to keep running this company for that long? Or should we try to sell it?’
I think a lot of founders are so used to a rah-rah culture, and they're afraid that if they admit that things aren't going well, employees might leave, non-believers will leave, or they don't want to do a layoff because what would that do to the culture with the good people leaving because the bad people got laid off or let go or whatever.
It's a business where being liked and being accepted is important because the value of companies, in many ways, is often based on consensus, like in private equity or something. But the knock on private equity is too much focus on the company and not enough focus on the market.
Ali: And you know those are all-natural, normal things, and it's not about being a good partner or a bad partner. I'm not suggesting that the goal of having hard conversations is to rip value away or be a jerk; it's more about being kind to somebody, being honest with them, and letting them know where things might be.
And, you know, I don't really see, I see a lot of, um, whatever, now-famous Elon Musk interview, like I thought my favorite part was if you want to be perceived as being good…not actually being good. I was like, ‘Yes, that's so true.’ I think VCs care a lot more about being perceived as good as opposed to actually being good.
It all comes down to how concentrated you are in the one, two, or three best companies in each fund. And how well have you avoided being drawn into writing a hundred $2 million checks?
Honestly, it's really hard to do that. That is where discipline really comes in, more than anything else, because everybody's going to want to follow along. They're going to want you to participate in an extension round or a bridge, or you're going to have mediocre conviction in series A, where you don't want to lead the series A.
It's very easy to get drawn into this death-by-thousand-cuts thing. So make sure that you're really reserving, allocating to hammer, and taking much larger ownership. And those winners are where we've historically done a much better job than most funds.
Get your hands dirty and learn from the smartest people in the industry.
Erik: For people listening in and say, ‘Hey, I kind of want to diversify my knowledge base a little bit, not just, you know, study all about venture, but also other asset classes.’ What advice do you have where there’s a high-leverage way to learn and do that?
Ali: First off, you do a thing, and then you try to find something tangential to it. There are things that I don't know anything about if you ask me about which long-short equity funds, or hedge funds are good. I really couldn't tell you what makes it great. I'd listen to an analyst talk about a stock and try to figure out if I thought they sounded smart or not.
That'd be my best idea of how to underwrite a long-short equity fund. So no, I know about a handful of asset classes, and I try to go up and down the capital structure of companies, but I mean, it's looking at a lot of deals. I guess I'll answer it differently. I'll say that when we're trying to do a new space that we haven't done before, the way we learn about it is that we try to make sure the space is one step away from where we currently are.
So we're not going from over here to over here. And then we try to look at 50 of them, because it takes 50 Bs to recognize an A. You know, when we look at a company, it's the same as looking at space. When we look at a company, we ask ourselves three things:
What are the things that we need to believe for this company to work?
Are we qualified to figure out those things?
Would it be worth our time?
And sometimes, when we think it's not worth our time, but then we see like 14 pitches in the same ecosystem, space, or asset class, we're like, ‘Shoot, maybe we should go learn about that asset class, ecosystem, or space?’ So we spend a lot of time, and we try to get a lot of pitches.
We try to co-invest with somebody who's been in the space for a while, and then we learn from that deal and size it appropriately. You know, we're not doing it because we think we're just learning. We think we're going to make money on it. You know, we've already seen a bunch of things.
We think that we're now kind of experts in it and we do it over and over and over and over again until, finally, we feel confident enough to lead deals in that space. And then we end up knowing the space really well. Insurance is a great example. I think insurance is interesting because everybody in private credit has to think insurance is interesting.
You know, we had a great financial crisis. Banks had flighty liabilities, which SVB just found out. So after the crisis, a lot of private credit investors and shadow bank funds like just regular LP funds. Some had a really good idea that they should buy insurance companies instead or reinsurance businesses instead.
You know, the nice thing about insurance companies is the same as depositors -they're regulated liabilities that are cheaper than what LPs demand. But they're better because in life insurance and retirement annuities, you owe the money back, whereas bank deposit banks don't know when their depositors are going to pull money. It's okay, it’s a better place to hold alternatives. And all these private credit funds started doing their deals using insurance money instead of LP capital. Okay. So fine. So, like I'm in private credit, a lot of people in private credit know a lot about insurance. I should try to learn a lot about insurance.
So I used to call all these private equity funds that bought insurance companies and make a lot of friends with people who work in insurance companies and talk to people like Drew Aldrich, who runs an insurance tech venture fund. Then I got to the point where I realized, I know more about insurance than the average VC, but not enough—not a lot compared to the person who's buying insurance companies.
And you know, at one point we thought, ‘Gosh, we buy an insurance company to go along with our private credit business,’ and that would have been bad because that would have been the dumb money in the room. And so then we thought, well, maybe we should co-invest with somebody who could buy an insurance company, and we would even put up most of the money, and then pay them economics or like an origination fee or something if they wanted to make sure they had skin in the game.
But we couldn't find somebody willing to do it. I just actually had lunch earlier today with somebody who's like the deputy CI of an insurance company. Then we concluded that it wasn't right for us, but we learned a lot along the way. And one day we'll have the opportunity to hire somebody who's bought a bunch of insurance companies before.
And you know, the trade is kind of mature. It's not like it's a new idea anymore. So you know, if it's a new idea, it's easier to be an expert than when it's an old idea. When it's an old idea, people really are experts. So this is an old idea. We need to find someone who's done it a million times.
And so I probably know enough to hire somebody who would be good at it, but probably not enough to do it myself. So that's like a way that we're exploring that space. You know, the new version of that is the RIA space. So, everybody did the insurance trade already, and then they're like, ‘Well, where else can we find money?’
And somebody was like, ‘Well, did you know independent RIAs don't have that many alts in them anymore because a lot of their clients are accredited but not qualified purchasers?’ And, you know, QP investors are usually the only people who can invest in funds now. And everyone's like, ‘Oh, great.’
We'll go start interval funds and all these other products that you can sell alts into RIAs with. So now we're spending a lot of time in the RIA world. I don't know. And then, you know, we work like 100 hours a day. We don't have any hobbies. This is all we do. You know, we're just like finance nerds.
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