3 Steps to Unlocking Powerful Investments in Any Industry

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Hey, welcome to another episode of Making Billions, I'm your host, Ryan Miller, and today I have my dear friend Alex Chompff. 

Alex is the lead partner at Evolution Ventures. Before that, he launched a successful career in venture capital at the prestigious Kleiner Perkins, after a career in the Marines. 

So what does this mean? Well, it means that Alex understands how to build successful portfolios and startups as both an angel investor and a venture capitalist, and he's about to teach you and I the critical aspects of launching your first fund, closing your first deal, and verifying winning investment strategies that your competitors just cannot see. 

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[THE GUEST]: Alex is the lead partner at Evolution ventures.

[THE HOST]: Ryan Miller is an Angel investor in technology and energy. 

Transcript

Ryan Miller  

My name is Ryan Miller, and for the past 15 years, I've helped hundreds of people to raise millions of dollars for their funds and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, this show will give you the answers so that you too can enjoy your pursuit of Making Billions. Let's get into it. 

Ryan Miller  

If you love the idea of launching a fund and doing deals, then there's no one better than my next guest join me and this season venture capitalist that will show you his three step process of determining what investments are needed in any industry and how you can start to do it today. All this and more coming right now. Here we go. 

Ryan Miller  

Hey, welcome to another episode of Making Billions, I'm your host, Ryan Miller, and today I have my dear friend Alex Chompff. Alex is the lead partner at Evolution Ventures. Before that, he launched a successful career in venture capital at the prestigious Kleiner Perkins, after a career in the Marines. So what does this mean? Well, it means that Alex understands how to build successful portfolios and startups as both an angel investor and a venture capitalist, and he's about to teach you and I the critical aspects of launching your first fund, closing your first deal, and verifying winning investment strategies that your competitors just cannot see. So Alex, welcome to the show man.

Alex Chompff  

Hey, thank you very much, it's really honored to be here, Ryan. I appreciate your entire audience the Making Billions podcast, and thanks so much for inviting me here, I'm really pleased and honored.

Ryan Miller  

Yeah, and we're honored to have you too, man, a vet in the VC space. I mean, you're doing all things, brother, you're firing on all cylinders and I can't wait to chop it up, and I feel spoiled to know your brilliance and now we get to bring that forward in the audience. So when it comes to starting out, launching a fund, doing your first deals. There's so many things in venture capital, most people, myself included, when you first jump into VC, or you think about it, you're like, it's going to be fun. I'm going to raise the next generation of investors or people that I'm investing in. And while there's an element to that venture capital does require some knowledge, and I'm excited to chop it up. So when it comes to launching your first fund, for example, how can startup emerging fund managers, how can they get some early opponents on the board? What would you say? Good question.

Alex Chompff  

Good question. Well, if you're just getting started, if you're an emerging manager, probably the most important thing that you don't have is a track record. That's probably your number one thing that people are going to ask you about. What's your track record? What's your track record? What have you done?  And so I would say that the most important thing that you can do, if you are an emerging manager, or you want to be a manager in this space, is to, as you said, put some points on the board, put some, you know, what you call them the other day, called them tombstones, right? That put some puts, put some winners on the board, or even losers, doesn't have to be, you know, not everything's going to be a winner, but demonstrate that you have the ability to access quality deal flow, that you understand how to put deals together, that you have relationships in the community that are going to support you as you move forward, because all of those things are going to be important to your investors. Ware, there's a concept called warehousing, right? So you can, you can accumulate some projects early on and in using a technique known as warehousing, you can roll those projects into your first fund. And having some of those projects can be a great way to attract your first round of investors. But really, there's, there's nothing that's going to be having a track record that's going to be the most important thing you can do. I would also say, don't wait to acquire it. You know, sometimes you'll run into guys that are, you know, they're telling him, I'm putting together a fund that's going to be 50 million, it's gonna be 25 million, it's gonna be even be 10 million, but I don't have it all together yet. I only have, you know, a couple million dollars in committed capital. You want to take advantage of those couple million dollars in committed capital as quickly as possible to create a kind of lightweight fund in which you can accumulate a set of projects in a very professional way. That's something that we have been helping emerging fund managers to do, we think it's an important part of becoming a fund manager, like learning the mechanics. How does it all work? Don't forget that there's more to being a fund manager than just deal flow and investors. There are regulatory topics, there are staffing topics, there are business processes, there are software, quite a bit that goes into this business. Get yourself somebody to hold hands with while you're doing it.

Ryan Miller  

Brilliant. And as I always say, we're now in the age where it's no longer enough to know, we need to know how. So let's, let's unpack that a little bit. What are some key things that you would recommend for a first fund? I know you said, you know, scrape together a little bit of money, like, how many deals should you do over that money? What would you, I know, you have a position on that. I'm curious of what you can teach our audience. 

Alex Chompff  

So the first thing that I'm going to say is that I'm a very early stage investor. So when I'm talking here, I'm talking pre seed and seed level stuff, okay, and there are some things that are really important to understand, and pre seed and seed level deals. And the first, most important thing to understand is that you cannot pick winners. Nobody can pick winners. It's a fallacy to think that you can pick winners. You might be able to eliminate losers in the beginning, and that's because of this really interesting dynamic that occurs. It's totally counterintuitive, I'm bringing to you, bringing this to you from the. Data Science that I think it's a carta or angel list. And the key idea is that the earlier you invest in a company, the more perfect the information is, the more possible it is to know all of the information about the company. This is very counterintuitive, because, of course, when we when we start in early stage investing, we think about all the unknowns. And the fact of the matter is, is that there's always an infinite number of unknowns. There's a finite number of knowns. And the earlier you are in the company, the more possible it is to know everything that is possible to know about that company. And the earlier you invest, the greater your reward potentials are over the whole of the company. Right. Early stage, early, early, early, early stage investors, invest with an expectation of returns on a per project basis that can be orders of magnitude larger than what you invested and this is important because in anybody's portfolio, a significant number are going to fall to zero. Any kind of early stage portfolio, significant number of your projects are going to fall to zero. So when you understand that they're going to fall to zero, when you understand that you cannot pick winners, then the next sort of thing that comes to mind is, how do you diversify? Right? There's pretty much nobody in the world that's going to tell you that diversification is a bad idea when investing, particularly in a risky asset class. But then the next question is, is, how much should I diversify? So if I have a million dollars to invest, am I better off with 10 companies at 100,000 each, 50 companies at 20,000 each, or 100 companies at 10,000 each? And the answer is, you're better off with 100 companies at 10,000 each. The challenge is, is that $10,000 might not be a really welcome check size for experienced early stage investors who have projects that are high quality. But what the data science does tell us is that $25,000 checks are welcome in about 80% of the projects that have raised less than $5 million to date. So I'm going to recommend that you start with that as a benchmark. You pick up a low amount on a per check basis, so that you get broad diversification, it also is going to give you a couple of advantages that you're not aware of yet. One of the advantages is that you can afford to lose your money. Don't write you know, the corollary to that as a rule that says, don't write a check that you can't afford to lose, right? As venture capitalists, very, very important part of what we're doing when we invest is we're not just bringing money. At Evolution, we say we bring capital community and culture. Of those capital is the one we distribute the least often, and it's actually the least important. Community and culture are more important to our early stage startups than the capital that we bring because we're in a position to use our networks to boost the benefit of the business? Well, what happens if you find yourself in a conversation with a CEO or a board and they're sort of betwixt, in between two hard choices, and they're asking you for your advice. Your best advice should be for the benefit of the company, the benefit of the company, not your own benefit. As an advisor, you should be advising for the benefit of the company. So when you write small enough checks, and you write them frequently enough, and you write them over a broad enough portfolio, you get to a point where you really can afford to give the best advice that's for the benefit of the company, without worrying too much about what your end is going to be, knowing that if the company works out, you're gonna get taken care of. 

Ryan Miller  

That's, that is absolutely fascinating. So it sounds like I'm just doing mental math based on what you said. So if you say, Look, if you just got a million bucks, right, you scrape that together, maybe, like, I say, quadruple F, friends, family, fools and followers. So you hit up the people that kind of know you and like you and trust you if you put together a million dollars. So the end game, back to the first thing that you talked about, the end game is you gotta get a track, right? Track record. Doesn't mean track record managing hundreds of billions of dollars for BlackRock. Maybe that's fine. If it is, we're saying, don't think that anything less than that is not going to qualify in the eyes of an investor. And so the first objective is to say, maybe I don't just make money, my God, and go try to be a billionaire on one deal. Maybe I actually do this more intelligent. And think about it this way, folks, is if you're going to build the tallest building in the world, before you can ever build higher, you must first build deeper and wider. And that adds credence to building the foundational things necessary to go as high as you would like, we'll say. And so building those foundational things that Alex is talking about, I cannot underscore the importance of this enough is getting that foundational track record is so important. Why? Because I believe that most serious investors are not interested in funding your internship. Now, I know that comes across a little harsh, but I'm just telling you like it is. You come to me to tell you like it is. And so you can say, look, you're not funding my internship. I've done this. So this is no longer about me figuring out how to be an asset manager. This is about me scaling what I've already done. And so we'll say the math adds up to 40 deals if you do $25,000, 40 deals, if I can do mental math while running a podcast about 40 deals, maybe, maybe a little less, if you want to incorporate some legal and closing costs on that. So let's, let's say 30 plus deals you could do for million bucks of $25,000 checks at these angel investors. Would you say that that would be a good foundational start? 

Alex Chompff  

Go one step further and say, go ahead and pay yourself a reasonable management fee. And go ahead and pay yourself a reasonable management fee and give yourself about 20 projects per million. About 20 projects per million is kind of a good rule of thumb, $2 million in one year, 40 projects in a year. Fantastic place to start. Very easy to do, you know, in the sense that the numbers are not difficult to comprehend. Of course, if you're going to do 40 projects in a year, you're going to need to have one heck of a machine that turns the wheel of candidates and possibilities and deal flow and all the rest of it. So, you know, again, find yourself an operating partner that can help you be successful in that way.

Ryan Miller  

Brilliant, you know and it's not enough to get some points on the board. Yes, do that. But there's also some cautionary tales and my brother, you've seen it all, from the Marines, the Kleiner Perkins, to everything at Evolution and more. And so I'm curious about some of those downside risks, right? We all face it. Some we know, some we don't, until we get our teeth kicked in a little bit. But what are say, three or four things that you can communicate to our fans around the world, as far as cautionary tales on how not to lose in this game, what would you say? 

Alex Chompff  

Okay, well, the first I'm going to say is just go ahead and check into the fact that you're going to lose a significant portion of the time. Just, just understand that. Understand that no matter how good you are, no matter how good your systems are, no matter how hard you try, a significant number of your of your projects are going to fail. And this is important, because the sooner that you check into that and really understand it and really sit in it, the better off you're going to be when those moments arrive, it's, you know, there's an old saying, train like you fight, fight like you train. So put yourself in the mental space of understanding what's really going to happen to your portfolio. So in this example portfolio, these 40 companies that you put in your first year, you know somewhere between 22 and 28 of them are going to zero, and they're probably going to zero relatively frequently, because your early failures are going to appear much more quickly than your successes. So just strap, strap that on and understand it and give yourself the freedom of needing to win every time, freedom from needing to win every time, because that's going to free your brain to operate. What we look for is we look for credible deals. That's the threshold that we are interested in, particularly in early stage investing. So we disregard things that are not credible, and we invest in things that are credible, but we don't labor under the illusion, like I said, that from among the credible we can pick the winners. We just broadly distribute among credible deals, knowing that some of them will inevitably be winners. So going back to that idea of writing checks that you can afford to lose, right freeing yourself up to give the best advice that you possibly can, because what you're going to do by doing that is you're going to develop a good reputation in this business. Entrepreneurs are going to know that you're caring more about them than you are about the check that you wrote to them. And they're going to start bringing you other entrepreneurs, they're going to start speaking good words about your firm in the marketplace, and all of those things are going to be absolutely essential for scaling. And you know, I'm sure your audience knows this, but it's worth saying again, reputation is everything in this business. If you make a deal, keep it. Shake hands on it, follow through right. And you know there are a couple of other ideas, like in early stage investing. In particular, I like to say that a gut no is a no. A gut no is a no. One of the things that you'll want to do when you start this business is you'll want to root for everybody. We don't, you know, why do you become a venture capital investor? You become a venture capital investor because you care about startups. You care about founders. You want to be around. You want things to win. So as a result, you tend to be pretty not just financially invested, but emotionally invested in these projects. And as you consider, you know, let's say that the 20 or 30 or 40 projects that will eventually become the two or three or four investments that you actually make, you're you're going to, from time to time, feel a twinge in your belly. And it's not necessarily going to be something you can put your finger on. It might be the way that an entrepreneur answers your questions. It might be the fact that an entrepreneur is not entirely forthcoming with who their partners are or what their track record has been, or what their plan is. They're going to be some things that are going to cause you to feel like, I don't know if this is a good deal or not. My encouragement to you is to stop and walk away right then. Do not try to overcome that feeling, do not try to convince yourself that your gut is wrong. Trust your gut when it says no. Now, conversely, do not trust your gut when it says yes. No is a no, but a gut yes is not a yes. You still should force yourself to be disciplined about how it is that you invest on the yes side. You should be really working your way through a system. You should be trying to be objective. You should be asking for other people's input. You should be involving your team. So a yes should be a group decision and at Evolution. A yes is always a group decision, but a no is an individual decision. Anybody, anybody along the way, can say, No, I don't care for this deal, and that'll drop it out of the chute. So gut no is a no. You know, there's some things that we definitely don't want to don't want to be around. One of the things that we don't want to be around is entrepreneurs who are hiding information. Hiding information is a big red flag for us, right? There is a difference between I don't know and I'll find out, and I do know, and I'm not telling you.

Ryan Miller  

You got that right. 

Alex Chompff  

 Yeah. So you know, as an investor, you know, you'll ask a question, and the entrepreneur will come back to you. A good entrepreneur will come back to you and say, hey, great question. Don't know the answer, I'll have it for you in 24 hours, or 12 hours, or six hours, and they'll get it to you. When they say they're going to get it to you, the entrepreneurs that you want to avoid are the ones who are who your gut tells you that they're hiding something, right? Another thing that we tend to avoid in our practice is we tend to avoid people who are too hasty. This is interesting, because obviously you should have a sense of urgency as a CEO, as a company leader, when you're raising money, and as an investor, you want that your counterparty to have a sense of urgency. But there's a difference between somebody who is professional and follows up and stays in contact, which I appreciate, and somebody who comes back and says, hey, there are only two days left on this deal. If you don't get on this deal, you're going to miss it, right? We have, we have a big deal in the wings, but you can get in right before they get in. Those kinds of remarks to me are a turn off, they're a flag. I do have one other test that I tend to run in early stage companies, which is what I spend the night in a foxhole with this entrepreneur. What I trust this entrepreneur to protect me while I go to sleep on the dark, cold, wet, miserable night, if I would, then I'm probably inclined to invest in them. If I wouldn't, I'm certainly not going to. 

Ryan Miller  

That's brilliant. So not only is that good, a great opinion on investing, we're not giving advice, but it's good opinion. It's also good, good opinion on dating, I would say. So there's some parallels here, it'd be like, if you're too hasty, it makes me nervous to lock it down if you if I feel like you're hiding something. Is this someone I would spend day and night with in the muck and roll around in a foxhole with?

Alex Chompff  

This is a lot like a romance I one of the things that I've said for years is that when you're thinking about fundraising, I'm talking to the CEOs out there now are fundraising. You're almost always thinking about fundraising like engaged people think about a wedding and you think, oh, the flowers and the caterer and getting everything just right, you're very, very focused on the wedding. Now, as a man who's been married for the better part of 30 years, I'm here to tell you that the wedding, just like the financing, is in the rear view mirror very, very quickly, and now the money's been spent and you're married. So I would say, for whether you're on the emerging manager side or you're on the CEO side, really ask yourself, do I want to be in a long term relationship with this person when the Bloom is off the rose?

Ryan Miller  

That's absolutely brilliant. I always joke, as you know, Alex, I've coached about 2000 people launch your own fund and I always tell people, I'm like, launching a fund versus running a fund is like having a wedding versus having a marriage. I was like, those two sounds similar. They are nothing alike, very different skill set and the biggest part you hit it, brother, it's raising capital. That's the biggest part of going from the wedding to the marriage in this fund space is saying, can you fill it with capital deals and the other management issues you mentioned earlier? Now, there was something that you taught me that blew my mind, and it is so simple to understand you're like, as the saying goes, ELI5, right? Explain it like I'm five, and it's something about how you arrive at product market fit, and you have a bit of a path that you take to get there, not just you, but also your advice for other people who maybe want to approach you for an investment in their startup. Maybe talk a little bit about that process of product market fit. Because not only does this work for startups, this is where you commonly hear product market fit, but actually this works for anyone raising capital, anyone running a fund, anyone doing deals, this works on every level. I absolutely love it, and I want you to get full credit for it. So I did not come out with this, but I want Alex, the man, to really get credit for this. 

Alex Chompff  

I will share this with you, but just as you have said, I have to give credit where credit is due. And this is an articulation that my team has come up with, particularly our lead analyst, Coleman, and it is rethinking of a traditional funnel. And this arises because funnels and funnel logic have been around for long enough that everybody knows how it works, and everybody knows when they're being funnelled, right? And I think, for example, of my kids, my kids are the most sophisticated media consumers that I've ever met, and they have been since they were very, very young. My kids think about everything from camera angle to scripting to directing whenever they watch anything, because they understand that they're being manipulated. And the world has come to a much better understanding of how manipulation works and funnels are the classic articulation of manipulation. And I don't mean manipulation in a negative way, I mean manipulation like a sentiment.

Ryan Miller  

Influence. 

Alex Chompff  

Yeah, right. So that, you know, the old funnel was, what was it? Awareness, desire?

Ryan Miller  

Yup, ya.

Alex Chompff  

And that's fine, that's fine, and it works in certain places, but I don't think it is what's going to take us forward. And what I think is going to take us forward is a three step process that my again, my team, has articulated, and it starts with content market fit. And when you have content market fit, then you turn your attention to community market fit. And from within community market fit, you design and develop the products that fit your market so you get to product market fit. And this articulation content, followed by community, followed by product, is probably pretty similar to a lot of things that people are doing intuitively. But when you express it clearly, you articulate it in this way, suddenly it becomes much more actionable, and it helps to solve one of the biggest problems that you see in the startup world, which is that entrepreneurs tend to rush to product and then seek market. So the most common error that I see is from product oriented CEOs, who use 80, 90, 95% of their resources to develop their product, to find out that they don't actually know who their market is, and that their market is not beating a path to their door, and they've no longer got enough resources. What I would say is reverse that entirely, do the cheap thing first, get the content out there that's going to resonate with your market. See if people will pay you with a click, if they'll pay you with a click, then they might just pay you with an email and join your community, become part of your Slack group or your newsletter or your Facebook group or your LinkedIn group, or wherever it is that you find yourself. But if you can get from a click, you might be able to get to an email. If you can get to an email, then you might be able to get to $1 if somebody is not going to give you a click, they're never going to give you $1 so don't start by building the most expensive part of the product or the most expensive part of your company. Start by finding those customers, maturing them into the community, and then using that community to design and develop a product that you want to give to it.

Ryan Miller  

Absolutely brilliant, man and you know this, this ties in, and I think I prefer your version of it. But I always say, you know, when it comes to this sector, right, so I hear pitches from real estate, hedge fund, I've heard them, and one thing I've noticed between an experienced founder versus a first time founder, as an example, for those of you who are listening and looking at maybe entering this space or getting better, maybe already in, is every entrepreneur will talk about their product as they should. It's fine, tell me what, tell me your idea. What are you doing? But the experience ones, not only do they talk about product, but they talked about how they validated the market, and they know about distribution, right? So, PMD, so product, market and distribution. When I hear someone that can articulate, here is my product, here's how I know that there is a huge desire for this, and I understand how to get it to market, not just I'll build it, and everyone's gonna fall in love and rush to it. Okay, do you have a funnel, do you have a community that everything that Alex is talking about? How are people gonna find you, it does you no good building the best product in your industry in a cave and nobody's heard of it. So you may have the best product. How do you get it to market? How do you validate and so this, this gap between product and distribution, the middle piece is the market, and validating that is a big part. It's not just validating your market, folks, it's with that validation, you can convince an investor to support you. Would you agree, Alex? 

Alex Chompff  

Oh, absolutely, yeah, especially in early stage investing. So we will, we are very early stage, we will invest pre revenue. We will invest pre formation for the right founder. 

Ryan Miller  

Wow. 

Alex Chompff  

And yeah, my pre product certainly pre profit. 

Ryan Miller  

Yeah, that's brilliant. 

Alex Chompff  

One of the number one indicators that we're looking for is somebody who understands the market in which they're operating and how to satisfy that market. You know that, that, you know that that points to some of our thesis points right? We're interested in innovation over invention for example, we're interested people that are problem, that are, that are solving commercial problems in commercially viable ways. To us, this is much more interesting than invention, which sets us apart a little bit from some of our peers in the venture capital world who are very interested in invention, right? Who see innovation typically as indefensible, right? They're worried about encroachment, they hope that invention will keep encroachment at bay. And in my point of view, from my point of view, innovation is actually much preferred over invention. I would much rather have an entrepreneur come to me and say, hey, I've got an idea and I'm using commercial off the shelf software. I'm using things that already work in the world. I'm strapping them together. I'll be done in 30 days. I'll have a product that the world can buy. Versus a entrepreneur who comes to me and says, hey, I've got a great idea. All I need is a couple million dollars in 24 months, and we'll have a minimum viable product ready to test. No, thank you. I'm gonna pass. I'm gonna pass. So I like innovative entrepreneurs, very, very, very much.

Ryan Miller  

Brilliant and so when it comes to finding products and entrepreneurs that are dealing in the innovation space versus the invention space, you have a very interesting thesis, and I'm curious if you would be willing to share with us, just a brief insight into how your thesis and innovation and invention and how all of that works. Maybe you can unpack that a bit. 

Alex Chompff  

Yeah, yeah. I'm happy to share and perhaps it might even be useful for your audience. We I should mention that we never get keep knowledge. We believe that capitalism is a great good, it's a tool for great good when properly handled, right, just like any tool can be improperly handled. And so, you know, in our mission, which is to spread capitalism as far and as wide as possible, we don't get keep information. So in that spirit, I share with you our investment thesis, which I've developed over many, many years. And you know, you mentioned that I used to be at Kleiner, and that's absolutely true, I was there as their director of technology during the.com boom, as well as several similarly situated firms. It was a very interesting and exciting time to be in the business, and a few things that I started to learn there that I've cemented over the 20 some years since then. The first is that technology decomposes monolithic industries, technology decomposes monolithic industries. So this means that, from my perspective, what I'm looking for is I'm looking for companies that are alongside large industries, and that are using technology to try to siphon off what's happening in those industries, right? So Amazon decomposed logistics, right? It used to be that if you wanted to be in the logistics business, you needed to have a truck, you needed to have a radio, you needed to have a driver, software manifests all those things. Today, if you want to be in the delivery business, all you need is a phone, an app, two wheels and an hour. And actually, I heard in San Francisco there's a guy who does it on a unicycle. So you only really need one wheel now, but you can do it foot powered, if you look hard enough, as YouTube did to the entertainment industry, right? 

Alex Chompff  

So remember when it used to be that if you wanted the world to hear your voice, you had to have somebody who knew how to produce a professional studio edited film or piece of work. You had to have distribution channels. You had to have all kinds of things in order to make your voice heard. Today if you want to be heard again, what do you need? You need your phone, need a few minutes. You need anything from YouTube to Tiktok, and you too, can be a star. YouTube can affect what's happening out in the world. FinTech has been busy decomposing the banking industry for a little while now. Banking industry is a fantastic example of a monolithic industry stacked to the rafters with cash, filled with people who are pretty sure that they're protected behind their Byzantine rules and regulations. Point of fact, technology is taking all that away from you. 

Alex Chompff  

You know, there's a good example, Ryan, when I started my career, every shopping center had two or three travel agents in it. I don't know if you remember those times remember that? I do. Everybody had their favorite travel agent, you know, and they two travel agents in the same shopping center two doors down from each other, both doing fine, okay? The Internet decomposed the travel industry, right, one of the very first things that happened when the internet came online was that people who went to school for a couple of years to learn how to use the saber reservation system suddenly found that anybody sitting in their kitchen could do the same thing. I just remember that right? Used to be, I want to go to Mexico. I'm going to take a trip with my wife. I would go to the travel agent. I'd give the travel agent all this information. They would tippy, tippy, tippy on their computer for half an hour, then give me three choices. I'd bring those home to my wife. Then all that's gone, all that's gone, because technology decomposed that process and I really like technology is a decomposition mechanism that's a little bit different, again, from my peers, who oftentimes are looking for category killers or new categories altogether, right? Those are not what I'm looking for, I'm looking for companies that know how to make money in existing industries, can pull that money off and use it more efficiently than their competitors can, so that we can continue to scale. 

Ryan Miller  

Absolutely brilliant, and you're spot on, man, like, like you said, look what Bitcoin or crypto did to the blockchain industry, even you and I talking right before to be able to do this, you'd have to do a national radio tour. And now you can do it from a hotel room or from your home studio or home office. And so this disruption, I know maybe you don't quite call it that, but this decomposition of these monolithic industries, there is tech that can decompose, and I think that's where you really start to get excited, is that, is that right?

Alex Chompff  

Yeah, that's right. That's right. The second leg of our thesis I've already shared with you, which is that we prefer innovation over invention. Invention has its place, intellectual property has its place. Not denigrating the importance of IP I'm saying that from my perspective, I want to see you move faster. And as an investor, I'm going to look for companies that know how to move quickly. That takes me to the third leg of our thesis, which is that we're looking for companies that are running to revenue, I want to see you run to revenue. So if, as an investor, if you come to me and you say, hey, I'm, you know, I've raised a million dollars, and my plan is to raise 2 million more, and then after that, I'm going to raise $3 million and as soon as I raise $6 million hey, I'm going to go out there and slay it. No, it's now. That's not what I'm interested in, it's much more meritorious to generate customer revenue. Customer revenue is far more meritorious than investor revenue, or it's not revenue investor funds, right? When investors invest into you, there's this tendency to feel very proud. Oh, I've got all these people that have invested in me. There's this tendency to boast around the campfire about how much money you've raised, I'm not interested in that at all. I'm interested in how much money you've made, how much money have you earned in the marketplace, and how efficiently were you able to do it, able to do that? These are things that are very important to me, particularly in early stage startups. 

Alex Chompff  

And then the last, but certainly not least, part of our thesis is that there has to be marginal advantage that exceeds marginal cost when you add a new unit of production, which is a little bit hard to understand, but think of software, right? Every time you add a new software user, your software just accepts that user and moves on without any very large incremental cost. Where, if you're running a car wash or an accountancy, every time you bring in a new user, you either need a new car washer, or you need a new somebody else to process the books, right? So what I'm looking for are businesses that are scalable, where every time we add a new customer, the revenue accumulates more quickly than the cost accumulates, right? There's some interesting things here, like one of the things that was not really well understood about Uber by most people is that Uber was never profitable on a per ride basis. The reason that Uber was so attractive and that people found Uber so competitive was because investors were subsidizing your ride. In addition, drivers were subsidizing your ride because most of them don't appreciate the actual depreciation that's hitting their vehicles. But in any case, rides on a per ride basis, they were not profitable. Nonetheless, the plan at that institution was to accumulate more and more and more and more rides, and it became less and less and less profitable. Investors had to put in more and more and more as the company grew. That's why eventually the company ended up going public so that those investors could see a return. And the public markets seem to have encouraged a kind of fiscal rectitude that is pushing that company toward profitability or toward profitability on a per ride basis. But as an investor, I share with you, and I think as emerging managers, you should be avoiding companies that are unprofitable on a per ride basis and become more unprofitable the more rides you accumulate.

Ryan Miller  

That's absolutely brilliant and building out a lot of these different investment, theses that follow a lot of the experience. And I know we could talk for two hours. In fact, we've had those moments where we've talked for two hours. But, you know, I'm really curious. As we round third base, I would love for you, with all of your experience, been doing this for a long time brother. What unfair advantages can you provide for people that are looking to maybe enter into this industry of alternative assets or venture capital directly, whatever that is. I'm curious what unfair advantages have you found that would be helpful to our audience today?

Alex Chompff  

Yeah, yeah. We always looking for sustainable unfair advantage. How do you get sustainable unfair advantage as a venture capitalist, though, as an emerging manager, this is very difficult to do. There are 1000s of VC firms out there, you're entering a very crowded space. So the first thing I'm going to encourage you to do is actually use and observe the things that you're interested in investing in. There are a surprising number of investors who do not understand the technology of what they're investing in. They do not understand the business problems that these technologies are trying to solve, and so as a result, they're kind of shooting in the dark as to whether or not these, make these investments, or these sets of investments, make sense. And I'm going to use an example from my own experience, and I'll start by saying that I've been making money with a keyboard since 1990 right prior to 1990 I played with the keyboard, but only to meet girls. After, after 1990 I started making money, and along the way, I've done a lot of relatively technical jobs without ever being like a computer science major or a program or a developer, but that doesn't keep me from playing with technology and understanding what the limits are of technology, so that when somebody comes along and proposes an idea to me, I have some real comprehension about whether they're solving a real problem in the business or not, a real problem in industry or not. 

Alex Chompff  

And the example that I'll give you is AI, because it's very hot, people are very interested in AI right now. And I'll just say hey, when OpenAI made their first announcement, I stayed up all night. I sat on the couch and talked to that GPT all night. Okay, but as soon as opening eyes made it possible to buy a license or a professional very first thing I need to buy a professional license. And by May of 2023, I had received my developer key from open AI, and the first thing I did was go play with it, I went and played with it. And what I did, and in particular, I created a world called MasterVerse. Masterverse.ai interestingly, the AI named itself. I was playing around with using AI, and I said, well, what would you like to call yourself? So I would like to call myself MasterVerse, okay, great, masterverse.ai was born, and masterverse.ai was a place where I invited friends from my community to come into a combination of a Substack and a Slack world. And in that world, I used off the shelf technologies like Zapier to connect open AI to Slack, to connect open AI to a number of tools. And then I started playing around with, what can I do with this? I started trying to create specialized agents in May and June using prompt engineering. So May, June 2023, I'm trying to create specialized agents that created an agent for the law, I created an agent for accounting, I created an agent for helping startup funders get funding, a few other things, and I put them in the Slack channel, and I had my community come in and work with it. And because we were all using and observing together, we were getting smarter faster, and we quickly discovered some basic problems, like one basic problem is, as we know, if you talk to an AI that's been talking to other people after a certain point, it forgets what it was talking to you about. It no longer remembers and all of that work is gone. And that problem became really apparent to us by about July of 2023 maybe August of 2023, I spent two or three months trying to solve that problem myself. And what I learned is that it's a class of problems, and there's a whole group people that are working on solving it, collectively. They call this R A G or RAG, recall augmented generation, because I'm not very skillful. I was trying to solve rag in some unskillful ways, but I was learning through use and observation, and what that gave me the ability to do was understand when these AI companies started coming to my door, which ones were actually dealing in a problem that was germane. And so as a result, we invested in a company called DAX, because DAX uses no SQL data structures to provide recall augmented generation. I said, hey, that's a real problem. I know exactly what that problem is, because I'm stuck in it in my community. Another problem that I had was what to do with all these agents that I had created, how to keep track of them, how to understand what their utilization levels were. Eventually, would have been ideal to monetize them, right and I didn't have any real way to do that inside of my own skill level. So when a company called Pickaxe came along, and Pickaxe is essentially the Etsy of GPTs, I said, hey, those guys are working on a problem that I understand because of use and observation. So several of my investments reflect this, what you would call unfair advantage of actually being in the machine and understanding what works and what doesn't work. And it didn't require me to be a computer science major. It required me to take a couple of evenings, and then after that, a  couple of weeks and a couple of months to play around with this new tool and understand what the problem was. So I think really, it's very important.

Ryan Miller  

Absolutely brilliant man. And would this tie into what you mentioned earlier about content market fit, and then Community Market Fit? Because you mentioned you created a community masterverse.ai. I believe you said.

Alex Chompff  

Yes.

Ryan Miller  

 And so it's a bit of a community, and I'm just you tell me if I'm hallucinating here. But with that community, it allows you to really understand some of the systemic issues in that industry and that community it is involved in. And then, as an investor with your use and observation, says it's not just observing and using tools, it's observing and talking to people in your community. I think that power empowers you to really, then identify, like you said, without being a computer scientist or or that subject matter expert, you can still become one, because you have a community and you have content and now through that observation, you can really start to understand what are the main problems. And then when people pitch you, you're like, holy smokes, this is someone who's actually solving a real foundational problem, would you say that that all ties together, and that's how you leverage use and observation. 

Alex Chompff  

And I'll even go further than that. Remember the originals don't, don't try to pick winners, right, pick credible companies that are solving real problems that matter in industry.

Ryan Miller  

And now you know what those are real problems, yeah, ah, brilliant.

Alex Chompff  

 Yeah, I'll go one step further, which is because I am a manager, and not a small number of my friends are managers. When I created this community, I would say that we had a few billion dollars worth of wealth management in there within a relatively short period of time and they are seeing that we're using and observing technology. They are seeing the problems that we're solving. They are recognizing that we are becoming leaders in an emerging field, which makes them comfortable placing their money with us so that we can go be good managers, so we can have resources to manage. One of the I mean, is he shall remain nameless, for you know, out of propriety, but one of, let's call him the top 50 money managers in the world is a member of MasterVerse, and we're very, very pleased, because not only is he in there, blending credibility to our work, but he sees what we're doing, and when we turned around and started making investments in this class, he entrusted us with his assets to manage. Now, what does it say when one of the top money managers in the world trusts you to manage their money for them, right, that's something. That's something and that comes about because of this humility, this understanding that you don't know you can't know. What you can do is you can discover, you can use you can observe, you can learn together. You can share lessons with each other. And when it comes time to make investments, you can focus on companies that are solving real problems in the industry, and just diversify across a credible selection of them. Again, don't try to pick winners.

Ryan Miller  

Brilliant. So don't leverage use and observation. Number two is, don't try to pick winners, but pick companies that are solving critical problems, which you've established through use and observation, so you can spot them a lot quicker. Do you have a third unfair advantage you can provide? 

Alex Chompff  

Well, we've talked about diversification. I'd really like to communicate to your audience as efficiently as possible that diversification is not just a good idea, it's a competitive advantage. It's a competitive advantage, right? The ability to invest broadly, which is done by writing small checks quickly, allows you to operate with a certain freedom from fear, because you can afford to lose these checks, because you can concentrate on what's really good for the company, because you can focus on being of service to your community. These things create foundational advantages that accrue over time, they continue to accrue value over time, you will develop a reputation in this industry, not only as somebody who's knowledgeable and can be trusted with investors money, but as somebody who is ethical and who in who entrepreneurs can afford to get married to, right? We all know somebody who got married to someone they couldn't afford to be married to, right? You can afford to be married to us because we diversify at such a level that we can afford to give you our best advice without worrying too much about our end on the outcome. 

Ryan Miller  

Yeah.

Alex Chompff  

It's, it's something that's, it's difficult to understand, but once you're once you're in it, and once you're operating in it, it becomes a way that you don't want to leave.

Ryan Miller  

You know, running a startup, I'm reminded of, of something I most people don't know this about me, but I actually minored in sociology. I mean, I don't mean to brag, but I did take six classes in university, but, but in all seriousness, there was a study that I recall, so I believe it was in the 90s. So I was I was young in the 90s, and New York was not known for being tidy or being particularly safe during this time. And there was a lot of people who were skipping their fare and this is going somewhere with investing in companies, bear with me. And one thing that they found there was someone, and I can't remember the name of who coined this, but it was called the broken window theory, and they said the broken the broken window theory is something like this, that, let's say you're you're walking to the subway, as one does in New York to go to work, and you pass by a building that looks a little abandoned, but you're not sure, right? It could be of a business there, I'm not sure. And then day after day, and then one day you walk by and it looks like someone threw a stone through a window, and there's some broken glass on there, and you keep walking. And then the next day, another hole in the window, more broken window, and then maybe some graffiti shows up. And then people are leaving garbage outside and so on and so on, and the snowball happens. And so they adopted this theory called the broken window theory, which says if there is a little bit of a broken window that tends to not be addressed for many times, people get the message that nobody cares about this building. So why would I care about where I drop my Starbucks coffee, I'll drop it outside of this building. Nobody obviously cares, and it keeps going and going, well, maybe I'll skip paying the fare and I'll just jump over the gate and ride for free. And little by little, not tending to those little things added up to a major problem for one of the greatest cities in the world. And you have a very interesting take on the broken window theory, and I'm wondering if you could talk about that as it relates, maybe not to social good or bad, it might or New York, but you also have your own version in venture capital that relates to something similar to the broken window theory. I'm curious about what it is and how you go about implementing it? 

Alex Chompff  

Thanks for asking, it's a deep topic. I really appreciate it. I have two broken window theories. One has to do with foreign policy, but I'll skip I'll skip that one for the day. And my broken window theory domestically is that people only break windows when they feel like they don't own the place, or people who own the place don't break the windows. And in our society today, there are a lot of metaphorical broken windows, and there's a lot of window breaking that's going on, and I'm pretty sure that's because many of the members of our society and here I'm kind of, you know, I'm thinking about the United States in particular, okay. Could be the Western world in general, but then the United States in particular, there's an awful lot of window breaking that's going on metaphorically, and that's because people don't feel like they own the place. They have forgotten that this country belongs to us, that Ryan and Alex and everybody who's listening to this show have all collectively agreed that we do not need a Duke or a Duchess to tell us what to do, we're perfectly capable of deciding for ourselves. And at the heart of that enablement, or a critical component of that enablement, is the ability to marshal resources to affect change on the world in which you live. And so the corollary, then is that many people feel like they don't have the resources to affect change, that's why they don't own this place. What I would love to give to everybody in the world, if I could buy the world of Pepsi, I would share, I would share with every listener, the knowledge that capitalism, capitalism the tool of shared, shared work and shared reward that that tool is available to each and every one of you. It is in the metaphorical backpack that was issued the day that you got here. I don't care how you got here, in that backpack was a tool called capitalism, and you might not realize it, but that's your tool, and you can take that tool out of your backpack, and you don't need anyone's permission, you don't need anyone's okay to begin a capitalistic enterprise. And capitalism, in this case, is characterized by people voluntarily participating in the creation of something that has value sufficient to return to them resources. Those resources can come in the form of wages, those resources can come in the form of stock ownership, those resources can come in a lot of ways, a lot of forms. The key is that they're yours to create. They're yours to own. You don't need anyone's permission to practice capitalism and to accumulate the resources that will allow you to affect the change that you want to see in the world, so that you and the members of your community understand that this place really does belong to you. It really is your place. Don't break the windows, you own it. That's that's my take on broken windows. I would love to see a world in which everybody understands how to use capitalism and is deeply, intrinsically motivated to do so ethically, because it's just a tool. It's a creation of society, it's a creation of man, and just like any other tool it can be used inappropriately, it can be used to create horrendous effects. We need to do as a society is decide how we're going to use our tools by settling upon our moral direction before we get to our money. Right, sitting on our moral direction before we get to our money, understanding why we're on earth. What is our purpose here? What do we seek to accomplish? And then taking the tool of capitalism and using it to accomplish those things.

Ryan Miller  

That's brilliant. Thank you for that. So then, would you say, at the heart of, like you said, capitalism, I too, see it as a virtuous tool, but nonetheless, it is a tool. Would you say the ability for a society to unlock the benefits, the pure, the virtuous benefits of capitalism, at the heart lies ownership and ethics? Would you agree with that?

Alex Chompff  

 I would say that at the heart lies ownership, and I hope you bring ethics. 

Ryan Miller  

Yeah. 

Alex Chompff  

I need you to bring ethics. Right? And capitalism has done more to lift people out of poverty and create wealth around the world than almost anything else I can think of. But not every practitioner has operated with the best interests of society at mind, and I would encourage every person listening today to think first about their families and their communities, than about how to use that tool. 

Ryan Miller  

Absolutely brilliant. I love that. Also a big fan of capitalism myself. So you know, as we wrap things up, is there anything else that you'd like to say ways that people can reach out or learn more anything at all? 

Alex Chompff  

Well, first of all, Ryan, I very much appreciate our time together. I like really, I really have found a lot of meaning in our conversations, which I've shared with the people around me. I appreciate your audience. I appreciate that you take the time to do this. I understand that it's a labor of love, and I understand that you're doing it because you also want to share it with the community. So it's an honor and a pleasure to be here sharing with your community and really appreciate the opportunity, if people want to find out about us, if you're interested in learning more about investing, I would encourage you to go to evfm.co. evfm.co is where we talk about the science of fund management. We talk about the application of thesis. If you're a founder and you're interested in learning more about how to raise funds and be a successful founder. Try evolutionaccelerator.co, this is another community that we've created, each one of these are communities, right? And then a third community, which I'd invite your listeners to participate in, is the Master verse, masterverse.ai. As I mentioned, it named itself, so we're very pleased to be very pleased to be supporting our new robot overlords when masterverse.ai is a great place to learn about some of the more sophisticated aspects of artificial intelligence in business. 

Ryan Miller  

Brilliant. So just to summarize everything we talked about, leverage, use and observation, second thing is, don't try to pick winners, just pick companies that are solving critical problems in their industry, which you know what those are, if you're doing the first and then finally, diversify and operate your fund with excellence. You do these things, and you too will be well on your way in your pursuit of Making Billions.

Ryan Miller  

Wow, what a show, I hope you enjoyed this episode as much as I did. Now, if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better, and make sure to come back for our next episode where we dive even deeper into the people, the process and the perspectives of both investors and founders. Until then, my friends, stay hungry, focus on your goals and keep grinding towards your dream of Making Billions.