The Many Bosses of a Venture Capitalist

My episode with the razor-sharp Ateet Ahluwalia

Let me introduce you to the four horsemen of the investment apocalypse:

Fear.

Greed.

Hope.

Ignorance.

Notice anything?

Three of four are emotions.

I’ve long argued that effective investing is far more about emotional control than technical know-how (although the latter certainly helps!) By hook or by crook, the best investors can find a way to tame their pesky emotional impulses and overcome that primal urge to respond impulsively to panic, passion, or pride.

My guest, the razor-sharp Ateet Ahluwalia, is a veteran trader and investor who has spent well over 15 years at the coalface, from trading at Goldman at the dawn of the financial crisis to his current role as founder and managing director of the venture capital firm Island Green Capital Management. As you’ll hear from our conversation, Ateet has built an insanely deep understanding of the emotional constitution required to succeed in finance and venture capital, which informs his approach to risk management, hiring, investing, due diligence, and everything in between.

I hope you enjoy our wide-ranging conversation (available here), whose implications extend well beyond investing.

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Takeaways

Here are three things I learned from Ateet about how to be a successful venture capitalist:

1. Put Your Ego Away: Swallow your pride. Forgo the glory. Accept that “you will never, from this moment on, be the smartest guy in any room you go into, even the bathroom.” Venture capital is a service business. You have three bosses: your entrepreneurs, your clients, and your colleagues. Your job? To be their painkiller. Do this well, and you will become unstoppable.

2. Know Yourself: Two things Ateet learned about himself as a trader: he prefers numbers to stories, and he cares about his hit rate. In venture, he has structured his portfolio accordingly; a valuation floor of $100m helps him avoid the allure of sexy-sounding seed investments, and he focuses on macro sectors with aggressively favorable tailwinds. By understanding what he calls his “emotional constitution,” the nexus of preferences, traits, and impulses that govern how he reacts to different situations, Ateet has built a system perfectly designed to contain them. I have long argued something similar: if you adopt a strategy that you are not emotionally equipped to consistently deliver, you’re going to get poor results.

3. Do the Work: If you coast, you will get found out. There is no substitution for putting in the work (not even a firm-branded Patagonia). Here, for example, is Ateet’s approach to due diligence: “I have to leave no stone unturned, so I'm going to read everything about that. There's 400 items in the data room, I'm going to go through every single one, I'm going to go through every line of every spreadsheet until I feel like I've internalized this. And well in advance, so I'm going to go visit the factories on the ground in Chicago or Wichita or wherever. I'm going to talk to your suppliers, I'm going to talk to your clients.”

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Transcript

Jim O'Shaughnessy:

Well, hello, everybody. It's Jim O'Shaughnessy with yet another Infinite Loops. Now, today's guest I have really had to coax on to the podcast. He is my friend, Ateet Ahluwalia, who runs a hedge fund, or VC fund rather, excuse me, the founder of Island Green Capital Management. Now, why did I have to coax you on here Ateet Ahluwalia? And welcome.

Ateet Ahluwalia:

Thank you. I think for me and what I do in venture, when you're constantly trying to service the entrepreneur or your teammates or your LPs, you really have to be in a position to not want the glory, If you're helping an entrepreneur, you want to make sure that they dictate the narrative. In venture, they have investors that sit on the cap table that take board seats, and they're effectively your boss. They're thinking, "Well, she led us to the C, can she lead us to the D and the IPO?" Me speaking about anything in general to do with the business, I'm always a little bit reluctant to do because flying under the radars are our calling card, essentially. If you don't want the glory, there's so much you can learn, so much you could do and so many great companies and investment themes you can be a part of. That's probably why. Also, personality-wise, I just like reading and being a nerd and getting lost in my spreadsheet or doing the onsite visits in the factory in Wichita, Kansas, or wherever the business takes me.

Jim O'Shaughnessy:

You and I have had some great conversations about something that we think a lot about, and that is this idea of how do we approach risk? How do we approach risk management? We're going to talk about some of the lessons you learned when you were at Goldman. We have very similar views on that. One of your quotes is, "Ironically, in a changing world, playing it safe is one of the riskiest things you can do." I've often said that in the short term, the investment, which appears to be the safest, like say T-bills, is in the long term actually the riskiest investment you can make. Let's dive into that.

Ateet Ahluwalia:

The thing you're trying to avoid usually becomes the thing that happens because it's at the forefront of your mind and because you think about it all the time, the human mind has this unique ability to manifest what it thinks of most, whether that be good or bad, but particularly if it's something you're trying to avoid. When people think of T-bills, of course, they pay you an astronomical amount relative to the recent past or zero and low-interest rates, but if you look at someone like Larry Summers, treasury secretary under President Clinton, well-respected guy across circles, and even he tweeted out that, "Hey, if you measured inflation the way we did, it peaked at 18% and it's coming below six now." Your 5% on your T-bill while attractive relative to recent past, maybe on a real basis is not attractive at all whatsoever. I think people need to really think about what the real nature of the risk they're taking is. I guess one of the best lessons I learned was during the crisis in Zimbabwe. Do you remember those hundred-trillion dollar notes and things of that nature during the high-

Jim O'Shaughnessy:

I do.

Ateet Ahluwalia:

I had a buddy that worked next to me and he was from Zimbabwe, and I asked him like, "Oh, man, things must be awful. I hope your family is okay. Anything I can do?" He kind of laughed and he's like, "Man, everything's great. I don't understand why you could say that." I thought he was making fun of me, or just if something's happening. He goes, "Dude, when you can see a hyperinflation coming, people like us will take out loans and we will buy prime real estate and then we will pay them back with this hundred-trillion dollars note sitting on my desk here. My family got to really triple the size of it if its landholding is in real estate holdings. We've seen how this movie ends."

Ateet Ahluwalia:

That was such a wild lesson to me because if you thought hyperinflation is coming, maybe you'd buy gold, maybe you'd buy stocks or assets in other countries. There's many iterations and expressions of the trade for what safety really is. If you have a home bias or you can't actually invest outside of your own home country, a lot of counterintuitive things happen at the extreme at the limits of finance.

Jim O'Shaughnessy:

Let's talk about some of them because I've seen this pattern time and time again. I love that story about your friend from Zimbabwe. Because one of the things that both you and I do is look at things from a different perspective, I guess, would be the way to put it. The precautionary principle, which rules so many societies. If you do your homework and you look at the most tightly wound precautionary principle above everything else, we can't take this risk because, and it's so easy to fill in all of the reasons. It's really easy to find things not to do something. I also completely agree with your analysis of whatever you are spending all your time thinking about, it's like don't sit there and think, "Don't let my portfolio lead me to ruin. Don't let my portfolio lead me to ruin." Guess what? The universe is going to say, "Oh, he wants his portfolio to lead him to ruin. Okay, that's what we're going to do."

Ateet Ahluwalia:

Every single time.

Jim O'Shaughnessy:

Let's talk about how you look at risk in particular because it's very different than the way even your average venture capitalist or average hedge fund manager looks at it.

Ateet Ahluwalia:

I think for me, risk is not really a question of or shouldn't I, it's a question of size. Because the sizing of a particular position will dictate your ability to hold it, and then the next layer is what gels with your emotional constitution, and that will dictate the expression of the trade. There are occasions where you can buy in the money options in a stock that you like. Maybe a stock is $10 and you buy a $7 call. Well, there's $3 of intrinsic value and maybe there's a couple of cents or maybe a dollar over. Well, if you think there's going to be a big move, but you also think there could be a big drop, there's a way to risk only three and a bit dollars on a $10 stock that you think could really motor.

Ateet Ahluwalia:

You can either cut the amount of upfront invested capital through that strategy, or you can simply do three times as much or however much you want to lever at that point. I think a lot of times people will just think, "Hey, I'm taking less risk because I'm buying an out of the money call," but the implied to realize differential is so high that they're overpaying Nvidia earnings when it was breaking out above a hundred and split adjusted. I think the implied move is something like 12%. There are times to play options, there are different structures that one could take, but I think that when one's looking at price risk in just that dimension, you really need to understand what your personality can tolerate from a risk standpoint that will allow you to do the right thing continuously.

Ateet Ahluwalia:

Then it becomes a question of, okay, that's the price risk, but what about counterparty credit risk? What about other risks in terms of the Greeks? What about risk when it comes to how that impacts the rest of your portfolio? Do you really just have the same trade three different ways? If you buy three semiconductor stocks and you think you've diversified your Nvidia risk with AMD and Broadcom, you should probably have a conversation about that, you're tripling. I really think about the expression of the trade, probably way too much to see what's optimal. Then I spend even more time thinking about or have historically what gels with my personality, and that's a function of the things I saw in the crisis.

Jim O'Shaughnessy:

That is something that when I started out, I was a real proselytizer. It was like, here is the way you need to invest. Listen to me, I shall tell you. I shall tell you all. Then I realized what a fuck up I had been maintaining that attitude and your idea is the one I have come to fully express for investment. The key thing investors need to get right is what is right for them and their personality. I love vol. People around me think I'm absolutely fucking out of my mind, but I love vol, and so I perceive these things very differently than other people.

Jim O'Shaughnessy:

As I've talked to more and more both end users, so not professional investors. Also, with professional investors, I realized, okay, what an idiot I was to suggest that this was the one true way. Because if you can't put a strategy into action or if you can only do so in a hit or miss way, your results are going to be really poor. Let's talk about for our listeners and viewers, how would you walk somebody through getting to the essence of, hey, here's what I think I can handle in terms of risk return, et cetera?

Ateet Ahluwalia:

Man, that's a great question. There's two sides of that coin. There's how you feel about your process and how it gels with you, and then there's how you deal with success. I don't know if you remember Ed Seykota, he said, "Everyone gets what they want out of the market." If what you wanted was attention because you failed, you'll definitely get that. If you want riches beyond belief and you probably put in the hard work to do it, you'll probably get that too. I think how you deal with yourself and then also how you deal with winning is the other side of the coin. For me, I got lucky in '08. I think I was 24 years old, they just let go of the head index trader at Goldman. They brought me and another senior trader over. I went from putting out trade ideas that no one read to being a part of the biggest risk book, one of the biggest risk books in Europe.

Ateet Ahluwalia:

The guy next to me ended up leaving after a few months for personal reasons, and you're there on your own. The luck is there's no way on earth that would happen today. You're not giving a 24-year-old a several hundred billion book and saying, "Hey, go prop trade that. Have at it." Equally, they had to have had enough risk going on macro-wise for them to not really think about my age, but just to say, is he producing? Is he thoughtful? Can we trust him? A lot of luck involved in that, but within that, a lot of lessons were learned around the emotional constitution required to trade, and then also, how I thought about it. There were heroes of mine that I idolized that were just unbelievably intelligent, and every day was a joy because I was never the smartest guy in any room anywhere, including the bathroom.

Ateet Ahluwalia:

I saw some of these folks, not all, but a couple of them, they lose everything in a day. They're riding high, tens of millions, hundreds of millions of dollars personally. They came over from Lehman, their house was secured on Lehman's stock. Lehman's stock goes to zero, they lose their house, they get divorced, and all of a sudden, you're like, "Wait a minute. You have the exact same net worth as me." Which is around zero. Watching that happen was a shock to the system because it caused a handful of things to happen. The main one was I realized that my judgment is the only one that matters for a particular trade idea because everyone's fallible, and to some degree or another, we're all groping in the dark. That was seared onto my prefrontal cortex forever and ever. I had to do the work, I had to agree with the trade, and I had to put it on and own it because I saw just incredible people just get fired in half a minute or lose everything in half a minute.

Ateet Ahluwalia:

I thought that was remarkable, that the mark-to-market is the only true purifier and the only true objective judge. I like to think my wife's objective about me, she's not. The only thing that's really objective, it's not your relationships, it's something like that. It's the mark-to-market. Watching that was a really big deal. A lot of my friends that aren't in finance are like, "What's the big deal? All you can lose is what you put on and you can make within a certain probability, a certain amount." I'm like, "Yeah, that's true-ish." If you have an options positions on, you can lose a lot. Ask the Porsche or VW folks who got crushed. Ask LTCM, the smartest guys in the room. This happens over and over and again. Ask anybody that's actually in finance. The difference is your emotions aren't finite and aren't probable. Your emotions are more like, you know in physics or in mathematics when you're stress testing a theorem? You test it at the limit which is negative infinity, positive infinity and zero to see if the theorem holds true.

Ateet Ahluwalia:

Your emotions are like that. You might lose 1% or 20%, but you're going to feel like negative infinite bad emotions. You might make 1% or 10%. If you're new, you're going to feel elated as if you just conquered the world. I think the ability to manage those emotions in a system designed to make you feel them at the extreme is quite important. For me, that means that I only look at things that are monopolies and oligopolies. It means that I will not lever unless I see something that I can knock out of the park and then I very strict risk limits as to how much of the portfolio it can take up in terms of size. I'm never going to take something that will put me into stock that's three times my portfolio, something like that. Or in the case of venture capital, it means that I'm trying to find the very best company in a specific category, trying to help the entrepreneur out and making it a very big concentrated 10% position in the portfolio and never having more than 10 to 12 names.

Ateet Ahluwalia:

To get back to the risk piece, for me, that's because if you diversify a little too much, and for me that's more than 12 positions. It just shows a lack of confidence in the process to me and it shows a lack of confidence in how you handle adverse situations. If you are blessed, let's say in venture to not have a mark-to-market, you better do all the work, all the work possible, and you better have the most top-flight company so that since you can benefit from no mark-to-market and COVID, if every venture investor had a liquid market that they could object, they would've hit eject, but they didn't. Some of those companies are now 10X, 20X, 30X, but the market doesn't treat everyone the same. The liquidity from the Fed doesn't treat everyone the same. You really need to put yourself in a position emotionally where you understand how you're going to react at every phase of the market and how you've reacted in the past and structure as well.

Jim O'Shaughnessy:

Yeah, so much to unpack there because that was the other conclusion I came to as I actually started running money, and you realize that you can simulate everything. By the way, I advocate doing so. I wrote a piece called The Thinker and the Prover, and he takes you through... My grandfather taught me a thing which he called pre-dating, which essentially is, okay, so here's what I want or think I want, what happens if I get it? Good, but also, bad. What happens if I don't get it? Bad, but also, good. It's a great way to clarify your thinking, but the more I dove in, the more I saw that the four horsemen of the investment apocalypse are fear, greed, hope and ignorance, and only ignorance is something that you can address. Fear, greed, well, by that I mean without trying. You can address ignorance through learning, through talking to people smarter than you, etc. But the ones that you can affect but it's really hard because you got to figure out your own emotional makeup, are fear, greed, and hope, right?

Ateet Ahluwalia:

Yeah.

Jim O'Shaughnessy:

And so the deeper I got, the more I understood that it really is an emotional question and the immediacy of emotions and the way they're asynchronous with the way that we should behave. So like Proust, I'm going to blow the quote, but the essence of his quote is driven by feelings that are destined not to last, we make our irrevocable choices. And that's what it's like to be in one of those Lehman Moments. And during that whole crisis, so my solution was to be a quant. So the only emotion that I had to control was not overriding our models.

Jim O'Shaughnessy:

And so after I retired from OSAM, somebody asked me, "What are you most proud of?" And I said, "Honestly, what I'm most proud of is that I never overrode a model emotionally." And during the crisis, my head of research used to come into my office every morning, say good morning, like, "Hey, Jim, how are you?" And I'd be like, "Fine." And well after the crisis at a dinner, he said to me, "I have something to confess to you." And I said, "What's that?" He goes, "Remember during the financial crisis how I came into your office every morning and said, 'Good morning?'" And I went, "Yeah?" And he goes, "I was doing that because I was so fucking freaked out about what was going on that when I walked in there, I heard Bach playing, I saw you were very calm," he said, "it literally brought my own temperature down."

Jim O'Shaughnessy:

But that's not right for a lot of other people. One of the things that you also mentioned this and my friend George Mack talks about a lot, increasing the surface area of luck. So you mentioned you get put in charge of this ridiculously big book at age 24. A lot of people, that would make them crumple, right? It's like I've seen traders literally that can't do it. They can't push the buy or sell button just because they're so freaked out about what is happening to them emotionally that they can't do it. But I think that the calibration of one's own emotions is a good topic here because you mentioned several things that you did personally to do that. But if you were coaching somebody who you found to be super bright, very suited to this world, where would you start? Where would you start with your questions of that person to kind of calibrate their risk tolerance yourself?

Ateet Ahluwalia:

There's two parts. I'd zoom out and I'd really try and suss out how they felt about their partner and how they felt about their choice of career. That's step one. My aunt is a psychiatrist and she used to tell me when I was a kid all the way through to today, she's like, "There's only two choices that matter. Who's your life partner and what is your career? Because one could be bad and one could be good, and you have a good life. If both are bad, you're in hell. And if both are good, every day you're walking in heaven." And so if I understand kind of how they're feeling, how they are on an emotional level from a big picture standpoint, it gives you a little bit of insight into what matters to them and where their focus is.

Ateet Ahluwalia:

Drilling down, you can ask questions about them. I think if someone says they did a thing, you just simply peel back the onion and drill down until there's nothing there. And you quickly find out was this a guy who worked at, pick a generational company, a Stripe or a SpaceX or a Goldman or O'Shaughnessy Asset Management. Did you just have a Patagonia with the logo said that name or did you actually do the deal that you say you did where you actually deployed X amount of capital into these companies? And so I think pretty quickly you can suss out where they are. I think too, you can ask obvious questions. Do they matter to them? If you say, "Hey, does money matter?" I think it's popular to say money isn't everything, money is the root of all evil, which is a misquote obviously, or things of that nature. But at the end of the day, there's this drive for a scoreboard and it solves multiple problems.

Ateet Ahluwalia:

Understanding the person's background gives you an insight into do they have a choice or not? I mean, so much of it's driven by mimetic desire and doing... "Everyone in my class from Princeton, they went to Barclays or they went to a Citigroup or whatever. So I'm here." How much of it's real? And the more you drill down, the quicker you get there, their willingness to admit mistakes, their willingness to take full accountability and say, "I'm wrong." It is shocking how hard it is to get people to say those two words. But I really drill down there and then I drill down into do they want accountability? Because everyone says they want a meritocracy. The reality is every human wants leadership, but they don't necessarily want meritocracy. And so depending on how you structure their compensation, you get to learn a lot about whether or not they really do want to eat what they kill or whether maybe they want to do that, just not yet. They're not ready for it. Or if they want something else entirely or if they just want to cruise.

Ateet Ahluwalia:

And so I think learning about their views on where they're headed, learning about their views on partner and career, is it a function of mimetic desire? Are they kind of on autopilot on some of these bigger background choices? Learning their expertise by saying, "Okay, and then tell me about this piece and then this piece and this piece," and finding where the dead end is, learning their actual quantitative rigor, and then learning their views on compensation and accountability. That matrix is, I mean, that's essentially the bulk of the hiring matrix we use at our firm that I've always used. But I think that gives you a very good picture of where they're at kind of on a mark-to-market basis as it were.

Jim O'Shaughnessy:

So as I listen to you, I'm ticking off in my brain, you're looking for people with high agency, accountability, who are sort of the least affected by mimetic desire, which had its moment a couple of years ago, lots of books. Peter Thiel's real big on mimetic desire and René Girard and I studied him for different reasons, but then found how applicable they were to the market. And I love your idea.

Jim O'Shaughnessy:

For example, one of the reasons why naming my companies is simple is because when I started my first company back when I was 27 years old, speaking about having a great life partner, my wife now of 42 years said to me, because I had this long list of Macromite or New World Invest, just horrible names. And she looked at me and she goes, "Jim, do you really believe that you're going to succeed at this?" And I'm like, "Yeah, of course. I wouldn't start it if I didn't believe that." And she goes, "Then put your fucking name on it. The only way that you're going to absolutely do 100% burn the ships is to put your name on the company." And I'm like, with "Wow."

Jim O'Shaughnessy:

And then of course, I started immediately looking at all the old school firms. They were all named after their founders and partners, right? It was like J.P. Morgan was a guy, Merrill Lynch, Pierce, Fenner & Smith were guys. But that just cut through so much for me when she said that to me. And it's kind of like, "Duh." So I found that to be incredibly helpful because you're not just putting skin in the game, you're putting your soul in the game if you put your name on it.

Jim O'Shaughnessy:

But then your other comments are also equally true. It's like one of the things when I'm working with younger people who really want careers in finance, I will explore getting them to the point of saying, "I'm wrong," or, "I don't know." And the best things in my life were opportunities where I was wrong and I didn't know. And just being able to say, "I don't know. Let me find out." And that leads to a view on how people look at mistakes. So I view mistakes as portals to discovery and growing my mental models, and a lot of them are going to be completely wrong. And there's nothing wrong with that, right? In the age of Ptolemy and his astronomy, guess what? Completely wrong. Very useful, very useful for guiding those early ship to discovery. But along comes Copernicus and you got to change your outlook. Do you look for that too? Do you look for an ability to in real time because you like mark-to-market, in real time for somebody to say, "Hey, Ateet, I'm fucking wrong. We got to change this."

Ateet Ahluwalia:

I mean, I love it if they're that thoughtful that they can say that, that's huge. It tells me a lot about them, and it allows us to then address the situation at hand. How many people do that? Very few. That's probably why in a year we've hired two people, three people. It takes a long time to find these great people. But you're right, mistakes kind of purify everything. They refine the process, they iron out the wrinkles in your worldview and your risk management system and whatever it is you're working on. And I mean, I don't know, Stan Druckenmiller's right, what, like 55, 60% of the time and he's the greatest trader in history. So I mean, you don't need to be right every time to dominate or be fabulously successful. I think you just need to be really good at cutting and either going to the sideline or reversing.

Ateet Ahluwalia:

And not everyone can do that. If you can't reverse a position, then just go to the sideline. It's just a lot better than bleeding. I had a boss named Wayne and an instrument I was trading was at like 90, 91 and I wanted to buy it at 90, and then it went down to like 88, 89. And he goes, "Did you buy some?" And I go, "No." And he goes, "Oh, good. Well, you can buy some now." And I was like, "Well," and he goes, "Let me get this straight. At 90, you like it. Your conviction hasn't changed. At 88, you don't want to buy it?" And I go, "No." And he goes, "At 89, do you want to sell it?" And I go, "Well, no." And he goes, "Okay, well, what good are you then?" And just walked away. That's kind of, it framed it up.

Ateet Ahluwalia:

You have to get in the game and that's normal. And yes, you will make mistakes. Just step up to the plate and make them and figure out what your analogy is. So much of learning, for a lot of people it's visual. Sometimes it's audio. Figure out the thing that allows you to make the mistakes with regularity so that you can just get on with it. So a buddy of mine said to me, he used to play baseball, and he's just like, "Yeah, a lot of pop-ups, a lot of pop-ups, but then every now and again there's a single or a double or whatever," and pop-ups as someone who is objectively awful at baseball, that really kind of resonated with me. But whatever it is that resonates with you, that gets you to get on with it in the right way, I think's really critical.

Jim O'Shaughnessy:

And the sports metaphors are legendary. I just read a thing the other day about how many shots Michael Jordan missed and the number's massive, and Babe Ruth, number of times he struck out. And people, it's so funny because I think our human OS guides us towards only looking at the one side of the ledger. It's like, "No, no, no, no, no, no. You need to look at the full history of, in the case of sports an athlete, but in the case of markets, the trader or the investor."

Jim O'Shaughnessy:

And one of the things that, I was just talking to some of my colleagues at O'Shaughnessy Ventures yesterday, and we were talking again about the financial crisis in a different context. And one of the rules that I had when I was at OSAM for everyone at the firm starting with me, was we don't call people when we're killing it because when we're killing it, they know we're killing it. They don't need us to call them and say, "Hey, hey, look at how good we're doing. Look at how smart we are." However, the rule was when we are absolutely getting the shit kicked out of us, everybody's on the phone, everybody is on the phone to our clients because that's when they want to hear from you.

Jim O'Shaughnessy:

And I had one guy, I still remember, again, it was during the financial crisis, say to me, "You are the only manager who is called incoming." And then he told me about his frustration without being able to get other managers online. And again, to me, those simple things orient you, I guess, and the firm to understanding it's hard. I mean, obviously nobody, when, let's say, the market itself is down 30 and your stuff is down 45 or more, and there's this huge delta, it's not natural to want to call the person whose money is down way more than it would be if he or she had been in an index fund, but that's the time to call them.

Ateet Ahluwalia:

That's how you build trust, right? I mean, I don't understand. They're not stupid. They know exactly what's happening. What they want is to know that you know exactly what's happening. And if you're not calling, then there's a real problem there. And it breeds insecurity because it shows incompetence, and that's natural. You do want to overcommunicate. It's funny, I do think everybody should trade a mark-to-market book and feel accountable to themselves for a long time to really just beat whatever it is inside of you that thinks they're better than everybody else, because we all have that to some degree or another. And just to make everything humble and nice and smooth again. I think that's really critical. That's funny. No, I think, yeah, your clients see their statements. They know when you're making money, they're all right. You pick up the phone when they call for sure, but you definitely pick up the phone if you need to alert them to something.

Jim O'Shaughnessy:

Yeah. And let's not kid anyone. Anybody who decides they want to come to the world of Wall Street. When I became just infected with that bug, I was still a teenager, and before she was my wife, she was obviously my girlfriend. And she's like, "Why are you so obsessed with markets?" And I'm like, "It's the Olympics of business." It is like markets are, I mean, they're just endlessly fascinating and they can have endless outcomes. And so it's just this great puzzle that I was really interested in trying to figure out because they touch everything, like we started our conversation about how you got to calibrate yourself emotionally, because that is what's really driving things. I'm a huge fan of the, well, I guess, I don't know what I'd call him, I guess the enlightenment author, Jed McKenna, who himself, that's a nom de plume. And I always joke that the author created the fictional character of Jed McKenna to tell us we're all fictional characters.

Jim O'Shaughnessy:

But a friend of mine, Dan Jeffries, who's a technologist, wrote a brilliant essay, couple of them, on Jed's work. And one of the things that he found was, who is the closest to reality, the way shit really is without your fantasies, without the way you want the world to be? And he lists the following three. The first are emergency room doctors, who have to make a life and death decision immediately. The second, special forces. Special forces, they can't have delusions. They have to have the best map of reality as it exists right in the here and now. And then the third one was the one that surprised me, traders. He said, basically, people who trade billions and billions of dollars, he loved them because he goes, "They are the closest to reality and they have very, very few illusions, good ones at least."

Jim O'Shaughnessy:

And it reminded me, he's got a great quote, which is, "If somebody comes along and doesn't buy your fantasy narrative about having a tea party for Lord Lion and Lady Gazelle, maybe they're not mean, and maybe your fantasy narrative is just a little bit fragile." And you just see so much of this today, right? These fantasy narratives that just make you shake your head. And how do you maintain these with... The best thing that happened to me was... Well, let's step back.

Jim O'Shaughnessy:

The worst thing that happened to me, I was originally interested in trading options and the fatal thing happened. My first trade, I doubled my money. And I like, "I am God's gift to markets. I will soon be a multi-billionaire." And then of course, the market kicked the shit out of me for the next several years. And it's like I am pretty convinced no matter what your level of abstract intelligence, no matter how clever you are, however good your ideas are, you need to be made humble by the market. Because if you're not, you're fucked. Because ultimately, and I have it tattooed on my brain, if I think one thing and the market thinks another, I'm wrong. So just that simple thing, it's really hard for people to get to.

Ateet Ahluwalia:

No, I mean, that's absolutely right. A lot of people thought, Wayne was very direct and abrupt with me. And one of the guys was like, "Man, he really goes after you." I'm like, "Actually, I'm fine with that. We're actually talking, we're communicating. He's preventing me from making bad mistakes." It's just one of those things like everyone thinks because they're good at one thing, they're good at everything. And as humans, we have a tendency to believe that. And so the difference is, I have doctors in my family, does that mean I can go into a theater of operation and conduct open heart surgery? No. I've read books and contracts. Does that mean I can go into the courtroom and defend somebody and understand the legalese and procedure? Absolutely not.

Ateet Ahluwalia:

But in the market, you just literally have to sign a document, said wire are the money in, and you're good to go. You're playing against the Michael Jordans of the space. You're literally squaring off against Druckenmiller and PTJ all those guys. And there is no guardrails. It's just you on your own trying to figure out reality. And I think that's a great hierarchy of folks. I'd add one more, pilots. You can't just fake being a pilot. You kind of have to know how to land the plane, take off. You can't just decide to maybe or maybe not run into the mountain. You have to be really good at it. And so I think that's another one. But even some of the guys I've worked with historically, some of the best guys and girls were special forces operators. They could cut a position with zero remorse, zero thought,

Ateet Ahluwalia:

"Oh, I'm going to go to the gym now." I'm like, "Dude, you're down like 3% today." "Okay, yeah, I don't care, dude. I'm going to the gym. I've seen bigger things than my 3% P& L." And so I think that's a really good one. It's very important. It's also, it puts perspective on things as to where you stand, because some things are not linearly difficult. They're exponentially difficult. And as traders, we're kind of on the bottom of that totem pole and get to have the most fun. But nevertheless, it is interesting to see. Like I said earlier, your emotions will range from negative to positive infinity, unless you can really control them and bind them and understand how to channel them, and most people just, you're never forced to do that.

Ateet Ahluwalia:

I'm curious about the gentleman that you talked about before that couldn't push the button to buy or sell. I wonder what his background was. Because there is no defined background. Like the old “give me a poor, smart and hungry,” that does work most of the time. There's a reason that saying is popular. But I've seen a lot of insanely wealthy young folks that want to make it on their own, that want to prove that they're not there because of their mother or father or whatever, work just as hard and do just as well. So there's no one template, but certainly there's a lot to find out about oneself.

Jim O'Shaughnessy:

Yeah, that's another great quote about the market. If you don't know who you are, the market is a very expensive place to find out. And again, it's that reality. And like your boss, Sir John Templeton had, he knew his his own limits. I remember reading an interview with him and he said that, he would often put good till canceled bids on stocks that he loved, way below where they were trading. If it was trading at 100, he would put a bid in at 20, good till canceled. And they're like, "Why do you do that?" And his response was beautiful. It was like, "Well, because I know that if the stock ever actually gets to 20, I will never, ever have the emotional fortitude to push the buy button."

Ateet Ahluwalia:

Yep.

Jim O'Shaughnessy:

And so, his way of dealing with it was to do that. And that's what I love about when you study some of these great investors and traders, is they figure out the right way that's going to work for them. And it's different for everybody. So, for me, it was like, "Okay, I know that I'm running human OS just like everyone else. I'm probably not any better or any worse, probably somewhere right in the middle of that fat bell curve as to how I react to emotions. So, what can I do?" Well, I can neutralize them by being a quant, and of course I was drawn toward algorithmic investing anyway.

Jim O'Shaughnessy:

Have you noticed the changes of your history of trading? What has ported over toward venture in terms of the way you think? Do you have different systems when you're looking at venture investments, which, by their nature, are much longer term?

Ateet Ahluwalia:

Yeah, I think I want to... Intellectual stimulation is one of the key benefits of both career paths. I think in venture, everything sounds sexy at seed. "Jim, we've got this chocolate that cures cancer and it can grow in any climate, this cocoa bean, and you can just harvest it immediately. We've got this laser that loosens up the gravel or whatever you'd call it, the moon dust, and it creates diamonds and we're going to bring them back." There's all sorts of things that sound incredible. I know that's not for me. Micro caps are not for me. I want the big, liquid, blue chip tickets that I can trade options on, that are going to be here forever. Or the guys that are creating a new sub sector where I think they'll be the winning player. Regulatory advantage, IP advantage, whatever the case may be. And so, that ports over in terms of my mindset.

Ateet Ahluwalia:

I run a concentrated portfolio, that ports over. The fact that I know this about myself. I've got guys on the team that work really smart. If they wanted to, they could only work a couple of days a week and they would do just as incredible job if they worked all five days a week, or seven days a week actually, technically, for us. But I'm not that guy. I know that about myself. I have to leave no stone unturned, so I'm going to read everything about that. There's 400 items in the data room, I'm going to go through every single one, I'm going to go through every line of every spreadsheet until I feel like I've internalized this. And well in advance, so I'm going to go visit the factories on the ground in Chicago or Wichita or wherever. I'm going to talk to your suppliers, I'm going to talk to your clients, I'm going to talk to...

Ateet Ahluwalia:

If you have government contracts, I will find out who you have them with and how those are going because of our connectivity within the Department of Defense. And I go through all of that. And you can do that in the publics, but in the privates, I guess what's different is, they don't have to give you information, so you have to figure out, "Why does this board member, CEO, CFO, current, ex-employee, whomever, why do they want to give me information? Why do they want me to participate on the cap table?" So, that's very different here.

Ateet Ahluwalia:

The other thing that's different is, "How am I going to help them?" Satya Nadella is a stud, he does not need my help with literally anything other than passing time with good conversation probably. And even that's debatable. He doesn't need my help. But in the privates, some of these CEOs, you can actually help them. And it's a lot like Christmas, where sometimes I might get you the gift I want, not the gift you want. And what's really great about venture is that, sometimes they want silence. Just, "Dude, help us out with this one thing and go away." Sometimes it's, "Hey, we have this huge project you need to come on for six weeks and really help us dig into the nuts and bolts." That would never happen in publics.

Ateet Ahluwalia:

The fact that there's not a liquid exit or entry is very interesting in privates. I traded CDS when CDS was 10% of the bond market, in route to 500 times the bond market. So, understanding how to [inaudible] liquid assets at scale is very important. And I think one of the key lessons from that is game theory. Who are you up against? I don't know a single asset class, other than venture capital, where somebody would tell you all their positions, post it on a website. It's the craziest thing to me, even now, whereas... And you advertise it to the entrepreneurs, I get it, but it's also weird to me. Whereas in the publics, I don't know what Millennium and D.E. Shaw and Stan Druck, I don't know what they're holding. I can look at regulatory filings in certain cases, but it's on delay and you don't really know. "It is a delta versus an option, what is it?"

Ateet Ahluwalia:

And that's very different here. Very, very different than in the public market versus the private market. I'd also say that, those same lessons still apply as to how do you analyze the company, the financials? And like I said, I don't do seed, so what actually fits my emotional constitution? What has delivered me consistently high returns? It's the valuation of 100 million and up. So, half of what I do is probably 100 million to a billion in valuation, the other half is a billion and up. And I'm always constantly thinking, "Well, at 100 million, that's an arbitrary floor, more or less," but at that point, you've got a real income statement, a real balance sheet, cash flow statement, I can do forensic accounting, I can talk to your clients.

Ateet Ahluwalia:

Below that, I'll fall in love with the story. And I'm not a story guy, it's all just a number on a screen in publics. In venture, it's not that. But at that valuation floor, you do get real numbers that you can then start to marinate over and see where you can be helpful, if you can be helpful, if you like the company, regardless of the degree to which you get involved, and how it complements your portfolio. So, there's a lot of really big differences, but the behavior, the understanding yourself, the emotional constitution required for it, the accountability, that all stays the same, that foundation is very consistent.

Ateet Ahluwalia:

But yeah, it is interesting. I think the market-to-market experience is so important. The fact that you really understand how to manage up, manage laterally, you understand that there are no heroes. I don't want to get in something just because one of the best firms in the world is involved in the venture side. Why are you even seeing it then? There's a degree of negative and adverse selection that people trick themselves into getting involved with, so I think there's a lot of lessons in publics. I think you have to go public to private as opposed to private to public, but I think there's a lot of lessons to be learned and applied. I think the game theory part is so huge.

Ateet Ahluwalia:

You have price action in publics. That tells you the game theory embedded within it. In privates, you have a cap table. The top 35 funds run 70% of the dollars in venture. If one of those top 35 are not on your cap table, and you have a CapEx heavy business, let me tell you right now that if the cycle finds you, and it always does, you're going to have to take wild amounts of structure, dilution, aggressive cram-downs, whatever. And so, that's a very different world to the public market. And so, you have to really think, "How am I going to work with these 35 folks, these 35 firms that are illustrious and have decades-long, multi-decade generational returns, some of which are new, but still have that gravitas? How am I going to work with them?" Because venture's a rising tide, lifts all boats economy. It is not a zero-sum game, like publics are quite obviously, or real estate is quite obviously.

Ateet Ahluwalia:

And so, I think you really want to understand who are the players you're up against or working with, because if you don't respect the people that you're up against, you'll get devoured. It's unfair. It's like a goldfish and a shark. And so, you really have to respect the ladies and gentlemen you're up against and figure out how you're going to work within the frameworks that exist, where that fits your emotional constitution, and how to really respect their past investments and how they've reacted under pressure. There's so much of this business is me understanding the competition and how they operate. Are they likely to put LickPref on? Are they likely to put options, warrants, structure?

Ateet Ahluwalia:

Because we trick ourselves a lot in this business. It's an up round. Great. Why does it have structure on it then? 54% of the deals this year, so far, and last year have had structure on them as up rounds. Okay, why do you need structure if you're doing well and have momentum and it's an up round? It's a synthetic up round, it's a down round by any other name. So, I think you really need to understand who you're up against, the terms of the trade, the different permutations and expression of the trade, secondary, primary, preemptive primary notes, structure, parameter, all that. And in that way, it's very similar to publics. You really want to respect the process and have a really great risk management system that gels with your emotional constitution. But I don't know, I could go on about hundreds of lessons from publics that have applied here.

Jim O'Shaughnessy:

Yeah, I had a similar path, where the lessons from the public markets were invaluable. But when we started in private markets in about 2006, my basic strategy was, if I'm seeing a deal, it's so bad, it's so horrible that I can just pass on it. So, I'm like, "But I want to see these deals, because I want to learn what a horrible, horrible deal looks like." And so, via negativia, I learned a lot. I agree with your statement that, at seed... Which we do seed, by the way, because the way I'm built, is very attractive and interesting to me. But you're right, at seed everything looks fucking unbelievable. It's like, "Wow, they've discovered how to turn the moon into cheese, how to make that cheese transportable back to the earth, and they've solved hunger. What is the TAM for solving hunger? That's amazing."

Ateet Ahluwalia:

That's exactly how I [inaudible] seed. I know that about myself, because quite obviously, personally, I lost a bunch in seed when I was still working at banks and hedge funds and before I became an operator, and then before the asset management side. Again, just because you're good at one thing does not mean you're good at everything. There are very few Elon Musk's out there that are good at a host of things. Most of us are very good. I'm good at growth and late stage, very good at that. And so, I don't want to go to seed and compete with you or Sequoia or anybody else down there. Yeah, that's really funny.

Jim O'Shaughnessy:

The other funny thing, my son, Patrick, who is the real podcast king with "Invest Like the Best" and all of his other offerings at Colossus, he was very kind in that he named his podcast as a homage to me, because that was the title of my first book, Invest Like the Best. And we were chatting the other day, and he's publicly said this lots of times, that the name he really preferred was "This is Your Competition" and it was with these legendary investors, because he too is like, "Man, if you don't know who you are competing against, if you don't know who they are, why they are that way, you're the old adage about poker. If after a half an hour at the poker table you can't figure out who the sucker is, you are the sucker."

Ateet Ahluwalia:

For me, that valuation floor eliminates a lot of stress, I'll tell you that. A lot of stress. And so, that's where I play. But at seed, the other thing is, I know this about myself, I like a high hit rate. My LP's like a high hit rate. And so, it's really hard for me to evaluate a seed manager in a world of zero interest rates up until recently, where I'm like, "Okay, yeah, you made 70 bets. One of them was Airbnb, or Uber, or Coinbase, or Palantir." Pick a great name. "And the rest of them were zero. So, how much of that was the environment we were in, with the most liquidity in the history of mankind ever, essentially, in the U.S.? And how much of that was you?"

Ateet Ahluwalia:

So, hit rate matters to me. That's something that you would look at in a quantitative context as a trader. Win-loss ratio, wins in a row, losses in a row, sharp Sortino, all of that. You can't really quantify that in venture, but I do think hit rate still matters in venture, especially given the stages that I invest in. And again, for me, it comes back to what makes the most sense to me on the oligopoly monopoly part, in macro sectors with such aggressive tailwinds, that you have to really mess it up on purpose to not find something favorable. I don't know if you ever saw the show, The Wire, where Omar-

Jim O'Shaughnessy:

Loved The Wire.

Ateet Ahluwalia:

There's a scene where he's facing off against Brother Mouzone and he goes, "You'd have to hit me first." And Omar goes, "This range? With this caliber? Even if I miss, I can't miss." And so, when you have a great entrepreneur in a great sector with tailwinds, then it comes down to, "Who am I up against? What's the structure? What does that look like? Where does this fit in the portfolio? How does that impact various correlations within sector specific themes we have, etc.?" I really think you want to find what is it for you that, "at this range and at this caliber, even if I miss, I can't miss."

Jim O'Shaughnessy:

Yeah, I love that quote. I love that show. So, I know that we're not going to talk about any of your actual positions or your LPs, but what are you loving now from a macro view?

Ateet Ahluwalia:

I really like robotics manufacturing and AI. We obviously, as a country, have off-shored a host of mission-critical jobs, both on our ability to print everything from basic machinery all the way through to the most advanced defensive technology. I think that's a theme that will continue near-shoring, on-shoring, friend-shoring, all of that. You see the CHIPS Act, the IRA, all of the different... Inflation Reduction Act for folks who don't follow it, but all of those specific programs. If you hear Donald Trump in Bloomberg Business Week, Former President Trump basically said, "We need to get the dollar down so we have manufacturing back on-shore." So, I think things that are involved in manufacturing industrialization, particularly for mission-critical products in various sectors, to me, is very interesting. AI is very interesting, I think to everyone, for a host of reasons. Aerospace and defense, for me, is very interesting.

Ateet Ahluwalia:

Space is a new frontier for... It's always been a frontier for defense and commercialization, but it's having its fifth renaissance and a lot of capital's pouring in there. And thanks to SpaceX, you have an ability to connect via their Falcon 9 and other offerings. You basically have a superhighway that lets you iterate the latest generations of R&D in very varied sectors. And also for defense. And so, I think aerospace, defense, manufacturing, robotics, AI, we look at a lot of deep tech. We look at a lot of software as well, but those are the areas that we really focus on. And I think there's a lot that is getting done and that will continue to get done.

Ateet Ahluwalia:

Within that, we have to keep a critical eye towards what's shifting on the macro side. You can't, on the one hand, look at, "Oh, there could be dollar devaluation," or, "Oh, hey, there's the IRA and the CHIPS Act." You also have to think, "Well, what could get cut from the U.S. budget in a world in which the Fed is operating under fiscal dominance, where they're really operating to just fund the government debt as opposed to their dual mandate of employment inflation?" They're kind of doing it, but they're kind of in a fiscal dominant situation.

Ateet Ahluwalia:

Chair Yellen is... Well, Federal Secretary Yellen now, she shortened the duration of the debt twice, she's obviously front- loading it in T-Bills because foreigners are frankly balking at a lot of our longer duration debt and we've run out of pockets to tuck that away. We regulated it in with Basel III and supplementary leverage ratios for banks, but in a world where the banks can get hit via an FRB SVB situation in May of '23, you really don't want to find yourself in a situation where you're on the wrong end of that curve. And so, we really think about, "Well, what do we like? What is the macro picture? Where will the U.S. government be forced to cut? And what kind of volatility could that induce?" And then, what does that mean for everyone on the cap table as well?

Ateet Ahluwalia:

We drill down to the various permutations and game theory around that, but those are the sectors we really care about. And we're lucky in the sense that, because we don't seek glory, a lot of the venture firms, a lot of the entrepreneurs or serial entrepreneurs will come to us with their ideas and we're able to track them. A couple of the names we've done in defense, we've been tracking them for six, eight years in some cases. In some cases 15. And so, having that rich catalog, we're able to see when the cycle favors them or when they've actually hit critical mass and have inflected. And when something's inflecting and inflecting on those unit economics that are oligopolistic in nature, you really want to make sure that you're thoughtful there and that you're along for the ride. Not just, "Oh, hey, this sector sounds cool,” but “do the numbers make sense? Does the team make sense? And are they really at a place where they can do well?" And so, the sectors I mentioned, I think, are perfectly positioned for that, for the forthcoming five to 10 plus years.

Jim O'Shaughnessy:

And what are the red flags? As somebody who reads everything that's in the data room, and goes through every line of the spreadsheet, and meets and talks to the customers, and really meets with and gets to understand the founders and their team, what are the things where your initial interest is on the macro view, which you just described, it fits perfectly and everything else from a 30,000-foot looks great?

Ateet Ahluwalia:

Yep.

Jim O'Shaughnessy:

But then, when you're in the data room, what are some of the red flags that others, who are interested in doing this, maybe aren't looking for that you find and use often?

Ateet Ahluwalia:

We're always direct to cap table, and we're always fully integrated with management, with the C-suite. So, a lot of that is in the data room, but a lot of that's also... It depends on the sector, it depends on their economic models. But a lot of that you can get face-to-face. If I asked you a question and you answer an adjacent question, you think either I'm stupid, or you don't know the answer, or you're hiding something. It can be nothing else. And so, how they answer the question, do they answer it? Do they skirt around it? That really matters. "Hey, how many robots are you guys producing this year?" If you don't know the number, there's a problem there. If you answer a different question about your production facility, there's a problem there. And so, I think how someone answers the question or degree of hesitation there matters.

Ateet Ahluwalia:

I think that a lot of the red flags we see is when I have to keep asking you for things that aren't in the data room and you're probably reluctant to show them, particularly financials. There's a lot of pro forma financials and games that are played there. When somebody joins the firm, there's a couple books that we make them read, just so they can have a basic understanding of... I like to hire folks that don't necessarily have a pure form venture background. I want them to be real operators or to have a dimensionality that other venture players might not. I think venture is one where you can learn it if you've got a rigorous background in something else, whether you're a scientist or an operator or whatever. So, I give them those books and there's some basic manipulation that you can see in a lot of pro forma accounting, which I think really matters.

Ateet Ahluwalia:

I also think that, when someone says, "Hey, we're the Uber of X or the Airbnb of Y," no, you're not. Uber is the Uber of Ubering and taking cars from here to there. You are not that. Stop telling me that, because you're trying to anchor my perception on the most survivorship-biased focused firm that you think I will like and I don't like that. I just want you to just give me the facts. That happens. Usually, I'd say 99.99% of the time, I'm never the smartest guy in the room, but I'm certainly one of the most effective. And so, I need you to answer my plain, English questions as if I'm five to 10 years old. And again, I do the same thing that I do for interviewing people, I peel back the onion. "Okay, tell me about this. Tell me this."

Ateet Ahluwalia:

And there is certain context clues within an interaction. If I email you and I'm going to give you money that you need for your firm to work, how long does it take you to get back to me with the answer? That's a big deal, because capital's the lifeblood certainly of my firm, but it's the lifeblood of all firms. And I don't know, if you're Bill Gates, or Jeff Bezos, or Elon Musk, you can raise money just by saying, "Hey," and everyone will just chuck it at you. You've earned that right because of your well-earned success for other people and yourself. If you're not that guy, you should be answering it quickly. So, timing really matters as well.

Ateet Ahluwalia:

I ask questions about competition, see how they answer it. If you don't know your competition, I don't know what you're doing, frankly. And in the data room, you can see all of that. I found there's one founder where I asked him, I was like, "Oh, so tell me about the debt you have. Tell me about the interest rate. And what you're thinking. What are you thinking there? Do you want to refi it?" He didn't know they had debt, because he was a new CEO, but he'd been there for 12 months. Surely you know you have debt. Even if it's de minimis, even if it's a legacy position that's 1% of your total capital stock, you know if you have it. Surely you've sat down with the CFO and poured over the books.

Ateet Ahluwalia:

And so, I think it's more about the people there. One of my colleagues, she's one of the smartest people I've ever worked with. She does real background checks on people. She can understand, "This person was fired for cause, here's what the cause was. This person is incredible, here's what they actually led." She's able to discern by talking to people and fact checking, "Do you just have the polo shirt with the logo? Or were you the girl or guy driving the deal?" And so, I think there's a lot of that that goes into it. And then, in the data room, there's always something about the clients.

Ateet Ahluwalia:

You'll ask, "Hey, let me talk to a client." You can verify the information. There's a lot of basic stuff on the accounting side, there's a lot of rigorous formulations. We build our own models. Sometimes we'll have folks that are experts in that sector, we'll contract them to make sure that they can triple check my work and our analysts' work, etc. But there's a lot that you have to do there. And that's why I think onsites are valuable. If you're investing in something you don't know management, you've never been on onsite, sorry, what are you doing again? In a world with illiquidity in venture, you really need to be on it from a diligence perspective.

Jim O'Shaughnessy:

What are the books you give people joining the firm?

Ateet Ahluwalia:

Man, I give them a lot now, but the first two are Venture Deals and Financial Intelligence. So, books nowadays, I think publishers are like, "Hey, make this 600 pages so we can charge $60." Those books are a couple hundred pages each, but every line matters. So, I think that's why I give somebody that's a new analyst, and that's even for me, 15 years ago when I did my first seed deal, I was reading stuff like that. So, I think that's very important for people.

Ateet Ahluwalia:

And then there's a host of stuff on different sectors. There's academic work. We have a self-development budget for folks on the team. I had to learn how to code at night school at NYU when I was living in New York and I had my company, so I could talk to the engineers, so we could scale our business, et cetera, and I can understand what they're doing. I want these younger folks at the firm to have that ability because they care about compensation, sure, but they also care about personal development and that'll get them where they need to be in various sectors. Because we're a generalist firm, you're not going to know everything from biotech to aerodynamics. That's just not how the world works. So, making sure that they get what they need from an online course or whatever they need has to be made available, I think.

Jim O'Shaughnessy:

Yeah. There is a book that I recommend often by Peter Drucker called Adventures of a Bystander, and I've read almost everything Peter wrote. I really find the stuff he wrote on management incredibly boring and antiquated, but his book, Adventures of a Bystander, I love because it's basically character studies of people that he met and he met some really extraordinary people over his lifetime. But the one that's germane here is he worked for an old school merchant bank in London in the 1930s, and the guy who was the head of it, Ernest Friedberg, was old at the time and had brought in these younger brothers to run the firm on a day-to-day basis.

Jim O'Shaughnessy:

And one of the things I gleaned, first off, he's a fabulous character. He would be great in fiction, but one of the things that I really gleaned from it that fits with what you're talking about is the brothers got really enamored with this guy that everybody in the city was putting money with. This was the best thing in the world. They were so excited because they were a small firm, they were so excited that they got invited because it was all of the blue chip names in the city of London at that time.

Jim O'Shaughnessy:

And so, Friedberg decides to sit in on the presentation and afterwards he goes, "We're not putting a dime with that guy. He's a liar. He's a fraud." And they're like, "What the fuck? He's been vetted by the most important players, they're all backing this. You're insane, Mr. Friedberg. Why are you saying that?" And he said, if I'm getting this right, I haven't reread it in a while. He looked at them and said, "He came in here with answers to every single question that we could possibly have asked." And he goes, "An honest man wouldn't need to do that and would say, oh, that's a great question. I don't know the answer. Let me get back to you on that." Just that simple observation. You came in here with answers to every single question and it's like, oh, yeah.

Jim O'Shaughnessy:

And then when you apply that, when you're talking to founders, it instantly hits me when I meet somebody like that. It's like, "A-ha. Ernest is telling me to pass on this one."

Ateet Ahluwalia:

That's actually a great point. I mean there's things that you know from being a human being and walking this earth and talking to people that you can apply quite quickly, that's pretty amazing. I keep drilling down into, "Tell me about that. Oh, you read that book. Tell me about it. Oh, you built that company. Tell me about it." A really good body of mine, Ollie, made the comment, he goes, "Yeah, he's the 25th thousandth top first 25 employees at Uber." Because apparently there's so many people that say they were the first employee at Uber, or first 25 employees, I actually know one that was the third hire and whatever. But he gets really mad about that too. He's just like, "Dude, it's diluted my brand completely."

Ateet Ahluwalia:

And so it's funny how people just can't say, "I'm wrong. I don't know." It's also, you're in a service business. You can't forget what you're doing. A lot of people, it feels good to be in finance. There's more capital involved, there's more autonomy involved, but what do you actually do? I ask this a lot in interviews. I'm like, “what do we actually do here?” Or “who's the boss?” That's a seemingly innocuous or even a trick question, but it's not a trick question. It's like, the one gentleman I hired, he goes, "Well, I mean, God, you have a lot of bosses, don't you?" He was like, "Like you said, we're focused on cash on cash returns in a compliant manner for LPs. So I guess the clients are your boss." And he goes, " You're always talking about we got to go work for this entrepreneur and make sure we can help him with everything from asset backed lending out of Japan all the way through to an entree into the Department of Defense so he can sell to various procurement officers in the government." He's like, "So the entrepreneurs are definitely your boss.

Ateet Ahluwalia:

Well, I guess we all have part of the firm you give everybody carry. It's a really good package. And so I guess you report to us because if I have carry, I have ownership. And if I'm an owner, you report to me in some sense. I'm not trying to be rude." And I'm like, "Yes, that's exactly right. You're in a service business. You report to everybody. You need to really crush your ego or check it at the door because you will never, from this moment on, be the smartest guy in any room you go into, even the bathroom."

Ateet Ahluwalia:

And so I think it's really telling when you have people... Some of the best entrepreneurs in the world, I've been lucky enough to be in the room with them or on a conference call with them and the humility there is really striking and you really need to dissociate the persona on CNBC or Bloomberg TV or whatever that they're giving an interview on in a public forum versus who they are in private and how hard they work and what they're actually doing. There's so much mythology around it. There's so much branding and marketing, but a lot of what they do, a lot of how the sausage is made, it's mind blowing how some of these folks work and how good they are.

Ateet Ahluwalia:

And I think understanding, what is your job? Do you remember Forrest Gump? Where the Sergeant, "Gump, what is your job?" And he goes, "To do whatever the hell it is, you tell me to, sir." That is exactly right. What is your job as a venture capitalist? It is your job is to serve your three constituents, your three bosses; the entrepreneurs, your clients, and your colleagues. That is it. That is your job. And then within that, yes, you have to do a ton of due diligence. You have to do a ton of work. You have to do a ton of analysis, a ton of lunches and dinners and drinks and all of that, and a ton of favors for firms you know and they know you won't invest in, but it's a rising tide ecosystem and you have to be in the information flow and you have to be well thought of.

Ateet Ahluwalia:

And that's another big difference compared to traditional finance. And it suits my personality better. Every one of us wants to make the people around us feel good. I guess some people call it people pleasing or whatever, but venture lets you do that. It really does. And you can make a hell of a lot of money and learn about the best technology and play the most supporting of supporting minor roles in being a part of that journey. But you've got to know what your job is, right?

Jim O'Shaughnessy:

Yeah. And the idea of the difference between the persona and the way the person really is, I've been lucky in my life to meet a lot of incredible entrepreneurs, incredible people in finance. And there is such, for the most part, a gap there because everybody, "We are the Uber of," that gets back to mimetic behavior and let's go for the easy metaphor.

Jim O'Shaughnessy:

So, what do you do? You attach your enterprise, however remotely similar, normally not similar at all to this anomaly that is Uber. And it's kind of like you're lazy, right? It's kind of like, no, you are not that. What are you really? And it's just like, if you just keep asking that question and asking that question, you can tell when... Again, back to my being lucky enough to meet all these people. It's like the difference way that that gets answered, it's just so telling. There's none of that bullshit factor and it's just so much more fun.

Jim O'Shaughnessy:

I also like your idea, which we touched on earlier about trust. A lot of people who don't understand finance, who have never experienced the world of finance, be it publics or privates or whatever, they give me their I'm-actually-shocked face when I say, "You don't understand. Our business is based on trust and it is based on reputation." Those two things together and one feeds the other and they're just like, "Oh, that's bullshit. You're all just a bunch of used car salesmen." I'm like, "It could not be further from the truth."

Ateet Ahluwalia:

Well, that's actually an important point that they're almost making but not quite, which is what kind of salesperson are you? Because if you're in a service business, you are selling, and there's two types really, if we could be simplistic about it, there's the used car salesman with slicked back hair that can sell you the used car for top dollar. If you're going to do that, man, you better have it all together. That's terrifying to me. I just tell you exactly what it is. I have one LP and he asked me questions and they're usually one word answers; unclear, yes, correct, correct, correct, no, and then sentence explanation. And that's how we interact because that's what the situation calls for.

Ateet Ahluwalia:

But I think if you're a straight shooter, you have to be okay with rejection because if you're a straight shooter, we're in the rejection business. This is maybe a bad metaphor, but I tell everyone it's like dating in high school, or it was for me. You're going to ask 100 people out. They're all going to say no, right? You just need one person to say yes. And that's kind of... You have to be selective, but you have to be okay with rejection. And that's okay because why would someone... A lot of people take it personally. Why won't they say yes to me? Like, dude, they have a whole life over there that you know nothing about. Maybe they have a lot of illiquidity in venture since 2022 and they invested in certain people that have lost their money. Maybe the family business isn't doing well, whatever the case may be, you don't know. It's also none of your business, but you do know that trust is a function of experience and experience is a function of time.

Ateet Ahluwalia:

So maybe go in there with no agenda, be helpful, do your job, you're in a service business, and maybe in 10 years they're a good fit for you. Maybe in 15. Maybe never. But you will get something out of it, whether it's the information flow, thinking about what somebody intelligent is on top of mind for them that maybe you should be thinking about. There's always something there. And I think in a world of instant gratification, in a world of very integrated communications, it can be very hard for people that were not born pre-internet to just do what it takes to leave no stone unturned and just do what the situation calls for. That's the trade-off. These younger folks are infinitely smarter at an age, like pound for pound, than I was at 24, 34, or whatever. But equally, I remember writing a letter to my grandfather and putting a stamp on it and a photo and envelope and you know that it matters. Business gets done in person and in the post-COVID world, a lot of people think, "Oh, I'll just do it on Zoom. I'll hop on Zoom." I mean we're on Zoom now, but if you want to do business, you have to meet people where they're at and address the actual need.

Ateet Ahluwalia:

I mean Goldman taught me a lot, but one of the things that I used to do, I knew I wasn't, at inception anyway, the first couple of days, I knew I wasn't up to scratch in my own mind. We all deal with imposter syndrome or whatever. That dude just made 100 million. That guy just did this. I'd figure out the 10% of someone's life that they hated, hated, and I would make it go away. Just make it go away. And then I started doing a lot of favors with zero in return. And at first, people are skeptical, but after a period of time they're just like, "Oh, that's the guy. Every time I see him, I get a dopamine hit. Every time there's good news, he's just going to tell me how it is." And I think if you can do that, you really become indispensable on a fundamental level. And then if you go through the... You can actually add value on an investment basis. I mean you're unstoppable at that point.

Jim O'Shaughnessy:

That also, the find the 10% that they absolutely hate and fix it for them, that's a great way to look at new companies, right? Are they finding those pain points and are they making them go away? Is it repeatable? Does it stack up? Getting rid of people's pain, man, if you just look at things through that lens alone, you can fit it to virtually, it doesn't matter the industry, it's absolutely universal. If you can find a company that is effectively, repeatedly able to remove the pain points for the end users, that is something that's very interesting. Right?

Ateet Ahluwalia:

Yeah. And if they don't have a 10% that they hate, I don't think they're an entrepreneur. I don't think they're doing it as an operator. I mean it's such a hard... I'd done it once and it is brutal, and I got lucky that there was an exit there at the end of the rainbow. But like, oh my God, that is hard. Everything is hard and every fire comes to you. You're on 24/7. It's forced accountability in the most raw sense. And so, I think if you don't have stuff, fires you're trying to put out, then probably won't be investing into you.

Jim O'Shaughnessy:

Well, this is, I'm getting the hook here for my producer. This has been so much fun. I was so lucky to be able to coax you because, guys, it's folks like Ateet that you really want to be able to listen to. I've been after you, dude, you should write a book, you should be doing all this. And you're like, "Jim, I don't have time to do that because I'm doing this."

Ateet Ahluwalia:

As we've grown quite a lot and scaled dramatically in the last year or so, I'll be able to start maybe talking about more stuff as time goes on. But I always want to check with my entrepreneurs and make sure everything's kosher for them.

Jim O'Shaughnessy:

Which is exactly the way that you should be doing things. Well, if you've listened to the show in the past, you know that at the end, we are going to make you the emperor of the world. And you can't kill anyone, you can't put anyone in a re-education camp, but what you can do is take a magical microphone, speak two things into it, and you are going to incept the entire population of the earth. Everyone is, whenever their next morning is, going to wake up and they're going to think that both of those two ideas were theirs. And unlike every other time they wake up in the morning with a great idea, they say, "You know what? I'm actually going to act on both of these two ideas." What are you going to incept into the world's population?

Ateet Ahluwalia:

Man, I'm going to steal my aunt's thing that she told me. It's probably been the guiding principle in my life. It really matters who you choose as a partner and it really matters what career you choose. You want people around you that aren't going to say, "I told you so," when you're low, they want to bring you up. And when you're riding high, they're not trying to snipe you and bring you down, they want you to go up. And I think so many people I've seen led astray, it's because they're trying to please people that will never be pleased. It's not about them. It's not about you. It's about them. So, really focus on what you need in a partner and a career because that's all you got is this one shot and this one go around.

Ateet Ahluwalia:

And then the second thing I would really impress on people is, you are in a service business. Karma is very real and you report to everybody. People rise and fall every day. The guy who got fired now runs his own company, it's worth $3 billion. The guy who had a $30 billion company is a fraud and he's in jail. You really do want to take a karma-heavy approach to life. And if you're living a life of service, that is not a negative thing. You're not demoting or demeaning yourself in any way. What you're doing is setting yourself up to be in front of the most opportunities and have the most enjoyable time with people. So, I think figure out your career path, figure out your partner, and then the second one would be you're in a service business. Focus on the karma. If you're in the game long enough, it works really well.

Jim O'Shaughnessy:

Both of those are absolutely great. Well, listen, this has been absolutely a tremendous amount of fun for me. I hope that as you grow your company, that you'll have a little more time, because I'd love to have you back. But for now, thank you so much for coming on and sharing some really deep wisdom.

Ateet Ahluwalia:

Thanks so much. I appreciate it, Jim, and I'll talk to you soon.