Venture Capital Investing: 3 Keys to Success feat. Leif Hartwig

Hello, future billionaires. Welcome back to another episode. We got a fun interview today. I interviewed Leif Hartwig of WealthVP, and Leif has created a platform for family offices, generally larger family offices, to invest in venture capital and early-stage, you know, seed-type investments and really creating a matchmaking platform to help them get more access to deal flow. But one of the cool things that he really shared is really kind of laying the landscape for, you private equity and venture capital and where the kind of industry has gone wrong. So if you have any interest in investing in private companies, in venture capital, as an angel investor, definitely want to check out this episode because Leif shares his top 3 things that have, according to this AI that they're working with, an over 80% predictability score of success for companies. He shares those 3 things and what they are and why they're important. But he also shares what's really interesting too. He said kind of the hidden power of SaaS companies and SaaS business models as compared to really any other business model, even compared to real estate. And has some really cool perspectives around why that business model is so compelling from a value standpoint as an investor. So definitely want to check this out. I think you'll enjoy it and look forward to sharing this with you. This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Looking for passive investments done for you? With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal, so our interests are aligned. We focus on macro-driven alternative investments so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. Hello, future billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. I am your host today, Ben Frazier. And I'm joined by Leif Hartwig, who is the CEO and founder of Wealth VP, and really excited for this conversation. So Leif has started this company, Wealth VP, and really a goal, he says, to make the world a better place, which I love. But he's really trying to do this from an investment standpoint, really matching families, high net worth individuals with really good investments and really specifically kind of the private equity space initially, but expanding from there. So Leif, thanks for coming on the show.

Hey, you're welcome, Ben. Thanks for having me. And I love the name of your show, you know, Invest Like a Billionaire. You know, when I had a business coaching company all over the US and Canada, one thing that we'd say is, how do you become successful or a billionaire? You act now as if it's already happening. And so I love that your show is doing that. Thank you.

Yeah, absolutely. Absolutely. There's a lot we can learn, right? I think a lot of people just make the blind assumption that, oh, they're at a whole different level. I can't implement or, you know, mimic some of the things they're doing. But a lot of the things that they're doing, you know, we can do. And I think one of our big kind of theses and drivers of this show is investing in alternatives, private alternatives that can provide a lot of times better diversification, non-correlated assets, better returns than a lot of the public markets. And it's pretty clear from most of the research that we've done that these high net worth families, you know, pensions, endowments, foundations, these big institutional investors are investing big portions into these assets. And so, you know, let's talk a little bit about your story because I know you kind of come from more of a traditional finance background. And then, you know, what kind of led you to, you know, launch this and really what's the vision for this platform building?

Well, one of the things that you've just said, we had covered so many facts that I was raising money for startups and getting investors to be involved. And I kind of backed off and said, you know, this is, this is kind of hard to do what's going on locally because you can be in a community of like the Phoenix area where I am, I'm in Scottsdale, that they're primarily real estate investors. But we had so many great software companies and I said, wow, this is pretty hard. How, how, how can this happen? So I, I, I took a couple days off just to think and found out that is this private middle marketplace. So you're not, not public companies or not crowdfunding, is all word of mouth and networking. Can you imagine that? And so what led me into this, as you said, we want to leave the world in a better place and great companies were going under because of lack of funding. And we found people on your, on your podcast today they can't find companies outside their network that could be, you know, great opportunities. And so I said, you know, there's a way in which to do this. It's called left-right matching, where you're matching two marketplaces. Amazon does it, Airbnb, Match.com, you know, so the technology's been around for years, but we found that we could match those two marketplaces and do it in a way that was better, faster, less expensive, and certainly less time-consuming. And so about 3 years ago, we, we started at the research, developing the user interface, coding, and launched about a year ago. And now we're all over the globe, which is great.

That's so cool. I want to kind of pause there because I think it's, it's really important what you just said. And just to be clear, we're really talking about what's your kind of first focus of these are private equity or venture or companies seeking venture financing, right? So it's different than real estate, right? Which is another big bucket of alternatives a lot of people invest in. But even, you know, which is a whole other conversation around even finding good deals there. But it's even more difficult for companies to, you know, have access to capital without going and doing these roadshows with these other networks. And you actually were a broker, right? You had a Series 7, I think you said, and Yeah. Were you a registered investment advisor?

And, you know, with a firm, I was one of their top 5 guys and, and very early on got into portfolio diversification and modern portfolio theory and actually helped companies develop software programs for that. But what we're seeing and the other thing in the industry that we found that I think is important to mention is most investors in your audience believe that venture capital companies fund the most of these these endeavors. And in fact, the truth is they only fund about 1% of all private companies. And believe it or not, 75% of venture funds do not return capital to their investors. It's amazing. And so we're finding, like you are, that alternative investments, both private companies— and by the way, we have another vertical that is a real estate vertical as well for people looking at those two types of alternative investments. So the markets are huge. They're, they're very— even though it's a multi-trillion-dollar marketplace, it's really early in this cycle of, of development and what's happening in that industry.

Interesting. So, so talk a little bit about, you know, some of the challenges, you know, prior to this kind of democratization or the technology-enabled, you know, matching, because from my understanding, I'm a little bit younger, but, you know, even saw, you know, later stages of this where most of these deals, especially real estate, which is kind of more my background, were kind of driven through broker-dealer networks, right? It's really who you know, which, you know, financial advisor or broker you're working with and how do you hear about these deals is usually coming through gatekeepers, through networks, right? It's not this very easily accessible platform. But really with the advent of technology, with, you know, the JOBS Act in 2012, that's really allowing more democratization and allowing, you know, a lot more to be shared in a more public way. It's really totally shifting the landscape. And we're seeing this, you know, with these crowdfunding platforms, with Reg A and other things that are on a smaller scale. But even with the clients you serve that, you know, are more skewed to the high net worth clients, it's still the same problem, right? It's access to deal flow, it's access to good operators, and it's historically been driven by network. But you really wanted to shift this to make it more accessible, make it to where anyone can sign up and start getting matched with the types of deals that they're looking for.

Yeah, just a great comment. Years ago, brokerage firms used to sell a lot of limited partnerships, so they had real estate, they had private deals, and then the spigot was pretty much turned off because they couldn't put those on their statements and mark them to the market every day. And so between the brokerage firms and the banks, if, if you, if everybody understands the investment pyramid that, you know, on the bottom it's safe things and then mutual funds at the top, it's that venture group. It was like the whole industry lopped off the top of the pyramid, just weren't available. Well, in the last 8 years we've seen unicorns, those are billion-dollar private companies, grow from 39 to 1,200. So the market has grown 2,200%. In the same time period, venture funds have grown from 800 to 1,000. Okay. So only 25% increase. So the market kind of outkicked its coverage, you know, if we can say. And, and then, but where do you find this money? So it's been this word of mouth kind of thing. And so that's why Right now we're, we're seeing so many people trying to do what we're doing and democratizing, as you said, or digitizing this process. And we're not only doing it with our matching feature, but we're working with a company right now to add some great AI features that not only look at the quality— and I'd love to follow up what we look at for quality— as well as predictability of future success, which is really exciting stuff.

I love that. I mean, it's interesting to me, the more research I've done of the high net worth, the billionaire investors, right? And what is their portfolio allocation? And generally it's, you know, these are rough numbers, but it's pretty consistent across, you know, large data sets that they're investing 50% of total net worth into private alternatives. And that's usually, you know, of a few different buckets, but mostly it's real estate and private equity, you know, which can also include venture capital. And that usually makes up about anywhere from, say, 20 to 30% of the portfolio. So it's actually a pretty significant piece of the pie of these more wealthy investors. But the average, you know, maybe high net worth investor doesn't have the access to the networks, doesn't have, you know, they're not part of the Y Combinator and these, you know, accelerators and get the best of the best. And also there's probably a sense of, well, I don't really know how to evaluate an early-stage company, right? Because, you know, especially early stage or seed, you're kind of playing a lottery game to a certain extent, right? You, you kind of hope for that 100x, you know, winner to cover the losses, but you don't expect maybe all of them to, you know, make it at a certain point. And a lot of businesses, small businesses fail, right? So it's a little more of a high-risk, high-reward potential, but it's still a big part of the allocation of a lot of these high net worths. So, you know, talk a little bit about what you're kind of seeing. And, you know, for, you know, newer investors coming into this space, what are the big things you want to look at? You know, how do you evaluate? I mean, there's obviously there's private equity, traditional private equity, which is, you know, more mature companies. A lot of times they're leveraged buyouts. You're coming in with debt, you're buying existing you say, a manufacturing company and you're just trying to either consolidate or you're trying to scale it all the way to seed companies that are a lot of times more tech-focused, maybe healthcare-focused or some kind of niche trying to, you know, create a market or grow into a market. So talk a little bit about just the world of venture capital, private equity just as a whole. And then how do you kind of— how do you figure out what fits you and how do you find the ones that are more likely to win?

Great, great question. So this middle marketplace is, is really where we're located and where the billionaire investors are. And we have a few of those on our platform as well, but they're kind of a different animal. They're, they're more like the venture capital funds. They get plenty of deal flow. Everybody's soliciting them. And it's really the smaller families and high net worth people, but you know, not billionaires, but more of the $10 million or the $20 million type of people looking for these things. And what we've heard from the marketplace is there's plenty of what I call list companies like AngelList, and there's other ones that go out to investors and say, we have, you know, a million different companies, we can do that, or we've got 100,000 investors that we match. And they really don't have access to all those people. It's just, it's just a list. So we— but what we've heard from investors in every category is quality, quality, quality. And that comes from your risk-reward question that you asked. How do you— you know, companies that are at this high, they have a high risk. Well, great investment isn't high risk, high return. It's minimize your risk with high return. And so we have spent a couple of years looking at companies all the way from the Y Combinators to other accelerators and said, what are the common threads that make a company lower risk and higher with a higher return? And so we came up, actually we looked at dozens of different factors and we came down to 3 that you must, the companies must have to be on our platform. Number 1, they have to be in revenues. Okay? So that really makes them a pre-seed or A round. And that is that it's not an idea anymore. Somebody's paying for the product.

Number 1, I want to pause you there because, I mean, it's almost kind of funny to say that, but it's, it's a big deal, right? Going— I mean, Peter Thiel wrote the book Zero to One, right? Going from an idea to proof of market to get that first sale is so critical, right? Because until you get those, the first revenues in the door, all you have is an idea. Right? You don't necessarily have a business yet. So I think, you know, it sounds funny, maybe people that are real estate, you know, investors predominantly, it's like, well, of course you want revenues. Well, that's, you know, a lot of times in the industry, that's not where a lot of these companies are at, but keep going.

Well, yeah, and I've had the opportunity to meet Peter and talk to him about investing. And so it's, you know, I think that was a great name to bring up. Second factor is that they need to raise enough money to get them to the next stage of their business, and investors don't want to invest in companies that they're going to run out. And the rule of thumb is pretty clear when you ask people, it's 18 months minimum of your projected expenses over that time period. And most people would say, we're not even going to count your revenues in there. So they just want enough runway to get to the next step. The third, and absolutely by far the biggest thing that every investor looks at And all your audience should, should take this as their number one feature to check out in companies is management. So either the companies, the companies must have one of two things to join our platform for management, that their management, direct management or founders have had an exit. So they've made their mistakes in the past and they've done it before. Just like you doing this podcast, you could start another one and know how to do it, right? You made your, mistakes in the past. Uh, the second, uh, qualification, if they don't hit that and has to go to our committee, is, uh, have they come from high up in their marketplace and maybe they found a niche when they were at a corporation, or they developed a product that there was kind of a hole in the market, and then they surround themselves with other very competent people on their team. So those three factors put them, we believe, in the upper 5% of all private companies out there.

And you think— you believe, based on some of the data you've looked at, has a pretty high predictable predictability score of success. I mean, what would you say is a range of confidence of, you know, this, this lowers your risk by X amount or whatever your metric is?

You know, I don't have a number like that, but it's interesting. AI company I'm speaking with this afternoon, so I really can't disclose everything about it, but they've worked for 4 years with huge data. For instance, they have 500 billion medallions on their platform checking out startups all over the world, and they've come up with a metrics, uh, that can predict future success of a company on a scale of 1 to 100. And they've done backtests on unicorn And so, so think of a company 4 years ago that really had nothing and they turned into a billion-dollar company. They went back with their data and were 86%, um, accurate with their projections. How would one of your investors on your platform like to see a company with that kind of predictivity? But there's so many factors in, obviously, that VCs check all these things out. They, they know everything I've told you yet. They have a high failure rate. And whether that's because their metrics is wrong or they don't get involved with the company as much, I don't know. But I think quality means not only your today's values, but also how are you growing in the future? And do you have those executives that can do that? And that's not always quantifiable, but with AI, as everybody in your audience knows, is going to give us tools that we've never had before, and we'll be incorporating those into our platform about the quality and then probability of success. And of course, it's, it's an art and a science.

Totally. I mean, a lot of things are qualitative too. It's hard— you can create quantitative measures, but there is a lot of qualitative, especially around the management and the, you know, the people leading it. But You made a comment, you know, before we started the show that, you know, of the VC funds that are in operation and trying to do this same strategy, trying to hit the big winners, find the unicorns, 75% of them aren't actually returning capital to investors. Right. Which is a pretty high percentage. So my question is, as someone who hasn't invested a little bit in VC, not a lot, But, you know, what— how could I feel confident that I could do better than a VC firm? Where do you think the VC firms, you know, veer off a little bit? Where are the challenges that, you know, maybe, you know, their strategy or the thesis or whatever it is kind of puts them at those numbers? And how could I have confidence as an individual picking, you know, one individual or a couple of different businesses could do better than that?

Well, let's, let's start with VCs and then talk about how we can fix that. We're trying to fix it because it's a huge problem. VCs have a structure called 2 and 20. Now many of your listeners may not understand what that is, but it means that they get 2% per year of the total fund that they've raised. So if it's a micro fund, just a small one of $100 million, they make $2 million a year whether the companies do well or not. A billion-dollar fund. Now we're what, at 200— we're at— was that $20 million? $200 million. So, and then the 20 means they get 20% of the— it's called a carry. So after people receive their money back, they make 20%. So look at a fund over 10 years, it's a 40% haircut, right? The other thing that that we take exception with is that— and there's, there's some great VCs out there, so I don't mean to be, you know, beating up on VCs, you know, but overall they look at just the dollars and cents of the deal as opposed to the mission of the company. And as we said, leaving the world in a better place. And when you talk to a private investor, they want to do both. So we really like that approach. And it means when a company's raising smart money of some of your listeners, they get input, they get advice, they get follow-up that they may not get at a venture capital company. So now the second part of your question was, how can you pick these companies with a greater degree of success? And that's why we developed our company that we have fields that invest— successful investors have told us What should we check out? So it's things like, do, do they know what they're doing with a pitch deck, with an executive summary, which is kind of a business plan, their cap table, their 3 to 5-year pro forma that they have. These are all things that every investor out there should look at. The total amount, we actually have a data room that investors can access and look at that. Plus we link all of the executives to their LinkedIn profile so they can check them out too. So the best thing that you can do is to, to look at this holistically. And then I would say for those unseasoned investors that are just getting into that, look at something you already know. So if you came from manufacturing, you are going to understand that more than you are of a SaaS company that is in software, right? And so I probably would start out with investing in those things and then just don't listen to your uncle. Or your CPA that has something that you're excited about, compare 2 or 3 of those. So that's what our platform does, right? You can take a look at a number of those things and see which one is best. The majority of investors, when they start investing, pretty much 100%, they lose everything because they, they don't understand that basic question that you just asked and how to do that. So when we say leave the world in a better place, we don't just mean help building companies up. But helping investors make great decisions for themselves, their family, and future generations.

Yeah, I love all those points you made. And I was literally about to say, you know, one of my favorite axioms of Warren Buffett is invest in what you know, right? I mean, it's, it's so simple, but especially in this, you know, strategy of investing in companies, you know, it's if you come from a healthcare background, you may have a hard time, you know, understanding a SaaS company, right? And vice versa. And there's just, you know, there are a lot of overlapping business principles, but understanding a, you know, go-to-market plan, a, you know, total addressable market, what's the real need and the deliverability of this particular, you know, product or service, like those are things that it takes understanding the industry to really be able to to understand if it's feasible or not. So I love that you said that because I would say that's probably my number one advice for people that are getting started in this is invest, start with where you know, right? Because you're going to be— and to your point too, if you're coming in with some of these companies and they want more of a value-added, you know, capital or it's like, hey, maybe you can be on the board, maybe you can introduce them to resources and now in your network, if you come from that background to help them be more successful, you can actually be more value-added partner than just you know, a nobody in a fund that's a huge VC fund, you know? So I love that.

That's such wise advice. And also I would, the founders of these companies, and I'm sure there's a bunch of them on the podcast today, that they want to know, gee, how do I approach investors and think, have empathy and say, what are they looking for? And if you're hearing this loud and clear, then form an advisory board of people that can help you with this because typically the founders are brilliant, but they're not brilliant at raising money and they really don't understand the investor and they, and they'll take money from anybody because they're desperate. They're going to go under if they don't. But the, the wise founder will find a good fit where the investor will be participating at the minimum at advice. And help them move along in the process. So it, we, we call our, our company WealthVP. It stands for Wealth Venture Partners. Okay. So we want the two side of the marketplace to partner with each other, not just give advice or not just give money, but you know, if we can do this, and I, I'll make a little political comment, I think we gave close to a trillion dollars away for people to stay at home. You know, and during the pandemic, what if that trillion dollars went to startups? Where would our country be right now in the world? Where would our founders be if we could do that? Well, we can't do it through politics, but we can do it with your audience in a way that can be meaningful and create millions of jobs, great products that can help our lives improve. I mean, right now you could have the cure for cancer and someone couldn't get funded. So again, for your audience, I think these alternative investments are a wonderful place that you can fulfill your life as well as make, you know, a bucketload of money too, right? So, but so, so what you're doing right now in this alternative talk is, is really helping us move into the future because as much money now is going into the public markets, going into the private markets now.

Yeah, absolutely. I love that. I'd love to shift. Real quick, you said you, you've interfaced with Peter Thiel. I don't know how much, but I'd love to hear if there are any takeaways of your conversation with him or things that he said that were, you know, stood out to you. Because I mean, this guy is considered probably one of the best venture investors in history. I mean, I think he famously has a Roth IRA that's, you know, tax-free valued, I think, well over $1 billion or something from investing in Facebook and other of these big unicorn companies. And yeah, did you share a little bit of just any, any, I guess, that you gleaned from him? Much thanks.

Because, because what, what we've, what we found with ultra-high net worth individuals like Peter and others, they want their privacy. And so, so that's kind of number one with our investors when they come on the platform. And it was at a political, as you know, how political he is. So it was at a, a political fundraising event. But he was, he was very interested in schools and making life better for people. So he had that. I work with his right-hand guy that was with him at PayPal with Elon Musk, and we go to lunch probably a couple times a year. And, but again, at that level, when you have that much money, they come across as more like venture funds. Because, you know, a small investment to them is $50 million. Okay.

Right.

And so if, if the smaller company's raising $1 to $5 million, even if they got a 10 times return, it doesn't make much of a difference in their portfolio. So, so they pretty much have a different look and they, you know, they invest in, you know, finding a town in Africa with agriculture around it and employing all that, plus, you know, building the roads. It's, it's, it's a different deal. But, um, so I, I think that's all I can, I can say. Uh, I, I enjoyed speaking with him. He was grounded in the need to make the world a better place. Um, I got the sense that he was risk-averse, uh, as much as you can be in that area. Um, and, but again, I, I don't want to overstep my bounds about, um, sure, in privacy.

Yeah. Kind of the last thing I wanted to, to ask you and not to put you on the spot or anything, but I do think, you know, for, for a platform-based model, you know, you, you can create alignment of interest, but a lot of times it's important. You know, I always advise, you know, investors to look at what are the incentives, you know, is there alignment of interest? And if you depend on how you guys are structured, I'd love to kind of hear how you guys make money and how you maybe create an alignment of interest for investors to where it's not just, you know, it's one thing to say here's kind of our standards for the deals we put on the platform, but it's another thing to, you know, abide by it. And, you know, compensation, those kind of things. Can you just maybe disclose a little bit of how you guys, you know, structure your compensation as a platform and how you're aligned in interest?

Yeah, I think— thanks for that question. The industry needed to be disrupted. right? Because the pain point now is too high for companies. We just, in our great country, they can't get funded. And so we already talked about the 2 and 20 model and we decided not to do that. So we are a matching connecting platform with a mission to get people funded, but we want 'em to stay outside the SEC rules of investment advisory. So how do you do that? So we are a SaaS company, software as a service, Interestingly enough, the majority of investors I talked to to fund our company don't know what that means. Okay. And why we are that way, because there's, there's not many companies out there that would do what we do. So we charge either an annual fee for investors or a monthly recurring fee for companies. We take no carry, no, none of the 2 and 20. And both sides like that because they know we're unbiased. And they know we're not taking part of the deal. And so, so that bodes really well for both sides that, that we can do that. And that again, for our company as a valuation, I'm going to digress and tell everybody out there why SaaS is— has a better leverage than real estate and anything else out there. And if you were to go to Google the unicorn list of names, and see 1,200, you won't recognize 90% because almost all of them are SaaS. So why SaaS versus the EBITDA or multiple of earnings model? And I'll just give you a short story. So if you built a company, $10 million in revenues and it's an EBITDA model, you get about 5 times that bottom line. So let's say it was producing $2 million. The company's worth $10 million. Okay. About, and there's, of course, exceptions. A SaaS company, because the gross margins are so high, in other words, cost of goods that they get in a normal market, it's lower today, but let's say in a normal market, they would get 10 times top line revenues. And imagine that. So a $10 million company is now worth $100 million, and that's probably the best kept secret in the marketplace today that private investors don't know, that SaaS companies on average get the, the Unicorn Club of $1 billion. On average, they get there in 4 to 5 years with a fraction of them. So again, to all your listeners, this is, you know, it's like The Matrix. You want the blue pill or the green one? You know, you, you just got exposed to a marketplace that is— will continue to be the focus of investors over the years because you have a reliable cash flow that you don't have to continue to sell. It can continue to grow with lower churn rates.

Awesome. Well, this has been really, really good. I loved your kind of top 3 things to look for for companies. I think that's super valuable along with everything else. What's the best way for folks to kind of learn more about Wealth VP? And just to be clear, kind of who you serve? I know you kind of skew more towards the high net worth, ultra high net worth. But for someone that heard this, like, hey, I do want to kind of get more exposed to venture and private equity, even you said you have a real estate vertical, you know, what's kind of a, you know, a range of net worth that makes sense to even start exploring some of this with your platform?

At least on our platform, we work with ultra high net worth individuals and family offices. And by definition, that starts at about $30 million of assets under management. And yet the beginning of next year. So if you're not in that group, hang with us because it's very possible that we will go to a lower tier and invest kind of diamonds in the rough companies as well. The methodology that we've talked about should work for anybody. And we take a pitch book type of approach that if a family were to do this on their own, they'd have to hire a whole team that's going to be a minimum $250,000, $300,000 a year with a lot of work. We can do it for $25,000 a year, better, faster, less expensive. On the company side, uh, we have two tiers. One is at $300 a month, and that just comes with the software. At $1,000 a month, they not only get the software, but they get a relationship manager as every one of our investors. We've added the human being relationship. So not only the software, but we will help hook you up to other investors, help to form syndicates, hook you up with companies on and off our platform. So it truly is not just software, but a service that goes beyond pretty much anything we've seen out there.

Awesome. And then what's the website?

It's wealthvp.com, like Victor Paul dot com. And of course, I have a really easy email. It's my first name, Leif, Leif@WealthVP. So feel free to contact me and I'll route you to the right people to help out.

Awesome. Well, thanks so much for coming on. We'll put that in the show notes and appreciate you sharing perspectives on the market and just what you guys are doing to disrupt and hopefully bring a lot more transparency and better deals and education for everybody.

And I'm honored you'd have me here. Thank you.

All right, thanks.