Altimeter (with Brad Gerstner)

Summary Notes


In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, along with guest Brad Gerstner, founder of Altimeter Capital, delve into the evolving landscape of venture capital and the rise of crossover investing. They discuss how hedge funds and venture firms are blurring lines, with early-stage VCs restructuring to retain stakes in public companies and hedge funds like Tiger Global entering seed investing. Gerstner shares insights from his career, highlighting his firm's dual approach to operating both a hedge fund and a venture capital firm. He also touches on his personal entrepreneurial background, the challenges faced by his father's business, and his commitment to using his platform for impactful initiatives like Invest America, which aims to democratize investment opportunities. The conversation underscores the importance of adaptability, the role of mentorship, and the potential for venture capital to drive significant societal advancements.

Summary Notes

Introduction of the Hosts

  • Ben Gilbert introduces himself as the co-founder and managing director of Pioneer Square Labs and PSL Ventures.
  • David Rosenthal introduces himself as an angel investor based in San Francisco.
  • Both are the hosts of the Acquired podcast.

"I'm Ben Gilbert, and I am the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund, PSL Ventures." "And I'm David Rosenthal, and I am an angel investor based in San Francisco."

The quotes introduce the hosts of the podcast, providing context for their backgrounds and expertise in the technology and venture capital industries.

Crossover Investing in Venture Capital

  • Discussion on the trend of crossover investing where hedge funds like Tiger Global and Kotu are engaging in seed investing.
  • Traditional early-stage VC firms like Sequoia are restructuring to maintain stakes in companies post-IPO.
  • Altimeter Capital is highlighted as a pioneer in operating both a hedge fund and a VC firm.

"We are watching hedge funds like Tiger Global and Kotu come all the way down to seed investing, and we're simultaneously seeing classically early stage venture capital firms like Sequoia completely reinvent their structure to hold on to their winners longer, even as they become public companies."

This quote summarizes the current trend in the venture capital industry where both hedge funds and traditional VC firms are diversifying their investment strategies to cover a broader range of company stages, from seed to public.

Changes in Venture Capital

  • David Rosenthal observes significant changes in venture capital in recent years, more than in the previous decade.
  • The conversation implies that the venture capital industry is undergoing a transformative period.

"There has been so much change in venture in the last few years, more change, I think, in the last few years than in the decade that I was doing venture, than watching it before."

David Rosenthal's quote emphasizes the rapid and substantial changes in the venture capital industry, highlighting the dynamic nature of the field.

Brad Gersner's Background and Altimeter Capital

  • Brad Gersner is the founder of Altimeter Capital, a firm that operates both a hedge fund and a VC firm.
  • Gersner has an extensive career, having started five companies and invested in major tech firms.
  • He is recognized for his expertise in the business of online travel, with involvement in companies like Expedia and Uber.

"Brad has had an unbelievable career starting five companies. So he's got a very different mentality than your sort of classic hedge fund guy on the investing side."

The quote provides insight into Brad Gersner's entrepreneurial mindset and distinguished career, which sets him apart from typical investors in the hedge fund industry.

Pilot as a Sponsor

  • Pilot is a startup-focused accounting firm backed by Sequoia, Index, Stripe, and Jeff Bezos.
  • The company offers comprehensive financial services for startups and growth companies.
  • Pilot's growth is highlighted, now being a billion-dollar company.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact now is the largest startup focused accounting firm in the US."

This quote introduces Pilot as a leading accounting firm for startups, emphasizing its comprehensive services and significant growth in the industry.

Brad Gersner's Family and Entrepreneurship

  • Brad Gersner shares his family's background, with his father being a first-generation college graduate and an entrepreneur.
  • Gersner's father faced challenges in the auto parts manufacturing industry during economic hardships.
  • The story illustrates the personal risks associated with entrepreneurship outside of venture capital.

"My dad had classic immigrant story. His parents had kind of given up everything in order to help put their only child through college."

The quote highlights the sacrifices made by Brad Gersner's family for education and the pursuit of the American dream, setting the stage for a narrative about entrepreneurship and personal risk.

The Reality of Entrepreneurial Risk

  • Gersner contrasts the risk taken by his father with that of Silicon Valley entrepreneurs.
  • He points out the differences in the safety nets available to founders in the tech industry versus traditional businesses.
  • The story serves as a reminder of the varying degrees of risk and consequences faced by entrepreneurs.

"The risk is have a young family, mortgage your house, mortgage your car, double digit interest rates and inflation. The business goes under. My dad loses his health, he loses his house, he loses his marriage. Right? That's risk."

This quote poignantly captures the true nature of risk as experienced by Gersner's father, contrasting it with the relatively lower stakes for tech entrepreneurs who have more support and fewer personal liabilities.

Brad Gersner's Career Path

  • Gersner shares his early interest in politics and his role as deputy secretary of state in Indiana.
  • He discusses his decision to pursue business instead of a political career, driven by a desire to avoid fundraising and maintain financial independence.
  • Gersner's journey reflects a strategic pivot from politics to business, with a focus on self-reliance and entrepreneurship.

"The idea of groveling for the rest of my career for money just didn't sit well with me."

The quote reveals Gersner's personal aversion to the constant need for political fundraising and his preference for a career path that allows for more autonomy and self-sufficiency.

Transition to Harvard Business School (HBS)

  • Gersner explains his last-minute decision to apply to HBS and the unconventional nature of his application process.
  • His experience as deputy secretary of state played a role in his acceptance into HBS.
  • The story illustrates Gersner's determination and the serendipitous events that shaped his educational and career trajectory.

"I can't say that I've ever interviewed somebody who didn't have time to complete the application."

This quote reflects the unique circumstances of Gersner's HBS application and his ability to seize opportunities despite unconventional approaches.

The Dot-com Bubble and Online Travel

  • Gersner discusses his involvement in the online travel industry during the dot-com bubble.
  • He highlights the formation and rapid growth of NLG, a company that provided the infrastructure for online travel booking.
  • The eventual acquisition of NLG by Expedia and IAC is discussed, showcasing Gersner's early success in the tech industry.

"We built the business to over a billion in gross bookings, think had over 1000 employees at the peak."

The quote summarizes the rapid success of NLG in the online travel space, demonstrating Gersner's ability to capitalize on emerging market opportunities.

Fundraising Philosophy

  • Gersner reflects on his approach to fundraising for Altimeter Capital, differentiating it from political fundraising.
  • He views himself as a steward for investors, aiming to generate returns and support various causes through successful investments.
  • Gersner's fundraising philosophy is grounded in a sense of duty and the potential for positive impact.

"I am a steward, I am a fiduciary on your behalf, and I believe I'm going to make you a lot of money."

This quote encapsulates Gersner's perspective on fundraising for his investment firm, highlighting his commitment to his investors and the broader impact of their capital.

Market Dynamics and Investment Decisions

  • Recent market changes have significantly impacted growth multiples and risk premiums.
  • Many businesses that were previously thriving may now face challenges due to these market shifts.
  • Decisions in public markets investing are influenced by current market conditions and historical events.

"Look at what's happened over the course of the last eight weeks, right? Growth multiples are down 50%. Risk premiums have changed dramatically."

This quote highlights the rapid change in market conditions, particularly the decrease in growth multiples and the shift in risk premiums, which are crucial factors for investors to consider.

Venture Capital and Hedge Fund Crossover

  • The concept of lifecycle investing, where investors stay with companies from early stages through to public markets, was not initially obvious.
  • Historical examples of investors like Warren Buffett and Paul Reider did not differentiate between public and private investments.
  • The idea of a crossover fund, combining venture capital and hedge fund models, was not traditional but became a vision for some investors.

"I thought there was going to be a lot of disruption occur in that business model."

The quote reflects the speaker's belief that the traditional separation between venture capital and hedge funds was ripe for disruption, leading to a new model of lifecycle investing.

Entrepreneurial Journey and Transition to Investing

  • The speaker recounts their entrepreneurial experiences and the decision to transition into investing.
  • Rich Barton's advice played a pivotal role in the speaker's realization that their skill set was better suited for investing than entrepreneurship.
  • The speaker's legal background and approach to investing were identified as strengths in the context of evaluating investment probabilities.

"Investors think about distribution of probabilities, not possibilities."

This quote encapsulates the speaker's shift in mindset from an entrepreneurial focus on what could go right to an investor's focus on the range of possible outcomes and their probabilities.

Founding a Hedge Fund during Market Turmoil

  • The speaker founded a business immediately after the 2008 financial crisis, a time of significant market instability.
  • Despite the challenging environment, the speaker's mentor, Paul Reider, provided both inspiration and practical support.
  • The speaker's personal financial risk was mitigated by their frugal lifestyle and the decision to invest their own funds into the business.

"I had a roadmap and I had a mentor who believed, and I had a clear vision as to where I was going to go."

The quote underscores the importance of having a clear vision, guidance from a mentor, and a strategic plan when launching a new venture, especially during times of economic uncertainty.

Crossover Fund Challenges and Opportunities

  • The crossover fund concept faced skepticism due to the negative perception of commingled funds in 2008.
  • The speaker's strategy was to wait for market conditions to improve before fully executing their vision for a public-private investment model.
  • The speaker's firm, Altimeter, was eventually able to raise capital for dedicated venture and public market funds.

"Crossover fund, commingled fund, public-private fund. Those were bad phrases in the fall of 2008."

This quote reflects the initial resistance to the crossover fund concept, which was associated with negative connotations during the financial crisis.

Venture Capital Industry Evolution and Strategy

  • The venture capital industry was perceived to be ripe for change due to the increasing scale and speed of company growth, as well as the emergence of deeper private capital pools.
  • The speaker's firm sought to differentiate itself by being founder-friendly and empathetic towards entrepreneurs.
  • Altimeter aimed to create a long-duration pool of capital to support venture and growth opportunities.

"I thought that the business building journey that started in that first institutional raise was different than what we intended to do."

This quote indicates the speaker's intent to build a venture capital firm with a unique approach, different from the existing players in the market.

Investment Insights and Successes

  • The speaker's firm focused on identifying and investing in companies that would benefit from the transition to cloud computing.
  • A key insight was that not all software and ARR (Annual Recurring Revenue) are created equal, leading to targeted investments in companies like Snowflake.
  • Altimeter's strategy involved being students of market trends and focusing on areas like cloud infrastructure and database markets.

"We did have a strong view that the entire database market was going to be remade. It was going to be remade in the cloud, purpose-built for the cloud."

This quote explains the speaker's conviction that the database market was undergoing a transformation towards cloud-based solutions, which guided their investment strategy.

Investment Philosophy and Portfolio Management

  • The speaker believes in the importance of understanding human behavior and themes driving market events to make informed investment decisions.
  • Altimeter's investment philosophy involves focusing on multitrillion-dollar opportunities and having several bets in the portfolio in those areas.
  • The speaker's previous successes in identifying transactional opportunities on the internet informed their approach to new investment areas.

"Unless you have an architecture, unless you deconstruct what's going on in the world and try to understand the theme, the human behavior that's driving these events, then you just have a bunch of data points that are disconnected."

The quote emphasizes the importance of having a structured approach to investment analysis, considering the broader themes and behaviors that influence market dynamics.

Internet Evolution and Search Engines

  • Early 2000s recognized the internet as a chaotic but productive space.
  • The decade was dominated by search engines, both horizontal and vertical.
  • Companies like, Kayak, Zillow, Google, and Baidu organized the chaos.
  • E-commerce businesses thrived by leveraging search engines for discovery.

"So one of the things that was very clear to me in early 2000s is the Internet is the most fabulous thing in the history of the world. It connects all these people. It unleashes all this productivity, but it's chaotic. How the hell can you find anything, right?"

The quote emphasizes the transformative but overwhelming nature of the early internet and the crucial role of search engines in organizing online information.

Shift to Mobile

  • The shift to mobile disrupted traditional desktop search around 2012.
  • The challenge became how to become a prominent icon on mobile devices.
  • Facebook's investment strategy shifted when it was undervalued post-IPO.
  • Facebook's mobile monetization strategy proved successful, especially in advertising.
  • Companies that thrived on desktop search had to adapt or face decline.

"So, as the anthropologist, what did we do in 2010? I said, whoa, this whole search thing is going to get disrupted by this phone thing."

This quote captures the speaker's foresight in predicting the impact of mobile devices on the search industry and the need for adaptation.

Software and SaaS Investments

  • Software, particularly B2B SaaS, became an area of interest due to enterprise market shifts.
  • The speaker discusses the importance of non-consensus and correct investment decisions.
  • Non-consensus decisions are often uncomfortable due to contrary popular opinion.
  • The speaker highlights the challenge of making career-impacting investment decisions.

"Software was similarly situated. And so we had been investing in software, in and around software for a long time, but it really started getting interesting about that period of time, because."

The quote suggests that software investments became particularly interesting and potentially lucrative around the time of the mobile shift.

Venture Capital and Investment Strategy

  • The speaker discusses the difficulty of securing funding for companies like Mongo.
  • The importance of developer communities and their stickiness is emphasized.
  • Non-consensus investment decisions can be career-defining.
  • The speaker recounts an anecdote about choosing to invest in Snowflake and the diligence involved.

"The problem is, being non consensus is most often."

The incomplete quote implies that non-consensus investment decisions are frequently incorrect, highlighting the risks involved in venture capital.

Public Markets and IPOs

  • There is a discussion about the potential for earlier IPOs and their benefits.
  • The public markets provide discipline and scarcity that can drive innovation.
  • The speaker hopes to see a return to earlier IPOs for the benefit of retail investors.
  • The speaker discusses the role of venture capital in supporting risk-takers.

"Having companies running around with billions of dollars on their balance sheet and decacorn valuations and not the discipline of public markets to me is not a great thing for the company, for the employees, for the founders."

This quote criticizes the lack of market discipline in highly valued private companies, suggesting that earlier access to public markets could be beneficial.

Competition and Collaboration in Venture Capital

  • The venture market is maturing and becoming more efficient.
  • Founders benefit from increased competition and access to capital.
  • The speaker values competition and collaboration within the venture ecosystem.
  • The speaker's venture firm focuses on adding value to companies and increasing their success probability.

"We collaborate as much as we compete, okay? And when we compete, we're going to go at it, we're going to lay out why we think we're the best partner for the company, but we're also going to collaborate."

The quote reflects the speaker's belief in a balance between competition and collaboration in the venture capital industry.

Capital Markets and Innovation

  • The speaker believes in the importance of innovation in public market access.
  • Direct listings, IPOs, and SPACs are seen as different pathways to the public market.
  • The speaker emphasizes the need for efficient pricing in all public market entry methods.
  • The speaker's firm provides insights to founders on transitioning to public markets without economic bias.

"And now we can offer what I think is the best insights to these founders. And we have no economic finger in the scale because I can partner with you if you want to do a traditional IPO, great."

This quote highlights the firm's role in advising founders on the best pathway to the public markets, regardless of the method chosen.

Incentives and Outcomes in IPO Marketing

  • Ben Gilbert discusses the influence of incentives in IPO marketing, drawing from his experience being approached to buy IPOs from banks.
  • He highlights transparency in the process and the ability to play a role in the marketing strategy.
  • Ben emphasizes the importance of understanding where one fits into the IPO process from the perspective of both the buyer and the seller.

"It's the old mongerism, right? You show me the incentive and I'll show you the outcome. And in this case, you coming from the perspective of, hey, you realize when the banks are trying to sell an IPO, they come to me to buy the IPO. So having sat on that side of the table and not yet having an incentive, I can talk to you about how this would get marketed to me. So you at least have that transparency. And then I can tell you how I want to play in that process, and you can give me feedback and tell me where I belong in your process."

The quote explains the concept of incentives determining outcomes, particularly in the context of IPO marketing, where the speaker's position allows him to provide insight into how IPOs are marketed and how he prefers to engage in that process.

Evolution of Banking and Market Efficiency

  • Banks are becoming more efficient due to competition and the emergence of alternatives like direct listings.
  • This efficiency is leading to increased choice and better outcomes for market participants.

"Banks are getting more efficient. The direct list, the competition is leading to more choice and better outcomes."

The quote reflects the speaker's observation that banking efficiency is improving, leading to more options and favorable results for those involved in the market.

Crusoe Energy and Clean Compute Cloud Services

  • Crusoe Energy is a clean compute cloud provider that specializes in AI workloads and partners with Nvidia.
  • Crusoe's data centers utilize wasted, stranded, or clean energy, offering better performance per dollar than traditional cloud providers.
  • The company's environmental approach involves locating data centers at stranded energy sites, benefiting both the environment and customers through lower energy costs.
  • Crusoe's model differs from hyperscalers like AWS, Google, and Azure, which need to build data centers near major traffic hubs.

"Crusoe, as listeners know by now, is a clean compute cloud provider specifically built for AI workloads. Nvidia is one of their major partners, and literally Crusoe's data centers are nothing but racks and racks of a because Crusoe's cloud is purpose built for AI and run on wasted, stranded or clean energy, they can provide significantly better performance per dollar than traditional cloud providers."

The quote describes Crusoe Energy's focus on providing clean compute cloud services for AI workloads, highlighting their partnership with Nvidia and the use of alternative energy sources for better performance and cost-effectiveness.

Lifecycle Investor Model and Venture Growth Business

  • David Rosenthal expresses skepticism about being labeled a pioneer, referencing Warren Buffett's investment philosophy of focusing on great investments, not just private versus public.
  • The venture growth business model is maturing, similar to the consolidation seen in the LBO and private equity markets.
  • There's a competitive market for generating alpha and above-average returns, requiring passion and sacrifice.
  • The venture capital landscape is undergoing creative destruction with various players, including solo GPs and hedge funds, entering the space.
  • A firm's reputation is critical, measured by NPS scores among founders and funders.
  • David discusses the importance of maintaining a high NPS score with founders and delivering excellent returns to partners.

"And for me, if you said, brad, you can only do public market investing, that wouldn't scratch my itch. If you said you can only do venture investing, that wouldn't scratch my edge. And so for me, it starts from the premise, like, what do I want to do? What can I be most passionate doing?"

This quote captures David Rosenthal's personal investment philosophy, emphasizing the importance of passion in choosing investment avenues and the desire to participate in both public and venture investing.

The Role of Brand and Partnership in Venture Capital

  • The signaling effect of having top-tier venture capital partners is significant and perhaps underestimated.
  • Strong partnerships between the best funds and partners can increase the probability of successful outcomes.
  • David Rosenthal acknowledges the importance of trust and business-building shorthand among top partners.

"The signaling effect is profoundly important and I think probably underestimated, which is amazing considering how high it's estimated."

This quote emphasizes the importance of the signaling effect in venture capital, suggesting that the value of having reputable partners may be even greater than commonly recognized.

Impact and Purpose in Capitalism

  • David Rosenthal reflects on the impact of the technology revolution and its tendency towards wealth concentration.
  • He discusses the importance of using platforms to drive diversity and address the wealth divide.
  • The Invest America initiative is mentioned as a way to make people feel included in the system and address wealth disparities.

"We are all part of one of the most fortunate systems at one of the most fortunate times in the history of modern capitalism. And I intend to use this platform to do things that matter, right?"

The quote reflects David Rosenthal's view on the responsibility of those who benefit from the current economic system to use their platforms to address significant societal issues and make a positive impact.

Invest America Initiative

  • The Invest America initiative aims to include more people in the ownership society by providing investment accounts to children based on means.
  • The idea is to create a government-funded investment account for every child, which compounds over time and can't be accessed until later in life.
  • The initiative is seen as a way to educate and include everyone in the financial system, potentially changing the trajectory of future generations.

"So a very simple idea that I floated. Chamath and I were on CNBC. I'd been thinking about it for a long time. I've abhorred the accredited investor laws for as long as I can remember."

The quote introduces the Invest America initiative, which Brad has contemplated for a long time and sees as a solution to the limitations imposed by accredited investor laws.

The Future of Altimeter and Retail Investors

  • Brad envisions a future where Altimeter's LP capital could increasingly come from retail investors, providing broader access to the asset class.
  • He aspires for Altimeter to have a significant scale and impact, delivering high NPS among founders and funders.

"Our aspiration is not to be the biggest, but our aspiration is to have the scale, to have the level of impact that we can to drive the highest mps among founders and funders like we want to deliver for both of those folks in that network."

This quote outlines Brad's aspirations for Altimeter, focusing on impact and satisfaction among stakeholders rather than just size.

Reflections on Capitalism and Modern Experimentation

  • Brad defends capitalism as an enabler for other aspects of life and highlights the importance of risk-taking in advancing humanity.
  • He sees business creation and experimentation without personal guarantees as a modern innovation that has significantly benefited society.
  • Brad underscores the potential for the current system to become more vibrant and accessible over the next decade.

"But I am a staunch defender of this beautiful system. I tell you, it's a hell of a lot better than having to mortgage your house. You think about the velocity of money. If the risk you run, if you start that auto parts company is you lose your health and you lose your house, there's not going to be a lot of risk taking. And risk taking is the engine that moves humanity forward."

The quote highlights Brad's belief in the value of capitalism as a system that encourages risk-taking and innovation, which he views as essential for human progress.

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