TRANSCRIPT
slava (00:01.826)Hello and welcome back to another episode of Smart Humans. I'm really excited for today's guest. He's really one of the anchors of building out the entire FinTech industry for investing. We have Frank Rotman, who is co-founder and CIO of QED Investors. Frank, thank you so much for joining us.
frank_rotman (00:22.721)Happy to be here.
slava (00:24.482)So our guests always tell us a story first, which is how did you even get into alternative investing? Like, where did that start?
frank_rotman (00:33.95)Yeah, so it's hilarious that we think about alternative investing, you know, as everything outside of cash and bonds and stocks. And for a lot of people, myself included, the first experience I had was when I was a kid. You know, I was seven years old, and my brother and I started to collect comic books, you know, something that's pretty common for kids these days to find something they're passionate about. Today, it might be trading cards and Pokemon.
a bunch of other things like that, but for me back in the day it was comic books. And never thought of it as an investment. It was just a hobby, a passion, you know, something that I enjoyed quite a bit. And if you fast forward to today, like that hobby turned into a habit and that habit never went away. And I now have about 25,000 comic books in my collection and have never sold one in my life.
So maybe that makes me a bad investor, but more of a collector than an investor in alts.
slava (01:34.046)Well, we heard from one of our other guests, I think it was actually Anthony Scaramucci. He actually said that the best investors are actually the dead ones because they don't get to do any trades. So maybe you're already moving in that direction. So you have thousands of comic books and never sold one.
frank_rotman (01:52.698)That's correct.
slava (01:54.134)Wow, so do you think about it as an investment or is it purely a passion for you or is it really a mix?
frank_rotman (02:01.27)It's a mix. So when you're seven years old and you're collecting comic books, it's much more for reading. As you get older, it's hard not to start thinking about which ones you have are valuable, which ones other people want. And it was always cool as a kid to think about the collection that I had and knowing that someone wanted some of the things that were in my collection.
slava (02:24.214)What's a, sorry, so what was that first comic book, the one that was like the gateway, you know, to really take you from like, oh yeah, I'll just get another comic book to, oh my gosh, this is so exciting, I need more. Because for me, that was the David Robinson rookie card, his basketball rookie card. I still remember that card, I still have it. So how about you, when I opened that pack, it changed everything, but how about you, what was that, what was that comic book, where is there?
frank_rotman (02:48.546)It was Marvel comics, so very much into the Marvel world. But my brother and I just started collecting around the same time. It wasn't, you know, one comic book in particular, but it was more a pattern where my brother and myself would go with my dad to, you know, the local pharmacy, which is where we used to get comic books. They had a spin rack.
And we would just go with my dad once a week. We would see what was on the spin rack, and we would buy a few things and come back. So it was more a trip with dad. And we would come back with some comic books, and we would sit on the floor of my room or my brother's room, and we would read them. So again, it was more a habit that became a hobby and a hobby that became a habit again. So it's just never disappeared. And to your point, as I got older,
slava (03:32.266)Amazing.
frank_rotman (03:37.314)you start looking at the collection and thinking about it in a very different way.
And the first time that I really started thinking about the value of the collection is when eBay first took off. And it's when I actually grew my collection considerably, because finally you could find anything you wanted in one place and actually stare at the prices. You could stare at what things sold for in the past. It was finally a marketplace where the things I had value if I chose to sell them. And the things that I had been missing for years, I could now find and I could buy and I could price
what things were worth. So I think the transparency of the market was really revealed for the first time when you had a giant marketplace like eBay come about.
slava (04:23.61)And in the last five years, comic books, along with many other collectibles have taken off. Have you bought more or less as it becoming more mainstream?
frank_rotman (04:36.402)It's funny, I actually started looking online again for the first time in years and realized that my collection was worth a lot more than I thought it was. You know, some comic books that I thought were interesting, some runs that I thought were interesting, but nothing special, are now worth a hundred or two hundred dollars a comic book. And I have runs of hundreds of them, you know, in some of these collections.
And then some of the rares that I had, all of a sudden I said, wow, you know, this is a completely different level than I thought these were worth. I just hadn't looked in a long time. So during the pandemic, I actually sent off a bunch of my comics to get slabbed, you know, professionally graded and slabbed because I hadn't done it in such a long time. And
slava (05:19.15)Slapping meaning to put it in like a plastic case to keep safe and to be professionally graded to show that there's a third party Who like authenticated this?
frank_rotman (05:27.086)That's right. So you get it professionally graded. It comes back with its grade. It's in a plastic case so that you can't open it. If you open it up, it breaks the seal, breaks the grade. And a lot of them came back with very high grades. I had been holding them for years. Some of them were the original ones that I bought and had protected from when I was a kid. Others I had bought on eBay when comic books weren't as popular.
And all of a sudden, some comic books that I thought were interesting and collectible are now worth thousands or tens of thousands of dollars a piece, now that they're graded and slapped.
slava (06:04.21)Incredible. So we'd love for you to just show off a bit. What are some of those top end comic books do you have? Are we talking like, you know, the Spider-Man one or are we talking?
frank_rotman (06:16.346)Some of the premium in my collection are the early Marvels. So I have an Avengers one, an Avengers 4, a Captain America 100, Iron Man 1, Tales of Suspense 39, Tales of Suspense... Yeah, I have a lot of the original Marvel runs.
slava (06:26.396)you have an Iron Man 1. That's amazing.
slava (06:34.533)What's the great on that, Iron Man?
frank_rotman (06:38.166)So I have a 9.2 Iron Man 1 and an 8.5 Iron Man 1. CGC, yeah.
slava (06:43.414)That's amazing. Is that CGC? Yeah, so I just saw a 9.4, somebody was asking 275,000 for a 9.4. So your 9.2 is what, like high ones, low twos?
frank_rotman (06:56.746)I don't even know. I've never thought of selling, so I look every once in a while at what things are worth, and it's interesting. But the early Thor, the Strange Tales with Doctor Strange, so when eBay came about, I just filled in a lot of the missing pieces in my collection.
because I was born in 1970, started collecting in 77. So most of the comic books in the 70s and 80s I had right off the rack. And then when eBay came about, it was the first time I had disposable spending cash in my life. I wasn't a kid anymore, I was working. And I would take some of that disposable cash and look on eBay and buy up a lot of the comics I always wanted when I was a kid. And it happened to be that the market was in a slump, so they weren't that expensive. And I picked up a lot of very high grade
Silver Age key books, really cheap.
slava (07:51.158)Silver Age being one.
frank_rotman (07:53.422)the 1960s, probably the best time in superhero comic books, 1960s.
slava (08:02.254)in the golden age being more like the Batman tying back to the 40s and such.
frank_rotman (08:07.702)Yes, so I don't have any of the comics that go back into the 1930s and 1940s, but I actually think I have one, but most of my collection is Silver Age and Up.
slava (08:20.43)So for Vault, actually, the Vincent Alt Fund, we picked up a Batman number one. So a lower grade, but still a Batman number one that was pretty epic to win that at auction. So we're very excited about it. So we're right there with you. I know who I need to contact next when we're looking for some great comic books, but it sounds like you're never selling. So is the idea to pass them on to your family or what are you going to do with them?
frank_rotman (08:28.834)Nice.
frank_rotman (08:48.894)I have not thought about it. So I have a two-story library. The bottom story of the library is all books. I've never sold a book, never gotten rid of a book that I've read either. So I have this bad habit. And then comic books is the entire second floor.
slava (08:51.351)Are they?
slava (09:04.638)And so no vault for you, meaning no third party vault. You want to see them, be able to touch them, even if they're in plastic.
frank_rotman (09:10.614)Yeah, it's important. It's a piece of my life. I actually have some of the slabs up on the walls. My workout room has a bunch of slab comic books on the walls. So it's just something where it reminds me of a different time. It reminds me of spending time with my brother and my dad. The collection means more than what they're worth.
slava (09:31.49)So, you know, your day job is more investing into companies, but do you consider the investments into the collectible similar to that? Or is it really just much more fun and nostalgia? And the investment return is kind of a side benefit.
frank_rotman (09:47.134)Yeah, so alts for me are an interest. They play an interesting role in my personal portfolio. You know, comic books for me are more of a hobby, right? So it happens to have value, but it's a hobby. The thought of parting with them is just hard. I could do it. It wouldn't kill me to get rid of my collection, but I mean, there's a lot of nostalgia there and it's a piece of who I am. But there are other alts, you know, that I am investing in.
The main one being actually real estate. So single family real estate is probably the single most important category of alt that I think people should pay attention to for a whole host of reasons. We can talk about that. But not a surprise, I see things come across my desk all the time for investments in wine collections. You know, a bunch of other collectibles, fine art.
I've actually gotten very much into NFTs recently, and we can talk about that. I have probably 260, 270 NFTs and growing by the day. I've only been collecting for about the past six months, as I've thrown myself into Web 3. So I think there's a lot of interesting things happening in the alt space. They are not for everyone, and we can talk about that as well, but I think alts are an interesting investment category.
slava (11:08.246)You mentioned that single family real estate is, in your opinion, the number one category. Can you expand on that?
frank_rotman (11:15.658)Yeah, so look, part of the reason for investing in alts is to have something that's resilient through different cycles. You don't invest in alts if you're looking for something that correlates with stocks or bonds. It really is a category that just has a different pattern to it.
So not a surprise that when the pandemic hits or when inflation hits, things that are rare and collectible aren't necessarily correlated with what's happening in the economy. It's more about do people have excess? And if you think about over the past couple of decades, how many new millionaires have been minted? How many new decamillionaires have been minted? That is much more correlated with collectibles than what's happening in the economy or what's happening in the stock market.
You know, just like when the first time I had disposable income, I went and bought a bunch of comic books on eBay. It's something I'd always wanted to do when I was a kid and didn't have the money for it. You know, holding in my hand an X-Men 94 that I had actually bought off the rack and now was slapped, like is something special to me. But also picking up some of the ones that I always envisioned having and never had a chance to own because it predated me as a collector.
Now I had disposable cash and there's just something nice knowing that you have one of the top 10 graded copies of something in the world sitting in your collection. So I think the lack of correlation is very important. Now back to single family real estate, the beauty of it is that it's very much an uncorrelated asset relative to the stock market, relative to inflation, relative to stocks and bonds.
People need to live somewhere. It is a supply and demand issue. And right now the country is underbuilt by a significant number of units. Depending on how you look, three, four, five million units. And if you're short that many units, you have to ask yourself how many units can be stamped out by home builders every year? And the answer is somewhere around 600,000.
frank_rotman (13:25.31)So in the supply-demand world, it's going to be years and years and years before we catch up to the supply-demand, but more importantly, it's inflation resilient because when inflation is high, wages start increasing. If wages start increasing, all that happens are landlords charge more for rent. So
If you actually look at the patterns of how single-family real estate behaves, in up markets and in down markets, you get a great in-period yield on the property. And then if you believe home price appreciation is heading in one direction and one direction only, which it has been for a while and will for an even longer period of time given the imbalance, then you get home price appreciation on top of the incurring income.
the only transactions in life where a consumer can get leverage. The bank gives you leverage, so you don't need to put 100% of the money down. Imagine if you could buy collectibles with leverage from the bank at the interest rates that the bank is charging. You can't. I couldn't get a line of credit from the bank at 4% in order to go invest in a comic book collection.
slava (14:42.058)or a board ape.
frank_rotman (14:43.486)or a board ape or fill in the blank, but I can for real estate.
So there's a lot of efficiency in the category. The yields are fantastic. It is very liquid, especially in this market where supply and demand are out of balance. So as long as you're buying in the right places and as long as you're buying places that are very rentable, which is a knowable thing, and there are many platforms out there to do this, we actually invested in a platform from day one called RoofStock that helps people get access to single-family real estate.
mined MYND, which is property management for real estate. So if you assemble a portfolio or use them to buy one, they do all the property management for you so that you can just invest in it as an asset class. So there's a lot of ways to get access to the asset class and it's just a beautiful one to be holding during a recession, during an upmarket, during a down market, during periods of inflation or periods of stability.
slava (15:42.194)Yeah, that was going to be my question, which is how are you personally getting your exposure to real estate? Is it buying these homes yourself? Is it going through some organization? Is it using these websites exclusively? How have you navigated that?
frank_rotman (15:57.178)Yeah, I mean, you have to make a decision about how much you're investing in the asset class because you want the returns versus do you want to be a landlord? Right, those are two very different things. If you want to own the asset, but you don't want any hassle of actually, you know, being the landlord, then you need to use one of the platforms that can be a property management service for you.
In the same way that if you want to invest in a wine collection, like do you want to be housing it in a cellar or do you want a professional to house that for you? You have to make that decision.
So a company like Mind, I think, is an incredible property management company. They do it very efficiently. You have an app on your phone so that if there are any questions, like they can contact you in case things need to be done to the property in terms of investing in repairs or needing to upgrade for some reason.
You know, so you can have access to the team at your fingertips without needing to be a landlord yourself. And RoofStock and Mind are just two examples of platforms that can do that.
slava (17:03.39)And for you personally, how much of your net worth do you think about putting into alts? Are you thinking 3%, 30%, 80%? Where do you think about in terms of Frank's net worth?
frank_rotman (17:17.89)Well, it's definitely a question I've been asking myself recently, because I actually think traditional financial theory is broken. Now, I don't have an answer for what should replace it, but the concept that you give me your age, you give me when you retire, and I'll tell you what percentage you should be allocating to stocks, bonds, and cash, I actually think that's broken. I stare at my bond portfolio because I have a fairly sizable bond portfolio, and I say why?
Like I'm starting to question the concept of where bonds fit, you know, in the overall scheme. And when you start questioning bonds and I start thinking about things like single-family real estate as a superior asset class to just about every bond that I hold, it makes me question how much I should be holding in alts. Now, there are other alts, which are things like collectibles, very different than single-family real estate where...
You can get the leverage, you can get the in-period income coming in to support the costs. I'm actually making money on my properties every single month. And I have home price appreciation, which is a longer-term gain. And I have liquidity whenever I want it, even though there's a lot of friction in transaction costs. But I can get access to the money behind the investment whenever I want. Some alts aren't like that. They're just harder. They're not as liquid.
So you have to think hard about where they fit in your portfolio, but I could imagine having double digit percentages, in fact, mid double digit percentages invested in alts, if I think about single family real estate as one of the categories.
slava (18:57.922)Yeah, of course, and it should be. So we rarely have a guest who has so much coverage across all these different asset classes. So I heard you talk about real estate, NFTs, collectibles. I think you mentioned crypto quickly. Is it just NFTs or is it crypto as well?
frank_rotman (19:14.986)So if anyone has been following me on my Twitter, which is at fintechjunkie, they know that I've been learning crypto in public for the past six months. And it's crypto, it's DeFi, it's Web3, it's all of the things.
It's an area that I kind of stayed away from for a long time. I was on the sidelines. I was reading about it, learning about it. But I bit the bullet about six months ago and committed to some of our companies that I would actually learn it in public on behalf of the entire FinTech community that had been sitting on the sidelines and watching. And it's been a fascinating journey, eye-opening.
As you can imagine, there's a lot of noise there. And part of my goal of diving in very, very deep, again, if you follow me, you'll see how deep I've been going, was to figure out is there signal there, or is this really just a lot of noise and kind of the next buzzword that will come and go.
And what I found is, yes, all of the noise absolutely is there. It's a gold rush. And whenever there's a gold rush, a lot of people end up pouring in, many of whom don't know what they're doing. Many of whom are fraudsters and trying to take advantage of the gold rush. But there's also some signal there. There's actually a lot going on in the space that if you're not a practitioner, if you're not digging in and rolling up your sleeves and being part of the communities, you don't actually understand what's happening.
So I've made that leap and I'm coming away not as a skeptic, but as a skeptic of many things, but a believer that there are some longer term trends that are here to stay.
slava (20:52.002)Great. I mean, that's usually true for most new waves. I mean, even if you look at internet 1.0, Amazon's amazing, but there was a lot of garbage out there. You had to sift through it all. So real estate, NFTs, crypto, collectibles, venture, obviously a lot of exposure. You just didn't mention debt, but how do you think about your diversification across those asset classes? And if you can think about it as a hundred percent pie, I would love your like, you know, guesstimate.
at the way you split that up. I'm thinking you're gonna say it's a huge chunk of SFR, which is single family real estate, but I might be wrong, but I would love to hear the way your pie gets split.
frank_rotman (21:34.174)Yeah, so it's not the ideal split.
There's a necessary split here because as the co-founder of a fund, I have a GP commit to QED. So I'm overexposed on a relative basis to venture. I'm also an LP in other people's funds. So I have quite a bit of exposure to venture, in fact, more than would be typical or healthy. But it's understandable because of the job that I'm in and it's what I do. So I'm in some ways betting on myself and betting on the team.
slava (22:01.179)It's your day job. Right.
frank_rotman (22:07.596)and it's something that I have my hands on and have been able to shape. So I don't know how you consider that. For me, it's not really part of my allocation. It's just part of what I have to do because of the profession that I'm in. Yeah, if you...
slava (22:23.842)What if we took that out? So we took out the venture. We shouldn't really take out the LP because the LP is investing in others, but if we took out your, exactly.
frank_rotman (22:35.642)If we took out QED, I would think about stocks and bonds is probably approaching somewhere around 85% of non-real estate. We can talk about real estate, but it's about 85% of non-real estate. And then if we start looking into...
the other categories, which would be LP interests and other venture funds, looking into alternatives, it's probably 10 to 15%.
slava (23:10.898)All right, great. So are there any particular alt asset classes that it sounds like you're pretty open-minded, but you're like, oh, I'm gonna stay away from that because that's just always bad news.
frank_rotman (23:28.602)Yeah, I mean, it's an interesting question. I don't think alts are for everyone. So let's start with that. I think alts are interesting if you understand the category, if you understand the liquidity of that category. If you have the ability to compound, I think alts become very interesting.
You know, I think the problem is a lot of people are getting involved with alts because they're fun. And that's actually not a bad statement. Like why not do things that are fun in life? Um, but there are a lot of people who are investing in alts because it gives them something to look at, something to talk about, uh, something to learn about.
But they don't actually have kind of the duration, you know, or the ability to let the investment compound the way that the category needs to compound to make it a compelling investment. So it's the biggest problem that I see in the NFT space right now is that people don't understand what NFTs are. That's thing number one. But thing number two, they think of them as fully liquid at all times.
and they think about investing in NFTs, but if there's an expense, you know, in real life that they need money for, they end up selling an NFT in order to raise the money to pay for in real life expenses. Not really what alts are for, right? It doesn't have a chance to do its job, which is compound. In fact, most investments, you need to let it compound if you're...
slava (25:01.41)going back to your comment books that you never sold.
frank_rotman (25:04.59)Yeah, I mean, look, I bought them at, you know, 20 cents and 25 cents a piece when I was young. And now, you know, those comic books are worth many, many times. The the rate of inflation would suggest that they're worth like it's compounded better than the stock market and better than pretty much any other category I can think of. It's done well. But if not for that compounding over decades, like it wouldn't have done its job.
So the concept of buying into an NFT project, which again, let's talk about what an NFT is. When you mint an NFT, it's basically a fundraising opportunity for a team on the other side to basically work and build a project into existence that you want to be associated with. But you don't own the project. You don't own the company on the other side. You don't own the output.
you're just associated with the project as evidenced by the NFT. It's digital proof of ownership. And you have the ability to sell that digital proof of ownership to someone else who's interested in being associated with the project. And if there's utility created, that's great. If the project team wants to deliver things to the NFT holders, they can. But legally, they're not obliged to. So you have to associate yourself with the right projects. So it's not a...
tangible thing that people want to use in the same way that they do some other alts. Like when people invest in a wine collection, a lot of people are investing in it because they fully intend on drinking the wine. Right? Yes, they might end up trading the wine, but you know, a lot of people invest in it because they want to drink it. There is utility there. And same thing with comic books. Like, yes, they are worth something.
slava (26:47.463)Utility.
frank_rotman (26:54.318)but they're worth something because there's a story there that people wanna read, or something important that happened that was important in the universe that was created with other comic books. So, in the NFT space, people need to be very careful that if they're investing in a team that has a project on the other side that's going to take time to create,
the thought of all of the language around this, when moon, when is this thing going to just take off? And people think in terms of days and weeks. Haven't heard anything from the team, what's going on? Is this a rug? Well, I mean, the team needs to do things. And I'm actually spending a fair bit of time with some of the actual teams on the other side.
slava (27:37.826)Sorry, is this a rug meeting? Am I gonna lose all my money here? This is, you know, right.
frank_rotman (27:42.191)Is the team just going to run away and just not come back and take the money and disappear?
slava (27:47.018)Not everybody's as cool as you, Frank, so we gotta make sure that everybody...
frank_rotman (27:49.242)Well, there you go. I'm learning the language myself. But I do spend time with some of the project teams that are on the project side of an NFT. And it takes time to deliver what they're actually building. And again, the duration mismatch between the impatience of a lot of the people investing in NFTs and how long it takes for a project to come about, I think that's the biggest issue in the space right now.
slava (28:14.594)Got it. Well, thank you for sharing all those stories about yourself and more about how you think about investing. I'm going to shift now to your QED experience, which is, you know, so relevant, but where did that start from? Like why start QED? You're one of the founders and why focus on FinTech, you know, many years ago, which I would argue it was probably not the cool thing to do to focus on FinTech. Now it seems super cool. And it seems like, uh, you were way ahead of the curve, but why do that then?
frank_rotman (28:45.238)Yeah, so this is a story of we are going to do it no matter whether it was cool or not cool because of who we were. And QED was founded by three people, myself, Nigel Morris, and Kara Buhonic. The three of us had a shared work history in that we were the early guard that helped create Capital One.
So if you know the Capital One story, you know a bit about the three of us. Nigel was the co-founder of Capital One, actually helped spin Capital One out of a small regional bank called Cigna Bank. I was there with Nigel when it was Cigna Bank. So one of the very early people hired in the early 90s. So 93 is when I started and helped spin off Capital One and build it into a pretty interesting, you know, full service bank at this point.
But in some ways, Capital One was a fintech of the 1990s before there actually was a word called fintech. We were doing new things and disrupting banks. We were spinning out of a regional bank and actually doing things differently, specializing in credit cards at first and eventually building more products.
So with our experience of building a company from almost nothing, just a handful of people into 30, 40,000 people and a global institution that was worth many tens of billions of dollars, when Nigel and I left and found ourselves in the outside world together, we talked about what we were going to do together. And after a lot of deliberation on this, we thought that being
frank_rotman (30:25.094)We could have been consultants, but the downside of being a consultant is you can put together this brilliant strategy, hand it off to the client, they end up not executing it, and then you just blame them. Right? And Nigel was a consultant before coming over to Signet and then spinning off Capital One, so it's so easy to blame the client and not yourself.
slava (30:35.71)Yeah, I was a consultant for several years, so I know exactly what you're saying. Being an entrepreneur.
slava (30:48.63)Being an entrepreneur is way better.
frank_rotman (30:50.97)Yeah, so the concept of being an investor means they can't get rid of us. And the only way that we make money is by giving good advice to the companies and then helping kink the curve on outcomes. So we thought we could take our operating backgrounds and help, you know, this next breed of, you know, young companies turn themselves into real challengers to the banks. Now there was not a word called FinTech when we started.
We started at precisely an awkward time, which was late 2007, early 2008, right at the beginning of the global financial crisis. So the banks were more worried about solvency than about disruption. And the thought of funding startups to take on the banks when people weren't even sure what was happening, it was hard.
slava (31:37.358)It's actually the perfect time, right? Because they're too focused on themselves, you know, playing defense and not being smart enough to think forward. And here you are getting to invest in the startups who people aren't keeping an eye on.
frank_rotman (31:50.262)Yeah, the interesting thing is there weren't many of them. So with just the three of us at the time, we were able to see and talk to just about every interesting company in the space. In 2008, I think globally, there was something around a billion dollars worth of capital invested in all of fintech. And that's globally. And last year alone, there was $130 billion, $140 billion invested in fintech globally. Those are not the same thing. Right now.
it's just very, very difficult to keep up with everything that's happening. We now have a team of about 20 investment professionals.
We're now a global organization. About a year ago, we added Southeast Asia to our core geographies, which our core geographies are the US, the UK, and Latin America. But we added Southeast Asia. And just a few months ago, we added Africa. So now we're investing globally. We've invested in, I don't know, 170, 180 companies at this point over a 14-year period.
We have almost 30 unicorns that we've been privileged to invest in, most of whom we are the first check or second check into.
slava (33:05.686)that we should pause there. That is absolutely amazing. I mean, I would just, was doing some research before, the number was 20, like not that long ago, and then a more recent article, the number was 25. It's incredible. That many unicorns and being so early for each of them, just so our listeners know, it's just really not easy to say the least.
frank_rotman (33:27.146)Well, the good and the bad is sometimes if you pick the right sector, it's a little bit easier than if you pick the wrong sector. And picking FinTech over the past 14 years has just proven to be chock full of really interesting companies that are emerging to either partner with the banks or to disrupt the banks.
So we've invested in a lot of extremely interesting companies and like I said, we were hammers in search of nails. We only knew how to do one thing and we're doing that one thing well.
slava (34:01.106)What is the lesson that you can share having now invested in almost 30 unicorns? What is the recipe for spotting that next unicorn? Because one can say, oh, it's case by case. You always have to. But I mean, you do have more than two dots here, right? You have a little bit of a trend, right? There's almost 30. So there's something that you got going as some good secret sauce.
frank_rotman (34:29.594)Yeah, it's an interesting question because not all unicorns are birthed the same way. We are very good at focusing on companies that are solving problems, right? There are other types of companies that emerge that are just creating demand for something new. We might miss some of those, but we're very good at understanding problem statements.
and saying, is it an actual profound problem or is it a manufactured problem? There are a lot of manufactured problems out there where people think they're more profound than they really are and they're not. So first thing is understanding the problem statement that a company is, or a founder or founding team is really putting forward. The second is actually digging in and understanding their solution statement, right? And I can tell you that a lot of investors forget about this piece.
They basically say it's all about team and TAM, right? If you find the right team and you have the big addressable market, they will figure out a solution to some problem. Just give them the money, plant it with them and let them go. That's not how we invest. We actually stare at problem statements and we also stare at the solution statements. And even though they may change over time,
It's important to get in the head of the founder or founding team, understand what they want to bring into existence, understand how doable it is, understand if it's better enough than the solutions that are out there, if they'll actually sell and sell well. Understand if the solution they have has enough pricing power associated with it that you can build a real company.
So there's a problem statement, there's a solution statement, there's always a team statement, which is really about founder market fit. And when you're dealing with a lot of things in FinTech, this is very important. Don't try to build a lending business if you don't have people on your team that have run lending businesses. It's actually quite important.
frank_rotman (36:33.623)There are types of problems where if you're a talented MBA, you could just tear the industry apart and the problem apart and understand it well. And then there are industries where that's just not true. And FinTech happens to be one of them. In fact, many pieces of FinTech are like that. Where if you haven't been a practitioner, you don't understand what's happening.
slava (36:51.35)because of both the complexity and the regulatory nuance.
frank_rotman (36:56.226)complexity, the regulatory nuance, just where the speed bumps are, where the landmines are that you need to avoid. Instead of redoing things three and four times, getting it right the first time. It's very difficult to do in FinTech if you haven't done it before. Some industries, it's just much easier.
slava (37:19.398)And to state the obvious, it's your operator background of having done some of these things with your co-founders that helps you analyze this in terms of navigating who to invest into or not. Is that fair?
frank_rotman (37:32.502)Yeah, almost every member of the QED team has an operating background of some sort. You know, so we have people who spent, you know, years within FinTechs.
as people in the C-suite actually helping build the businesses from the ground up. We have people who existed in the regulatory and treasury world. We have people who have built businesses on the lending side and on the banking side. So we have a lot of experience that can basically say to founders, look, most VCs will help you think strategically about what three years and five years from now could look like if you've done your job.
we can do that, but more importantly, we can work with the founding team to say, what should you be doing tomorrow? Right? And that's a very, very different way of being able to help a business. You know, tomorrow is actually much more difficult to figure out than the three-year or five-year plan. You know, that's much more strategic in saying, look, if everything goes right, this is where you want to be.
slava (38:18.73)Yeah, I love that.
slava (38:34.278)Yeah, there's a funny saying that like, hey, you telling me what I should do for my strategy falls just below you trying to get me some lunch for this afternoon. Ah.
frank_rotman (38:44.058)That's right. But again, back to your question of spotting unicorns, these three statements are important, but the fourth statement is one that's ignored by founders, ignored by a lot of VCs, but we find it all important. It's actually the financial statement. And yes, we know that a financial statement is full of assumptions and that they are going to change as you learn more about the business.
But ultimately, it's about the unit economics of the business. It's about how healthy a business is being built. It's about the plan for building the business just expressed in terms of numbers, where you can dig in and understand, is the prize worth it? Is there something being built here that's actually a fundamentally good company?
And I think a lot of founders have lost sight of the fact that, yes, they exist to solve problems, but that's second to the fact that they exist to build a business. Right. And the best way to build a healthy business is to solve a problem, but not the other way around. Right.
slava (39:53.314)I mean, we're only gonna learn that more and more in this macroeconomic climate, right? Where money's becoming more expensive, people are gonna be tighter with their investments. There's gonna need to be more unit economics, as you say, and companies doing real things with real results, as opposed to telling good stories.
frank_rotman (40:11.842)So even if you don't have everything figured out, having an idea how you're going to make money and challenging those assumptions and trying to figure out how to turn cards over in the right order as you de-risk the business, to figure out whether you're right or wrong, not just whether you can solve the problem. Again, you solve the problem because you're building a business.
right? And building a healthy business, the best way to do that is to solve profound problems that people are willing to pay you to solve for them. So when you talk about spotting unicorns, you know, we try to find these large addressable markets with incredible teams, you know, yes, team and
frank_rotman (40:54.894)that you can build a large, durable, healthy business? If the answer is yes, you know, it's a company in the making, you know, that you should be backing to figure out whether the assumptions are right or wrong. But if you have no idea how to make money, then you're a stage two, stage three, stage four business, however you wanna think about it, where stage one is, let's go get customers using our product and loving us, and then stage two is, let's figure out how to make money. That's a harder thing to actually navigate.
slava (41:25.378)Great, so what was innovative many years ago when you started in 07, 08 is very different than what is innovative in FinTech today because some or many of those problems were resolved years ago. What is interesting today in FinTech or from your viewpoint, are there any thesis that your investors are thinking about when they go out to the market looking at entrepreneurs?
Are there specific pockets or types of verticals or spaces that you think today, the coming weeks, months, years is ripe for disruption? I mean, you already mentioned that we're 5 million units short on demand for housing, so I'm guessing there's something related to that, but outside of that, can you share what are those, you know, three, five kind of points of views on what's innovative today and where you're trying to target?
frank_rotman (42:18.478)Yeah, I wish there were a simple answer because we have 20 investment professionals. Every one of them have multiple themes that they're actually chasing. So you can imagine it explodes very rapidly. But that's because the core pillars of banking still have a lot of innovation ahead of it. So storage of money, which would be deposits, movement of money, which would be payments.
the lending of money, which again are lending businesses, the investments of money, investments, and then basically the shifting of risk to someone else, which would be insurance. Right, those are kind of the five big pillars of banking. And in every single one of them, there's another wave of innovation that's coming. And part of the reason for this is over the past handful of years,
an infrastructure layer has been built and is still being built, that's making the ability to launch new things much easier and the ability to launch things that have never been launched before possible. So the API layer in all of banking is now, I would say, materially built out. It's not completely built out. There are a lot of companies still working on it.
But if you went back six or eight years, you didn't have APIs to basically do a bunch of the things that the API layer can do now. So if you think about crypto in the same way as right now we're working on building the primitives, so that you can assemble the primitives to create product. I think we're gonna start to see another wave of innovation come as people start assembling these Lego blocks in ways that we had never thought of before.
slava (44:04.478)meeting to accelerate the deposits, payments, lending, investments, insurance.
frank_rotman (44:09.49)in entirely new ways, right? You don't have to rely on old code and refactor it. You know, you'll have...
slava (44:15.03)Right, so instead of the old infrastructure from years or decades ago, you're thinking that Web3 will help evolve that to speed it up or to allow things that haven't been done before.
frank_rotman (44:26.05)So in the Web 3 world, definitely, but also in the Web 2 world, with the API layer, with open banking, with in some countries like India, a bunch of new infrastructure that's come about that the government has invested in. There's a lot of things that are happening that are at the atomic level of how you manufacture a product.
that now we're going to see founding teams assembling them in different ways that we really can't even imagine today. That's why you take creative, talented teams and you say, look, these are still big, unsolved problems. Go at it. So it's gonna be really interesting to watch.
slava (45:05.486)So an example of that in comparison for our listeners can be like in the past, in the 90s, every internet company had to have their own kind of web services because they had to keep up their own website sort of thing. If the website went down, Johnny or Samantha had to make sure it went back up, right?
And now they're using like Amazon web services as an example, which it's all outsourced to Amazon, so there's a whole level of effort or knowledge that is not needed to spin up a whole new company. Um, and that kind of banking as a service or those capabilities as a service is really building out in the last few years, allowing for all these entrepreneurs to bring their products to market much faster and in more proliferation. So there's even more at bats to try to solve the end customers problems.
frank_rotman (45:48.878)That's right.
frank_rotman (45:53.59)And it also enables Fintech to be embedded in places where before it wasn't. So instead of applying for products, you're going to have products embedded in other experiences where with one click you can turn it on or turn it off.
And I think that's a whole new way of thinking about moving money or storing money or investing money or even think about micro insurance. You're about to go do something that could be risky. Do you want to insure yourself for when you go on the ski slope? Either you would have to think about that in advance and apply for that in advance or
with today's connected world, companies can spin up around that and say, okay, well, this is what it's going to cost you for how long you're on the slope. Press this button and you now have insurance. But it's just amazing. We don't know what's coming. We also know that a lot of countries are starting to build an entrepreneurial culture where startups are forming.
slava (46:39.166)Right, so as soon as my brother takes us down the double black diamond, I need to press that button really fast. I gotcha.
frank_rotman (46:58.714)So the fact that we started to invest in Africa just a few months ago and the team has already seen hundreds, I think they've crossed over a thousand deals that they've looked at and they've only been looking for a few months. It shows you kind of the pace of innovation and how it's picking up.
slava (47:15.182)So how does today's market impact all of this? So, you know, I don't think we're quite yet at 2007, 2008 in terms of the reactions, but you know, it's definitely as getting as dark as it's been since those days. And I kind of remember those days similarly because that's when I started Indiegogo. So what do you think of the current market because you've been investing in general
in mostly a bullish market. At first, it was bad, but it was already at the bottom. So it's going up slowly. And then it went up more rapidly. What do you think of today's market? How are you investing differently? How is this impacting what you invest in? What the types of prices are? This is a pretty broad open question about today's state of the situation.
frank_rotman (48:07.103)Yeah, I mean...
Look, if you think about my background, when I was at Capital One, I played a variety of functions, building businesses, fixing businesses, but I also was the Chief Credit Officer at the company for many years. So I think in terms of risk and cycles. If you're in lending businesses, you have to think in terms of cycles. And your goal isn't to invest at the beginning of a cycle and, you know, basically shut down at the end of a cycle. Your goal is to build a business that's resilient through cycle.
Right, so if you think about some of the biggest, most seminal companies in the world, they've been around a long time. Right, they've been through many, many cycles and survived. So as an investor, yes, it's problematic when things correct and it's a big change in capital availability, which is a core resource that's needed by these companies to grow.
But the reality is if you're building a healthy business, you're going to have to learn how to survive these periods of stress. So if anything, we're very prepared to help our companies navigate, to understand how you tighten your belt in the right way if capitalism is available as other market conditions when it's more available. But you should never lose sight of the fact that the goal is to build good, healthy businesses that will be around and be able to survive cycles.
I think the challenge investing in this environment, when you see price corrections the way that we've seen them in the public markets, is that markets tend to correct using an axe, not using a scalpel. When things correct, everything corrects. It's completely indiscriminate about who, which company, should this one have corrected more than that one. It's just a big wholesale correction.
frank_rotman (50:01.718)And I remember the same thing happened in 2008. And I remember our first CEO summit at the end of 2008, where I was giving a state of the economy to the CEO. So I was the uplifting speaker of the session. And it was not fun, but I was looking at Citibank at $3 a share and saying, Citibank at $3 a share does not mean the Citibank is worth $3 a share.
slava (50:15.082)in 2008. That's tricky.
frank_rotman (50:28.518)It's an expression that nobody knows what Citibank is worth. It's either worth the breakup value of the organization, it could be insolvent, or it's probably worth $20 or $30 a share. But the $3 a share was a correction in the market and a statement that nobody knew what something was worth. And I think that's what we're seeing in the market today, like there's a disconnect between the quality of the company and how much it's corrected.
We have a number of companies that went public in the past year. Many of them are blowing their numbers away. Great earnings calls, right? In any other environment, you would say, you did your job. You did a great job. You met expectations and raised or you, uh, you hit your forecast or exceeded your forecast and now raised the expectations with the market and you're watching them get punished. Right? So the market that we're in today in the public markets.
is basically saying we don't know what things are worth until we understand the environment better, which makes it very difficult because there's an analog, it kind of, it cascades its way back into the private markets all the way down to the earliest stages. And, you know, how much do you pay for a company in the private markets if you see what's happening in the public markets? And a lot of later stage investors are just frozen if they don't know what something is worth.
they would rather not put a bid on the table than try to open that conversation and talk with companies about what the real price should be.
slava (51:59.958)So is the answer that there's not a lot of investing happening right now in the private markets or would you say if I force you to put a number that prices have been discounted 10%, 50%, 90%, what would you say is kind of the general feel out there? Obviously every company is unique.
frank_rotman (52:20.03)There definitely is a discount going on. It's actually pretty steep, but you don't see it because it's showing up in kind of the terms and how things are formed in the actual, the investment contract itself. So if you think about how many degrees of freedom you have for putting money into a company, there are a lot of ways of putting money into a company.
So if you put money into a company in a convertible note, that's not the same thing as having a price round. If you put money into a company and you're top of the preference stack, that's not the same as if you're a parapet with the other preference stack or if you're in common stock. So you're seeing a lot more protections in place, start to show up.
you're seeing a lot more convertible notes put in place. You're seeing a lot more insider rounds come together where the goal is for a company to grow its way into its last valuation rather than reprice it. So money is flowing into companies, but it's just harder to tell exactly what the terms are compared to kind of the clean market that we had over the past few years where everything was coming in.
price rounds and in fact very high prices.
slava (53:42.026)So the easy answer to my next question is you're going to say, I'm not really an economist, but you are pretty close given your experience. So what do you think of this market in terms of where we are in the cycle? Are we a month in into a downturn that's going to take 12 months? Are we three months into a 24 month cycle? Is this a U, a K, an L, a V? You know, I don't know how many letters we could use, but
frank_rotman (54:05.806)Ha ha ha.
slava (54:09.426)And I know you're not the economist, but you are one of the smartest people on the show. So I gotta ask your opinion, because I'm sure you have opinions, because we all have them.
frank_rotman (54:17.818)Yeah, I actually do spend a lot of time thinking about recessions, I can't help myself, you know, given my background. And this one, I think is going to be strange. So I'm still piecing together what I personally think is going to happen. But what is obvious is that it's a market that's going to affect the economy very broadly.
When it affects the economy broadly, it means it affects corporate America as well as small business. And when it affects corporate America, you have to ask how. And this is going to be a recession where I think it's going to be a recession around enterprise's ringing out efficiency.
So people think about recessions as two quarters of negative GDP. Well, nobody actually feels GDP. GDP is this magical mystical calculation that's done when you aggregate millions and millions and millions of smaller data points into one big data point. But the reality is it's about job loss. So when you think about a recession, it's about wage decreases or how many individuals are affected with job loss.
It's about how many people go from being technically solvent on a monthly basis to technically insolvent. Then you have to ask who. Right, so in this next recession, I do think that probably the first group that's going to be stressed are going to be middle management in corporate America. Because if enterprises are going to start ringing out efficiency, that's where the bang for the buck is. It's not the frontline worker.
And if you think about it, executives don't fire themselves. So that middle layer in corporate America is probably going to be affected pretty hard. Good news is usually corporations have severance packages. Usually people in those positions have savings. But it is going to be a pretty impacted group. I would have worried more about small business.
frank_rotman (56:27.134)and small business owners, but it's very striking that over the past six months, it's as if everyone got the memo that inflation is real and that it's okay to actually increase your prices, which is strange. I'm not used to seeing that right over the past 30 years of kind of looking at the economy and being in the market. Typically, it's a given that you don't increase price, like you will lose business if you increase price.
But this is a market where everyone is saying, look at gas prices, like they raise their price, look at the dollar store. Like if they can raise their prices, well, we can raise our prices. And all you do is blame the economy. All you do is blame inflation. That actually helps a lot, at least maintain jobs and maintain the health of a small business owner because they're not absorbing the margin. So there's a lot that's going to happen in this next cycle.
I don't think it's going to be as long as some people think. I don't think it's a 24-month cycle. I do think it's going to last longer than six months. So if you had to pin me down, I would say it's probably a, you know, call it 12 to 18-month cycle somewhere in that ballpark.
slava (57:36.138)it started in like Q1 or Q2 of this year.
frank_rotman (57:39.578)Yeah, it started about three months ago, you know, sometime earlier this year. And there are gonna be groups of people affected more than others. For instance, if you were lucky enough to be a homeowner going into this cycle, the home price appreciation over the past two years, it solves a lot of problems. The ability to tap embedded equity is a solution for a lot of people in navigating, you know, 12, 18, 24 month periods.
If you weren't a homeowner and you were a renter, you're going to see rising rent prices. And depending on what job you're in, whether you see wage growth or not, you're going to be pinched. So again, different people are going to be affected in different ways.
But I think overall it's not going to be as brutal as some people think there will be less Consumption of big durable goods for a period of time that always happens whenever people are nervous. They just stop buying big things But I think it's going to be short-lived
slava (58:43.362)So not the purpose of the show, but just because you're so interesting. The tech stocks in the public markets have really been hammered. Some of the high multiple stocks, we're talking 70%, 80%, even 90% down.
Given your point of view of it potentially getting better by July 4th of next year, plus minus, do you think now is a good time to be buying into some of these stocks? Obviously it's always company dependent, but at a macro level, are we seeing that Citibank at $3 right now that's really worth $20? Or is it a challenging situation that the public markets wanna get rid of some of these, let's call it not profitable companies that don't deserve these types of valuations?
frank_rotman (59:27.01)It's a good question and I'm not the right person to answer it. I'm not an investor of individual public stocks. You know, I find the, the lack of ability to talk to the management teams, the lack of the ability to dig in, to understand the business model at a fundamental level, um, is just hard for me given my day job where I can do those things. So when I look at public stocks, I look at them and say, wow, like
where do I start, where is there information, how do I know whether this is a good company or a bad company, and I know what I would do in my day job and I can't do it in the public markets. So, but there will be some very good companies that when the market does start to correct, it's a pendulum, like it'll start swinging the other way, then the scalpel comes out, not the ax, and people say, wait a minute.
slava (01:00:02.864)Totally fair. It was a bonus question anyway.
frank_rotman (01:00:21.198)Here's a company that's actually doing really well. Here's a company with good fundamental economics. Here's a company that has a reason for existence in the market and has diehard customers that are growing with them. Like, there is a whole batch of companies that look like that, that have been just punished, you know, because of the market environment. And those are the first ones that will start swinging back.
slava (01:00:44.458)So just changing gears as we come to the close, a lot of people wanna be as smart as you and as knowledgeable as you. It's hard to have your experience, but what is it that you read? What is it that you listen to? What is it that you watch? Can you share any of those things that our listeners can do the same?
frank_rotman (01:01:00.754)So I do not read business books. I typically read science fiction. So it's something that kind of straight. And yeah, and occasionally I'll read a really serious book like debt, you know, about the 2000 year history of debt. So there are some important books that I do read from time to time.
slava (01:01:10.614)So basically it's recessions, comic books, and science fiction. If you want the path to Frank's heart, those are the three things.
slava (01:01:22.978)Nice.
slava (01:01:29.29)What's a good science fiction book you want to share with folks?
frank_rotman (01:01:33.162)Boy, I mean I like all of the classics so I'm very much into all of the Nebula winner I kind of go through and
read all of the best modern authors. But recently I've been rereading some of the old classics. Frank Herbert is one of my favorite. Isaac Asimov is one of my favorites. The Expanse series, which has been turned into a show on Amazon, is also a very good series to read. Alastair Reynolds is a great author. I mean, there are just so many of them now that the list goes on and on. But I read science fiction.
As for shows that I watch, it's really for entertainment. So for me it's about shutting down at night and being able to turn my brain off a little bit. So I'm almost embarrassed by a lot of the shows that I end up watching to turn off my brain.
slava (01:02:26.318)It's all good, it's all good. And then how about anything that you listen to or watch that somebody listening here can copy you to learn as much as you do, or is there nothing really that you watch or listen to from a business perspective?
frank_rotman (01:02:37.218)I do listen to podcasts. So there are a lot of just high quality podcasts out there. 20 VC, so Harry Stebbings does a very good job.
slava (01:02:42.978)Can you give us one or two?
frank_rotman (01:02:49.93)I read everything that Paki McCormick writes, like he's very good. Sahil Bloom is an amazing writer as well. Both of them have a prominent role on Twitter. It's amazing Twitter is still free when you can find resources like theirs available all the time. But great, great people to follow.
slava (01:03:05.326)Sure.
slava (01:03:09.342)Awesome. And the last question, we always like to put the guest on the spot, which is what is one investment you would make an actual investment, not of industry, not a space that you think we should make today, that you would make today that we could have you back in three years from now. We can see how it performed.
frank_rotman (01:03:25.27)I talked about it earlier. I do think the number one asset class to hold over the next decade is single-family real estate. I would be buying up properties because this decade, when we think about inflation, it's amazing when you look at the compounding effect of inflation because I don't think it's going away as quickly as people think. This could be a decade like the 1970s or 1980s where the end of the decade is 60 to 80 percent more expensive than the beginning of the decade.
slava (01:03:32.535)Got it.
frank_rotman (01:03:53.886)And you want to be holding tangible assets. You want to be holding real estate, if that's true.
slava (01:04:00.162)So Frank, thank you very much. This has been an amazing episode. I've learned a ton. One, never sell your comic books or really any of your assets. Invest in single family real estate. We learned that there's five million units of real estate that were short in America and they're only building about an extra 600K a year. So there's a big gap there. FinTech was not a word when you started and now everybody talks about it. So be willing to be on the edge. Invest in companies that solve problems.
If you want to be like Frank, you got to care about recessions, comic books, and science fiction. And, um, you know, your bet is single family real estate, which was pretty consistent throughout the whole show. So thank you very much for your time. And we look forward to having you back.
frank_rotman (01:04:42.226)Happy to be here whenever you want me.
