My conversation with Mark Peter Davis of Interplay

I had a fun conversation with Mark Peter Davis of Interplay about my love of marketplaces and all things FJ Labs. The discussion was peppered with lots of entrepreneurial advice and thoughts on impact.

Their Episode Description:

This week I chatted with Fabrice Grinda, Founding Partner at FJ Labs. FJ Labs is a VC that specializes in marketplaces and invests in every geography in every category at any stage. As Fabrice puts it they do angel investing at venture scale, meaning they don’t lead rounds but do a massive number of investments every year. Last year they made almost 200 investments.

Fabrice is super interesting beyond being a VC. He’s been a serial entrepreneur for a couple of decades at this point and has interesting views on wealth and impact.

He started what was essentially the ebay for Europe and then OLX, the Craigslist for the rest of the world.

During our chat he shares some incredibly useful tips for entrepreneurs – especially for those who are interested in marketplaces. We talk all about his approach to venture capital, how FJ Labs operates and makes decisions and much more. Enjoy.

Show Links:

Transcript (this is an automated transcript):

MPD: Fabric, thanks for being here. 

Fabrice Grinda: Thank you for having me. 

MPD: I’ve been very excited to have you on I think you’ve got a lot of wisdom and you do something that most people don’t do and that you practice radical candor. It feels like in everything, every time I’ve ever talked to.

So I think we’re going to get into some really interesting topics today. And I think I have a feeling you’re going to share more than people normally comfortable with, which I think is very powerful. You’re going to help a lot of people. Let’s start though. Let’s level set this can you give an overview of FJ labs?

I think people need to know what you’re doing for your day job before we extend beyond. Sure. 

Fabrice Grinda: So my current day job is to be the founding partner at FJ Labs which is a venture fund – actually it’s an accidental venture fund. It really came out of my angel investing activities while I was an interpreter.

So for the last 24 years, I’ve been building companies, I’ve been running companies and. Other founders kept approaching me for me to invest some of them. And for the longest time I thought they were, should I be doing this right? Is it a distraction from my core mandate as a founder to be investing in other startups?

And I’m like, if I can articulate lessons to learn to others it probably means I’ve internalized them. And so it’s okay. And meeting all these amazing founders beyond helping them realize their dreams is also an amazing way to keep my fingers on the pulse of the market. So by 2013, when I sold my last company, which by the way, was like dried or missing.

I don’t know if you want to cover that until I went, the last company was real quick. So the last company was a company called oh blocks. It’s today, the biggest classified site of the world. It’s a 11,000 employees in 30 countries. It’s the leading classified site in Brazil and all black tem and Russia, Ukraine, all of these sued Europe and India, Pakistan of all the Southeast Asia and the UAE and all the middle east.

And it’s basically what Craigslist would be or should be if it was running. By someone like me, meaning a modern UX UI, integrated payments and shipping and escrow. Exactly. No, no spam, no scab, no birders, et cetera. And actually targeting primarily women in a female friendly space, given that women are the primary decision makers in all household purchases.

That companies like over 300 million new users of mothers is absolutely ginormous. And after I sold that already at 150 investments doing really well already pulled them with my current partner. And I was like, I like building companies like invest in companies. Let’s create a structure that allows me to do that.

And I never really set out to build a venture funds. And I think by virtue of being visible, I started being approached by potential investors and said, Hey, we would like exposure to where you guys are doing. Do you mind if we co-invest with you? And so 2016, we took our first investor LP for 50 million, one LP outside of our own capital.

Yeah, it’s again, what I be basically they’re people that had it, it’s a company called . They were a big telco in, in Norway. And they had backed my biggest competitor when I was running about locks and ultimately we fought a big war and we merged 51 for us, 49 for them. And by then we, all of this I’d like unwell.

They’d made like a billion dollars and they ended up owning a whole bunch of classified assets around the world. And they were like, Hey, we love you. You’ve also made us a lot, lots of money. We’d like to understand what’s going on in marketplaces in the U S to either bring it to our markets or defend against disruption.

And so it was really both strategic for them. And financial in 2018 we raise fund two and they’re like, Hey, if you want to bring other people on board, why not? And other people’s sorta approaching us. So we started getting like a lot of family offices that were being disrupted by tech and a lot of other strategics were interested in investing in the category.

And so we finished deploying that and that was a hundred, 225 million finished uploading that in July of 2021. And then we close fund three, which would be like three, 400 million with either amazing founders that I’ve worked with forever, like Reed Hoffman, or, whatever Kevin, Ryan, or the founder of Wayfair or these family offices were actually strategics interested in either buying or investing leader seizures in the companies move us.

So I guess w w. That was a long-winded way to answer your question. So my day job is running FJ labs. FJ labs is an a, a venture fund specializing in marketplaces. We invest in every geography in every category at every stage. But the focus is we really do angel investing at venture scale. We don’t lead, we don’t price.

We don’t take board seats. We decide after two, one hour meetings, whether we invest or not with full transparency, we tell them why we’re investing, why we’re not investing what we need to change for us to change your mind. And we try to be as Frey, founder, friendly as possible. So we’re not setting the terms we decided very quickly.

And we’re super prolific. To give you a sense of scale to date, we’ve invested in overheat 150 startups. Last year, we invested in 281 startups, so 180 new investments or 101 followups, and it’s a lot for a venture firm and it’s been going really well. We’ve had 265 exits and so far in a 45% realized I are.

So things are good. 

MPD: That’s great. Okay. So what’s the typical investment profile. Cause when you say angel investing at a venture scale, I get the angel investing part that your, the process is less rigorous it’s you’re looking at more strategic elements rather than doing your own diligence.

I get that nothing wrong with it. The question is when you say to venture scale, is that the reflection of the volume, the amount of capital you’re managing the volume, what is it? The check size? 

Fabrice Grinda: Yeah the angel investing in venture skills really because of the overall. Capital deployment. We’re deploying a hundred million a year, 150 million a year potentially, but this funds which is way more than typical angels deploy.

Now, the reason it’s still angel investing is writing small checks relative to the lead. We don’t want to compete with the top VCs in the world for allocation. We want to be their friends. In fact, most of the deals come from friendly VCs or sharing deals with us in return. Of course, we send them all of our deals.

And so our pre-seed check size is going to be like 200 K or C check size, like 300 K or eCheck size is 3 25 or beyond words is 7 25. So it’s fixed check sizes that we’ll take lots of philosophers available and they’re always small relative to the lead. And that’s why it’s kind of angel investing in venture scale.

But I’m more than happy to talk to you and walk you through the process of how we decide whether we invest or not. If you’ve 

MPD: teed it up, let’s do it. 

Fabrice Grinda: Yeah. So actually, before I get to the process, I’ll walk me through the flow. These days, every week we get about 200 inbound deals and often many more than that.

And they come from three sources, a third comes from the friendly VCs and every eight to 12 weeks, we sit down the top hundred VCs in the world, covering every siege, every category of geography and we share deal flow. And it goes from everyone the amplifies or whatever first submitted to the pre-seed stage with the.

General catalyst, Bessemer Sequoia first walk in the middle, all the way to whatever the tigers at the leader stages, where we bring them all of our best seals. And in return Bain by to some of the deals where we have expertise. So mostly marketplaces about a third of the deal comes from fellow founders.

So at this point we’ve backed almost 2000 founders in the 835 companies. And they come back for their next company. They send us their friends. They’ve sent us their employees to becoming founders and about a third of the deals come in cold. And it actually, we review even the cold inbound deals and that 16% of the investments we’ve made have come from cold.

And some of the very best investments come from cold. So we get these seals they’re assigned randomly to one of the team members, unless someone says they want it. We we’re four partners, three associates, and one analysts. And we reviewed the deal we decide, is it appropriate or not for us or not?

And usually about. Three quarters of them are not there. They’re amazing, but they’re not for us. They’re like biotech, hardware, space SAC, and we don’t feel that we have appropriate expertise. So we review and we, the other 50, we take a one hour call and that one hour call, we try to assess four things and that’s actually the evaluation criteria.

Do we like the team? Do we like the business? Do we like the deal terms? And does it meet or pieces of where the world is heading? Now, let me double click on all four of these. Do we like the team. Every VC in the world will tell you. I only invest in extraordinary people. The thing is that’s extremely subjective.

What is an amazing team? And we’ve actually looked and thought through what it meant for founders to be very successful for us. It’s someone who is both a visionary and an execution machine. And that means someone who is extremely eloquent and as extraordinary communication skills. But that’s not enough because if you only have that, maybe you build a you build a very large company, but one that’s not profitable or it doesn’t scale, et cetera, but that’s, that is necessary.

It’s a necessary but insufficient condition. Because if you have an amazing, if you’re an amazing or rater or public speaker, you can attract better teams. You’re going to raise more money. You’re going to get better PR and you have better. But you also need to be able to execute. And we look at that, that we evaluated over the course of when our call is, how well do you understand the business, your hand?

How well do you understand you did economics? And we want you to be able to articulate even pre-launch, we want you to have done the lending page analysis and done a customer, cocky a customer acquisition cost analysis, and compare that to look at what the average order value in the industry is.

See what the net margin structure you’re expecting is. And you should be able to articulate that intelligently and the Venn diagram of people that are amazing storytellers and people that are amazing at execution is actually the intersection is very small and we want people that are both number two, Businesses that are compelling.

And for and so for many, some VCs, by the way, number one is enough. And if you’re pre-seed, pre-launch obviously will, this is the most relevant metric once you’re post-launch actually we do care, but the other three number two is, do we like the business? Which means for us, is the category large enough?

Or can it be larger enough through your execution and, or the unit economics is compelling and we are extraordinarily unit economic driven in marketplaces. And obviously this a little bit different if you’re in e-commerce is a little bit different if you’re in SAS. But we try to invest in businesses where you re.

You’re fully loaded customer acquisition costs on a net contribution margin basis after six months. And we’ll use three X your CAC after 18 months now. And ideally we don’t know what the LTV to CAC is because you have negative churn. In which case, who knows it’s 10 to one, 20 to one, et cetera.

And if your unit economics are underwater, which can happen, we want you to be able to articulate why with scale. They will automatically fix themselves. Maybe you’re in a food delivery business. And right now you’re doing one delivery per hour, you’re paying $15 an hour. Your delivery guy, your unit economics are under water, but the minute he does three deliveries an hour, it’s $5 a delivery.

And it works. Something like that. Like I don’t, it should not require every story. The multi-payer so align for you now, economics to work. And we really care about that because otherwise you may build a very large business that doesn’t make any money, which in the long run doesn’t really work out. Number three, what are the deal terms?

And we are. Yeah, nothing’s cheap and tough, but we want something that’s fair. In light of the size of the opportunity, the quality of the team, the traction that you have, 

MPD: what is fair? How do you think about that? 

Fabrice Grinda: So evaluations went up, especially in the late stage last year and, something I covered in one of my macro articles, but the median pre-seed the median valuations didn’t move up nearly as much as you might think.

And crypto falls a little bit of time that route, but then the median pre-seed for us until 2020 was like three to five pre raising one. And last year went up to six, seven, but not that much more. And so if you’re, pre-seed raising a 30, more likely than not, we’re not going to do it. The median seed used to be like re three raising at eight and nine pre and last year we went up to 12 and that’s still reasonable for us and the median a, you used to be, you’re raising seven at 22 and iRacing 10 at three.

And those are fair by our standard with relevant traction. So as your seed ran, we’re expecting you to have whatever, 150 key in GMV per month with a 10 50% take rate of the, a Rand, you’re doing 500 K in GMV and the B round, you’re doing 2 million GMV per month, more or less, it depends on the take rate you have, et cetera. Now there are exceptions, right? Like the rounds you’ve been reading about in the press are like, oh, they raise a $50 million series, a two 50 pre total, and these crazy. But yeah, we wouldn’t do those deals. There were amazing for the founders and the companies that actually I can make an argument.

Many of the companies that dies because the company, the founders raise too much money at too high, a price. They don’t grow into that valuation. And that kills the companies because of like anti-pollution provisions and it one more Sudan, Rams. It’s really one of the top reasons companies die is founders raising too much money at too high a price.

So we don’t do these deals. So the mean by the way is way higher than mean seed a and B is way higher than numbers I gave, but the media actually is not. And we’re so prolific. We have a good sense of where the market is. And so we stick to our with the exception that if you’re a returning founder for us, that has done well before we will back you, no matter what, no matter where you build, no matter the raise, et cetera, you don’t even need to take a call.

We’ll just send you the check. And so we have done a few crazy deals by that’s the reason it, also many of those deals are out of scope for us. Like we had the founders of a. Vettery, which was a labor marketplace then decided to go. And we sold a deco for a hundred million made of whatever, 8.5 extra money.

Everything was great. And then they went on to build Archer, which has an electric flying taxi company. And they’re like, we’re launching we’re pre-seed, 80 pre or whatever, a hundred pre. And we’re like, okay, here’s the check 

MPD: is those is the re-upping founders, your lumps, 

Fabrice Grinda: Ever increasing because we have 2000 founders, we backed, put it differently.

30% of the portfolio is non marketplace. And many of those are the re-upping founders which is a good sign that they have they’re coming back and they would have worked with us. But we also do like tools around marketplaces, et cetera. And we’re doing a lot of stuff. That’s like an interest things that interest us, which actually leads me to selection criteria.

Number four is your idea in line with our thesis of where the world is. And we are extraordinary thesis driven. We have a clear thesis on the future of finance, the future of food, the future of see the future of automotive, the future. And even within marketplaces, we have three core thesis on marketplaces that we look for and we want ideas that are in line with that.

And in a way we’re also mission driven, right? The reason I’m a VC, the reason I’m an investor is I, the world is facing a number of fundamental problems. We’re facing a climate crisis. The, we have a social inequality and inequality of opportunity or social injustice. We have a mental and physical we’ll be in crisis.

And the, I do not think that a. The political system is going to address any of these. And so it’s up to us as founders to use, to be solutionist to use technology, to find solutions to the world’s problems. And so it is mission driven from that perspective. I want to try to invest in companies, founders that are trying to address these fundamental problems.

And by the way, the bigger, the problem, the bigger, the economic opportunity, and it fits better in a for-profit model because this actually ends up being more scalable and more effective. And here we have it. If we’d love the team, we’d love the business. We’d love the deal terms. And we think that the ideas in library, their thesis, we invest and we can decide that in one hour.

MPD: That’s great. What’s the what are the reasons why a founder should choose to work with you guys? This is my underhand pay. 

Fabrice Grinda: And take a swim, the were former founders. So we actually know what it’s like to operate a business and we can talk extremely intelligently about the complexities of operating a business.

We’ve probably seen more marketplaces than anyone else either. And in addition to the fact that I run marketplace, I’ve run marketplaces for most of my life. And so when it comes to everything from like building liquidity, do you start with the supplier, the demand, should you go hyper-local or national or international?

W should your rake be 5% of 1% of 20% you’d have, how do you measure it? Let’s see supply demand. We’re probably more. Versed. Any other investors out there in this category in terms of being able to help you and last but not least, we’re in an ma because we don’t lead and we don’t price. And we have these amazing connections with all the other VCs, we will get you funded.

Like our superpower is we will get, if you need help raising your filling this round, we will do that for you. And more importantly, and most people do not need help raising a specific, the ran they’re typically talking to us about but if they, when they go to the a, when they go to the beach and they go to the sea, we will ensure them to whomever, like first of our grade lock and Driessen whomever is right for them.

We will make the intros and is extremely valuable for them because it directs the fundraising and makes it a lot simpler. We will give them feedback on like them, but back on the pitch on the process. And it’s also super efficient because you’d we have 850 companies in the portfolio and yet.

We’re often the most value added investor these founders have because we really focus on when to help them, we’ll do, we’ll help them right before they go fundraising the next ran and that’s the most valuable for them. 

MPD: Okay. So there, there is a implicit piece of this that I think is the most interesting.

It’s the sheer volume of your portfolio, right? There are a couple of firms out there that have huge volumes Techstars. My buddy, over at David phone number Techstars has a huge volume. He’s had a very different model than you. You have a huge volume. It’s not as common. Most firms are going out there and targeting 25 deals in a portfolio.

Is something there about what is your thinking around the optimal volume in a portfolio? 

Fabrice Grinda: First of all this is a reflection of my personality and not there’s no intelligent portfolio construction. So I actually have done the research. And what is the ideal portfolio construction by the portfolio of F J labs is completely built.

Bottom line. We meet people. If we’d like them, we invest. If we don’t like them, we don’t invest. And at the end of the year, the chips fall where they may, and it just so happens. Of course, there’s more seed deals and ideals, more aid deals and deals and CDLs, there’s more U S deals than European deals or European deals in India and Brazil deals.

And so if you look at our portfolio for a number of deals for of, we’re mostly seated a then a few B’s and very few season and not too many pre CD there. And then we’re 55% us Canada. We’re 25% Europe. We’re 10% Brazil, India. We’re like the rest of the world and really all over the world.

But it’s not by design. Now in terms of number of deals to answer your question specifically, is I diverged on portfolio construction. The I actually I think there are many problems to solve in the world and I like finding ways to address many of these because we choose not to compete with the major VCs.

We could actually not run a concentrated portfolio. So first of all, by design, if I wanted to invest in 30 companies, I would need to be a lead and I would need to ride like five, 10, $15 million trucks. Then the entire strategy. Of working with the other VCs and being their friend and other competitor becomes invalidated.

But more importantly, as a reflection of my personal philosophy, I just like, meeting lots of interesting people and being exposed to all these different areas. And I get I, now I have a great sense of what’s happening in like everything from climate to to automotive, to real estate.

And I think it’s fascinating there also the corollaries between these other industries, which are the marketplace dynamics so much closer to people suspect. I find that fascinating. And so it’s more a reflection of my personality, but that said there is data, but what is the correct portfolio size and angel listed and analysis of what your return profile looks like based on the number of deals you have.

And basically because venture follows a power law. The best deals return, do most of the returns you need to be in those best deals. And the best way to be in those best deals is essentially to be in every deal. And so the angel was study, which actually was published in peer reviewed and all that is the more diverse your professor of your portfolio, the higher your IRR and your returns that you should invest in all qualified.

And they have a definition of what qualified beans deals possible. Now, the reason most VCs are not built that way by the way, is actually driven by the LPs. So LPs heat that diversity. Because they see their jobs as themselves picking the VCs that are more specialized. So the LPs are like, oh, I’m going to have this fund.

That’s going to be my series, a B2B SAS company. I’m going to have this one. They’re going to be my series B DDC e-commerce in Europe, whatever. And they do, they’re like little funds of funds, strategy and fund that does all that for them. They really don’t like, because in a way it’s like the job they should be doing.

And so LPs are not super keen on that diversified strategy. And so it wouldn’t work for most, but it really works. And the benefit is over longer periods of time. We’re always going to be in the title. That’s solid before now and anyone fund life, by the way, we’re never going to be top decile because if you imagine a fund, eh, is hyper concentrated, they do 10 investments.

One of those is a hundred X. They’re going to be at a 10 X funds and they’re going to be topped us all, but they’re going to have massive variability, next fund they’re 10 may not hit and they made Richard money. And by the way, most VC funds actually don’t return cashflow cash money beyond the S and P the top Cortel does.

And the top quartile is actually highly correlated over, over fund life by most do not it our case. We I’ve been, if you include all of my history as an angel investor and but not as a founder, right? I’m not including my benefit. The equity I got into companies I’ve founded on the 270 exits we’ve had a 45% realize I are over 24 years either.

That’s I don’t know where that ranks. It has to be in the top 10%, maybe in the top 1% over that time, Peter. 

MPD: Given that you’re diversifying so much, is the core value add more sourcing or is it more deal selection? Because one of the things, theoretically, arguably the best portfolio is one investment, all the money in the world and the best company, the best returns, that’s it.

But the presumption there is that someone could be a good enough deal picker and get access to it. The core issue for a lot of VCs is they’re not great deal pickers. So how do you think about this? Is that the message to LPs like, Hey look, we’re good deal pickers, but we really don’t have to be because we play the game so broadly.

Is that part of the narrative for you? 

Fabrice Grinda: Not really. So we were actually would argue we’re very good deal pickers. We will buy often. We will not be in the top 0.1% of deals by the way, because we’re so sensitive on price. And we’re so sensitive on unit economics, either like we would have passed the Facebook, we would have fastened Google because neither of them had business models when they launched, nor could they articulate where those models, the, those those models were.

But we have a lot of singles and doubles and triples. So even though our portfolio is so broad, we’ve actually made money in over 50% of our exits which for a seed, mostly seed fund is extraordinary. Last year we had 41 exits, we made my name 24, we lost one in 17. And obviously you make a lot more on the 24th and you lose on the 17.

So I think we were very good pickers, number one, but two, obviously our deal flow is amazing because we built a brand as these founder friendly. Guys who’ve decided after you investor died, who were super helpful. And if you’re doing anything marketplace related, by the way, marketplace, let me define it pretty widely as if you’re building something that’s an intermediary between a seller of something and an a at a buyer or something.

And that thing could be anything. So to me, most of FinTech is the marketplace because, think of Clarita. It’s an intermediary between providers of capital. Typically the banks will give you the lines of credit and consumers that are borrowing. And many people wouldn’t think of it that way.

But to me, those dynamics, if you’re matching sellers, the buyers, regardless of the category it falls in the marketplace definition for us, which is obviously why we can invest at 300 marketplaces in a year. 

MPD: Okay. So there’s a little bit of learning here. I think you’re a bit of a pioneer in this type of volume for something outside of an accelerator incubator model.

Yeah. Whereas this model gone wrong that you had to correct. What did you learn along the way? That’s nuanced to not being a VC and not being an investor, but being a high volume VC or high volume investor, 

Fabrice Grinda: The way luck what’s I don’t know if it has gone wrong in the sense that we can typically.

First of all, I don’t think it’s necessarily easily replicable by most because we are in extraordinary privileged position to answer also part of the previous question where the deals come to us, right? Like most associates and analysts and most VC firms spend their time like networking and finding deals.

In our case, we’re like drinking at the fire hose of incoming deals and we’re reviewing the incoming deals and we would like to do more at boundaries, just we’re too busy, previewing main band. And we have the 200 Ben bands. We’d there’s. Yeah, we do miss seals as a result of that. So I D we are trying to change that to some extent, even though, so first of all, there’s the, part of the reason I can share my entire strategy online, including everything, the deal memos, the philosophy, et cetera, is even if you had all of it in your mind would encode it, even though probably hard to do without the 24 years of like ad bats of seeing 5,000 companies a year without a deal flow.

So I really replicable now where it’s gone wrong. Yep. Sorry. 

MPD: And as I say, FJ labs is a 

Fabrice Grinda: marketplace. Yes, we are our marketplace. Absolutely. We’re matching founders with money, from our LPs. And by the way, our LPs I’m the largest LP in the fund, right? Like about 450 million we’ve deployed to date, over a hundred million of that is my own money.

Maybe one 50. I actually, haven’t tried to look at it too closely because this started as a frankly personal investments for my partner. I said myself again, the accidental VC thing. One more thing. I know, I didn’t answer the question. One more thing we do very differently by the way is the following.

So we. We don’t reserve capital for follow-on. So we’ll invest that of whatever fund is currently active. The follow-ons. So we tell our, because we don’t always follow on we’ll evaluate follow-ons as though they were new investments, knowing what we know now, the company of the team would the terms, would we invest?

And often the answer is we love the team. We’d love the company, but the valuation is insane, so we’re not taking our Paratas. And so we’re, we’ve been following on and maybe 33% of the deals. But as a result, it doesn’t make sense to reserve capital fellows in a fund. So we do it in other funds, which leads me to the issues in a way we face, right?

Like the problems we face. As we have had a really hard time, much harder than ever to expected raising capital other than the capital that keep to us automatically. So we’ve had these LPs that are like friends. They’re like, here’s a check, they know 

MPD: you were, I know your success, 

Fabrice Grinda: those exactly, or strategics that we’ve worked with from across many years who want to exposure where we do or family offices.

And so there, the capital’s come, but pitching institutional investors has been really so far. We don’t have a single institutional investment partner differently. They don’t love. Anything about what I just described the hyper diversification, because they feel that in a way it’s their job to find different funds that cover different areas and hyper diversification number of deals.

They don’t like that. We’re multi-stage, they don’t like that real multi geography. They don’t like that. The follow on strategy is in whatever fund is currently active in which versus, having capital reserve followings in the original funds. And so all of that. And so it’s been, it’s taken way more time to raise capital than I would have liked.

And also as a result, we’re proudly a much smaller fund that we should be. So right now, we’ve closed for student 10 million of the new fund and you find. It’s three to 500 million, five, really a hard cap. I would like to hit it, there’ll be at least 300 million and it’s been seven months.

It’s mostly the existing investors. Re-upping yeah, there are new investors like founders that we’ve backed that have excess exited that are investing in it, et cetera. But again, we have, don’t have a single institutional investor in the fund because of all the reasons I, and I’d like to change that because the reality is we should probably, we could be a billion dollar fund with no problem.

Despite the not leading, not pricing strategy with given the volume we have if you do, if I do intelligent portfolio structured, like what is the maximum size I can deploy at pre-seed without leading to 25 K or so maximum check size, I could deploy at seed without leading it’s four 50 at AA could probably write a million.

That’d be, I could probably write 2 million and let’s see. It could be right, probably right. 5 million and up to 10 million in like the pre IPO Rams. And so if you look at all the deals last year, all the allocations we had, we could have deployed 350 million. And yet we didn’t have that level of capital.

And so we only deploy a hundred million. So what we’ve done to not run out of money after a year because our LP base is not such that I can actually. Say, oh, instead of three years, we it’s just one year and now we are re-upping they don’t want that is at nor could I, because I’m the biggest art piece.

It’s also driven by my personal cashflow. And so what we did instead is we men decrease her check sizes to not run out of capital. So currently, as I said, our HX size is 3 25 K. It could be a million or beach, X size is 7 25. It could be two and her and frankly, DHX license. So the 25 K and could be 10.

And so that’s been an issue I’m trying to address it and we’ll see if we were successful in the future now, in terms of underlying performance and access to deals, et cetera, Matt, I think B hasn’t been too much of an issue, I guess the other issue, it’s something we’ve learned as we’ve had to build a very big ops team.

The team we’re 30. Which is a lot of people are most people 

MPD: doing, cause it sounds like 10 or so those are investment professionals. What do they, yeah, 

Fabrice Grinda: so yeah. So four partners, three associates. Why now? So eight investment professionals we have two but then we have a big back office team or like the head of operations, the CFO the lawyer, the, all the accountants and the that are in the back office team.

And then we have all the support team for them. So when 

MPD: you say 200 deals a year, you mean 200 pounds of paperwork? 

Fabrice Grinda: Yeah. Let’s do a lot to do. Yeah. Everything, stock, purchase agreements, follow ons, legal approvals, exit, there’s infinite back office work to do. And actually one more thing we haven’t done is we’re currently not gap dot a gap accounting, because like, how do you do gap accounting on.

800 startups and we don’t even, we want to be the founder friendly guys and so doing an evaluation of each company in the portfolio when they’re like seed is a massive exercise that most, firms, which is another reason we haven’t been able raised institutional money. And maybe we need to have bite the bullet and do it.

In fact, we’re currently talking to Mike CBO and YC and, people like that, like how do you guys do it? And we probably need to buy that bullet at some point. But yeah it’s a lot of the issues that like you don’t think about when you’re dealing, when we’re lower volume from, 

MPD: okay, now you guys are the marketplace experts, and that’s very clear what are three rules of thumb that marketplace entrepreneurs listen to this need to know the things that are like, Hey, these are the baseline pro tips, right?

Fabrice Grinda: When you’re building your marketplace and you have your chicken neck problem the. Place to start is with supply because the sellers on the platform are financially motivated to be on the platform. And I would go to them and set said, low expectation and saying, Hey, we’re launching this. We’re free to launch at the beginning.

And we take just a rake, a B in there, but here’s the key. And here’s the pro tip. It’s easy to have infinite supply, but if you’re drown your marketplace and infinite supply and you’d have demand for it, they’re all going to turn. They’re not going to be engaged. So when you launch, you curate the very best supply for it in one vertical, in one category, maybe even in one geography, like in one zip code, and then you find demand for that.

And first of all, there are the very best. So you make sure they’re engaged. You make sure they understand where the product is. You understand what their needs. Then you find demand for them, whatever way it is. It could be sales driven. It could be marketing, it could be Google, it could be Facebook. And by the way, I actually like paid marketing to work because that means it’s scalable kind of infinitely you find demand and what you wanted to get to for that supply.

And again, very limited supply, highly curated. You want to represent. If it’s an item for sale, you want the probability of the item for sale to be about 20, 25%. That’s when you have pretty good liquidity, if it’s a services business, you want to represent at least 20% of the revenues of that provider.

And then once you have that at that scale, then you scale the supply up one more like whether it’s in the same zip code or gee sitter, adjacent category, and then you match. So you always, you start with supply, you bring them in and then you scale both always in parallel. A problem is it’s so easy to get supplied that you could launch.

I could launch a locksmith marketplace and put every lots within New York on it, but then you have no demand for it. And so the supply is going to churn. There’s gonna be no engagement and the users, we awful, et cetera. So doing that is, is key. So that’s I guess somebody human mind or like magic trick number one, magic trick.

Number two is, as you start thinking about. How do I monetize? How much do I charge? Who do I charge? And what is the correct percentages? Because you see marketplaces like stock photography, marketplaces that takes 75%. And then you have some B2B marketplaces where it’s essentially 0% rate or 0.1% because of extreme price sensitivity.

And so the correct way to assess that is you look at the less toxicity of supply and the less, the city of demands and you take your rake on the more and elastic part of the curve. And the more elastic it is, the higher the rake is that turns out that in most cases you can take 10 to 20% from the supply side, but it’s not a hardest at roll.

It really depends on how fragmented your supply and demand is. And by the way, the more fragmented it is, the better it is for you as the marketplace, right? If you’re in a market where there’s three or four suppliers and three or four consumers, You’re probably not a marketplace. You’re probably a distributor.

And your ability to price and take margin is going to be very limited. And that’s why I be very careful of playing in like highly concentrated industries. It happened to me and not really a market place, but I was I ran a company that was selling ringtones to the mobile operators.

And in the early days it was okay. But like between 2001, when I launched in 2005 and my mom, I sold in 2004, but 2005, when I left all the operators, consolidated merge with each other, like singular with, at and T Verizon with they’ll remember whom I’ll be like. And also when we went from. 50 customers.

So four and on the music come to a five and on the music company side, they all merge with each other like BMG and whatever, and EMI and whomever. And they also went from like many to three or four. And so all of a sudden there were four and five and it wasn’t an issue until we had 50 million in annual revenues.

But the minute we hit 50 million annual revenues, we started being seen by the VP level at these companies. And they started seeing us in their P and L and they started squeezing and squeezing. So in 2004, with my company, we did 50 million in revenues and 4 million in profits. In 2005, we did 200 million revenues and seven and eight in profits because they basically divided by our margin by three.

And so that’s not a marketplace, you’re a distributor, you’re a facilitator, but it’s not a proper marketplace. 

MPD: Okay. So now you guys do more than invested FJ labs. I know this is evolving. You guys have been a studio, right? You’ve been building companies. You don’t talk about what you guys do when the method for it.

Fabrice Grinda: Sure. The reason we were a studio is really, I say, bang. It’s what do I like to do? I like to build companies. I could invest in companies. I love that. And so every year we’d be coming up with ideas and it was like, try to build them either personally and go run them, which I did for a few of them or with entrepreneurs and residences.

And we created through happenstance, a program that ended up being successful. So what happened is. I don’t even remember the year, maybe 2010 or 2011. This young founder reach out to me and he’s Hey, I’m McKinsey, Harvard business school. I am I’m at HBS right now, but I’ve raise 500 K and trying to build this company.

And Eddie kept harassing me. The thing is I was running billing oil, super busy writing a relaxer. I’d like, so that 10,000 employees in 30 countries, and I was getting emails like that, like dozens every week. So I ignored him and ignored them. And one day he’s Hey, I’m at the door of your office, can we meet?

And I’m like, okay, maybe I’ll beat him. Maybe I’ll leave. Let me be. And he was building like some sort of chat roulette for competitor, and I’m like, terrible idea. Won’t work return the money to your investors, call it a day and. Cultural back the next day. He’s oh, thank you for the radical honesty and candor to when I’ve been like honest with me.

I talked to my investors, I offered to return the money and they said, no, let’s find an idea. And another idea. So now why don’t you and I look on fighting an idea together. I’d have I’d like to know the last thing I want to have time. And I kept saying, no, I kept saying no. Then he emailed me a check for $5,000.

He’s I’m going to pay you $5,000 a month to work for you. And I’m like a fight. Keep your money. Yeah. You’re super motivated clearly. Let’s let’s see if we can do this. And in a way it it was useful because it forced me. The first thing I made him do is help me filter my inbound deal flow.

And at that time it was 200 a week. It was like 40 a week. And I was like, can I teach someone else? Might Euro six K I could have fight how to evaluate a team, how to validate if the business attractive, what my thesis is what appropriate deal terms are. And can I have him, do that for me and not pass the next Uber and turns out that while he was useful, because it forced me to structure my thinking on what my Euro six were and teach them to him.

And once he started seeing all the deal flow, he started getting ideas, sorta applying the same criteria to his own ideas. And then we started 50 ideas then became 10, then five and two, then one, then we pivoted and that company became adore me and adore me is a laundry DDC, commerce subscription company, both econ not which today is I don’t know, over 200 million revenues, I don’t know, 20 million tickets.

It might be much more than that, but I’d like at least that and crushing it. And the last thing he did. And I told them too, it was like, find me your replacement. And so we started a program where we would go to the first year of business school at Harvard MIT, Wharton, Columbia, Stanford, we’d say, Hey, you’re S you’re going to join us.

Full-time during the summer between your first and second year, half the summer, you’re going to be taught venture capital. Not because we want you to be VCs, but because we want you to see where the ideas are, how to pitch how to write a great effective deck and keep your pulse on the fingers of the market, your fingers on the pulse of the market.

And number two, pap the summer, you’re going to be in the company we’re currently trying to build. So you understand what it’s like to be an early stage founder, that profile. So the reason we took these schools by the way, even. On average, we’d rather have people that don’t go to business school.

It’s frankly, it’s just an easy filtering mechanism. And, but we only wanted people who wanted to be founders. And most of them, the profile was they were product managers or city managers of one of the larger marketplaces, like Instacart or Uber or or Airbnb. And they want to now go and do it on their own.

And and there were an HBS like looking for ideas and maybe improving their skills that like finance, something like that. So they join us for the summer during their second year they’re part-time 15, 20 hours a week. Mostly helping us filter inbound deal flow. And then when we graduate.

They become full-time EIRs meaning we pay them. I don’t know where the salary was, like maybe 135 K years. I’m like that to look for ideas with us, they look for their own ideas and we meet like on a weekly basis to iterate. Now, also every twice a year, we bring the entire team investment team, everyone like in the team together once in February and once in August and July, usually my house interest in kaikos who are in Canada.

And we have to all come up with ideas that don’t exist in the world of tech that should and out of these. And we usually come up with like a hundred, a pop or 150 up opposite, two to 300 ideas a year of which they can actually go and go deeper and pick some of these et cetera. And we typically would take two weeks.

I bet there’d be some churn because some people decided to build companies that were not, for us, some people decided they don’t want to be founders after all, et cetera. And we ended up building a lot of companies like that. We some successful some not so much. So we built a company called BP, which should have been Carvana, raise 150 million and was worth 700 million in like in famously blew up.

We, the main mission is we try to have the founders fail fast. So we try to build a company. We build a company called punch show, which is like an entrenched company and it didn’t grow big enough. And so we decide close it, but then we’ve had a lot of companies that are really doing well. So we’re in Rebag, which is a handbag marketplace.

I think they’re going to do 200 million of revenues this year and I’m like that that is that the founder is amazing. We were in properly, which is a Zillow Trulia meets compass meets a open door for Canada. Absolutely crushing it. Last round was like, multi hundred billion dollar valuation we’re investors 

MPD: in that with you great company.

Fabrice Grinda: Yeah. Yeah. So I’m chairman of that one and unsure is one of the best a EIRs we’ve ever had also we’re the best founders we’ve ever had. The team is amazing. We’re in Mundey, which is a trade finance company between Mexico and the us helping us and B some Mexico export of the U S and there, they grew from zero to like tens of millions and originations in a year and a half.

Like my, my, I know that it sends really definitely over 10 million might be over 20 million now. We’re in like Seafair, a marketplace for helping shipping companies find seafarers, a work rise for shipping where we’re in a umami card versus vertical. And grocer in the Asian category, we’ve created Milko, which is a kind of Shopify for restaurants, helping people build digital brands in food and helping them operate restaurants operate better and more effectively.

Many of these that actually I ran one of them for a while, actually to 2014, 2015, I built a mobile classified site in the U S called Salud, which I then merged with wallop pop. I ran Walla pop. USAA was true, but a wallet pop. And then we merged that with let go, which now of course has merged with offer up.

So now it’s offer up and that’s a multi-billionaire company, which I ran in 20 14, 20 15. And the CTO model is as follows. Very different, very generous because we do very few. We, you come in, we pay you 135 K until you find idea, once you find the idea we put in the first seven 50. With 65% of the capital going to the team, 35% to us.

And then we commit the next 2 million at either 10 million valuation or market, if you can get better terms but we have the right invest 2 million in your next round. And and so the T it’s not at all, like some of the other studios out there where the teams get five, 10, 50%, or in our case, they started at 65% and actually real capital, right?

Like you guys have got 2.7, 5 million. So if you don’t want to go to market for the next first two years, you don’t really need to. And that model’s really worked well. Intrusive, like it’s fine. We build amazing companies. The problem is it’s time consuming and my time is not scalable. I’m still, I’m on the board of and these companies it’s the opposite model.

We’re coming up with the ideas. And often I even rent product like Rebag and lofty. I was like, I went to Ukraine and Romania and I hired the team. I re I was like scrum master. I was like, I was actually writing the stories and managing the teams. I was working day and night for them for many years.

And now I’m still on the board of like most of them ones I just mentioned. And so that model, it’s amazing. But it’s just too time consuming. And so putting that on hold for now, but we still have two or three more to build. We still have two more to build as we speak, despite the fact that we’re not recruiting a new batch and in 20, 22 

MPD: only so much for breeze.

That’s a lot of sounds like you’re spread pretty thin if you’re doing. 

Fabrice Grinda: Yeah. Yeah. Plus we have a SPAC plus the a week plus I do a lot of stuff in crypto, independently. What we do at FJ yadda I’m spread too thin as is. And so my current what I’d like to find a way to do while I. The reason I built the team to 31 is actually to do all the, a lot of the stuff I don’t like to do, which the good news is that the problem is when you’re going to something, the world sends you, the universe sends you more of that.

And so the temptation of course is to do more and more. But I need to find a way to be more scalable. And I think putting aside started the studio to spite of how much fun it is, eh, and just focusing on the venture side because it’s more scalable and POS probably more useful for humanity in the long run, but in terms of like placing bets in so many categories to try to address it, all the world’s problems is broadly a better allocation of time.

And I can tell 

MPD: you’re inspired by it. Yeah. You’ve had a lot of success. I think that’s safe to say maybe an understatement of the day. Did you grow up. 

Fabrice Grinda: Yes and no is the, which is a weird answer. My great grandmother so I greet great grandmother in the late 18 hundreds inherited a hotel from when her husband passed away.

And instead of doing the done thing and and marrying again, she had decided to just take over the hotel, which was like fully embedded. She turned it around, made it super profitable, then bought another one. Then another one, she ended up owning all of the luxury hotels in nice owning half of the residential real estate of niece, basically becoming the wealthiest thought.

And if not the wealthiest, one of the wealthiest women in the world in the late 18 hundreds She gave it all to, she had multiple children, she gave it all to, or oldest Augustus who was actually an effective manager and didn’t lose any of it, but a force by the time. But he didn’t do the same thing.

And by the time. It’s kissed took over. It was split between all of them and they all spent basically the new VAR reach. All they want to do is hang out with the queen of England and the prince of Monaco. And by the time of my grandparents’ generation, by the time my parents came along, there was basically nothing left.

And so the, I imagine a generation that had been brought up with the idea that they were going to be wealthy, never need to work. It’s the silver spoon in their math, and yet didn’t have anything already be to show for it. And so my father had started from scratch. So when w we were living, the four of them.

Brother and I have two brothers, so I’d like when we started at my brother and my parents, like in a studio apartment and he started working for this French billionaire as an endless, and they’re a leveraged buyout firm in the seventies. And so we came from, even though we had come from family that had a lot of money by the time my parents level, there was nothing left.

And so we started with nothing. I went to public school but in 1989 when I was 14 my father’s father was became grossly of the ranks. We can to CEO of the company that that, that guide bought through an LPO. And they sold it for whatever, like a billion dollars. I think my dad had a 5% of it in stock options.

And it’s like the pre not venture capital per se, but like a similar model and overnight became wealthy. And actually you retired at the age of 41, which I think was a huge mistake. But I guess it didn’t live through it because I, at that point I’d already, I was living with my grandmother and niece and then I’d left for college and probably out of ego.

I decided I didn’t want to take any require, ask for any help. So I paid for college. Most of them, I saw, for my living expenses myself. So I had to work. Like I went to Princeton and when I was 17, but I’d like to work four jobs plus build my first company to pay for it, et cetera. Whereas probably the easier thing would have been asked my parents for money.

So because at that point of time we did have money. Cause that was two years after my father had become wealthy. But because I had left kind of my parents, I was living with my grandmother. I also didn’t really notice a shift. And so I came from an upper-class family that was probably middle-class in income.

But that rose through the ranks. And then all of a sudden became wealthy at the. A 50 for me by my parents. My parents are getting, 

MPD: but from a life experience standpoint, it sounds like you had more modest sensibilities as a kid than maybe generations before you what’s. How has money changed your life now because you’ve had tremendous success?

I know that is challenging for a lot of entrepreneurs who are going through these cycles. What have been the ups and downs of this evolution for you? 

Fabrice Grinda: I don’t know first of all, as a kid, I was just built differently from everyone else in my family. I was like really serious, like until post-college I was like Shelton, for me it was all about like intellectual pursuits and getting a pluses and skipping all the grades and winning the Olympiads.

And I was completely antisocial not at all a good public speaker or. Just different. Like I cared about like studying economics and philosophy and getting a pluses and nothing else and map like no interest outside of that. And no time for anyone, including by the way, my family, I was extremely arrogant and condescending as a kid of you guys are not smart enough and worthy enough of my time and attention, including my parents, by the way, I was like, so it’s funny because in a way I was the best kid ever, like always a plus is going to bed early, not doing anything bad, et cetera, but it was also.

At difficult kid in the sense that I’d like, didn’t provide much love. It was like, yeah, you guys are not smart enough for me. Leave me be I’ve learned. And it’s interesting because I have come to value people, I think as you’ve you put the emphasis and value and things you were really good at.

And of course that I was really good at being smart and not so good at anything else. And so of course that was my prison by which to value the world. And as you become older and also more confident and successful, you’re also realize there’s so many ways to be and to live. And it’s not my ways a personal value judgment, but there are many other ways that are absolutely amazing.

That to answer your question directly it’s a little bit of a non-sequitur know. So I became wealthy and in 2004, I sold a zingy for $80 million and I own 53% of the company. So I made $43 million net of tax. It was like 26.5. And what’s interesting is in a way it didn’t change anything.

I still lived in a studio apartment for a few more years. I think the big purchase of that time, it was the next box of TV and two tennis rackets mostly driven by how busy I was. Like we were growing, we grew from 15 million in revenue. So for it’s two hundred and two oh five. I can moving offices every four months and thinking we re-did that.

And like it kept, we kept getting bigger and bigger offices and hiring. So it didn’t really hit me completely. What’s interesting is my first company where I built in 98, 99, like my company on paper is worth hundreds of millions and that it comes so easily that I didn’t realize how much money that was like at 28.

I started my bath company at 23 is like an eBay of Europe. We had a buyout offer. 300 million at 40% a company, I was going to make $120 million. And again I’m like, man, of course everyone makes money to me. Other than that, it’s just a bubble. Everything seemed easy. I did not realize how, because you, 23, you don’t know any better.

And also I never really lacked for money. And also I never really, I never money was never an objective. It’s like a means. It’s not even a Misa net. I want to be a tech founder. That’s all I wanted to be. And whether or not I was going to be financially successful was irrelevant, which is why, by the way, in 2006, After the bubble bursts and, I made I went from hero to zero basically, and was bankrupt in 2001.

Then I realized maybe I should have taken a secondary for a couple of million, which is people will offer it. And I’d be like, nah, a couple billion who need, I want to be Bebe. The founder of there’s all in. I don’t want to take money off the table, et cetera. I’d like a more to prove I want to be the ideal entrepreneur.

And of course for me, I thought like a couple of millions, nothing. It forced at that point, I was thinking that having literally nothing in my bank account that I realized, oh shit, no money is really hard to make. It’s very easy to lose. It’s very hard to make. But in 2001, when I would have built zingy.

This internet thing is it’s dead. It’s small. It’s not big and no big deal. At the end of the day, I didn’t do this for the money. I did this to be, I wanted to create something and nothing. I’d love tech. So I’m going to build a new company. It’s probably not going to be big and it doesn’t matter. Now, lo and behold, it turns out I made sure that it wasn’t dead.

Despite every company had got on web van Petlock com MCI work on everyone had got under. And at that point in time and VC soft investing, but came back and B was financially successful. Now what has done for me since is I value experiences and I value my time. And so what I use the money for is I have a, I have a Butler or a an estate manager and who’s also my chef and does all of the offline things that I don’t like to do, so I don’t cook. I don’t clean. I et cetera. I have a virtual assistant in the Philippines and managers of my entire life. I. I go heli skiing, which is extraordinary, expensive, by the way for fun. Now I don’t own any physical goods per CyberKnife. I have a house in Turks. I have a house and I have a department, New York avenue.

I have a house in Revelstoke, but I don’t have, yeah. I really have a sense of cars or clothing and luxury, et cetera, all those things. I don’t think mattered too much for me. I think physical goods are anchors. But for me it’s more using the financial success I’ve had as a means of buying Experiences.

I love helping people around me and I give millions a year, but beyond giving millions a year to charity, I actually give millions a year to my friends as a means of changing their lives and making the, making a difference on the day to day of their life. And it’s a bit non-traditional other way.

But these are people I’ve known for 20, 30 years. And so I tell them, don’t expect it to be recurring. It just happens when I have an exited where I feel you’re in need and it’s meaningful for them. And I don’t think it impacts our relationship. So I think it’s been an amazing tool and it’s also been amazing to have freedom.

Like my dream, for instance, in and FJ labs is actually not to have external investors. If it’s the maximum I can invest with my current strategy is 300 million a year. If I have 300 million a year of I owed money to deploy, I would do that and not have any external capital. That would be way easier. That would remove the part of my life that I don’t like of dealing with LPs and fundraising and like and whatever, a gap, accounting and sec registration and all that stuff.

I would do that in a heartbeat. Financial success is really a means of free personal freedom to do what you want. When you want to have the experiences you want to have and to help the people around you. 

MPD: Was there a moment when you felt like you got your sea legs with being wealthy, where it went from, figuring out what that meant for you to, okay.

I got it. I know my framework for how I want to use money to have impact my friends, my personal life, et cetera. 

Fabrice Grinda: Eh, happened automatic over time automatically like the. I soon as I add capital, I started investing in startups. So I really stayed all by angel investing in 2005 and I knew I wanted to deploy capital into.

To back the, my friends were building companies and to help them realize their dreams and to solve the problems in the world. So that immediately came to me in terms of helping my friends did that leader, but I realized how, what I started considering like a little capital could change.

It could make a difference in the lives of my friends, a friend of mine, she was running a dermatology clinic in New York and she was making whatever a half a million a year. And she decided to said to go run a cancer research, live at Harvard and make like whatever, a hundred K a year. Profound difference in her income yet for the world.

I thought I was like a massive net positive contribution, but as a result, she could no longer afford like the down payment or a house in Boston. So I paid that for her and I think it’s the right thing for you and your husband and your kids to be able to love and amazing place. So you can actually do research this meeting folder of the world and that sort of happened.

Little by little over time. No, I’m not sure there was ever like a, oh, this is a correct strategy. Very rapidly. What I did realize is I don’t, I never followed traditional wealth management advice. You go to these wealth managers or like Goldman or whatever, and they’re like, oh, you should have 50, 60% equities and 30% bonds and blah, blah, blah, like crazy.

None of that ever made any sense to me, I have a complete barbell portfolio where it’s like a 10% of cash because you want optionality of being able to take advantage of things in crises, 10%, crypto, 10% public Sox of the things that have gone public in my portfolio that I still like and old 10% of real estate that’s really consumption.

And then everything else is like early stage Texas tech stuff. A completely barbell works really well. I realized it was much better at doing that. And ma which is essentially the same thing as like running FJ labs. If your labs are in a ways, a family office, and good on that front. And I made many mistakes.

Like I, I lost in a way millions dollars and Billy’s trying to buy a big chunk of the country to preserve the rainforest, which, taught me something about a rule of law. I lost millions dollars in Dominican Republic doing something at a much smaller scale, instead of hundreds of thousands of acres doing it with 165 acres, wanting to build a big community where I would bring founders and spiritual leaders and and artists to just create and be there with no business model, but like everyone from the mayor to the minister of tourism and environment, all wanted bribes and create an environment that was all super tenable.

So lost millions of dollars. Pursuing, if you, these houses, I made many mistakes along the way, but in general, at the end of the day, my true north star of help those around you. Help the world through, in my case, second Vaseline. So like finding solutions, the world’s problems, and like by yourself and living the life you want to lead has been amazing.

By the way, through that process, I did a lot of iteration in 2013. I’d actually 2012. I gave almost all my physical possessions to charity. I went down to 50 items that fit in a carry on my backpack and my tennis bag. And I went cap surfing and France couches for a year that I went like an Airbnb.

I lived in Airbnbs and hotels for three years beyond that all around the world. Like making sure I allocate time to invest in my friends and friendship and my friendships and my family in a way I’d never done that before. 

MPD: And why did you need to do that? Just cause the material items were owning you at some level.

Was that the thinking, did you have all the goods to do that? To have related 

Fabrice Grinda: time allocation? If you have like at a country house in Bedford and I would go and it was amazing, right? Like I, it was huge and we played paintball there and like it organized like parties. We played video games the way they gave me a room, et cetera.

But at the end of the day I went there because I was paying so much for it, which is the wrong reason to use something. The minute I didn’t have an apartment, the minute I didn’t have a house, I was like, okay, dad, I have infinite freedom and flexibility. Where do I want to be? Who is it that I want to be spending time with?

And so being, when you have a default, you go to that default, if you remove the default option, you can be way more thoughtful about what it is you really want to do, who it is, what it is you really want to hang out with. And the fundamental problem I was trying to solve for is. As you get older as your friends.

And I start getting married, having kids jobs, et cetera. I like the quality of the tea. The texture of your friendships, like changes when you’re in college, you’re remaking the world. You’re starting to you’re seeing your friends seven days a week. Even at McKinsey, I would see my friends date many days.

Many hours every week. And all of a sudden it would came at like the biographical update. I, we see you once every six weeks. And at that point is what happened to your husband and your work, et cetera, and your kids since then? And it’s fine, but it’s not the reason that we became friends. We became friends because there was a more fundamental connection and perspective and beliefs of some of the world and extraordinary conversations.

And I wanted to rekindle that in, in my thirties, in a eighties, it seemed to have gone away between the age of 25 and whatever 35. And I’m like, there must be a way to change it. And others were not making the adjustments to their little. Why don’t I adjust my life to make it happen. And now there are many false starts, right?

Like the couch surfing was a total failure because of course it was Dean and cab. The fact that I was at a position in their life and they saw, I’d like to bring skids to school and go to work, et cetera. The Airbnb thing worked really well until her BB was made illegal. It may most of the major cities and like across New York, all the high-end inventory to spirit then they will tell us all became full.

So I was like moving hotels every four days. So that’s actually the reason I ended up buying an apartment in New York. I was very happy living in like billionaires apartments, for a month, at a time in every neighborhood in New York, hosting dinner parties there. But once I had to live at hotels and move a tell, remember five days, I’m like, okay, that’s not viable.

And I couldn’t find high-end re rental inventory. I liked, so I bought a place, but. I guess people don’t put enough iteration and design and thought into their lives. They follow the default, whereas you can throw stuff on the wall and see what sex and see what sticks for you, right? Like people are built differently and what they want to do and how they want to lead their lives.

And they followed the, I guess thing, the default path way too much. Like my life is very non-traditional in general. I do a month in New York than a month intrusive kaikos I’ll do a month in Canada. Because New York and is socially artistically, professionally extraordinary intense.

And if you’re doing, you’re not thinking, and then I come to church and I’m working during the day. I’m in trucks right now and we’re doing this call and I have 12 calls today, but I’ll meditate. I’ll go, kitesurf, I’ll play tennis. And I’ll take the time to read and write and think and be reflective and rebuild my batteries.

And then most people don’t necessarily think through what is right for them in light of their energy level, personality, et cetera. And so that iterative design is alive, made it alive by. 

MPD: I love all that. You mentioned through there that you do a lot of charity, which I think is great. I particularly was interested in the buying a Britain forest or attempts to do taking it that further.

I would love to hear your take on impact, right? Is there a cause that you’re passionate about or some particular topic? Let me put it a different way, because my favorite way to ask this question, if you were king now, president king, what is one thing you would change? 

Fabrice Grinda: So I’m going to give the hyper rational answer to that.

Please, if you look at all the policies you could do in the U S and which ones would actually impact wellbeing for people the most it’s actually, there’s one thing that has much larger impact on personal outcome than everything else. And in the U S social mobility as a client, it used to be the 95% of people made more money than their parents.

Now it’s about 50% since people born since 1982. And the main reason for that is that the top cities are the ones where all the jobs created for all the opportunities are, have become unaffordable. And the reason there aren’t affordable is we’ve passed extraordinarily idiotic, zoning and landscaping laws.

And at that, that mean that you cannot build as easily as you should be able to. And there’s a lot of reasons for that. If your current owner restricting supply means your thing your homes increasing value dramatically. But it’s extremely bad for like social mobility economic diversity.

And so you look at San Francisco, 80% of the city is zoned. Apartments are illegal. You can not have more than two story buildings. And as a result, you have the cities become extremely unaffordable. So if I could change one, one thing is essentially. Remove all air rights, all essentially zoning and construction regulation.

Other than a few, see if you’re not going to be building over whatever central park, but like air rights and city and your city make no sense. Like having these buildings that are less than a hundred year olds old, be like landmark that you can’t build over them makes no sense. You should be able to build up as much as you can.

And we should have unlimited supply. And of course, there’ll be a lag of eight years or 10 years before things get built and prices adjust. But at that actually solves affordable housing. And when you solve affordable housing, you recreate mobility and your lack of people to get the best jobs. And this is what changes the outcome more than anything else.

Now that’s not a something I’m investing in any way, shape or form or. Because there’s crazy nimbyism and political forces against it. And it’s, it has to be in the U S the rules are like literally like neighborhood by neighborhood. And it’s so painful. So I, as king, I would do that. That is not where I keep my claim to.

Now I’ve not put a lot of thought into charity. That first of all, what I do at the charity level, it is way more personal and directed will have a much larger impact on the lives of the people I help, but it’s much more smaller scale. Like in the Dominican Republic, I helps pay for the education of 10,000 kids from K through 12.

It’s amazing for these kids. So it changes their life outcomes, dramatically program. 

MPD: You do that through, or you just set that up. 

Fabrice Grinda: No, it’s the dream project that I was funding. And I, but I helped them beyond that. I helped, I built like a tech center where they could learn programming and to have access to computers and internet and find jobs, et cetera.

I fund something called the university of the people, which is helping non low-income people basically get us degrees, especially in things like computer science. And there are people from like our over a hundred nations and they often end up getting jobs at Google, Facebook, et cetera.

So it’s been mostly right education, helping people be able to increase their out their life outcomes through adhesion often in the communities where I was living, I lived in the Dr for largest spend, like four or five months a year from 2012 to 2019 2018, the men I’ve done a lot of that now, separately I’ve dragged given directly.

Contributions to many of my friends and like dozens of them, right? And we’re talking millions and millions of dollars, it’s life-changing for them, but I don’t larger scale. All of that is dwarfed from a social and economic impact by what I do. And as a tech investor, right? Like my tech investments of hundreds and hundreds of companies, I think ultimately will change the lives of billions of people.

And yeah, they’re for profit, but there’s a fundamental social motivation for them. And I think they will dwarf anything I do on the direct investment and the direct shadow charity frame. That’s why most of my personal capital is actually allocated to investing technology, to solve the world’s problems.

And I think we will, by the way, I’m extremely optimistic on how we’re gonna address climate change, inequality of opportunity, et cetera. 

MPD: It’s been great having you on. Thank you so much for doing this. 

Fabrice Grinda: Thank you for having me

MPD: every time I talked to Fabrice, I feel a little bit smarter, very grateful for him being on the show today and grateful to have him in my orbit, working together and doing deals together. It’s a great guy. If you liked what you heard, please hook us up with a like or a five-star review. This is my basic pandering.

Help us out. You can find me on Twitter at MPD. And to hear more of my conversations with innovators, subscribe on YouTube, Facebook, or any major podcast platform. Just search for innovation with Mark Peter Davis.


This week I was in Finse, Norway training for an upcoming polar expedition. The training involved skiing up to 25 km per day while pulling a 130-pound sled in blizzard conditions, sleeping in freezing tents, eating dehydrated food with only a shovel as a restroom. It was painful, cold, and difficult, and yet I loved it.

I have often pondered why many entrepreneurs like myself love adventure travel and extreme sports. It’s seemingly ironic because we have everything we could ever hope for. This is doubly ironic as I am built grateful and optimistic. Not a day goes by that I am not thankful for everything life has given me: an amazing family, lots of close friends, health, the opportunity to pursue my purpose, the freedom to explore, and an aptitude for happiness.

So why do we put ourselves in situations where we deprive ourselves of the very things we are thankful for and risk losing it all?

I remember vividly driving a Formula 1 car back in 2000. As I pushed it to its limits, time slowed down. I never felt as alive as I was in that moment where I knew if I went any faster, I would lose control. After a lifetime of professional and personal risk taking, as a tech founder and investor who loves to heli ski, kitesurf and do many types of adventure travel, I have a few insights.

1. A love for flow states

Flow states are magical. They are these moments where everything else disappears and you become in sync with your surroundings, at one with your environment operating at the highest level. Yet they are fleeting and are not the norm of the human condition.

As I will detail in my upcoming review of Stealing Fire, extreme sports are an amazing way to harness flow states because they require focus and concentration. The risk of death seemingly quiets the monkey mind. In my case, my mind is rather quiet to begin with, possibly because I suffer from aphantasia. However, I still love that meditative state that I enter in when skiing in deep powder, taking in the scenery and weaving through the trees in a flowy dance. Likewise, I love flying above the waves while kitesurfing or kitefoiling, feeling the sun on my face, the wind in my hair and the smell of the ocean around me, experiencing the contour of the waves under my feet.

And so it was last week. I was exhausted, pulling my sled in a white-out blizzard where I could not see if I was going up or down. My entire field of vision was 100% white. All I did was focus on my breath, gliding one foot, then the next in a rhythmic way: one, two, one, two, over and over again.  I entered into a trance-like state where I felt at one with the elements. Our minds must not like blank canvases because I started hallucinating that we were in a valley with a refuge offering hope of shelter in the distance. In that moment I understood how travelers lost in the desert can see the mirage of an oasis. (To be clear, I was not on any substance, psychedelic or otherwise.)

This is not to say that extreme sports and adventure travel are the only way of achieving flow states. Quite the contrary, I experience them through meditation, psychedelics, tantric sex, or when in the zone while playing padel or tennis. Those are all different modalities we can use to reach the same state.

In the West, the most common way people use to reach a flow state is through mastery of a skill. It’s always wondrous to witness these displays of magic. We can always tell when we are witnessing it. This is why we are in such awe of the prowess of Federer, Messi or Jordan and reward them accordingly.  I have experienced watching this in so many contexts: watching Steve Jobs on stage, attending Derren Brown’s magic show, listening to Hamilton on Broadway, but also in countless other moments from “normal” individuals who had mastered a skill.

The one requirement for using a skill as a means of entering a flow state is mastery. While I was learning skiing, tennis, or kite surfing, I was never in a flow state. I was focused on technique and repetition. It’s only once you master something enough that the process can disappear in the background that you can be in the zone. You will be well rewarded, but you must put in the hours.

That is why I recommend extreme sports and adventure travel. They are a shortcut. You do not need mastery. Let me attest to how few skills I truly have when it comes to surviving in the cold and cross-country skiing, but the dangers involved focus your attention and act as a flow state generating machine.

2. A sense of meaning ingrained in the human condition

Humans seem to have this ingrained need for feeling danger and thrill. It was probably built in our psyche because for most of homo-sapiens’ existence we faced death from other humans, wildlife, and nature itself.

This is why many of my friends in the military often have trouble adjusting when they come home from active duty. The mundanity of modern-day life seems dull relative to the life and death situations they face daily. Shallower traditional friendships pale in comparison with the bond they have with their brothers in arms.

We feel there is something somewhat empty and unsatisfying about the nature of modern life where everything is safe, sanitized, and superficial. Perhaps what we all need is a bit of danger and risk to remind ourselves what we are living for.

Extreme sports and adventure travel are such a form of synthetic risk. We face risk, but in a measured and controlled environment. We do not want to experience the sufferings and deprivations of real war, but our psyche needs to feel the thrill and possibility of risk.

It’s worth noting that many “risky” things are less risky than they may appear at first glance. When I told my parents I left McKinsey when I was 23, they were horrified. I had just been promoted to associate. I was making nearly two hundred thousand dollars a year. To this point I had never really failed at anything I tried. Beyond leaving the safety and prestige of the job, they worried that a failure would crush me.

In a way they were right. With my first startup, I went from zero to hero. I grew it to over $10M per month in gross merchandise sales with over 100 employees in two years. I made the cover of every magazine and was a hero of the Internet revolution in France. Then it all came crashing down. The Internet bubble burst and I went from hero to zero and lost it all. My parents’ worst fears had been realized.

However, what I had really lost? I had confidence in my abilities. Even if I had to crash on their couch for a while, I did not worry I would starve. Worse comes to worse, I could always go back to McKinsey or take a regular job. I knew my skills were valuable and valued. In return I lived a life of purpose. I had a clarity of focus and sense of mission. That’s why in the end I chose to remain an Internet entrepreneur. I had not gone into it to make money anyway. I just wanted to build something out of nothing and use technology to help make the world a better place. As the bubble had burst, I thought that whatever I would build would not necessarily be very large, but it did not bother me. In the end, I was wrong in that assessment and succeeded beyond my wildest dreams. 

The same is true of the risks involved in adventure travel. The risks of death are extremely small. I think what people really fear is the discomfort they will face. It is true, you will face discomfort, but in return you will get a sense of accomplishment through grit and tenacity that is unparalleled in modern-day life.

3. Gratitude practice

People appreciate most what they have when they are at risk of losing it. I am built profoundly grateful, but every time I come back from a week of camping, I become so appreciative of all the little things we take for granted. I am truly in awe of the magic of modern life. I marvel at a light turning on at the flick of a button, at the ability to have hot water come out of a tap, not to mention the convenience of indoor plumbing. I also become infinitely grateful for the culinary delights available in modern society where every combination of flavor and taste is seemingly possible.

And do not get me started on the magic of modern-day communications and travel. We essentially all have access to the sum total of humanity’s knowledge in our pockets in a device that doubles as a free wireless video communications system. We can be in touch with countless people from all around the world. On top of that we have the means to go see them on the other side of the world in less than 24 hours. Those are feats that would have been not only impossible, but essentially inconceivable in the past. They are so extraordinary that they feel like actual magic!

4. An openness to serendipity

On my polar expedition training, I ended up sharing a tent Dr. Jack Kreindler for several nights. That magical combination of both spending an extended period of time and facing adversity together, where we truly depended on each other for survival, led us to become fast friends. I came to love his intellect, personal mission, directness, foul-mouthed sense of humor, and lust for adventure.

However, the true magic was that this was completely unplanned. Had he reached out to me saying that I sounded interesting, and we should go camping together to get to know each other, I would have said no. I lead a busy life. However, such is the serendipity that happens when you say yes to the opportunities that present themselves to you and I am sure we will be friends for years to come.

5. New learnings

There is something beautiful about learning something new. Putting yourself in new, unfamiliar environments is an amazing way to learn new skills, create new neural connections and keep yourself young.

I have done a lot of warm weather camping in my life but had never done cold weather camping other than the night I was accidentally caught in a freak August blizzard in Yellowstone utterly unprepared and improperly equipped. Likewise, while I am a great downhill skier, I had never cross country skied.

I had to learn so many things during the last week: how to set the tent in a way that it’s not blown away by the Antarctic winds; how to cross-country ski pulling a 130-pound pulk; how to melt snow for water and cooking inside a tent; how to stay warm throughout it all; and so much more.

I also discovered that Finse is the snow kiting capital of the world, so I decided to extend my stay to learn snow kiting. As a result, I am thinking of extending my Antarctic trip. I am supposed to ski the last degree to the South Pole next January. Now, I am thinking I should kite back from the South Pole to Hercules station as well.

6. Clarity of thought

Taking yourself out of your daily routine is an amazing way to be thoughtful and reflective. We often have thoughts weighing on us which warrant a decision. However, the busyness of modern-day life and the emotions of being caught in the moment make it difficult to go beyond our reptilian brain and to activate clear, dispassionate thinking.

Adventure travel takes you out of your normal environment, and the seeming risks involved help you enter a hypnogenic state where solutions seemingly come out of nowhere. You can see problems in a new light and find the rational solution to the problems you are facing providing you with a plan of action and course to take.  

7. Staying Grounded

Achieving success can sometimes mean losing sight of the difference between needs and wants. Experiences like polar arctic training can recrystallize the difference and remind us that we really have very few needs — health, water, food, basic shelter, and companionship.


This is what life is. A patchwork quilt of experiences that we curate or fall into with our family and friends, and relive with the broader community in our retelling, the memories of which keeps our hearts and minds alive.

The biggest risk is not taking one. Provided you have the basics covered in Maslow’s hierarchy of needs, say yes to adventure, opportunities and seemingly risky endeavors. They are less risky than they appear, and you will feel more alive, enter magical flow states, get a profound sense of purpose, learn gratitude, and have new magical encounters and learnings while clearing your mind.

As a new parent, I am already encouraging positive risk taking in my son. He loves being taken on all the adventures. I put him in a sling, and he screams in delight as the world flies by while we are biking, skiing and generally running around like crazy. As we speak, I am holding him by his fingers as he attempts to take his first steps.

Go out there and live!

The Great Unknown

A year ago, in Welcome to the Everything Bubble, I argued that an unprecedented combination of loose monetary and fiscal policies was fueling a bubble in every asset class. We were seeing frothiness in equities, crypto, real estate, land, commodities, and bonds with a full-on speculative bubble in SPACs. Unusual behavior like retail driven short squeezes and extraordinary volatility all suggested we were at or near the top of the market.

At FJ Labs, we were of course massive beneficiaries of the bubble as all our investments were being marked up insanely rapidly. We were keenly aware that while we think we do a good job at picking investments, we were also benefiting from the frothy environment. In a bubble we all look like geniuses. We took my macro concerns to heart and sold secondaries in some of our high-flying winners. This is not because we did not believe in them, quite the contrary, but they are typically the only positions we can get some liquidity in. Plus, we usually sell only 50% of our position.

Since then, the market has corrected especially for tech stocks and crypto. 40% of Nasdaq stocks are down over 50% peak to trough in every tech sector.

Multiples have significantly compressed for public tech companies. SaaS multiples are now back below the long-term median.

Most crypto assets are also down over 50%.

This begs the question of what we should do now. Therein lies the problem as where we go from here is extremely uncertain. In the past I had more certainty and clarity of thought. In the late 1990s, I published articles that explained we were in a tech bubble, and that while it would burst, it would also lay the foundations for the growth to come. In the mid-2000s, I argued on this very blog that people should rent rather than buy given inflated real estate prices. As discussed above, a year ago I suggested every asset class was becoming overvalued. Now I can make reasonable arguments for why things could recover, why they will go sideways, and why we could have a lot more downside.

An Uncertain Macro and Geopolitical Environment

A. The Optimistic Case

I wanted to start with the optimistic case because in this time of doom and gloom hardly anyone believes in it. The consumer price index climbed 7.9% in the 12 months to February 2022, the largest 12-month gain in 40 years. To prevent runaway inflation, the Fed is expected to raise rates 5 times this year by at least 1.5% cumulatively. Historically, most rapid increases in rates by the Fed have led to a recession.

The reason public markets pulled back, especially for risk assets like tech stocks and crypto, is the expected rise in US interest rates. The reason rate increases affect risk assets more is that risk assets have more of their value driven by cash flows in the distant future. The value of a company is the net present value of future discounted cash flows.

Imagine a tech startup expected to throw off $1 billion in cash flow in 10 years. If the discount rate is 0%, then that future cash flow increases the valuation of the company by $1 billion. However, if the discount rate is 10%, the same $1 billion of cash flow ten years downstream only increases the current valuation of the company by $385 million. When we start at very low rates, it does not take a large change in interest rates to have large impacts on valuations, especially for companies where most of the cash flows are coming in the relatively distant future.

Now, a large portion of the increase in inflation has been due to the supply chain crunch caused by a massive increase in the demand for goods. This in turn was due to a decrease in the demand for services as consumers could no longer travel, go to restaurants, the movies etc.

With all this extra disposable income on their hands consumers took to online shopping. It turns out, our infrastructure is not made to scale this fast. The number of container ships in the world, the number of containers available, the throughput of our ports, the availability of trucks and truck drivers, the availability of chassis (the trailers that haul containers around), all got overwhelmed which clogged the system. We simply don’t have enough of these essential supply chain elements, or resilient systems that are agile enough to shift the supply of these assets to where they are needed.

On top of that e-commerce logistics networks are fundamentally different in their geographical and physical space than those of traditional retail. They are more complicated because you are edge caching your inventory to be closest to your users instead of positioning everything in a distribution center in a single hub. Companies must position their warehouses all over the United States, making it exponentially more complicated. As a result, the more people bought things online, the more these systems were overloaded.

This is being exacerbated by the war in Ukraine that is pushing up energy prices and further disrupting supply chains.

Let me now articulate how an optimistic outcome could play out. The shift in purchases from services to goods was driven by stringent COVID restrictions.

Imagine that now that everyone has had COVID because of Omnicron and/or is triple vaxed, COVID finally becomes endemic. While it may be with us for a long time, we learn to live with it and states end all restrictions, following the lead set by Denmark and the UK. Consumers revert to their ex-ante consumption patterns. This should allow supply chains to unclog and have a deflationary effect on the economy as logistics costs decrease significantly.

On top of that, the end of COVID relief checks should eliminate some of the excess demand that was being pumped into the economy. If this happens quickly enough such that inflation expectations are not entrenched and asking for 7% pay raises annually does not become the norm, the inflation bump should prove temporary, allowing the Fed to increase rates slower than anticipated by the markets.

We are also at peak uncertainty with the war in Ukraine negatively impacting sentiment. Should it come to a resolution in the coming weeks or months, it should eliminate a lot of geopolitical risk overhanging on the economy. I am also hopeful that the difficulties Putin is encountering in Ukraine and the severity of the economic sanctions have given second thoughts to Xi Jinping with regards to a possible invasion or annexation of Taiwan.

Should inflation and geopolitical tensions abate, the economy would be well positioned to continue to do well and for markets to recover. Companies are in good financial shape relative to other periods when a recession was brewing in terms of cash positions and indebtedness. We are at full employment with US unemployment at 3.8%. The fiscal deficit is dropping sharply as Congress is not considering further relief packages, and the additional infrastructure and social packages will be much smaller than the recent relief packages.

In the long run, technology should also help deal with inflation. Technology is deflationary and provides better user experiences at lower costs. COVID has led to rapid technology adoption in sectors of the economy heretofore barely touched by the technology revolution: health care, education, B2B, and even public services. Economists like Tyler Cowen who first described the “Great Stagnation” are now predicting a re-acceleration of technology-driven growth.

In Q4 of last year I would have ascribed a 50% probability to the optimistic scenario playing out. Right now, I would say it’s about 33%, but unfortunately declining by the day.

B. The Stagnation Case

The optimistic case requires inflation to be transient and to return to the status quo ante allowing the Fed to raise less than expected. The issue is that the longer inflation stays above trend (say 2 – 2.5%), the more likely it is that inflation expectations get entrenched. The private-sector average hourly earnings, seasonally adjusted, rose by 5.1% in February year-over-year. While this is still lower than inflation, if workers start to get an automatic 7% bump in pay every year to combat inflation, this will entrench inflation at 7%.

States are generally risk averse and slow to act. They may loosen restrictions slower than justified. This would keep the demand for goods artificially inflated longer, keeping supply chains clogged, and prices high. This in turn would increase the probability of entrenching higher inflation expectations.

There is also a growing sense that many would be comfortable with higher inflation. Global debt is at an all-time high at over 250% of GDP, making governments, corporations and households particularly vulnerable to higher rates.

Permanently higher inflation would have many costs: lower purchasing power, lower investments, misallocation of capital, destruction of the value of savings. However, in the short term negative real rates would also erode the value of the debt.

In times of war, states have tolerated higher inflation rates for reasonably long periods of time as you can see in the chart below for WWI, WWII and the Vietnam War.

While we are early in the Russian invasion of Ukraine, the current quagmire the Russian forces find themselves in may lead to a protracted conflict creating a cloud of uncertainty that impacts sentiment.

It’s easy to see how the stagnation scenario plays out. Interest rates rise, but not enough to counter increased inflation expectations. Politicians and the Fed choose to accept above trend inflation. When combined with geopolitical uncertainty, we would set ourselves up for low real growth. In this regard, we might start looking like many Latin American countries looked for decades. Instead of tracking nominal growth and values, we should track real values. While markets may not fall significantly in nominal terms, it is very likely that real valuations would decline over time.

This scenario may very well be the most likely one at this point.

C. The Pessimistic Case

There is a real possibility that the worst is yet to come, with the number of scenarios that could lead to a catastrophic outcome growing by the day. While there is some tightening going on, the Fed and government are still running loose monetary and fiscal policies by historical standards. A 1.5% increase in interest rates may not be enough to contain inflation. In 1981, Volcker brought US rates to over 20%.

You do not need a Volcker 2.0 scenario to still have a significant impact on markets and the economy. Even a 5% rate, a level last seen in 2007, would tremendously slow down the economy and lower valuations, especially of risk assets. Even though public markets have corrected, valuations remain far above historical averages.

S&P PE ratio over time

It would not be unimaginable for valuations to be cut in half from where they are now, especially as earnings are likely to take a hit given higher energy costs and the fallouts of exiting Russia.

Worse there are many other scenarios that could lead to a global financial crisis and a general “risk off” mindset. Politicians, the public and the press seem to be like The Eye of Sauron. They are only able to focus on one issue at a time. For a long time that was Trump, then COVID, and now the Russian invasion of Ukraine. I often wondered if post-COVID that attention would not be brought to focus on the unstainable increase in the level of governments debts in many countries during COVID.

Italy, Greece, Spain, and Portugal all saw significant increases in their public debt over the last few years.

Italy’s debt to GDP ratio increased from 100% to over 150% in the last 15 years.

A crisis of confidence on Italian debt could threaten the entire Euro project with collapse. The Greek debt crisis triggered a massive global financial crisis. The Italian economy is ten times larger, and the crisis would be that much greater. In such a scenario the entire financial system might seize up. Many banks would be exposed to the debt of the defaulting sovereign. Banks would be wary of trading with each other with its implied counter party risk, as happened during The Great Recession of 2007-2009.

Such a crisis could also be created by an emerging country default, or just a large bank default for a variety of reasons including possibly over exposure to Russia. Credit Suisse and UBS in particular feel vulnerable. They have found themselves at the epicenter of every recent international debacle involving bad lending, e.g., Archegos , Greensil , Luckin Coffee, etc. Foreign currency denominated loans by themselves amount to ~400% of Swiss GDP. Officially, Swiss banking system assets are ~ 4.7x GDP but this excludes off balance sheet assets. Including these suggests a ratio of ~9.5x 10x is more accurate.

Switzerland has long been regarded as a safe haven with a prosperous and stable economy and a homogeneous population. I suspect that in the next crisis Swiss banks may prove too big to bail instead of too big to fail and could bring the entire Swiss economy down with them.

This is not unprecedented. For many years preceding the Global Financial Crisis, Iceland was widely perceived as an economic success story, winning plaudits from the IMF and elite commentators. Few people had noticed that in the seven years leading up to 2008, Iceland’s three largest banks Kaupthing , Glitner, and Landsbanki had embarked on a spectacular lending spree, which resulted in their total assets growing to >11x Iceland’s GDP (from <1x before).  Beyond the sheer size of their loan books, the Icelandic banks compounded their risk by poor underwriting to highly dubious borrowers, often denominated outside the native Krona (e.g., ~€50b in Euro loans versus only ~ €2b in Euro deposits). When liquidity dried up in early 2008 and people began to question the solvency of the 3 large Icelandic banks, their huge size relative to Iceland’s total GDP meant that the Central Bank of Iceland was unable to act effectively as a lender of last resort. The result was a total banking system failure, a soft sovereign default and an economic depression, as Iceland itself had to take a massive bailout from the IMF. The Krona collapsed by ~35% versus the Euro, and the capitalization of the Icelandic stock market fell by over 90%.

We cannot ignore other risk factors. In the postwar era in the U.S., every instance in which oil has spiked above $100 per barrel in real terms has been followed by a recession. This pattern has played out in 1973, 1979, 1990, and 2007.

Geopolitical tensions could also escalate. It’s no longer inconceivable that Russia would use a tactical nuke in Ukraine. The conflict could easily engulf other countries. It’s not clear where our red line is and what would happen if Russia launched cyber-attacks on the infrastructure of our NATO allies for instance. It’s also possible that Xi Jinping makes a play for Taiwan while we are distracted in Ukraine further threatening global stability.

In the not-too-distant past, I ascribed low probabilities to all these scenarios, but they are now increasingly likely and becoming likelier by the day.

Macro Conclusions

There is now more downside risk than upside risk as I currently weigh the optimistic case at 33% (and declining). When it comes to your fear versus greed toggle, it is time to be more fearful. However, fortunes are made in bear markets.  As Buffett has said, we should be fearful when others are greedy, and greedy when others are fearful.

To position ourselves to play offense in a bear market (either as investors or as founders), we must be proactive before the bear market materializes.  For both investors and founders, the takeaway is simple: raise a war chest now.  For founders, this means raising enough cash to survive and indeed to press competitors during tough times.  For investors, this means raising liquidity in anticipation of chances to buy attractive assets at dimes or pennies on the dollar.

Individuals should try to lock in long term fixed mortgages at today’s low rates while they still can. I would also recommend maxing out the amount of non-recourse loans you can borrow against your home at a low 30-year fixed rate. Inflation will ebb away at your debt load. I recently renegotiated my mortgage on my New York apartment for instance.

Despite high inflation, I would keep a fair amount of cash on hand. While its value is being deflated it gives you optionality to buy assets cheaply should there be a large correction. It’s the reason we pursued an aggressive secondary strategy over the last 12 months. Note that I keep my cash in decentralized finance and insure it as a means of generating low risk above inflation returns. I am working on a way to share the solution I use myself with a much broader group.

Founders should raise now while keeping an eye on their unit economics and burn. Private market multiples have not yet compressed to the level of public markets. Given a potential multiples compression, you might get the same valuation today as you will in 1 year despite having 1 year of growth.

History Trumps Macro

I do want to leave you on an optimistic note. The tide of history trumps the macroeconomic cycle. They just operate on a different time scale. The last two hundred years have been a story of economic growth driven by human ingenuity. Over a long time, recessions and wars barely register. Even The Great Depression, while unpleasant to live through, is merely a blip in the history of progress. 

Over the last 40 years we saw countless crisis and crashes: the 1981-1982 recession, Black Monday in October 1987, the 1990-1991 recession, the bursting of the dot com bubble & 9/11 and the corresponding 2001 recession, the Great Recession of 2007-2009 and the COVID-19 Recession of early 2020. Throughout all this, if you invested in technology writ large you did well.

My current asset allocation is as follows: 60% early-stage illiquid startups, 10% public tech startups (the companies from the portfolio that IPOed that I have not yet sold to reinvest), 10% crypto, 10% real estate, and 10% cash.

We are still at the beginning of the technology revolution and software continues to eat the world. I am optimistic that we are going to see a re-acceleration of technology driven growth. We will use technology to address the challenges of our time: climate change, inequality of opportunity, social injustice and the physical and mental health crisis.

As such, with FJ Labs, I will continue to invest aggressively in early-stage tech startups that are tackling the world’s problems. The macro for the next few years may suck, but ultimately is largely irrelevant. I care more about the amazing companies we are going to build to bring about a better world of tomorrow, a socially conscious world of equality of opportunity and of plenty.