Earnest Sweat 00:04
Welcome to Swimming with Allocators, the VC podcast from the LP perspective, with your hosts Alexa Binns and Ernest. Are you ready? Let’s dive in. Michael, it’s so great to have you on Swimming with Allocators. Thanks for being on.

Michael Wooten 00:22
Well, thank you for having me. I’m excited to be here.

Earnest Sweat 00:24
I think I first wanted to start off with your allocator story. I know you spent three years at an Atlanta-based family office, then almost three years at an allocator based out of Charlotte, and then another kind of a Bay Area private family office would love first to just understand how you got into this world, or were you just like an eight year old who was like read David Swinson’s book and I want to be an allocator?

Michael Wooten 01:00
Yeah, that’s a great question. It definitely goes back further than undergrad. I mean, if you go back to the first inklings of thinking about investing, it was probably when I was probably sub five. So part of it was my grandfather worked at a bank, and he had worked at a bank examining banks for his whole career, and so every holiday, birthday, whatnot, instead of giving presents, he would give all of his grandkids savings bonds, which I hated at the time. Obviously, like you know, as a five-year-old, you want Legos. You don’t want this piece of paper that I don’t know what it is, but that was definitely it. It started me thinking about money a lot, as far as like, well, what does this mean? Like, what it was, what is this? And I, I think even as a young kid, I was fascinated, and I remember doing odd chores and collecting up, you know, finding money around the house that probably didn’t belong to me, but at some point I had saved up $100 in quarters and nickels and whatever, and I went to my parents and I said, “Hey, can you take this to the bank? I want a $100 bill. And they were like, “Why do you want a $100 bill? And I was like, “Well, it’s just like it’s a milestone. Like it’s , it’s awesome, and in my mind, it was worth more than $100 in quarters, which I know now that actually a $100 bill is difficult to use. Though I will take more of them if anybody wants to give me them. So that was kind of my first like okay, I’m not probably not doing what normal kids do at that age, and then the next big step was probably what really led me down the investor journey was in high school. My older brother gave me a book on Warren Buffett called The Warren Buffett Way by Robert Hackstrom, and I read that, and I at the time I believe Warren was the richest person in the world, if not he was he was one of the top three, and I said, “Hey, this seems really interesting. I’ve always been fascinated by the concept of the stock market. I had kind of, you know, been a kid watching it crash in the 2099 bubble, and didn’t really understand what’s going on. And then I was like, okay, well, this is super interesting. I’m fascinated. How do I become an investor? And so that kind of led my journey through college, and you know, read everything I could get my hands on, and didn’t know how to necessarily go and get down that path. So it was kind of like I would talk to everybody, including all my professors, about investing, and they were like, “Well, this is accounting. I’m not an investor. I was like, “Okay, but who is? Who do I talk to? And that got me excited about it. And then you know, as I did did the finance, did the accounting, ultimately got lucky in the fact that I landed at a family office in Atlanta right out of undergrad, and it was one of those small places that they only recruit at a handful of schools where the partners went to, and so I just got lucky that I went to one of the schools that one of the partners went to, and it was the kind of job where they knew that they were probably under compensating you relative to what you could have done if you went to investment banking, but what where you were where they were making up for it was the experience and being on the buy side and being able to see just a swath of things and be able to go to conferences and things that that were, you know, usually more for somebody at a VP stage and later. So I was there for three years and that was a great experience because I really got to see all of the landscape of both like what’s going on in the public markets, but also this introduction to alternatives, which was you know they don’t prepare you for that school. So that’s kind of really the foray into the family office. It was kind of serendipitous.

Earnest Sweat 04:57
Did you see any? You know, I mentioned earlier at the beginning the different places you’ve worked at as an allocator. What were the main differences that you saw in the different organizations? Because you know, I think the adage that I learned as I got into venture was, when you meet one family office, you’ve met one family office,

Michael Wooten 05:22
and that is so true. So having worked at two different family offices, and then having talked to a ton of family offices through the network, and doing research about how the different ones organize and whatnot, they are all different, and they are all and it’s a people-driven business. It’s kind of like I think think of family offices almost as like startups in the sense of like whoever the first kind of five people and whoever the founders or the the you know the principals are they kind of set the overall tone for what it’s going to be as well as like what the goals are, what the risk tolerance are, you know things like that, and so when you come in, so my first job at Atlanta, that was an established firm that had been around for over a decade. By the time I got there, they were kind of like a well-oiled machine, although you know I’m sure it wasn’t always that way, but the processes had been laid out. There was already a mature portfolio, and so it was kind of a rinse and repeat. And now we kind of have this thing where we have this is our investment pace. This is our cycle, and so it was you know filling in for somebody who had already done the job. Then I went to the Silicon Valley family office, and even though the family office had been around for several years, it was morphing because there had been an external OCIO, and then we were building an internal team and were taking over part of that portfolio and trying to bring money back in house. But as you know, this asset class, like alternatives, they they last forever, so everything’s not always liquid, and you know, without taking haircut and stuff, so that’s really the wild wild west, and that totally depends on okay, what is what is the goals, what does the principal want, and so half the I used to I used to joke that my job was 50% making money, 50% not losing money, at 50% whatever the principal said, and I don’t know on which day which 50% doesn’t show up. So, yeah, yeah.

Alexa Binns 07:28
That transition’s fascinating. What was the goal at the time to take things more in house?

Michael Wooten 07:36
Yeah, I think it was controlled, and I think so. And that also is a big difference between the two family offices that I’ve been at. The first family office had been established, and the patriarch was largely out of the picture and retired, and you know traveling around the world as you should when you’re retired. And so the investment team had full discretion, and we checked in on a quarterly or semiannual basis, everything’s good. Like we’re golden. With the second family office, I think it was a control thing where the the principals were younger and still active in their day jobs, but they were also in positions of power where they were used to being kind of in control, so I think that they wanted that same feeling within the family office, and so that I think that drove a lot of the decisions and and kind of the autonomy on that front.

Alexa Binns 08:32
Yeah, well, and in our asset class, being in a position of power in Silicon Valley, you do have unique access. Like I can recognize that having a layer between you is not necessary if you are already in that universe and really plugged in in Silicon Valley. Interesting. What’s the transition been like specifically in venture?

Michael Wooten 09:01
Yeah. So that was-I mean-that was actually one of the other driving parts. Was that you talking about that control? But it was also the OCIO who had really underrepresented the portfolio from the venture, which was, you know, a great tragedy because we did have access. The principals had come up through the venture ecosystem and we’re very well connected within that ecosystem, and so that was really our plan. And what we were trying to do was build out that muscle, as well as that allocation within the portfolio, and take advantage of that. So we kind of saw here’s an area where we think we could actually generate some alpha, and then you know we were still a lean team at the peak. We were four people on the investment team, so we still couldn’t allocate to all the other asset classes and really be in the weeds on that. So we were still allocating to managers in all the other asset classes, but then specifically with inventure, we said, okay, we’re going to. Part of the pie to managers, and then we’re kind of using that as a platform to then also have access on the direct front and complement on that front. So we thought that we could actually have like above average sourcing.

Earnest Sweat 10:14
When you’re starting from scratch, what were some of the learnings? Like I would love to know what was your process in starting from scratch, and then looking back now with some time in between, what have you done differently?

Michael Wooten 10:32
Yeah, I mean it’s always you always love what you would have done differently. So I will caveat. You know, I joined that family office in midway through 2020, so it was also a crazy time where nothing was normal, and it was hard for me coming into that that that industry really, and you know moving out Silicon Valley and everything, understanding like what is normal, what’s not normal, because like nothing felt normal. But I think that the first process was to talk to people who had been doing it for a long time, and so it was. You know, first of all, where do we have access? It was kind of easy. Like at that point, you’re pretty clear on who tier one, tier one and a half, what what not are. So the first step was kind of, hey, can we get into these funds? Where are they in their investment cycle? And start building out that relationship and start having conversations, and then from there it was okay. We need to talk to as many people as we can, and just build out that you know that muscle and exercise that. As far as learning goes, I wish we had talked to more people without writing checks. But it was the era of you know there was a lot of FOMO, and it was one of those things where it’s if you’ve only seen one deal, that’s the best deal you’ve seen. So trying to get up to speed and see more deals and see what’s normal on that front. And then for me personally, I have more of a background or had a more of a background in public equities and traditional LBO like private equity, and in those markets, you know your forecasts and expectations on financials and things like that were your your error margin of error was a lot smaller versus seeing a company at a Series A or Series B. You’re like, oh yeah, like I love this plan. This is great. And then like fast forward 12 months, you’re like, you’re 70% off plan. I don’t understand. So that was a big learning of hey, you kind of have to know show me, don’t tell me. And I think that I think a lot of people coming into the industry that that’s a big big change, big difference. It’s also you know some people think that this little fraudulence or whatever that that you know there’s there’s a lot of stretching of truth, you know, when you talk to founders. So trying to parse out the ones that can actually execute on some of those high expectations is definitely a learned skill.

Alexa Binns 12:52
I get this since a lot of the allocators listening are going through the same path that they too have a similar background to you, and are the guy or gal in the office saying we should be doing more with emerging managers and ventures, etc. Is there any advice for that transition? You know maybe this is not the asset class for everybody, you know like if you were going to sort of like help people make that transition, what do you think helps make that successful from a career standpoint or even like a personality standpoint? Moving into our asset class.

Michael Wooten 13:40
Yeah, I think I think what I love most about the venture asset class is there’s actually no one type of person that that is successful in there, and so it’s a it’s versus you know if you look at traditional private equity, it’s okay you go do your banking and you go down that path and maybe you get your MBA and like this is this is the way, and for venture, that’s not the case. Like you can have people that have Ivy League educations. You can have people that dropped out of high school. Like there is, it’s completely free for all. Like you have PhDs, and it’s very industry kind of dependent. Like you know, if you’re doing biotech or if you’re doing something like that, and that’s like you want that domain expertise for sure. But I think the biggest thing it comes down to is continuous curiosity, and then tenacity, and that’s honestly it’s it’s you know that’s going to make you a good investor is because you’re going to go ask the questions and you want to learn and you kind of want to get on a call with people and you’re you’re not just checking a box you’re actually curious about them, you’re curious about what they know and why they think the way they think, and if you do that and you’re tenacious and you’re okay getting rejections, then you’ll be good at the asset class, and and I you know there’s a lot of similarities to that and actual entrepreneurs. I’d say entrepreneurs maybe have more stubbornness and or other quirks, but. But curiosity, like you, has to have that. There’s no question.

Earnest Sweat 15:05
Yeah, you in our pre-call, you mentioned that HFO and Signal Fire were two of the most differentiated managers you backed in the past. I’m curious at the time what set them apart from the hundreds of other pitches that you came across.

Michael Wooten 15:22
Yeah, that is something that they had to offer the founders. That was more than just hey, here’s some money, here’s my network, and I have some experience, so I might be able to give you some advice. And while I think that those things are potentially valuable, especially if you’ve had somebody with a lot of experience who’s you know sat in your seat, that could be valuable. It could also be dangerous because you know things rhyme. They aren’t always the same, and you can be jaded by an experience that you had and say, oh well, I tried this and it didn’t work, therefore it’s never going to work for you. What I liked about let’s start with Signal Fire. What I really liked about them is they had something that they seemed to be early in the whole, early at least within the venture realm. Of all right, data is king. We’re going to build proprietary data internally, and then we’re going to use it for a sourcing advantage. And then what happened was they actually were able to take what they were using internally and help them source, and they turned it around and they were able to give that product to their founders, and then that became a way of winning. So it wasn’t just a way of sourcing the who was the right founder, but then it was a way of adding value to the founders that led them getting super pro rata and getting more ownership in companies than they legally had right rights to, and so when I was when they were able to actually go through their track record and show us, okay, this is where we’ve won and this is why, and even though we’ve had like tier ones that were on the cap table, we actually beat them out because we were adding more value to the founders, and in this game, it’s it’s it all comes back to you know the the things that move the needle, and it’s sourcing.

Earnest Sweat 17:35
One thing that I’ve been thinking about myself and talking with other fund managers is this idea of differentiation, and it’s focused a lot on telling. And I think for some people they’re really good at just telling, telling, and they’ll be 10x telling even more. And others they’re kind of a little hesitant with it, but still know that they need to continue to tell people. But there’s also this idea of how you effectively show it as well, especially if it’s not so distinct as other people and not so early, but it is still differentiated and real. So do you have any thoughts on that? Examples?

Michael Wooten 18:19
Yeah. No. I think that you know this business, whether you’re an actual VC or if you’re an entrepreneur, like salesmanship is everything. Like there, there’s a lot of there’s a lot of storytelling, and storytelling can be very powerful. At the end of the day, you have to actually back it up with execution. So that’s always going to be the case. I think that the earlier you go, and if you’re an emerging manager with whom you know no track record or a thin track record, like you got to be able to tell that story. And so that’s and the differentiation that you have, you have to be able to really talk to it with concrete examples, and you can’t hesitate. And now the flip side of that is, depending on which investors you’re talking to, you also have to talk to LPs that want that particular flavor of differentiation, because you know, as I like to joke, sometimes like people want you to be differentiated, but they want you to be on the edge of the box. They still want you to be in the box or touch in the box, but you can’t be out in left field. So it’s like you have to be able to. We have to underwrite what you are. If you’re too differentiated, then that’s probably going to be tough for the investment committee. So I think that’s that’s somehow I tell a lot of entrepreneurs this especially at the early stages like if you’re a pre seed stage company you don’t really have an MVP. You definitely don’t have product market fit. You really got to sell the sizzle, not the stake. Like by the time you’re hitting, you know that growth phase, you actually have the stake. You can sell like you’ve got a better stake than everybody else. And I think it’s the same with emerging managers too.

Alexa Binns 20:17
show us some stake in this in this slide deck. Interesting. Another topic that I really appreciated your take on was this shifting dynamic in power between the VC and the founder, specifically with capital efficiency around AWS and modern infrastructure. Could we move to that topic?

Michael Wooten 20:38
Absolutely, and that actually ties in a little bit to I think what HF zero and some of these other you know whether it’s Neo or some of these other you know I’d say former accelerators now call themselves residency programs but but the idea is like if a business is more capital efficient by definition it just needs less capital in order to be successful, and if you are a VC where you’re primarily just providing capital, like that’s not going to be enough because that’s a commodity. And so I think that as that dynamic shifts, it’s not going to be enough. Like if you want to get that same ownership percentage that you had before, which is also you know you maybe don’t need that as much if it’s you know, if you think that future dilution is not going to be as high, so that’s a different, but that’s a different conversation. So I think that you’re going to have to do more to give to your founders to win, and I think you know, Andreessen Horowitz was early on this. I think that was when they came into the industry. That’s what they kind of saw as lacking, and based on their own experiences as entrepreneurs, and I think that that’s a huge shift, especially as we’ve moved from you know heavy hardware phase of early Silicon Valley to then software to then cloud computing and having all these tools and things like Y Combinator. The cost of capital has just changed, and therefore you have to be more full service, and or you have to, you know, everybody wants three things as a founder from your investors. You want introductions to customers, you want capital, and you want help recruiting because those are the three things you need to win and to continue to grow, and so a lot of the firms are now having to figure out: Hey, are we doing this with? Are we hiring people specifically for recruiting, or are we doing the recruiting ourselves? You know, like the benchmark model. But you’ve got to figure out and solve for that, or you’ve got to figure out where you play in the ecosystem and what your specific value add is, and then be really friendly with the firms that do all those other things.

Earnest Sweat 22:44
Now we’re going to take a quick break to speak with our sponsor.

Alexa Binns 22:48
You have a very active secondary and tender offer practice. That’s what Mike is known for. I’d love to talk more about what you’re seeing on the secondary side, specifically for these growth stages of hot portfolio companies.

Speaker 1 23:03
Yeah, yeah. Yeah. It’s an exciting place to be. You know, every year there’s a question asked of me by somebody in the media of, “Hey, are you seeing a slowdown in the secondary market? And the answer is no. If anything keeps going, you know, going faster and faster and faster. I would say that the somewhat new development, if there is one, is that companies are starting to see the secondary, especially for these growth stages, kind of late stage companies, as really part of their IPO journey. So it used to be viewed as its own transaction. Maybe you would do this because it took so long to have an exit. So you want to release some of that pressure to give employees liquidity and keep going, but now it is frankly quite unusual for an IPO candidate company to not have a tender offer as part of its kind of journey towards being either a public company or actually having an exit as well. It helps bring in the right investors on board. It helps test the market in general in terms of what people are willing to offer. It also helps to test out the overall kind of build up of pressure among insiders on how much liquidity they want and how much longer they want to stay. Some of the tender offers that I work on end up actually being under subscribed on the sell side

Alexa Binns 24:19
because a lot of

Speaker 1 24:19
folks are saying, “Hey, we want to wait. We want that IPO. I want that big exit. But the big development is is the the thinking behind it, which is even what you know used to be that companies would do this because they felt like they had, you know, kind of pressure, and now they are doing it because they really feel like this is this is really more of the necessary step rather than anyone’s pressuring them to do that, and it’s exciting to me. It’s exciting to have those conversations, you know, in the boardroom. It’s also exciting to have those conversations with investors who are now coming in and saying, “Hey, you know, I don’t have to come up with some sophisticated forward purchase cost.” Contract. Then I have to, you know, be a part of. If I want to be part of this company, there’s going to be probably a secondary. That’s the way to get into this company pre-IPO or you know a couple years before that, and that’s what I’m going to focus on. And so you know now the key is you know how do you get in? How do you negotiate the terms and so on?

Alexa Binns 25:17
Yeah, no, it’s fascinating that it doesn’t have the same stigma. In fact, this idea that there’s so much uninvested capital in the private markets that why not raise from some of that growth capital as opposed to rushing into your IPO? Interesting.

Speaker 2 25:39
Yeah.

Alexa Binns 25:40
Are they on the buy side for secondaries? Are there any changes you’ve seen of late who are participating? Is it more retail investors through you know structured vehicles?

Speaker 1 25:53
Yeah. So I would say you know I’m seeing two kinds of main developments. First is that the strategic investors and their affiliated funds are now participating in this very actively to a point where they are leading some of these. And what I mean by that is, you know, a lot of times you’ve got funds that are affiliated with, you know, a strategic party that actually wants to be in this company, yes, as an investment, but also to you know to be closer to someone who may be providing some commercial benefits to them, you know, development agreement and so on, GPUs, whatever you can think of, and and so that’s an interesting development because it used to be that those players were very hesitant to participate in secondaries and tender offers, and the other one, of course, is is this proliferation of secondary only funds. You know, some of them are on the you know kind of the the borders of what we feel comfortable with, and what I mean by that is sometimes you know you log in online and it says buy your you know insert private company shares today pre-IPO. Well, you know that feels a little bit like advertising of private company stock. We don’t feel comfortable with that. You know sometimes we do have conversations with them about what they can and cannot do, but many are very much operating similar to VC funds. It’s just that they are focused primarily on these growth late stage companies. By the way, I should say these days also secondaries are happening at every stage, including seed rounds, and it’s not unusual at all for a seed round to have a secondary component. But you know the focus so far primarily has been for these secondary only to be late stage kind of pre API, pre exit companies, and that’s their focus. So the exciting part, obviously, is negotiating that getting in. They are asking for their own terms. I think that’s important. But at the same time, what they’re buying is shares from either you know early investors or employees. So the concept of a negotiated liquidation preference or award seat is usually not there. Those two are fairly new developments. They do require sophisticated counsel to navigate, and I’m not just saying because I’m sophisticated counsel. There are ways to do this right, and there are ways to, you know, frankly, get in trouble. And we’re also seeing that where you have issuers, you know, who who call us and ask us to make a very carefully placed phone call to investors who they think are crossing the line of what they feel comfortable with when it comes to, you know, soliciting buyers for these shares of private company stock.

Alexa Binns 28:44
Yeah, no, a lot of the folks listening are allocating into venture, and I’m sure spending a lot of time looking at these secondaries. So it’s helpful to know who you can go to to ask for advice on where you can get into trouble.

Speaker 1 29:01
Yeah, I’ll tell you one other thing, which is you know the the thing to keep in mind for GPS on these transactions sometimes is that there is a delta in valuation, not always, but sometimes between if you have a joint kind of primary and secondary round, and oftentimes folks don’t appreciate the fact that you’re getting kind of a blended valuation, and the company you’re also getting a blend of shares. But that’s frankly a little less relevant because ultimately, if you’re having a successful exit, you know you’re expecting to take kind of a convert basis return, anyways. But the valuation and what your entitlement is, especially if you are, let’s say, in a second in a fund of funds, or are investing through some sort of an aggregator to try to figure out what the value of your holdings is. Sometimes it gets more complicated than you think because you got some shares that were bought in a primary, some shares that were bought in a secondary that was coordinated by a company, and some shares bought in an arms-length secondary. From some you know investors that just approached the fund directly.

Alexa Binns 30:03
Yeah, it does feel like you end up being quite far, quite far from the key decision makers either way. And now back to our LP interview. Buy the story, or is there a distinction you see between those cases where people will in fact need less capital, and you know we’re also seeing sort of the extreme other side of that, which is like mega rounds and the like there’s definitely not an anti dilution story there. You know, is there a distinction between this? Like, how can both these stories be true?

Michael Wooten 30:42
Yeah, so I think that the capital intensities of those large companies are very different because they’re not pure software companies.

Alexa Binns 30:51
Yeah.

Michael Wooten 30:51
So that ‘s that, you know, and I would also say that that’s not a venture at this point. You know, maybe you know Anthropic at a billion dollars. That’s still a venture because there’s largely you know, unproven whatnot. You know, Anthropic at a trillion dollars is, you know, they’re one of the largest companies in the world. So it’s a different game that’s a completely different game. You know, I was talking to a guy earlier this week that is the head of venture at a large global asset manager, and when I was talking to him, he was like, “Oh, we don’t. There are only about 100 companies in the world that we can invest in that fit our mandate and our size. What I was like, oh, so you’re actually not head of venture, you’re head of growth private equity. Like that is, so yeah, and so I do think that they’re different. They’re two different markets really in my head, and we even like when I was at the family office, one of the first things I did was separate out and create two different asset classes within our tracking system, and really had growth equity as its own asset class that was separate from LBO because it’s a different risk factor you’re underwriting, but then it’s very much separate from the early stage venture. So, because you’re you’re what you’re doing there is like you’re underwriting what is the risk that you’re that you’re underwriting and the return expectations. I think that if you’re you, you have to look at capital dilution industry by industry too, because I think if you look at biotech or anything that you have to go through FDA, it’s just going to be a very different dilution framework. And you know, everybody lately, the big thing everybody’s been talking about is these tranched rounds, and it’s one of those things.

Earnest Sweat 32:46
what else do you think needs to change within from an allocator perspective that you aren’t seeing today? You mentioned that of like being able to split it out, but are there other things you think or other trends you’re seeing that would help with as the asset class matures and gets more complex, yeah, I mean,

Michael Wooten 33:46
it always kind of goes back to what is your goal with the asset class, and what is your what does this fit? You know, as an LP, especially an institutional investor, there’s always the underlying like what is my portfolio supposed to look like, and what is supposed to be providing, and what is this venture sleeve? What is that? What does this fit within the portfolio? And then from there, I think that you have two different dynamics that are difficult and make the LP job very difficult. One is the long term nature of I don’t really know my winners for you know seven plus years, you know, and that’s where the allure of the growth equity is. You kind of hey, we’ve already seen that these are the winners. We know that they’re the winners from a company standpoint, but then where you get there, it’s all about valuation, and so that’s the potential hiccup there. And the other aspect is this asset class is incredibly cyclical, and I think that that to me was the biggest learning curve. As you know, my whole career has been around portfolio management and trying to think about diversification, the benefits of diversification, and you know historically I think about it from a risk. Standpoint of like how am I diversifying my risks and and the diversification of of the returns, but there’s also this diversification of liquidity, that is a component that is different in especially in venture where sometimes you can’t artificially create your own liquidity like you can in private equity you know LBO and definitely in the stock market or bonds and liquid type stuff.

Are there types of funds and strategies you wish you saw more of today, or that you anticipate should be, you know, maybe they’re a little contrarian today, but they’ll be, they’ll look very smart in the next 10 years.

Michael Wooten 38:31
I’d say yes, but what I am okay here’s here’s my hot take for today. There’s been a lot of talk lately about you have to be a thesis-driven VC, and you have to have a sector focus, or you have to have something like a boilerplate thesis. And I think that that is like really like I think it could work, but I think it works better at the growth stage. Honestly, I think that at the early stages, that doesn’t make sense to me at all. I think your thesis should be to find great founders who are trying to tackle hard problems, and I think that specific investments should have a thesis. So if you go invest in company A, the reason you invest in company A should have a thesis. But as a fund to have an overall arching thesis, I get it, and I understand why we got here. It’s because once again it’s LPs wanting to put people in a box or put funds in a box, and then the problem though is everybody then goes and you’re reverse engineering. You’re like I’m going to be differentiated because I’m only going to invest in fintech between you know X and Z, and then when everybody does that and reverse engineers it, you’ve crowded out that market and now you’re no longer differentiated because everybody else is doing that.
I always like asking LPs, what are some of your favorite questions or tactics with diligence seeing a fund manager?

Michael Wooten 44:52
Yeah, I really like understanding, you know, how they are as people because I think that that is what they always like. Everybody is going to be your best friend when they’re trying to, you know, sell you on something. And so it’s like if you’re if you’re if you have money and you’re trying to give somebody potentially give somebody money, they are going to love you no matter what. So I do like them. You can’t always do this, but if you can go to a restaurant with somebody, see how they treat the waitstaff, get in a car, see how they drive, see how they you know because a lot of a lot of personality comes out when you’re driving on the highway. You can really get to know some people, myself included. The

Michael Wooten 45:31
Yeah. Well, I mean, so I used to do this when I was at one of my former jobs when we would hire people, and I think hiring a fund manager is probably similar to hiring anybody, but I would tell them at the beginning of the interview. I would say, “Hey, I want you to teach me something. We’re not going to do it right now, but we’re going to come back to this in 30 minutes or whatever at the end of the interview. And then part of that is, I’m going to say it doesn’t have to be about investing. In fact, it’s probably better if it’s not about investing. Like, but I want you to teach me something. And then part of that is okay. Now I’ve I’ve got them like oh man I’ve got to think of something before this interview is over, and so I’m gonna see like can they multitask and keep the conversation going while in the back like they’re thinking about something else, and then part of that is I really don’t care what they teach me. It’s about communication, and it’s like can they break down a concept and can they really do they get flustered by it and it’s an unexpected question that they probably haven’t gotten before versus if I talk to you as like what is your you know portfolio strategy or what is your liquidation plan like all that kind of stuff like they had that memorized so you have to throw them a little bit of a curveball so they’re thinking on their feet and then that’s how it’s like okay this interview didn’t go as I expected, how do you recover from that? So that’s you know not investment related, but it’s once again this whole industry, everything is it’s all people related, and it’s it’s you know one of my favorite books is Business Adventures, and you go you know that book is so old, and it’s still so relevant from all the stories in it, because it’s all people driven.

Earnest Sweat 47:03
Love that. Are there any kind of pet peeves that you’ve had with fund managers that repeatedly showed up that you just don’t understand why?

Michael Wooten 47:20
Yeah, I mean, look, I think life is short, and so I think that dealing with people who are, you know, a hole is just not, it’s not worth it. And it’s no, there’s some tolerance, and it’s one of those things where it’s like, okay, if you’re putting up numbers and you’re doing great, then maybe there’s a little more tolerance for that, and but at the end of the day, it’s like there are a lot of managers, there are a lot of people you can work with, and I think you know for me, it’s all about communication. Like even if you get back to me and you say, “Hey, I’m I’m slammed right now, like let’s dive in this another time, just like a quick response, but no response or or non response, especially when you know we’ve invested in you and we’ve given you our money, even if for a small portion of the fun. It’s a you know I think that treating you knows all of your customers the same, regardless of how they are. I think that’s really important to me, and you know I saw firsthand at one of my former employers, you know, at one point they had an investor who was waiting on the phone, and I said, “Hey, like you know, I can step out. We, you know, you can take that call right now. And the partner said, “Nah, he’s a small investor. He’s kind of annoying. And I’m like, “Oh my gosh, no! But he’s your investor. Like you should take this call. And I think that’s like the mentality. Like if that’s a good way to run a business, regardless of what kind of business you’re running. So I think that that’s how you should treat other people.

Alexa Binns 48:48
And that hat you’re wearing these days, you’re running some SPVs under the Snowball Adventures title. I love it. You’ve been picking deals on behalf of this family office for many years, you also are coming at it from the allocator perspective, where you’re sort of reviewing these SPVs. Do you have any advice on if you’re packaging SPVs on behalf of other folks? You know how you do that so that it’s more allocator friendly, so that family offices can participate. What? How does an allocator present SPVs to his homies?

Michael Wooten 49:29
Yeah, I think communication is everything, and b is like you should never sell something that you’re not putting your own money in. I think that like some people have told me, you should go into sales, and I’m like I could only work as a sales job of a product that I really truly believe in. Like I can’t sell a lemon. Like I’m sorry, it’s just not my personality. I’m you know Boy Scout, like honest to a fault. So if I’m really excited about a deal and I want to invest, then it’s easy for me to go and say, hey, like let me go to my network and say. I think this is great. I’m putting my money in it. Would you like to join? And I think that that’s the authenticity. I think I think that what you get where you get in trouble with SPVs is thinking about it purely as a call option, where and and you’re over running and you’re saying like I don’t really care if this works out or not because like heads I win, tails you lose, and that is absolutely how you you know like lose complete trust in this industry. So I think that that is, and we saw a lot of bad behaviors, more so probably in space and whatnot back in 2021. And I do worry about some of the SPVs now, and especially when you start thinking about charging fees and everything on that front. I think alignment is always good, and I think getting paid on the back end and not getting paid on the front end is ideal. So I think that that’s you know yeah you did work, and so maybe you need to take a little bit of a management fee or something like that. But it’s a you know that’s the trade off versus raising a fund. Raising a fund’s a lot harder, I think, but then you get you know a little bit more comfortable from that management fee, so yeah, I yeah look honesty, transparency, and you never sell something that you’re not buying yourself.

Earnest Sweat 51:13
That’s true. Well, Michael, we love speaking with you. Thank you so much for sharing your journey, and and thanks for being on Swimming with Allocators.

Michael Wooten 51:24
Absolutely, this has been a lot of fun.