Welcome back to the Rate of Change with York Wealth Management. As advice as to some of
the wealthiest families in the country, the Rate of Change is a podcast designed to help
you in the pursuit of building long-term wealth through the insights of some of the brightest
minds in asset management. I'm your host Murdoch Gaddi and in today's broadcast we're
speaking with Jason Edwards, CEO of January Capital about venture debt and the unique
database Alternatives.pe, which is used by roughly 80% of Southeast Asia's VC firms like
Sequoia, Tiger Global and more. If you're familiar with private lending like many Australians
are, and you often wondered how to both generate income from say lending to 10 to 15 million
dollar high growth B2B SaaS companies and also participate in the potential upside,
then I think you're really going to enjoy Jason breaking down venture debt and their
funds strategy. Quite literally have your cake and eat it too. If you're not familiar
with venture debt, well it's a form of lending to startups, senior secured debt, earning
income day one backed by institutional investors with the unique ability to participate in
the company's growth success via warrants. January Capital has a capital call structure
for Australian investors. The feeder fund has a two-year lockup with redemptions quarterly
after this period ends. Regarding returns, the fund will be paying 12% current yield.
Then when the warrants kick in, they expect that investors will be getting closer to something
like 17 to 19% total return per annum net of fees. You're probably wondering maybe what's
a warrant? What's venture debt? Why Singapore? And how does it all work? Well, best join
us and let Jason add color to this canvas. Before we get into the conversation, please
remember this podcast is made for entertainment purposes only and not to be construed as any
form of advice. I encourage you to listen to the disclaimer at the end of the broadcast
and to keep your feedback coming. You can reach me at mgatty at ywm.com.au. So with
that being said, I hope you enjoy this conversation as much as I did. So sit back, relax and enjoy
it.
Jason Edwards, January Capital. Welcome to the Rate of Change with York Wealth Management.
It's great to be here. Thank you very much.
Jason, one, we start off as always and tell everyone a little bit about yourself. And
why I'm very interested in this, I was doing a bit of a good old fashioned stalk book on
you know, who you are and you're a lawyer. How is a lawyer ended up in the investment
world?
Lucky, I guess, like a lot of lawyers glad to get out of it. It's a bit of a grind. So
I started working in Australia, Clayton Utes for about six and a half years and like a
lot of Australians at that time, really wanted to see a bit of the world. And so convinced
some of my best friends to sort of get on a plane and you know, go off and work in London.
And so they all quit their jobs, got got great jobs overseas. And just before we were about
to leave, I got approached by a recruitment company who said, bakers in Hong Kong, which
was the largest law firm in Asia at the time, want you to come up and interview and I said,
I've never applied for the job. And they said, Oh, yeah, but we sent you CV. And I was it
was a bit strange. So I said, Look, they convinced me to take this trip. You know, I've never
been there and all expenses paid. So I went. And so in the end, I ended up changing my
mind and going to Hong Kong and all my friends are like, but you told us we're going to London,
we're all going because of you. So they all went had a good time. But I ended up in Asia.
And I thought I'd be away for two years. And that was about 24 years ago. And I guess no
one goes overseas with the sort of view that I'm going forever. And I still think I'm coming
back in a couple of years. But you probably talk to me in a few years. And I'll say the
same thing. You get sort of involved. So I spent a few years in Hong Kong, and it was
really exciting. And then the Asian financial crisis came. And so it was incredibly busy
as a lender up until that point. So we would also finance lawyer, we were doing a lot of
work. And it just stopped. Everything stopped. And so we had about 800 people in the Hong
Kong office, it was big. And they fired 40 lawyers in one day. It was just so the guy
on the left to me, the guy on the right to me, and they could speak Mandarin and Cantonese
being with the firm five years packing up. And then the three three of the head partners
come into my office. I'd only been there, you know, nine months. Like, okay, and they
said, you know, that the Thai office of bakers, which is the biggest law firm in Thailand
really needs some foreign help because they don't have any foreigners. And they all borrowed
US dollars. And practically every public company is insolvent. And they have never had an insolvency
of a public company. And they've just got no laws to deal with it. And they said, Would
you like to go and help them for a year? And as I watch all these people packing, I try
to negotiate. Yeah, I can go but I, you know, I have to be able to come back and I have
to be paid in Hong Kong. In the end, they said, Look, that's all fine. We'll send you
off. So I went down there and for a year and I stayed for seven. And Thailand is an interesting
place. And when you work there, there's a lot of good things about it. It's frustrating
because they have a very different view of life, very laid back the tides. So working
in a law firm trying to get things done for Western clients was challenging, but the lifestyle
was amazing. And so from there, one of my clients had set up a special sits fund in
Singapore. And when they got to half a billion AUM, they asked me to join them. And I thought
that was if I didn't move, I thought I'd be in Thailand forever wouldn't be the worst
thing in the world. It's not a bad place, but it wasn't sort of the intention. So I
moved to Singapore in 2005. And spent eight years with that fund Clearwater Capital. It
was a multi we built it up to about two and a half billion dollars. And it was special
sits lending to companies across Asia or buying distress debt and trying to get the money
back. And so that's pretty interesting when you're trying to get the money back from borrowers
in places like Thailand, China, India, Indonesia, where the rule of law is, let's just say quite
different. And where the the court systems are, let's just say much less predictable
and far slower. So we learned a lot, you know, what works, what doesn't work. But after that,
I set up a VC fund called Qualgrown with two partners doing sort of B2B investments across
Southeast Asia and Australia. And that did really well. And I they were doing later stage,
I wanted to do seed stage, because I thought that was the most exciting stuff. Best risk
return. And I wanted to be very data driven. I was building a data business. My other two
partners didn't want to do that. So that's when I joined up with the team in January
capital about four and a half years ago. And we launched another fund here in Singapore.
So what we do is seed stage investing in B2B businesses in Southeast Asia and Australia,
very data driven, we use data defined, basically, when startups are incorporated, and then filtered
by the quality of the founders. And more recently, what we've started to do is venture debt for
growth stage technology companies in Southeast Asia, in Australia. And that's where we are
today.
I love the journey. Never a straight line. I have these conversations regularly now. It's
never a straight line. And one of the ones I find fascinating is, you know, if you didn't
go through that crazy path, you wouldn't be where you are today. Absolutely. So where exactly
are you are today? What is and who is January capital?
Yeah, so I'm in Singapore now been here for a long time since 2005. So January capital
is a venture capital fund. And we believe we're the most data driven fund in Southeast
Asia. So we've got a team of five data scientists, software engineers, and our affiliated company,
which is called alternatives.pe is now subscribed to as in thousands of dollars a year in subscription
fees by 80% of the VCs in Southeast Asia, Sequoia, Tiger Global, you name it, they pay
to get our data. Because we built this unique database that pulls the regulatory filings
across Southeast Asia, Australia, for every startup every day, to show every company and
to show every valuation. And in Southeast Asia, we can show all the financials. So it's
doing something people didn't think was possible. And again, if I wasn't a lawyer before, I
wouldn't have realized that was possible. So we knew what was possible. It was just
whether or not it was practical, but it turns out it was.
Right. Okay. The one thing I found fascinating when I met you guys is you the fund operates
in a lending space, but it also has the benefit to, you know, participate in the upside, you
know, if the company does well, do you mind shining a bit of light and then explaining
exactly how that works?
Yeah, sure. It's an asset class in the US that's quite established. It's called venture
debt. We like to call it a growth stage credit. But venture debt is the asset class that it's
known by in Europe and the US and it's about $35 billion a year over there. So it's a form
of lending to startups that are backed by institutional investors, where you get interest,
which is high, high rates of interest fees, and you get warrants to participate in the
upside. So the idea is you come in and you're senior security fix the floating charge. So
you're top of the cap table. If there's ever a problem, you get paid before anyone else.
You're getting money from day one interest and usually amortize in your loan over two
to three years. And then you've got these warrants that are set at a price, usually
at the price of the company or the valuation when you invest or make the loan. So you hold
onto those warrants for six or seven years. So that when the company goes to an exit point
of view, you can convert the warrants back at the valuation seven years ago on a cashless
conversion and then you can participate in the exit and get the equity upside. So we
predict it will give about a third of the return through the warrants and two thirds
through the interest and fees.
So for people that aren't familiar with warrants, there's probably a lot of people on here that
are acutely aware of how they operate. But for people that are not really familiar with
the warrants, what is a warrant?
Yeah, so a warrant, it's the same concept in a public company. It's where you have a
right with that warrant to convert it into shares on agreed terms. So you could have
warrants that are issued as penny warrants where you can convert them into shares without
paying anything. You can have warrants that convert at an agreed price. So it's a way
to get people to invest in different structures and also to incentivize people. For example,
lenders, you can say, well, I'm not going to pay 25% interest, but I'll pay you 15%
and I'll give you warrants at the valuation of the company today. And then if the company
goes 5X in value, you can convert the warrants and offset your strike price and get a 4X
return on that warrant piece. So that's how it works.
So this is very interesting. I really would like to dig into this because Australia has
seen ever since COVID this boom and interest rates being so low of the private lending
market.
Mainly in the private lending market.
Yeah, you can't walk down the street with someone offering you a private lending deal.
It's paying you really, really good money.
But what I find you do quite interesting is this ability to have the equity upside. But
you mentioned there's not many players in Australia. How many firms are you familiar
with in Australia that actually offer this? And then secondly, how you have a fund that
does it? Do you want to give a bit of color around the fund that offers this, the mechanics
of it, how it all works, the types of companies? Because the other thing you were explaining
is the large caps or larger caps. It's not necessarily in the tiny end of town as well.
That'd be great.
Yeah, that's right. So in Australia, you've got a few more players in sort of a larger
space, Partners for Growth, One Ventures, a couple of family offices. You've got banks
like HSBC bought out part of Silicon Valley Bank and they want to do big deals, 50 million
plus, which is very few and far between. And then Southeast Asia, you've got a few players,
but they're all doing the small stuff, two to three million dollar checks. And so where
we saw the opportunities, there's no one doing the sort of 10 to 15 million dollar checks.
And that's where the best risk return is and you've got no competition. So we wanted to
get the best team. So we took the most experienced team that was existing in Southeast Asia like
a spin out. It was a joint venture between Tomasac, the sovereign wealth fund in Singapore
and UAB Bank called Innovent. So the CEO, the first employee, CEO for seven years joined
us and we're hoping to get a few more of the top analysts join us as well. And with that,
having the best team to execute. So yeah, we're looking to do late stage companies.
If you're lending to an early stage company, of course, people say, well, look, aren't
you taking high risk, really equity risks? Series A company, failure rates are pretty
high. We can give you the stats on that in Southeast Asia at least and Australia now.
It's a 30% sort of fail before they get to the next round. So you have a risk of not
getting your money back. But once you get to series C, that risk drops to less than
2%. That the risk of them not raising another round. And if they raise another round, you'll
get your loan fully repaid with a minimum mid-teens return. Series D, it drops to less
than 1%. There might be down rounds, but it doesn't matter. If they raise money, equity
always comes last and there's a lender you're going to get paid. So that's why we're focusing
on the very low risk, sort of series C and beyond. And if you do have the unfortunate
circumstance where you pick a company that you lend to in that sort of 1% that does struggle
to raise another round, they're amortizing the loan. So by the time that happens, you've
probably got half your money back. And then that company, let's say it was worth half
a billion dollars when you made your loan, you only need to sell that business for 1%
of the original value to get your money back. Now, series A companies will go to zero pretty
quickly. A half a billion dollar company has got IP, recurring revenue, or some infrastructure
that someone says for 1% or 2% of that value, that's good for me and I'll pay it. So that's
why we think the risk of any capital loss is extremely low.
Yeah, that's quite interesting how that works. And how does that, like if someone's looking
to allocate money in your family office or an institution, how does the mechanics of
the fund work and what sort of return should you be respecting for that money?
Yeah, so it's a fund structure. So we take a 2% management fee for the investment period
three years, and that trickles down to 1.25% after the investment period. And then we get
20% of the upside only after the investors have an 8% net return. So we align the interest.
The investors have got to make at least 8% net before we get our performance fee. We
are lending out now in the discussions with these companies, interest rates are sort of
starting 13%, 14%. But you add fees on that, like the banks do and everyone else, fees
at the front end, fees at the back end. The reason people do that, of course, is just
to push up your IRR. And that gets you to around a bid teams IRR, 15%, 16% from your
interest and your fees. From that, we're going to pay a 12% current yield because most of
our investors are in Australia. And they say, what's important to us is we want to get a
current return. So we're going to pay a 12% current yield. And then when the warrants
kick in, we expect that we get closer to something like 17% to 19% net return. So you're getting
12% current yield. And by the time you get all the money back, you're getting something
like 12% to 17% net, net of fees. And the time for a credit fund is generally smaller.
If you go into an early stage equity fund, you're locking your money up for 10 to 14
years. And that's a significant time period before you're getting any cash. But the credit
fund paying a yield, and then after the investment period of three years, all of the loan repayments
we get after that point in time will return to the investors. So they get all the money
back in the fourth year. So it's relatively short duration.
So three year lock up for the money. Yeah, how much money is in the fund?
So first close 60 million US and then we're going to do a few more closes over the course
of this year, bring it up to 120 million US. So we recycle the principal. So that'll give
us enough capital to do about 15 to 20 deals. Between five and 15 million is where most
of the deals will be done. That was US dollars.
Yeah, I was just about to say, so US dollars, 160 mil you kind of need and the money's being
lent out in US dollars as well? Yeah, well, it is. So we just did our second
deal from an SPV because the fund just got set up recently. So we did an SPV deal a couple
of months ago. That was to Australian companies. So we did Australian dollars. We're actually
looking to do an Australian sleeve now with one of the existing players in Australia,
very well known, who's been doing venture debt for most of their career, but they want
to part with someone to do a little bit bigger. So that will be Australian dollars only because
for Australian investors, the majority of family office high net wealth would prefer
to have Australian denominated investments. If they're a very big family office or a global
investor, of course, US dollars is going to be fine. But we're going to do a specific
Australian dollar only later in the year. There's a lot of lenders running around or
a lot of venture capital running around that operate in a capital call structure, which
has its pros and cons. Is there a capital call in this or money just goes into the tin
and then it sits there until it gets used? Or how does that work?
We do have a capital call. And we need that to be capital efficient because if we pull
in the tin on one day, we won't deploy it. We'll deploy it over a two year period on
average. So you don't want it sitting there on a fixed deposit dragging down the fund
IRR. So we try to be very respectful of drawdowns. People don't want to get them every couple
of months. So about two to three a year is what we would do over a two year period. And
for the Australian investors, we've got an Australian feeder. So we actually have a redemption.
I mean, it's another thing the Australian investors said we really want. We want to
be able to get our money out. We'll probably never use it. We want to know if we if we
have to we can pull it out. So for Australian investors only, we have an Australian feeder
where we have a mechanism that, you know, within a three month period, they can say
after the first two years, they can say I want to get my money out now and they can
get their money out. Okay, so there's an Australian feeder that
currently exists that if you stick it after two years, you got the capacity to get out
on a quarterly basis. Yes.
Well, you can't blame them. The markets have been volatile. But we also but also look a
lot of Australian high net wealth families understand that, you know, if you, you know,
head to the lifeboats, as soon as something happens, and you're going to be in there for
three months, it might not be exactly the right fit. And maybe you shouldn't have gotten
that boat to begin with. So this is kind of very important. And I think what we really
should dig into here is what exactly are these businesses that you're lending in and then
they have the ability to have the warrants. Are there any, they are B2B. So there's probably
a number of names that people are familiar with. Are there any names that potentially,
you know, Australians may be familiar with? Yeah, we just did in Australia a few months
ago was a company called Fluent Commerce. And what that is, again, in our businesses,
a lot of them are B2B. And so they're not consumer facing. So it's not sort of the most
well known like, like an Uber, for example. But Fluent Commerce is one of the leading
software enables, what it does, it works with retail businesses that have more than 100
outlets. So it works with people like Adidas, Louis Vuitton, providing the software to manage
inventory across stores, click and collect, people buying online, everything so you can
actually have the ability to do that at scale. And there's only a couple of other very large
players that do this well. And they're really legacy built, you know, built before the cloud.
So we think it's a really exciting company, growing very fast. And, you know, a typical
Australian SaaS business, most of the revenue comes from the US and Europe, and Europe,
because you get to a certain point in Australia, and the Australian founders who are very good,
know you've got to, you know, expand and they expand out to typically the US or South East,
US or Europe, we're trying to get them to think Southeast Asia. And they're like, it's
a big market, but it's not the US, right. So we're not going to necessarily run there
first. Other companies, we've done this,
let's continue here, because I find this quite interesting. And then you know, how the relationship
with you and the founders work, because you offer us in offering the deck component with
the capacity for the upside, so you get an interest to make sure and see how this works.
And with this particular business, this is essentially the bedrock of the entire operating
system if someone, you know, purchase fast fast moving consumables, correct?
It's sticky. It's sticky. It will take you three years to change that software. It's
really a process. To get out of that, even if you want to, it would take years. So it's
very sticky product. And it's got a very high APU, you know, Louis Vuitton, it's big market
clients. It's not like millions of clients playing a small fee on a SaaS. It's big clients
paying hundreds of thousands of dollars a year for software. So that's what we really
like about it.
So it's a third party provider with the operating system that a lot of these major brands are
using on their day to day business.
Exactly. Yeah.
So one question we've ever seen the NASDAQ, we had the Fed out last night, you know, put
markets and whole so interest has a whole sample that sample the Aussie, you know, markets
up, I believe today. But that's been largely, you know, due to AI, right, artificial intelligence.
So one thing I still find fascinating, and especially with people like yourself, they
get to see these transactions, what I'm hearing is a lot of the venture capital deals or companies
coming through the they say they're AI. But as you pointed out, there's a lot of large
legacy businesses that tried to bring in AI and not actually AI orientated businesses.
I really wouldn't mind hearing like, how do you work, say, with this specific company,
as you said, it takes three years to get rid of them to bring in a in a competitor. If
you see something like artificial intelligence coming in approving everything, how do you
work with say that particular firm to either I don't know if it's already there to improve
their business so that I get kicked out in a couple years time. I'm just curious because
this is this is the yeah, I find this fascinating.
Yeah, you know, it's interesting. And what you say that AI three years ago, almost every
pitch deck we got on the equity side, had, you know, this has found us pitching to us,
they would mention machine learning, right? They just thought everyone's gonna put it
in there. Now, you have so many pitch decks mentioning AI, right? They've got some form
of AI that they're using. So it's just one of those catchphrases that I think founders
often think that they've got to mention this because everyone's using it. And it is changing
things pretty quickly in many areas. You know, we were looking at some really amazing businesses
in sort of low code, no code, you know, the ability for you to come in and make your own
apps for your business, etc. And all that stuff without getting developers and it's
incredible because you can do so much. But then AI come in. And all of those businesses
are probably going to really struggle because AI is going to take that away. So it's changing
a lot. We like to think with this business in particular, the fluid, we don't think it's
it's because it's not an AI trying to solve things. It's a software helping to really
do the practical of the inventory management for hundreds of thousands of SKUs, hundreds
of stores or thousands of stores across countries, continents, currencies, etc. So we don't think
that's really an AI focused problem. Ask me in 10 years and maybe I'll change my mind
because AI is evolving pretty quickly. So in that one, we're not so concerned about,
but we do have other businesses where for sure AI is either going to make it much better
or it's going to be a real threat and just sort of compete with it to a point where it's
going to be hard to survive. The reason why I ask with fluid is what I'm
saying, especially with my job is AI may directly impact or may indirectly impact or improve
that particular business. Right. So what I'm wondering is, is do these systems as an operator
system, does it improve the efficiencies to ensure that, you know, in three years time,
it doesn't get kicked off because there's a new player coming in that offers a better
product. As you said, you know, it takes three years to remove a particular business. A lot
of people are wondering, okay, you know, how does that work with these large operating
systems? It's a lot to do with the, the stickiness
is a lot to do with the, when you take these systems on board, it's the training, it's
the integration with all of your other existing software. It's getting it rolled out across
countries around the world, different stores. And that, that's a huge process. I think AI
is going to do a lot in a hurry. I don't think it's going to solve those things because it's
really training people. How do you use this? How does this system work with what we've
got here already that we need to keep? And if you want to then say, well, okay, I want
to go to one of the other three or four big competitors, it's like, okay, that means we
need to change this every person who's at the storefront, who's at the warehouse, they'll
need to understand how to operate this. That's the challenge of changing these big systems
that are integrated across global companies. AI will have huge effects. I don't think it's
going to affect that for the next five to 10 years. But again, it's moving so fast.
You never know. The reason why I was bringing it up, I remember
one of my first ever jobs at David Jones when I was in country road. And I swear to God,
they had something that was, you know, you know, when Tom Hanks, you know, went up in
Apollo 13, it looked like that, like that, that tech had been updated, you know, for
20 years. And it was horrendous. And it just, it just reminds me of, you know, things should
get updated, they should be fixed. You know, we don't want tech to go the way of Nokia.
Like I love CSL as a business, because they stick 10% of the money in R&D every single
year to improve. I suppose I'm just asking you dealing with these companies at a particular
level, you're funding them for growth. I'm just really quite interested to, you know,
what's happening with the R&D to assure that these companies are at the very, very top
so they don't end up losing that particular contract. That's where that question is coming
from. Oh, look, yeah, that is absolutely critical.
And just on the AI, where I think it really could help that business is in the ability
for adding on to all the data they pull from the software. So you can see every transaction
on a very detailed basis across the world every day. But then AI, you can use that to
help you think about how can we improve costs? So do we need to have stock prepared and delivered
to these stores at this time when we can see now very accurately and use AI to understand
what the demand flow probably really is, so we can get our infantry at the right level
and not be too big? How do we, you know, predict where sales are going? I think AI is going
to do a lot to help us in that on. But yes, you're absolutely right. I think in all tech
businesses, it's, you know, you can never be complacent. You can't say, okay, I'm one
of the top sort of businesses in this area and we're growing fast. I'm just going to
spend on business development and stop spending money on improving the tech because you can
be sure one of your competitors is going to be putting a lot of money into improving the
tech and just making the better experience. So there's always a significant part of the
budget on the IT done on engineering about how do we make this better? And it's constantly
evolving. It's constantly improving. And it's taking the feedback from customers, like what's
working well? What really do you think you would value if we were to add or do more?
What's not working? And if you don't address that, yeah, again, your competitors will.
So you've got to constantly be improving it and using tools, whether it's AI or something
else. And maybe it is incorporating the AI element to say, right, all this data, here's
now the new sort of module for AI to be using the data we have for your own operations to
help you then come up with output that's going to give you insights about where you can improve
it and improve efficiencies. So I think that's where they need to be moving more in the future.
Blows my mind what's happening. What's another company you've helped? And I suppose, because
you've got the lens on and you have the warrants, what's the company that you've helped go all
the way or the closest to having the warrant component play out? Learn more about that.
Another one we did last year was a company called A-Commerce. It's a company in Southeast
Asia. It's the largest e-commerce enabler. So what does that mean? It means when you're
in countries, particularly emerging markets, global businesses want to have a footprint
everywhere, right? So they can sell more, they can create awareness. So companies like
Nike, companies like Sephora or Anadets. So if they want to go into Indonesia, Thailand,
Vietnam, Philippines, it's like, okay, so we need to, if we really want to do this,
if we want to be able to provide online shopping, you need to have the warehousing, you need
the logistics, you need to have a in-country website with local language and you need to
modify that to the people and the culture of that country. And then you need to make
all of that work. And then you want to do it in like 200 countries or you just go to
an e-commerce enabler and say, okay, so you cover all of Southeast Asia, you will do everything
you think and you will build the website, you will do the marketing, you will do the
advertising, we will just give you the goods and you'll run it for us. Oh, that's easy.
We can get up and running very, very quickly with very little costs. So that's what they
do, work with 200 global brands and basically they do everything for them. So they've done
it so much when someone new comes, they say, look, here's our process. Obviously, we work
with you on the marketing and everything else, but we need to make sure it's done for the
local and how to get it out there. We do the warehousing, we do the logistics, we do the
fulfillment, we deliver it right to the person's door, everything. So we did a deal with them.
Again, loans, interest rates that were pretty attractive, sort of 13, 14%, lots of warrants,
minimum guaranteed return on that to bring up a really good return for us. Senior secured,
the company's raised 125 million of equity. So we see a top of that. Investors like KKR
below us. So a lot has to sort of happen for the valuation has to really collapse like
95% before you sort of have a risk of your loan being less than the security value. Now
profitable. Usually we would lend to companies when they're not profitable because if they're
profitable, they'll try and get lower cost of funding from a bank. Usually banks, especially
in Southeast Asia, but Australia could be the same, they want to see before they provide
million dollar loans, they want to see three years of profitability and they typically
here want to see real estate. They want to get hard assets of security. So if you're
a startup that's burning $40 million a year and you've got no real estate, you're not
going to get a look in for a bank and that's why we have a good place to play. Not that
we want to back companies burning that much, but if you're burning five or 10 million,
typically the banks, if you haven't got that hard asset security won't give you a loan.
Well that's the reason why there's been such a rise in the private lending space. But absolutely
for that exact reason. It just makes no sense. Like what was it? These Australian banking
laws were created what from the 87 crash crash? Was it wasn't it? Skates fault? I heard someone
maybe over a you know, a beautiful lunch one day, someone told me that it was all skates
fault and his mates fault. They were leveraging up to the heel with all the you know, doing
these businesses and getting loans from the banks and said, but there was nothing to back
them out when when a particular crash was it come over to 87 or what year was maybe
the 90s when it all came undone and the banks were standing there, they didn't have any
collateral. So like a line was drawn in the sand, you know, irrelevant of who you are.
If you want to, you know, get a loan from us, you have to have property. But now it's
gone so far one particular direction that if you aren't an employee, like I've got
mates that have $10 million in an Australian trading account, better traders than I've
seen a lot of people and just happy to run their own lives. They can't get a house loan
for a half a million dollar apartment. No, it makes no sense. It makes me so broken.
It's not funny. So it's nice that you guys are around. But it's just so broken. I think
the pinnacle of all that back in the 80s was Alan Bond, right? So Alan Bond, maybe it was
born in our skies or whoever it was. You ever read the book, you know, it's incredible what
he did. Like after he won the America's Cup, he said, well, look, I'm going to have it
over in Perth. He bought this land that was pretty shitty. And he actually apparently
because he was a painter originally had the beach painted to look like gold and yellow
because it wasn't gold and yellow. And then started to flog off this real estate to people
all over the world and say you can buy a place where this America's Cup is going to be. So
he was he really set a new level of what could be done. And it all worked for a while until
it didn't, I guess. But yeah, I think you're right. So what you have is lenders being,
especially in Australia, like the banks are making still record profits while the average
homeowner I was at the ABCJ conference in Sydney a couple of weeks ago when we met in
Sydney, and they had the top economists from the Commonwealth Bank speak and very interesting.
And what he said was that the average Australian was spending 48 percent of their disposable
of their income that they had on housing. That's extraordinary. That can't go any
higher you would think. It's extraordinary. So and that's because banks are making so
much money that do they need to do the hard work to say, OK, you don't have a real estate
or you don't have a traditional type of income? To your point, we know people who make lots
of money in lots of money. They can't get from their own business. But because they
make it in different ways that the banks don't understand and they're not getting a salary
as such, the banks are like, no, I have my requirements. You give me the tax return,
you give me your salary slips so I can go back and say tick, tick, tick. But if you're
saying, no, I've got a business and it's sort of lumpy, but I'm making a lot, they're like,
it doesn't tick this box. So there are non-traditional lenders that fill that gap like us, but ones
that will lend to individuals. But the sad reality is they charge a premium to lend to
people who are probably much lower credit risk. These people are very unlikely to default.
And these guys are like, yes, but we don't have the cost of capital like a bank. The
bank gets the benefit of having all this money that they get from people in the bank accounts.
And no one else has cost of capital that low. So yeah, I think you're right. The things
changed, it's broken, the pendulum always swings too far. And it's going to be some
time before it swings back to a position where it gets a bit normal.
I think with the young generation coming through now, being forced to work from home, you get
RFK coming in over in the States, pushing boundaries, shaking things up. I think people
are just sick and tired of essentially being a two-party system in most countries. You
have to take the left or the right, they're just over it. And I think the other thing
which I'm really enjoying coming through now is there is this, they call it the agrarian
age. I believe it was the 1700s, 1800s, where 85% of people that moved to the West, they
left because they wanted to run their own lives and run their own businesses. And it's
gone so far the other direction now that I don't even know what the statistics are the
people that run their own business, but it's going to be low. But what we're finding now
is a lot of young people are all couch entrepreneurs with a laptop. It's so quick to essentially,
as you said, I find this fascinating chatting to people like yourself, Jason, as you said,
I could sit here in Australia, I don't know, make some particular product or even knock
something up on Canva, set up a Shopify account. And then, as you said, I've got no idea about
Thailand or Vietnam, but I want to sell into that market and I can just essentially, if
I'm at scale, have a conversation with the what was the name of the company? The enabler?
A commerce, a commerce, a commerce, I can have a conversation with a commerce, not speak
any of Southeast Asia languages, and have essentially a direct access point into that
entire market for a particular price from your couch. It blows my mind. And at a cost
that's a fraction of what it was before 20 years ago, it would cost you 10 to $1000 to
have a business set up with a company, with the accountants, with the first employees,
all that kind of stuff. Now you can do it under a thousand bucks. And with a website,
all that stuff would cost 10 to thousands. Now you can build your own website at home,
even if you're a novice like myself. It's easy. Everything is there for you, all the
templates. You can get all that up, you can have a company set up, you can get all the
infrastructure, you can get the software to run payroll and everything else under a thousand
bucks and you can be running. And here's where you can go further. I mean, you can hire people
anywhere in the world. So for our data business, we're hiring people in India, Indonesia, Sri
Lanka, and we're getting university graduates. And this you will find hard to believe, but
they're coming out at 400 US a month. So say it's Aussie 600 bucks a month.
400 US dollars a month.
Yeah. And I tell you, and then you don't, there's no medical, there's no super, there's
no nothing.
Because they're all private contractors.
They're all private contractors and there's no rent. Right? Because they're on their laptop
at home because they're in different countries. So the second, the biggest cost for most companies
is capital is people. Second biggest cost for most companies is rent. So if you can
find a business where you don't need someone in an office and many people you don't need,
COVID taught us that you don't need to be in an office for many things, right? Zoom,
work from home. Everyone loves it. That's why the commercial real estate and the org
and other places is crashing because they're completely, San Francisco is a ghost town,
right? Everyone's worked from home. They're not coming back. So if you can get your rent
down and you can get your people cost down and then you can build all this stuff with
the software, like you said, my son came home the other day because I said, you know, what
are you going to do? You're going to start, you know, getting to pocket money. You're
going to start to think about how you're going to do this. He's a bit entrepreneurial. I
think you got to work for something. See, I could do that dad. But then he's got a presentation
on the TV PowerPoint. So what's this? He said, dad dropped it. And I said, okay, I know a
little bit about it. He goes, okay. And he thought it through 20 slides. And I kept saying,
how are you going to do this? What are you going to do this? And he just researched and
said, let's see, you do it. He said, no, I need to start that. I just need a bit of money.
And I said, oh, here we go. What do you need? He said, I need about $300. I said, okay.
I thought about it. I thought that sounds like, you know, even if it's just a complete
write off, if it's someone going to be to your point, you can really get a business
up, whether they succeed or not. But at least you can get the capital that used to cost
before was prohibitive for most people to say, I want to start this. Now that's not
the case. You can set up a business on the weekend. You can test it. You can even test
whether the business works without having anything. You can have the website set up
before you have the products. So if you're Tim Ferriss, you would have heard of him,
the four hour work week, right? Well, he's best seller in New York. That's what really
made him famous. Talked about before you even launch a business, test whether it works by
demand. So have the product that you want to sell even before you started to manufacture
or pay for it, build the website, do some marketing where you think you're going to
get success. And then if people say, yeah, I want it, then say to them, oh, sorry, we're
now at us out of stock. We'll get back to you very soon. So that you can gauge whether
or not you've got sufficient demand to make it a successful business, which is a great
idea. And then if you think there is, you've got all these people who are potential customers
because they're trying to buy it from you, then go and, you know, fill up the backend
and get it made before you incur the cost of saying, I'm going to develop all this.
You could never have done that, you know, 30 years ago, you'd have to build something
to get the product made. You'd go to the storefront, you'd put it out there and you take your chances
on you get staff, insurance, everything else. And you don't know what they're going to sell.
But now you can do everything without even having a product to test it.
It's brilliant because as you just mentioned, there's two ways of starting a business. You
start a business with potentially a product, no overheads. And then if you have demand,
you roll into it. But the old way of doing it is, and honestly, let's take a step back,
ask the question, why is a business set up the banks way? Because if you go the bank
way and you get a storefront, how much does it cost to purchase that asset? And where
do you go? You go to a broker, broker gets fees. Okay, now I have to set that up. Everyone
else gets paid. There's 250, half a million bucks just for, I don't know, a bakery or
some of that. Then you get staff and then hard premises. There's just an entire system
before you know it, you could be out of pocket, a million dollars in debt before you sold
your first muffin. Exactly. And look, I really like, is your son, you were mentioning, I
love what he's doing because there's a gentleman called Mr. Beast, the best YouTuber, you know,
that everyone follows and there's dropshippers anywhere, which is great. And there's a particular
TikTok order he does where he bets his mate, he gets two mates and he gives one a Shopify
account and goes and gives one a hammer. And he goes, which is faster, setting up a lemonade
store or setting up a brand new shopfront with Shopify, the guy on Shopify one. Yeah,
amazing. Absolutely. And the other thing I love about it is these people are happy to
share content because what happens they share, they get more business, more followers. Plus,
there's the revenue coming from the watching side. But the other thing which I've been,
I've been writing a couple articles, I've been doing so much research on is have you
ever studied the difference between Rockefeller and the Vanderbilt's? No. So the funniest,
the most interesting thing there is the Vanderbilt's kind of not really exist anymore, to an extent,
whilst the Rockefeller's are 300 odd people strong and practically control the world.
The one of the one of the key psychological differences is the ability between giving
family members access to money to start a venture compared to just giving them money.
Have you heard about this, the behavioral psychology behind it? So what happens if you
give someone money, then essentially they didn't strive for it doesn't mean as much.
Yeah, absolutely. Yeah, there's no there's no there's no Oh, thanks, dad, you know, oh,
look, I want to go to the movies, cover 100 bucks. There's no you don't know what that
value means you don't do anything for perceived value. But you say to your son as an example,
300 bucks, fantastic. I'm really respect the fact that you know, here's this 20 page slide
about drop shipping. You know, how about I also you know, return the favor and educate
you about how the real world works. If you want 300 bucks, not a problem. What we're
going to do is I'm going to show you how a contract works. This is this is what I do
for work. And I'm going to give you a very short contract $300. And what we're going
to do is we're going to make the interest rate 1%. And then the whatever, whatever it
is, how it all works, but just something is simple. And he said, What do you mean your
stack? I said, I'm paying for it. Yeah, yeah, it's just it's just blew my mind. Because
like the one thing they use with the Rockefellers is say like the guy wants a million bucks
to go to I don't know, Thailand and have a good time or you know, buys Ferrari that he
wants or whatever it is, it's not a problem. So what we can do is we can give you access
to the family bank, cheap credit, you go find the land, you get the project, you get everything
up, we'll give you one chance. But you know, if you get a project, we'll back it where
you won't get the money from the bank as we just found out, you know, from the conversation
we had before, but we'll give you family money access, building an entire thing. But whatever
profit you pull out of that, you can go and buy a Ferrari. That there is a difference
between the and that's the reason why that's the Rockefellers around the world. And the
Van Bels empire is not as big as it used to be. It's fascinating. Yeah, it's interesting.
And the reason why I'm discussing this is you you operate in the entrepreneur space.
And we've seen like, you know, subreddits like indie hackers, and I'm all for this because
the more innovation we have in the world, the more brighter minds we have in the world,
you know, no one knows where we're working go fully on must stop. Absolutely fascinating.
And then you finance them. So that's that's enough of my rant.
Yeah, no, but I completely agree. Right. If you if you if you give something to someone,
the perceived value is just not there. And so we see that in startup businesses about
trying to get, you know, it's the freemium model and how do you how do you pitch this
right. And it's really important not to give away too much because once people think they've
got it, they just don't see this value to pay for it later. So it's the same thing,
you know, you give someone money, if you incentivize them in different ways, the psychology is
very different. And it's different in terms of the output in terms of how they approach
it and then try to make the success. So I think that's really key.
What are the opportunities you currently seeing in the market? Because we discussed what you
currently doing. Where do you you're in a unique position. Normally when I ask a lender,
you know, you know, we're opportunities saying they just they said, Look, we're not in the
business of taking risks. So as long as they pay their money, we're okay. And then you
ask someone the offense in the town, it's all about, you know, here's the globe. You're
in this beautiful place where you're both lending and you want the equity upside. So
I find you know what you're seeing and you get in the data is completely data driven.
So I would love to hear your thoughts on where you see the world going and the opportunity
currently.
Yeah, look, in terms of what we see in Southeast Asia, I think to Australia as well, growth
stage investors went a bit crazy a few years ago. And we saw a huge amount of money coming
into companies that sort of series B, CD, at really inflated valuations, which we knew
was not sustainable. But we're you know, we were on the equity side seed stage. So we
were seeing our multiples on our investment going up very nicely, but not sustainable
at all. And of course, then the music stopped and NASDAQ fell down. And all of a sudden,
the multiples or that people were paying or to invest in series B, C companies dropped
by 40% or more. And the large investors were a bit shell shocked and started to pull back.
So a couple of years ago, you had new investors coming in from all places around the world,
or just new investors in general investing at late stage. That capital has gone back
a lot. So what you're seeing is the same number of companies are still raising, but there
are the rounds are much, much smaller. But you really seeing only the quality companies
getting the bigger rounds away. So what does that mean for us? It means that it's always
good to be a provider of capital and capital is scarce, right, because it's supply and
demand. So we're seeing those companies that were going out raising $50 million equity
rounds three years ago, that's not happening now. But those ones who really feel that they
should be raising 50 million, the equity investors are like, maybe I'll give you 30. And so they're
like, but hang on, I've got a gap. So it's great for us. So we say, look, we'll come
in and maybe fill that gap. We'll give you 20 million of the venture debt alone. You've
got your 30. And we're happy with that because the 30 sits underneath us, that gives us extra
buffer of security. And so there's more demand for growth stage venture debt now than there
has been in the last 10 years. And I think you're seeing the same in Australia. It's
just the larger sort of rounds, you know, you just I think you're seeing that pull back
across the board. Surprisingly, though, the NASDAQ, of course, has gone back up. But valuations
at startups, you know, sort of up into pre IPO have not tracked that. So I think that's
an interesting when the NASDAQ drops, the multiples fell pretty quick. But the multiples
on early stage companies didn't bounce back up with the NASDAQ where it is. And I think
it's going to be a slow march before they do. So in short, we're seeing a huge amount
of demand, which is good for us, and also good for pricing. So people like really want
it. And, you know, people look at what we do and say that, you know, you're getting
interest rates, 13, 15% fees, and then you're getting warrants. It's like, you know, your
cost of capital is 20% plus. That's really expensive. And then we say, but if you're
growing really fast, equity is going to be more expensive. Right. That's that's what
it is. So if you are really growing fast, you can do the math in different ways, then
your cost of capital of equity is like, No, no, I don't want to give the shares away.
I believe I'm growing fast on that. I'll pay your 15% interest and you can have your back
ended warrants and I'm still going to be better off.
Yeah, that that's fascinating, because we've been studying this as well, because the market's
just so high. But I've been to a number of conferences with other fund managers. And
they're all like, well, the, you know, some of these smaller companies can't even catch
a bid. And what's very fascinating about this is the point you made was before Codemac
COVID, or, you know, the funny money came in, you know, people were just throwing money
at anything. Everyone felt rich, but now everyone feels poor, a little bit hurt. But now is
the best time to do some of these deals, like some of these deals are a bit of valuations
than a lot of people have actually seen. And I was speaking to another gentleman the other
day, and he actually pointed out that in his particular space and say value investing,
whenever he sees deals and M&A activities start to occur in any particular asset class
in value investing, that he's indicating the bottom of the cycles in people, there's
consolidation, you know, that that turn, it might take two years, but that turn starting
to come. Do you think that we're at the bottom and this turns happening from what you're
saying? How long do you take for small caps in the value side of the market to get back
going?
Yeah, I completely agree. You know, that the saying goes be greedy when others are fearful.
We're seeing we think valuations have come back maybe too much. We're seeing great opportunities.
So we're also doing something else now. It's like a third strategy. We call it value investing.
Some people might call it distressed investing on the on the venture space. We don't use
that term. It's growth stage companies that are growing and they're doing reasonably well,
but they're struggling to raise the next round because they've had investors come in at growth
stage who know that they pay too much and they're like, oh, we can't go and this is
scarcity of capital. So we're looking at these businesses like, you know, they value three,
four hundred million dollars in the last round. They've, you know, grown their revenue by
30 or 40 percent year on year. It's still going reasonably well. And we're saying, OK,
we'll fund you. But in a different sort of structure where we're going to be senior secured,
maybe not venture debt, but we're going to put in a convertible loan. We get a minimum,
you know, two X if you exit two to three X, if you exit in three years. If you raise another
round, we converted a 50 percent discount. You pay us an eight percent coupon through
the way. And we're getting lots of interest with companies like, you know, I don't have
a lot of option right now. So I think that's, you know, and that gets them to profitability.
So then they're stable and they can move on the exit. So we see a lot of opportunities
like that. Growth stage companies that really just there's not as many investors around.
I think that where we are now, that the valuations did come back a lot. They were too high. I
think they've gone too low. As you say, pendulum always just goes too far. But I think it's
going to be the problem is interest rates. You know, it's a strange thing. High interest
rates are normally difficult and problematic for equities. Well, you look at the S&P and
you'd say, well, that's not really proving the case right now because we're at record
highs and on multiples we're at such a high space. And we've got interest rates that have
been high so long. And as lucky you mentioned earlier today, they're going to hold the rates
and they probably will for a while. Eventually they will pull it back. And, you know, I don't
think it's going to be in a hurry. But then I think you'll start to see generally the
obviously public markets get even sillier. But I think that'll follow on through to the
private markets. So I think now is a pretty good time. I don't think it's going to go
any lower in terms of multiples for private companies and especially in the tech space.
But I do think we are going to start to see it edge up and ledge up much faster as the
rates come down.
Yeah, that's that's fascinating. I'm hearing it everywhere now. And it's interesting that
hearing it now from a firm that does the lending and participated in the upside. That's interesting.
And there are still one of the if anyone's ever read, what's the lies poker, the book
lies poker, I just remember the deer. That's a fantastic book. You know, when everything
was burning, you know, Babylon gardens were coming down and the bloke steps in and buys
right at the death note and they just steps away and you know, teaches baseball and then
what's it all go up. It also reminds me of Buffett's deal which he did with what American
Express right when it's about to go on the ground did that doesn't have to work again
for a day in his life. It's Yeah, you know, but look, just I really appreciate the time
we've had today. Your insights are so so interesting. If anyone wants to learn more about
General Capital, how can they find you?
Well, they can they can reach me at Jason at January dot capital, or they can go on
the website and reaches that way. Always love to talk to people who are looking for capital
but just great, great entrepreneurs or people who just want to share views and collaborate
were always very transparent and looking to sort of meet with other people. Murdoch has
been fantastic talking to you. Really enjoyed being on the podcast. Thank you so much. It's
been awesome.
Fantastic. Alright, Jason, have a great day and we'll catch you soon.
Thanks for the time. Bye.
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