You're Either An Entrepreneur or You're WASTING MONEY | Randall Kaplan pt. 2

What is an entrepreneur, and can you learn to be one, or does it have to be in your DNA?

When I was a young kid, I always knew I was going to start companies, but can you learn it if you're not born with that gene? This is the age-old question you've raised. It is the most important question: can you teach entrepreneurship?

I've tried to answer that question over the years. I've tried to identify entrepreneurs in my classes that I teach. I believe that what works and what makes someone an entrepreneur is a burning desire to be free. It's not about the greed of money; it's the pursuit of personal freedom.

When I meet people that have a burning desire to be free, then I know I'm working with an entrepreneur. You may try five or six different ideas, and they may all fail, but the fact that you keep going back and trying again is that burning desire.

I don’t think you can teach that; you either have that desire or you don’t. It’s only present in about a third of the population. In every country, it’s the same: you find two-thirds of the people work for the other third. Of that third, ten percent are remarkably successful. So, if you think about it, it’s a very small fraction of people that change the destiny of an economy with, you know, profound businesses that grow and grow because they're very successful at solving someone's problem.

But the motivation they have is that—to pursue personal freedom. You will find that in today’s modern entrepreneurs. Elon Musk, for example, look at what that man’s achieved, and he’s just getting going. He has a burning desire to do things his way.

My son works for him at Tesla. The company has a remarkable culture of getting stuff done. I’ve met with a lot of venture capitalists over the years. We funded around 90 companies in 20 years. I have my own list of things of what I look for when I’m considering funding somebody.

What do you look for in an entrepreneur when someone comes in and pitches to you? I look for the ability to pivot because whatever idea they have is probably going to fail or it’s going to have to be changed. You always start with the optimism of the idea, but I look at the entrepreneur and say, does this man or woman have the ability, if things do not work out, to pivot, to change so that all this capital isn’t lost?

I'm pretty good now at determining winners and losers. I mean, you know, that’s what makes me successful as an investor. I don’t get it right all the time, but I certainly have been successful. I’ll let you in on a little secret: about 70% of my success over the last decade — now it’s more like 12 years — has been with women entrepreneurs.

Seventy percent of the really good outcomes have been managed by women, and I think, you know, I have a theory about it: they mitigate risk very well. They focus on return of capital first, not on capital.

That old adage: you want something done, give it to a busy mother, is true for a lot of women. They can judge and balance a lot of things at the same time. So, I’m a little biased.

Now, if you look at the deal flow—and I do a lot of deals—we have currently just closed another one last week. We have 35 portfolio companies right now; that's a lot for any venture firm. But I have the benefit of social media, so I’m able to help them reduce their customer acquisition costs in an incredible way.

That’s sort of our secret sauce in my venture firm. I basically go work for these people to help get their story out, reduce their capital costs and their customer acquisition costs, and in exchange, I get very proprietary deals. I know what my value is.

So, this model really works for me, but I really look for that ability to pivot because, you know, and I don’t have to tell you this, you’re going to go through a lot of hills and valleys before the deal's done.

What's your investment strategy as a whole?

We’re watching Shark Tank. I see you invest in all kinds of businesses. Now on that show, obviously, you don’t know what’s coming. You've invested in from A to Z, non-related. You have your venture. What are you looking for in terms of a strategy? Is there one, or do you just take every deal kind of one-off and look at every specific situation?

Well, I have deals in all 11 sectors of the economy, including real estate. I am not driven by just one sector. You know, some people just do biotech, some do pharma, some do manufacturing. I go everywhere. Lately, I've been doing a lot of work in crypto and decentralized finance.

Right, we’re going to get to that.

Yeah, it’s sort of a multi-sectoral approach. I look for that entrepreneur, that woman or man, that’s going to drive the process. I look for structure. I mean, the challenge I have is I know my value.

So, not to be arrogant, but when people come to me and say, “Look, we’re doing a round at a 10 million valuation, or a 25 million valuation, and we’re closing it—there’s a million left,” I have no interest in doing that. You want to put my name on your cap table; we both know why you want to do that. I get it, but that's not a deal I’d ever do.

I am not like any of your other investors. If you want me as an investor, you have to make me a founder, which means you’re going to give me founding shares of the company for free. Now, a lot of people choke when they hear this, but then hear me out.

I say, and here’s what I’ll do: I don’t care how many rounds you’ve raised. After we agree on the founder’s shares that I’m going to take from you, you’re going to give me for free, I’m going to pursue my percentage ownership into every round you've ever raised at that price.

So, if you did a round at five million valuation, I’ll give you cash for my seven percent of the ownership. I generally don’t do this; I start by asking for 9.9 percent of 500 shares, so I’m not an insider. You don’t want me as an insider because social media is what’s so valuable; I have to be able to speak about why I invested in it.

So, I don’t join the boards. Then I invest in every round for my 9.9 percent. Fifty percent of the companies choke when they hear this. They say, “Why would we ever do that?” and they don’t. The other half do.

The reason they do it is I simply let them talk to my CEOs. I don’t sell myself; I let my CEOs sell myself. They do the work; they explain how my organization changes their path and makes them far more successful in raising capital at a lower cost.

Because now, there’s a direct correlation between social media and market cap. I mean, you’ve seen it in Reddit, you’ve seen it in Robinhood, you’ve seen it on meme stocks. It’s very powerful, and I know it’s a fact.

Then I help them with customer acquisition. There isn’t a single retailer on earth that won’t return my call. That’s one of the great things about being a shark, right? At the president or CEO level, we can do a lot of things together, but I don’t do it for free. Obviously, that gives me a huge advantage against just some random VC.

Does it make sense to put all of your money or most of your money into the S&P 500? Given that there are probably less than five investors in the entire world who have beaten it over the last 30 years, the chance of the next Warren Buffett showing up at your door in Topeka, Kansas, or wherever you're living, is way less than getting struck by the odds of lightning, which, by the way, is one in seven hundred thousand.

Yeah, I mean, you know, I do have trusts. They do invest in the S&P 500. I do—I am a half owner of an indexing company that services pension plans and sovereign wealth and, you know, state funds and everything else. So, we design derivatives of the S&P 500, and I invest in those that tend to be a little higher quality.

I don’t want to own every company in the S&P 500. I mean, the airlines are uninvestable now. Their balance sheets are upside down after the pandemic. I think United had something like 8 billion of debt; now it’s got 23 billion. It happened in 18 months. I would never own that. That’s just speculation now.

So, you know, there are certain rules I have, but that’s way different than investing in private companies and being a venture capitalist. I mean, the majority of the money I make is not from the indexes. I’m the majority of the money I make is from bets I make on men and women that I invest in.

For example, three years ago, someone came to me in Florida and said, “Would you like to be an investor in LSD?” I said, “No, that’s an illegal Schedule I narcotic.” He said, “No, no, I’m going to do FDA trials towards turning it into a medicine.” I thought that was pretty crazy.

I bought into that when it had a valuation of 10 million dollars, and it’s trading at a billion and a half now. I was a founding shareholder of that. There are all kinds of research going on in the space, and in fact, there are many other companies that have pursued it.

We were the founders of that whole space, and we were the first to ever do it. The same thing with recent investments in Wonderfy, a company that is doing decentralized finance on an app to democratize it for people that can’t understand the complexity of staking and loaning and all the things you have to do to use DeFi.

I just bought a piece of Immune Holdings, a company that owns NFT.com and is building out the NFT platforms there—a large piece of it. So, I’m very involved in that space; I’m intrigued by the magic of what happens when you put capital to work with a strong leader and just watch it blossom like a flower. It’s just incredible, all the twists and turns that occur.

I give them advice; I can help them with social media, obviously, and I help them with customer acquisition. But generally, it’s them; it’s their idea, and my money is just, you know, gasoline on their fire.

I want to ask you about the expression that failure is not an option. Is that right? Is it okay to fail? And going one step further, is some failure a good thing? What’s your advice to people, for example, those who have been fired once or multiple times, or those who’ve started a company or failed multiple companies?

If you're one of the 1.5 million people who declare bankruptcy every year and you want to start a company, failure is actually very important in the journey of any entrepreneur. I prefer not to invest in people that have never experienced it. I prefer to invest in an entrepreneur that’s failed two or three times and understands why they failed. That experience is very important and very motivating.

I have failed many times. I’ve made very bad investments and lost lots, lots, lots and lots of money, but I’ve also made lots of money. I mean, you're not going to have a perfect track record; no one will, particularly investing in venture. I mean, that’s so risky in itself, anyways.

There are some rules, though. It’s important to understand why you failed. If I’m talking to an entrepreneur and they’re telling me about, you know, something that didn’t work out and they can’t explain to me why it didn’t work out, then I won’t invest with them because they haven’t learned anything; they just have failed.

So, I would say failure is an option—a very good option to make you better as an entrepreneur. Entrepreneurs hate to fail, so when they start the next journey, they try even harder. Unfortunately, and I say this to my graduating cohorts, there is no life balance for an entrepreneur.

The whole idea is you sacrifice your early years to have freedom in your later years; that's the whole idea. Unfortunately, you find out in your later years that you want to even work harder because all you know is work.

You do sacrifice a lot of family time. You don’t go to picnics; you don’t go to soccer games; you're not free on the weekends.

I’ll tell you a story about a class I was teaching a few years ago—a night class that started at six and went till nine o'clock as these do. This was a big cohort; I mean, it must have had 300 people in it. It was a very big room—microphones, cameras, you know, big speakers and screens, so they could see you down at the bottom.

At the end of the class, like five minutes before nine, this fellow at the back raises his hand. He says, “Can I ask you a question?” I said, “Sure, you haven’t contributed anything to this class; you haven’t said a thing in three hours, so welcome to ask a question,” I said cynically to him because he hadn’t said anything.

Basically, the story was this: he was in his graduating year of electrical engineering, and he was also a coder. He could write code, and he had designed a compliance cloud-based platform for hedge funds of 250 million and under. So, he found that niche market. It was a royalty-based system; he did all the mark-to-market compliance so they could be compliant in their reporting to the regulator.

He was able to acquire his customers just by word of mouth. He was at a run rate of five million dollars of free cash flow a year while he was in his dorm. So, he says to me, “My girlfriend came to me today and said I have to make a decision.”

I said, “What's the decision?” Well, we’re engaged, but she doesn’t want to live this way. I have no time for her family; I have no time for her. I work every weekend; I work all night, and I’m running this business, and I’m trying to graduate from engineering.

The guy’s at the top of his class, and also he’s very gifted. He said, “What do I do? I don’t want to lose her, but she’s going to walk out on me if I don’t change.”

I said, “Which one is easier to replace: your business that you've worked for three years to build that is now generating five million of free cash flow, or your fiancée?”

A lot of people didn’t like that answer, and he said, “Well, what do you think?” I said, “I think she’s the wrong person for you. I’m not Dr. Phil here, but you're an entrepreneur, a successful one. There isn’t a woman in this class that wouldn’t want to date you next week. You’re a good-looking guy; you have five million dollars. I think you can find someone else that understands your journey.”

Entrepreneurs need to understand that their partner has to understand them. That was my point.

Anyways, that class was a show; it didn’t end until 10 o’clock as we debated this whole thing. From what I understand, he has a family; he’s very happy, but not with that woman, so maybe I did something right that night.

You have people who are buying eight-second video clips of LeBron James dunks for six hundred thousand. It’s an NFT frenzy out there, and you and the best venture capital firms in the world are backing them, calling this the next big thing.

What are your thoughts on people and non-fungible tokens and all of this? Is it going to be like the early dot-com days that I was a part of, where so many of your friends were a part of, and you were probably a part of, where the frenzy’s going to die down and investors lost tens of billions of dollars and more than 95% of these companies are going to crash and burn?

No, it’s different. Even though you can go online right now and look at it on your computer screen, you don’t actually own it. The ownership is the person that owns the NFT with the smart contract built into the Ethereum blockchain.

That has tremendous value. Where I think the most interesting market is, and where I'm going and where I'm investing in NFTs, is where you can tie a physical asset that has already proven itself in the physical world to the digital NFT world.

The example I’m going to give you is the watch industry. There are so many people that want to have my NFT of my steel white-face Daytona that I wore for 13 years on Shark Tank, or my one-of-a-kind Ming. They’ll never own the watch, but they’d love to buy the NFT of that watch.

We know what the watch is worth in the physical world, and we’ll find out through the auction and the cry of price discovery on the NFT world. I’m working very hard to create the standards along with the horological societies in New York to determine what the protocol is going to be for all watch NFTs everywhere.

One idea is to do this: if you allow us to make the NFT at the point of origination—when the watch first leaves the factory—that piece forever will pay you a royalty every time it trades hands in perpetuity while it remains a piece.

In other words, if you’re a very unique watchmaker and you’re only making 13 or 14 watches each year, you’ll start building a revenue stream even after you stop making watches because you’ll be in the smart contract, and your estate will be paid a royalty every time the watch trades.

That’s the likely outcome because the watch industry cannot make enough watches to fulfill the demand anymore for watches, particularly brands like Adam RPK, Rolex, Patek Philippe, FP Jorn, Ming. They simply can’t. If you order one of those watches, you might wait two years before you get it, if you ever get it.

The NFT market will fill up the slack for those who really want to own the dials in a different way, and I’m a believer. We’ll find out. We’re going to learn so much in the next 24 months. It’s such an exciting time to be investing in digital, and I think it’s terrific and very exciting and I think has tremendous upside potential.

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