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What does it look like to lead in the midst of chaos, brokenness, and division?

The recent events in Israel and Gaza have made the brokenness of the world even more acute and visible.

There are a lot of thoughtful places where you might go to find perspective on politics, faith or even breaking news, but we wanted to bring something different to the table.

We’ve brought on two friends of the Faith Driven Movement, Mordechai Wiseman and Bader Mansour, to talk about what it’s like to lead businesses in the face of tragedy.

Bader Mansour is the founder of NAZDAQ, a company that develops data solutions in Nazareth. He comes from a unique perspective as both a Palestinian and an Israeli citizen. Most importantly, he identifies a follower of Jesus of Nazareth. 

As an executive for a network of 17 churches and one of the founders of a local seminary, Bader is also a recognized national leader within the Arab-speaking Christian community.

Mordechai Wiseman runs an investment fund and a consulting firm, and is the founder and chairman of Israel Firstfruits, an economic development agency for the local community of faith in Israel. He is also founder of the Messianic Business Fellowship, which is the only national network for marketplace believers in Israel, both Jews & Arabs. 

The two have worked together for many years, have a deep relationship that transcends ethnic roots, and are rooted in their love for Jesus. 

They graciously joined the Faith Driven Entrepreneur podcast for a conversation about how their faith has informed their perspectives on leadership, identity, and the current conflict. 

Find out more about the work they’re doing in this video that premiered at the Faith Driven Entrepreneur Conference: https://www.youtube.com/watch?v=ySOzMWsSc3U

Episode Transcript

John Coleman: Welcome back to the Faith Driven Investor podcast. This is John Coleman, your host, and I wanted to float something new with you today. Usually we dedicate the first episode of the month to a feature we call marks on the markets. But this month, instead of focusing on the macro investing environment, we wanted to highlight a recent episode released at faith driven entrepreneur between an entrepreneur and investor based in Israel. The tragedy of the Hamas terror attacks, the rise of global antisemitism and the resulting war in the region that made the brokenness of the world even more acute. Invisible. So we wanted to invite some two leaders who had become friends of the faith driven movement. Bader Mansour is the founder of Nazdaq, with the Z, a company that develops solutions in Nazareth. He’ll get more into this, but he comes from a unique perspective as a Palestinian and also an Israeli citizen. But most importantly, as a follower of Jesus of Nazareth, as an executive for a network of 17 churches and one of the founders of a local seminary, Bader is also recognized national leader within the Arab speaking Christian community. Mordechai Weisman is the founder and chairman of Israel First Fruits, an economic development agency for the local community of faith in Israel. He is also the founder of the Messianic Business Fellowship, which is the only national network for Marketplace believers in Israel, both Jews and Arabs. He’s a Jewish Israeli follower of Yeshua Jesus. Like most Israeli Jews, he served in the Israeli Defense Forces. His son is currently serving as well, and we are keeping his son in our thoughts and prayers. Let’s listen to that conversation.

Rusty Rueff: Hey, everyone. All opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guest may maintain positions in the companies of securities. Discussed in this podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization. Thanks for listening.

Henry Kaestner: Welcome back to the Faith Driven Entrepreneur podcast. We have a special edition today. I’m here with Rusty. And Rusty and I are going to wade into this amazing scene that’s going on right now in the Middle East. We are not going to be talking much at all about politics. This is not what we do here. This is a podcast that is meant to help the Body of Christ, particularly business owners and entrepreneurs, understand how much God loves them and what he is inviting them to as they participate in the marketplace. There are times when that mission that we were all on might seem relatively easy. It might seem sometimes when that mission is hard, there are times when the yoke is light, sometimes when it is heavy. But for today, we had this incredible opportunity to have this perspective of two dear brothers that we’ve known now for years. As Rusty said in the intro, we featured them on some great video stories for context, and they’ve graciously allowed us to spend some time with them as they process where God has them and how they are seeing him at work. The questions they have, the prayers they’re lifting up, and it’s a special privilege to be with them for their perspectives about all of those things. Hopefully with gold today that we will all know more about how God loves us and we would accept the invitation to participate in the work that He’s doing, building the world when it is easy and when it is hard, when there are clear points for us to follow and when things are a little bit muddier. So today we go to Israel with Mordy and Bader. Gentlemen, good morning. Thank you so much for being with us. I know it’s been a crazy couple of weeks. Mordy, I’m going to start with you. I know that you get a sense this summer we were at the Christian Economic Forum together and you were starting to really feel keenly that something was afoot. You’re troubled. You very eloquently shared with us at the Christian Economic Forum what was going on in Israel. And now we found ourselves a couple of months later in a precarious situation that you and and your friend Bader right in the middle of. And Mordy, what are you thinking about this evening? Israel time. What’s going on?

Mordechai Wiseman: Thank you, Henry. It’s a privilege and an honor to share with the FDE community. Yeah, It always seems like life in the Middle East is pregnant. There’s something’s going on or something’s about to happen. But it’s definitely, for me, at least since really early 2022 even 2021, there’s this growing sense of apprehension in terms of what’s lying ahead. And as you shared really with this latest government and some of the internal processes within Israel, I’ve been feeling grieved at things that I knew were coming but were hard to observe in real time sort of emerging before us. And then this crisis broke out eight days ago. And I think Israelis in general are reeling because we’ve never faced something quite like this and comes after eight months of internal conflict, nine months of internal conflict. So I guess the pressure of feeling squeezed now for a while, feeling like God is moving us in a, yeah, undeniable way towards a certain direction, and then a real spike in pressure. Actually not a lot of fun, but we have to trust that God is squeezing out of us things that He is seeking to either remove or to produce from our lives. I’m just hoping I’m producing light in salt.

Henry Kaestner: As you process all of this. You’re doing this in the midst of a number of family, including your son. You served in the IDF. Your son is in the IDF. What what are you praying for?

Mordechai Wiseman: My first prayer is mercy. The enemy seeks to steal, kill and destroy, and war is his favorite tool. And yet God will use the schemes of the enemy to advance his kingdom. He turns evil to good, and he will. So we have to believe that despite everything that is going on, God is doing something profound. And yet all we can do is pray for mercy. Pray for to be given the strength to stand up under the pressure to be used for good rather than participate in the orgy of death. It’s easy to get drawn into the male storm of pain and suffering and trauma. And to some degree, that’s what being in the world, yet not of it means. It means that we mourn with those who mourn. We feel the pain of our people. And yet we also have a different identity and a different reality that is within us. And that’s easy to say. It’s very hard to walk through. So, yeah, I’m a veteran and actually my son is the fourth generation of our family serving in the Israeli military. And it’s easy to worry. It’s not just.

Henry Kaestner: I would imagine it is.

Mordechai Wiseman: Yes. I mean, I have literally dozens and dozens of my friends serving right now of our tiny congregation of 400 people. Over 50 are under arms right now, either as enlisted or reservists. So it’s easy to surrender, to fear or worry. And it’s that daily choice to look to the Lord and trust him that he is in control. And it’s really not how do I change circumstances, but how do I respond in a way that glorifies God?

Henry Kaestner: Mordy, thank you, Bader I’m going to ask the same of you. Such a privilege to have you, as Rusty mentioned in the intro and your story at the most recent conference. So gave me more of a perspective of what it looks like to be a Palestinian Christian in Nazareth. How are you processing this? What are you praying for?

Bader Mansour: It has been a very heartbreaking situation, you know, being a Palestinian and an Israeli. At the same time, my news feed is mixed with Israeli sources and Palestinian sources for a long time. So first of all, there is the grief and the sadness of all the people that have been killed in the massacre that happened just Saturday, You know, watching the news. Heartbreaking. I have lots of friends that lost loved ones. Also from the Israeli side, it has been very heavy on us here. At the same time being, I have maybe the privilege or maybe the the problem of belonging to these two troubled people, you know, So I am also a Palestinian. I am also in grief for my Palestinian people as well, that first of all, this was something they produced, you know, something horrible like this. At the same time, we are seeing the developments that are happening, the war and that is going on, you know, in Gaza and also the innocent people being killed. And at the same time looking at the whole situation and the whole history, it’s not a you know, this is I don’t see this as event in itself. You know, this is a continuation of my own life. And then before I was born of a conflict, you know, in this country what I am and it has been very heavy. We are praying, Lord, for mercy, you know, on the people of Israel, mercy on the people of Gaza and the whole people of this region, you know, on the Palestinians, also on the West Bank, on the people who are also in the surrounding countries. We are praying that this will not escalate into a larger war. We are praying for our safety. You know, Palestinian Arabs who are Israeli citizens don’t serve in the army. So I don’t have immediate family in the army. But we are afraid. We are afraid. Our prayers are for the Lord to have mercy and to send peacemakers. We need more peacemakers to come and help us. We probably couldn’t solve it ourselves, and we need people to come and help us get this whole Israeli-Palestinian conflict resolved in such a way that maybe we couldn’t do it on our own. We need help. So this is what I am praying for God to send more peacemakers and for the peacemaker himself to intervene and be with us at this time.

Rusty Rueff: Amen. Amen. You know, we live in this as we as Henry said, we live in this complex time. Mordy and Bader, you guys are right in the middle of probably one of the most complex issues going on right now in the world. At the same time, we have a background that’s really developing all over the world around a sense of identity. You know, where does our identity reside? And we’ve mentioned, you know, the two of you come from very different backgrounds, Bader you are Palestinian Israeli, Mordy, you’re a Jewish Israeli. Can you share with us, both of you, how your faith has helped you think differently about those who have different worldly identities? You talk a little bit about that Mordy Do you want to start first?

Mordechai Wiseman: Well, I think, again, just to provide a little bit more nuance. Israel’s home not merely to Jews and Arabs, but actually both on the Jewish side and the Arab side, identities are highly complex. I won’t speak to all the Arab community, but you have Muslim Arabs, you have Christian Arabs, the Bedouins, Druze and the Jewish side. You have people from not only that were native born or born in this land, but who’ve come from dozens of countries. And we have Jews from what we would call Middle Eastern background or Sephardic. We have European Jews, we have Orthodox and so many different identities mixed in that even the idea of Israeli is highly complex. Now, as a believer, I’m not only Israeli and I’m not only a Jew and I’m not only an Ashkenazi Jew and belong within even other subgroups within Israel, but as a follower of Yeshua, I have this sort of overarching identity and we tend to think of things I think in hierarchical. And I sometimes I find that it’s unhelpful to say, Oh, my citizenship is in heaven. So that kind of like vetos, all the other identities, I think that’s not helpful actually in daily life. And we see in Revelation chapter seven, verse nine, that people from every nation, tribe and language will be standing before the throne. God created our ethnic identities, created our cultural identities. And so my kingdom identity, my identity as a Jew who follows Yeshua infuses is at the center of all those other identities, informs them, hopefully transforms them, redeems those and that richness, the diversity that God created and making us so different then gets elevated perhaps through our kingdom identity. And sometimes it’s a veto. Sometimes there’s something in my background that is just wrong. There’s a cultural sin, a heritage that we hold on to that is just not pleasing to the Lord and that needs to be removed. But more often than not, it’s something that needs to be fixed or healed or redeemed because the root of it comes from God. So maybe that’s overly theoretical, but as a believer, for example, I’m a combat guy, right? I’m a veteran. My son serves in the army. There’s a side of me that understands the need to fight against those who have a murderous worldview. And yet, as a child of God, highly aware of my own sin, to recognize that these Hamas terrorists are people who need God, they’re sick in the sense that they were raised on hate. We’re raised to believe that their highest calling is to not only die, but to kill for Allah. And, you know, the highest prayer for them would be that they would get revelation and be saved. Just as Saul of Tarsus very sincerely persecuted the early church. And yet I also recognize that I have a mandate to protect those who cannot protect themselves. And so here I am, a combat veteran. Jesus says blessed are the peacemakers, right? I have a calling to protect those around me, and yet I have to pray for their salvation, even as I have to take a step in standing against them. It’s that complexity in that nuance that is not immediately resolvable in the here and now. And yet I have to see God to, in every given moment, respond in a way that honors him. So that’s how my faith informs my identities.

Rusty Rueff: As beautiful as beautifully said, I mean, I’m really I’m emotionally struck there by what you said about Saul of Tarsus. And I think, boy, I wish we could stop. And everybody just think about that more often, that if you were a Christian at that time. Right. And you’re watching Saul and what he did, that there were people who were praying for him. Right. There must have been people who were praying to God, remove this person. Remove this person. And that his conversion from Saul to Paul, the blinding of the light, could have also been an answer to someone’s prayers. Never would have framed that without you speaking about that. Thank you so much for that. Bader anything to add here?

Bader Mansour: Yes, I think, you know, also my identity is probably more complicated. But, you know, I’m an Israeli and most of my, you know, newspapers or television I watch is Israeil television? I read Israeli newspapers, I speak Hebrew fluently. I’m an Israeli. I have lots of Israeli friends. And so I have lots of love to my country. I care about my country. At the same time, I am a Palestinian. Palestinians in 1948 were scattered. Some became refugees in the Gaza Strip, some became refugees in Lebanon and Jordan and some the West Bank and some stayed in Israel. I am one of them. You know, my parents in 1948 became Israeli citizens. So I am also an Israeli citizen, but yet I am a Palestinian. So I also have this sympathy and love to my people. You know, I love my country, but I love my people as well and feel for my people. And I also, you know, my prayer language or my home language is Arabic. And, you know, I am Christian Arab, but I also have lots of, you know, Muslim Arab friends and some are also religious, some are less religious. And I also read a lot of newspapers in Arabic and feed and have friends everywhere, also in Gaza, also in the West Bank, also everywhere. So to being able to see also the point of view of the Palestinians and trying to understand if there could be anything to be understood about this whole, I would say, barbaric attack. But at the same time, why did it happen and why did these people I don’t think these people came just because they wanted to kill. It’s part of a complex situation that has been going on for a long time with lots of injustice and neglecting the Palestinian cause for so many years by insisting that these people can be there for 16 years in a big jail and nobody cares about them, and seeing the world move on and they are still there, nothing. Nobody cares about them. So I don’t justify what they did. Try to understand what’s going on and what hope these people have and trying to have empathy for the people of Gaza in addition to the people of Israel. So as a follower of Jesus, I look at this in such a way, you know, you know, I’m not trying to give two points of view here. I’m trying to say that, you know, in addition to all this, I am a follower of Jesus of Nazareth, where most people in this country, you know, the 14 million people or 15 million people that live from the river to the sea, both Palestinians and Jews, most of them don’t know Jesus. They need Jesus badly. So what is my role as a follower of Jesus in this whole thing? And, you know, can a few thousand people make any difference in this whole craziness that’s going on? So I see my role as the follower of Jesus is to follow the footsteps of Jesus and whatever I do by showing love to everybody, by showing empathy like Jesus would meet the mother of the dead son, and will go and speak to her show love to these people and these people, and also spread the good news of Jesus that he is the savior of the universe, savior of the world. He loves us and he wants the best for all of us. And this is our calling. You know, it’s hard to do it these days, but at the same time, this is why we are here, to stand up for showing the love of Christ for everybody around us.

Rusty Rueff: So I want to go a little deeper into this because I’m going to frame this in a way when people have differing views and they bring that into the workplace, which we see more and more of happening. I was joking with somebody other day. I said, I’m old enough to remember when we didn’t talk politics or religion in the workplace. Right. And today, which I’m very happy that we can share our faith in the workplace. We also share here in the United States, we start to share our political views in the workplace. And our political views have been divisive in many ways. Yet you all are in a situation where you must live and work together with people who have much, much different views. Views that actually are beyond just opinions have turned into actions. Can you share your insights for other faith driven entrepreneurs about how best to live and work together with those who have very, very differing views and not only differing views for the short term, but for the long term because, you know, we pray for shalom, we pray for peace in the Middle East. And these wars, they seem to you know, they come, they go. They never really go away, but it becomes acute and then it becomes less acute. You have to go back and work together and live together. So you have a unique perspective I think you can share for our listeners on how to work together, live together with very, very differing views. Help us with that.

Bader Mansour: It’s just something about, you know, here in Israel, you know, I’m also a little bit old here in Israel, and we spoke politics and religion at the workplace before you. You know, I worked also in America where we couldn’t talk politics here. We talk politics all the time. You know, it’s part of life here at the workplace. So when I worked in an Israeli company that was 400 Jews and one Palestinian, I was the first Arab to join the company. You know, it was a tough at the beginning, lots of prejudice, like, you know, a Palestinian in our company. Who’s this guy? What’s the story? And lots of heated discussions at work talking about differences. But I think this is where our role as agents of change, as people who are followers of Jesus, comes into the place where we can show a different face of our people, because people don’t know, you know, the Jews I worked with never met an Arab other than maybe somebody at the gas station. So they finally meet an Arab engineer and they talk to him. And I also did not have these close relationships with Jews at the time. So when people begin to talk and I think if we bring the ethics of the kingdom into our discussions where we also show respect, we can make change. It’s probably small, you know, it’s one person at a time or, you know, a few people. But I think this is where it has been challenging. But we grow together. Sadly, when we have war, we go back, you know, the tensions go high. People have very strong opinions and things go back. You know, the relationships can be very hard. But I think if we live together, we know that we are going to work together. We have the same goal and we can talk and we disagree. Like, you know Mordechai and I we can disagree about many things, but we can still be brothers in Christ and friends. So softness, empathy, love to one another. And that could be a way forward, in my opinion.

Henry Kaestner: That was that was beautiful. Maybe 80% of our listeners are listening to us in the United States and wondering what does this conflict have to do with them? And you just showed very much so. I mean, you know, one person of Arab extraction in a larger majority spot and sometimes Christ followers feel that way in the marketplace today. Now, a lot of our audience, most of our audience entrepreneurs and business owners, where they had this opportunity to set the culture. And I also think that in addition to just struggling with what does it look like to share our faith when some way and the reason for the hope we have and amidst a discussion with people of differing views, there’s also, I think, this sense in America of, you know, I just I just want to run my business. I want to grow my company. I want to grow 20% year over year, maybe quarter over quarter and cash. All this political stuff is just really just an inconvenient hindrance to me achieving my dream. Because what I’m really trying to do and I’m casting some disparagement against some folks generally here with hopefully that this ends up being encouraging in this appropriate level of challenge, which is, look, there’s a real battle here and it’s not against flesh and blood, it’s against evil and it’s in the marketplace. And God chose this for such a time as this. And we can see some of these things happen in Bible studies. We see this in our scriptural reading, and yet there’s this reminder that you guys are living through things right now, that there is a world at war and God chose us for a time. Is this and this concept of maybe coasting to our funeral and running our businesses and maybe we have triple the growth and we hand it to the next generation and we go ahead and we retire and we play golf and we move to the beach and God calls us home. You guys are live in a different narrative. You’re not thinking about. Well, maybe I’ll work a couple more years and I can kind of cash out and get that country club on the Red Sea or on the Med. Right. I mean, there’s some beautiful beaches in Israel, but you guys aren’t thinking about that right now. You think that guys put you on Earth for a different type of mission? You guys have both spent a lot of time in America, and I don’t want you to, you know, just unfairly rattle the cages of a Western entrepreneur. But what are you learning about faith and mission and purpose and where God has called you in a way that might be relevant for somebody who’s not in the battle right now? Maybe. But how do you reflect on that? You’ve been in a war zone for so long and yet you interact so much with folks in America and the West that don’t have the same type of perspective? What would be an encouragement or challenge to them as they look to learn more about the living God through their work?

Mordechai Wiseman: Well, let me take a swing at that. Trying to tie the previous question to that last statement, I think they’re linked. Even if let’s say you’re not as informed or as mission driven to impact culture. If you are merely just trying to be successful and close to retirement, you would have to still acknowledge that. In these days, usually wealth is created through people, and people form culture, and politics is merely an expression of our culture. And so when the debate is about who’s right and wrong, and that’s what we’re fighting over, and we believe that actually our propositional truth will achieve victory, convinced someone to come to our side, then we get into all kinds of trouble. And in the Middle East, when we recognize that we could talk all day, we’ve been talking for thousands of years and, you know, necessarily convinced each other that truth needs to be incarnational. So that’s why Jesus showed up in the flesh that my calling as an entrepreneur is to engage people. And in fact, the way I produce value and hopefully the value that I attempt to produce is fundamentally around the flourishing of human beings around them encountering God and his kingdom. I can’t convince them of that. I can’t argue them into that state. What I can do is be curious about them to actually try to understand who they are. Why do they take the way they do? This is really how we have to handle conflict here in the Middle East. We’re not going to win when I walk with my Arab and Palestinian brethren. Our organization of first fruits, our board, our staff and the people we serve are Jews and Arabs and Gentiles. We do not agree on a lot of stuff, and yet we have a commitment to walk together. We have a commitment to care for each other and to care with each other for others. And so truth is no longer a club in the sense of hitting people over the head, but rather truth is incarnational. And truth is how I engage you. And how do I want to understand why you are the way you are, why you behave the way you do? Not so I can convince you that I’m right and you’re wrong, but rather that I could show love, that I could see how God might have called us to walk together. And I believe that entrepreneurs who get that will build better cultures. So it’s not even about politics. It’s about creating a culture of listening, of caring, of engaging people. When we do that, we build not only organizations that are more effective, but we are the outcome that we wish to produce, which is people that care about people, people who invest in people. And then our unity is not about uniformity or agreeing on a set of principles, but rather the choice to walk together, which is what marriage is two people that are different, that don’t agree and yet choose to produce life together, to do life and produce life together.

Henry Kaestner: That was beautiful. Mordy Thank you. Bader

Bader Mansour: Yes. I wanted to be answered a little bit differently about, you know, I think most entrepreneurs here who are, you know, followers of Jesus and also others, I think, have a deep passion to do something a little bit different than just making a successful company. They want to see change in the society they are in at Nasdaq. You know, most of the people here serve in the church or in some kind of para church organization. And we see this is part of our calling, not just to make software and, you know, build the great company, which we are, but also to make change as Christians in our sphere and our society. And I think a lot of people also in America are, you know, faith driven entertainers and others as well who have a deep passion to help others. I like to mention a story that touched my heart. And I actually broke my heart a few days ago. One of the entrepreneur, he’s a Jew and Israeli Jew, one of the most successful entrepreneurs in Israel. Eyal Waldman, he is the founder of Mellanox. Somebody I admire because he has built a very strong company in Israel. And he has been also one of these companies who hired lots of Palestinians also to work in his company. Some of the managers in the company are also Palestinians, which is not taken for granted in Israel. But he also decided to open a branch in Gaza Strip and also opened a branch in the West Bank. And few days ago, his daughter was killed in the barbaric attack during the party and all that was going on near the of the Gaza border. He went and he found his daughter. And I don’t know him, but when I read this, I cried and I went home to sleep, you know, just like I was so devastated. And he said, I still believe in peace. I still believe in peace. And I tried to find his email and sent him a note, you know, just an encouragement and condolences. Lots of people here in Israel, you know, have passion to see a different kind of Israel and a different kind of situation, you know, going on here. We as faith driven entrepreneurs are called to do more on this. You know, I admire my friends at first fruit that are doing excellent work, you know, bringing Arabs and Jews together, working together and you know, others as well. So I think entrepreneurs usually in these places have passion. And I think lots of people all around the world have passion to see change in their societies. Here it’s a bit about conflict and about these kind of things, you know, because we are, in essence, a war zone. But, you know, I encourage all entrepreneurs to take a stand on a subject that they care for and do something about it. In addition to cashing out a great company and going to play golf, you know, the Pacific Ocean.

Rusty Rueff: So I want to switch gears for just a bit and talk a little bit about running a business in these kinds of moments, right, in these moments of crisis. So you’re both entrepreneurs. Just give us practical advice. How do you continue to lead a business during the midst of these situations going on in the background like the ones you’re facing?

Mordechai Wiseman: Well, I don’t know if I can give good advice. I can tell you what I did, which is initially I just gave myself another 10 minutes in bed. I just to collect myself and more seriously, recognizing that it’s so easy to throw yourself in. And in the moment of crisis, in the season of crisis, there’ll be many times that as a leader, you’re called to step up and step into the gap. But if you’re the only one doing that and you’re doing that constantly, you will not be around when sort of there, the key moment arrives. So you also have to pace yourself and you have to recognize you cannot win every battle and you don’t have to be the only person who steps into the breach. As an entrepreneur, you’re called to galvanize, and yet in order to galvanize. So you have to be able to lead by example. You often are the first to step up. You also have to acknowledge, though, you’re human. There’s nothing, in my opinion, more powerful in leadership than a vulnerable leader who, rather than being the He-Man or the she man or she woman or, you know, the one who seems to have all the answers and is always like, you know, once more to the breach, my friends, they first acknowledge that they’re afraid, that it’s hard, that they’re hurting, that they’re frustrated. If you don’t acknowledge humanity, it’s hard for people to follow you. That’s my experience as a military guy in the Israeli army. They do not follow you if they don’t trust you and they don’t trust you, if they don’t relate to you, if they don’t believe that you understand who they are and understand the risks that they’re about to take following you. And so listening, feeling, being vulnerable about our own feelings and expressing our pain, and then when everyone else is stuck and kind of like then stepping up and taking decisive action, being bold in your stance, galvanizing, and that shocks people out of that kind of place of I don’t know what to do and they will follow you. So you have to be first human and then you have to be leader. That’s sort of the pattern that I’ve seen effective in these times. And knowing that the crisis is not going to be momentarily. You need to have good oxygen. You have to assess how long is this going to happen, go on, and therefore pace yourself as well.

Rusty Rueff: I’m going to come to Bader in just a second. But can I just dive in a little bit more on that, you know, being authentic? What about those who might be listening, who are saying, I’m afraid to show that I don’t know what’s going on. I’m afraid to be weak in front of my team. I’m afraid to show that I have real emotions because, you know, they might look at me and say, well, you don’t have your act together. What words of encouragement can you give?

Mordechai Wiseman: The highest form of leadership, in my opinion, is creating a safe environment where people can make mistakes and grow if you are perfect. A No one actually believes that, but b everyone’s going to try to be perfect. You will not be able to learn and every mistake is catastrophic and therefore it all becomes a power struggle over your image. And without naming names or pointing out political figures, those leaders who spend their time working about and worrying about how they’re perceived versus those that step up and say, you know what, we made a mistake, but right now we need to take care of business and fight. There’s a clear I mean, within my culture where we have developed a clear understanding of what effective leadership is, we will not follow those people who are just concerned about their image. It’s clear that they have clay feet. We will not follow someone into death and fire if we don’t feel that they understand really what they’re doing, that they’re actually worried about us versus them. And so my only encouragement to a leader who’s afraid of showing weakness is to look to Jesus. You know, I’m assuming that everyone listening is a faith driven entrepreneur. Jesus showed pain. Jesus showed that he is struggling in the garden, in Gethsemane. He says, My soul is bitter unto death. He allowed himself to experience the pain and express it, and that gave him the reserves and the strength as a human. As he said, my heart, not my wills. But your be done. That wasn’t some sort of, you know, faith on Prozac. That was a surrender of saying, I have faced death in my soul. Now I’m ready to face it with my body. And that’s the highest form of leadership. It may not be helpful, but that’s the model that I have.

Henry Kaestner: It is very helpful.

Rusty Rueff: It’s good. Really good. Butter. Anything to add to that thing of, you know, how do we lead in these times of crisis?

Bader Mansour: Yes. I mean, Mordechai put it in a very good way. I just would like to say that, you know, in companies, what do you have? Crisis? We act as if like families, you know, the families, different people react in different ways. We hug everybody. It’s okay to work for half a day or a day or somebody wants to take a day off or somebody is not producing or somebody is home because his children are not at school or they are crying at nights, it’s fine. You know, it’s part of life. You know, we are patient, we love everybody and we pray for better days.

Henry Kaestner: I’m going to hand it back to Henry, but I’m going to ask the question again from another perspective. You know, Israel’s known as the startup nation, right? You guys, you know, the country actually stepped forward and many, many startups come out of the culture of innovation, out of Israel in this time of crisis. What do you tell those customers and business partners that you have outside of Israel in other parts of the world to manage their perspective of how your business is doing? And you know that there’s there’s stability and can we count on you in this moment of crisis, because entrepreneurs not only have to deal on the inside, but they also have to think about the outside and what’s the outside world looking at. So what are you telling your partners and customers from around the other parts of the globe?

Mordechai Wiseman: Well, I would say that 75 years of Israeli industry has proven that we are both resilient and productive, even during the times of crisis, that when the rockets are flying, we still export, we still produce. I think one of the ways in which Israelis deal with crisis is as much as we can maintain normalcy and not get bunker down, obviously, as Bader indicated and as we’re experiencing, there is a okay, gather yourself. There is a momentary pause where we’re not just doing business as usual, but there’s definitely strong narrative and pattern in Israeli society that even in crisis, we try as much as possible to maintain normalcy and try to move forward and take the next step. It’s not about solving everything. It’s about just keep moving forward and that history, that sort of. Proof that is in the pudding is what a lot of our international partners have come to rely on. And so, frankly, at least in my history, people are first asking, hey, how’s it going? How can we help? There’s actually a lot of care, even from, if you will, hard nosed business people, you know, before they say, hey, when is my product ready? It’s like, hey, is there something we can do? What’s going on? There is a season of favor. And Israelis have learned to, in that moment, gather strength and keep on moving forward. And yeah, I think our track record shows that as a nation, we’ve recovered and grown after every crisis. And I think that’s what the clients and customers of Israeli companies have come to expect.

Bader Mansour: Is our customers are also they all send emails with the troubleshooting problems or sales inquiries with first asking about us. And we usually tell them that we are fine and we don’t talk too much about the problem. We want to talk about the issues that are for them important, which are solving their problems, you know, on the other side. So we try to do business as usual as much as possible because we don’t want our customers to suffer or to think that we are not a viable company that will disappear sometime or something like this. And we have proved, you know, lots of things happened and we continue to do what we are doing on the other side. You know, we have spoken to a lot of our friends and business partners in the business world who are on the Jewish side trying to just send them a note and say, how are you doing as well? Because, you know, it all started with this I would call massacre, you know, on Saturday, you know, like ten days ago, mostly most people who were killed were Jews. And I know lots of my friends have friends that lost their lives or, you know, they are somehow involved. So, you know, in business, lots of people become your friends, even though you just do business with them. But they are friends also. In times of crisis, you ask about them, you just give them an encouragement. And I think this is the least we can do just to like people are asking about us. We are asking about the people that are suffering the most, which are the people of the south of Israel and also our friends in Gaza. But we don’t do business with but we have church relations with the Baptist church in Gaza. And we also ask about them, what’s going on, how can we help and how can we pray for you? So it’s the whole society, you know, people asking about each other, making sure everybody is doing fine in this world. And at the same time, we don’t want our customers to be worried that we are, you know, not strong. You know, we’re not going to be here in the future and we will be here, as we have always proven. And lots of companies, you know, have proven that they can be resilient. You know, they can be strong with all difficulties. You know, we will continue doing what we are doing.

Henry Kaestner: Bader we like to finish every one of our episodes by asking our guests what they’re hearing from God in his word. Maybe it’s today. Maybe it’s or of course, last week. But believing that God continues to speak to us through his people, through prayer and absolutely his word. What are you hearing from him?

Bader Mansour: Yes, lots of devotions. We have lots of prayer meetings. Our church services turned into places of comfort. Everybody’s talking about this. People are turning to God. I wrote down two verses that spoke to me, and not only this week, but in general, but more strongly this week, Act justly Love, mercy walk humbly with God. This is one and another one, though the fig tree may not blossom nor fruit be on the vines, though the labor of the olives may fail and the fields yield no food, though the flock may be cut off from the fold and there would be no herd in the stalls. Yet. I will rejoice in the Lord. I will joy in the God of my salvation. This has encouraged me as day in our Sunday morning service. So the Lord is good. He is with us in the midst of this difficulty. But we need to be acting justly, not only with our people, but with all people and have mercy, Love it, love mercy, and ask God for mercy, but also have mercy on the others and be humble. I think we need to walk humbly these days, just trusting God more and not trusting our own abilities or our own strength, but just asking the Lord to work through us because we are weak.

Henry Kaestner: That’s beaufiful,Mordechai.

Mordechai Wiseman: Well, I deeply resonate with everything that Bader has just shared. Those two verses have definitely been hallmarks of what God has been speaking to me recently. As I said earlier, I’m on the heels of two years of feeling like God is squeezing me. And no matter how hard I try to get the outcomes that I’m seeking, Lord seems to have other kinds of outcomes that don’t fall in my category of success. And actually, a week and a half, I think ten days before everything kind of went crazy on this side, I felt like the Lord asked me if I will give him permission to squeeze me again. And, you know, the question that keeps asking me is, do you trust me? Are you willing to ignore the normal human signals of my favor and just trust me? And that’s a hard one because you just, you know, am I doing the wrong thing? Am I missing your purposes? And this season, I feel like God is squeezing all of us. And it’s not out of a desire to hurt us, but to produce in us something that is unique. And it is a choice for us as children of God on whether we cooperate with his discipline or not. The discipline is not so much about punishing us. It’s not about punishing. It’s about helping us to grow, to become who he’s called us to be and see things as he sees them and respond to things the way he is calling us to respond to them. And anyway, so that’s kind of what God has been speaking to me and a whole bunch of lamentation songs have been extra meaningful to me in this season. And actually that last verse from I think it’s Habakkuk that Bader mentioned very powerful.

Henry Kaestner: Let me pray for you all on behalf of the listening community. Heavenly Father, we lift up these two brothers, these two men. We ask that you would continue to bless them, Dear Lord. We ask that you would allow them to know you, to be protected by you, to be able to be faithful through this ordeal, just as you protect their families, that your will would come about on Earth and Israel Palestine as it is in heaven. Dear Lord, I turn this prayer back on us and ask that these really beautiful, important lessons that you are teaching, Mordechai and Bader, would be the lessons that you’re teaching us. Though the battles may not seem as apparent as maybe they are to Bader and Mordechai this morning, where we are in Kansas City or Seattle or London or Cape Town. But they are there. Dear Lord, I ask that you would allow us all to be able to lead in such a way that we would be real with people, to be able to be vulnerable. And yet with a sense that we’re on a mission. We’re on a mission to advance your kingdom under your power, not ours, but under your power. And that gives us a sense of hope, gives us a sense of gratitude that you’ve created us for such a time as this, with as much brokenness that exists all over the world. Dear Lord, you’ve called your faith driven entrepreneurs, your business owners, to be in the midst of this battle today. Allow us to understand what the times are like […..] allow us to be able to walk in with the full armor of God. In a way that we know that we have a joyful hope set out in front of us in a way that is this countercultural sign of hope and purpose that the rest of the world is looking for. That doesn’t point to us as strong leaders necessarily, but points to you as the healer, as the savior of the world. Find us faithful in Jesus name. Amen.

Bader Mansour: I put this in front of me, a friend of mine, an American, gave me this maybe 35 years ago. It’s known, but I’ll say it. Maybe it can be a good ending to this discussion. If our greatest need had been information, God would have sent an educator. If our greatest need had been technology, God would have sent us a scientist. If our greatest need had been money, God would have sent an economist. If our greatest need have been pleasure. God would have sent us an entertainer. But our greatest need has been forgiveness so God sent us a Savior. We are all sinner, we deserve. You know, the punishment of God. And he sent us a savior.

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Our ministry receives tons of questions around angel investing. What is it? How does it work? How can I get started?

In this episode, experienced investor and advisor, Mark Klopp, joins our host John Coleman to answer these questions and more as he provides us with a basic overview of Angel Investing. 

For more, check out this page: https://www.faithdriveninvestor.org/angel-networks

Episode Transcript

John Coleman: Welcome back to the Faith Driven Investor podcast. This is John Coleman. And I am very privileged to have with us today Mark Klopp to talk about the topic of Angel investing. Mark is an independent consultant, board member, advisor and investor. He’s focused on corporate venturing best practices. He’s an instructor for Global Corporate Venturing Institute and a principal advisor for Larta and Tech Future. He’s also an angel investor himself and serves as a board member and advisor for several startups and Christian ministries. And I know my partners have known Mark for some time. He’s such an incredible influence on this ecosystem, and we’re incredibly grateful to have him on today. So Mark, welcome to the FDI podcast.

Mark Klopp: Thanks, John. Great to be here and appreciate all that You and Luke and Henry and others are part of the faith driven investor movement and community that’s being built. I’ve gotten a lot out of it myself and happy to share what I’ve learned as well.

John Coleman: Well, we were joking before the recording started here for the audience that our audience knows, I sometimes get into rather eclectic investment topics that maybe don’t have the listenership of angel investing. But angel investing is a very popular topic that I think people will be engaged in, and we’re super excited to learn from you, Mark. You know, maybe just to start this term, angel investing is a little bit broad, right? People mean different things with that, I think. What is Angel investing mean to you? It’s a big topic. How do you define it and how do you think about the parameters of angel investing?

Mark Klopp: Yeah, that’s I think everybody probably has their own definition and mine is not an official one. But I think at a high level, John, that angel investors are really usually individuals that invest their own capital into startups. And usually that’s during the early stages of development. And for that they receive an ownership stake or equity. Sometimes they invest alone and sometimes in a formal or an informal group in order to pool resources and share due diligence. And now these businesses are early. They might not even have customers yet or generating revenue, but they could only have a business plan or a beta product test or a minimum viable product. So some of the capital is used for research and development to help the company formulate its product service, offering even to build a business strategy or identify a target market, depending on how early you invest. And for me, from a faith driven investing standpoint, that’s a subcategory of angel investing. And that means that I’m seeking out investing and mentoring an faith driven entrepreneurs and their teams, and that involves adding value beyond the cash investment in terms of coaching, strategic insights, as well as providing leads and introductions to investors, customers, partners. And the sweet spot for me is a company that has a strategic focus and values and a specific mission aligned with Christ. Hopefully being able to make some kind of kingdom impact.

John Coleman: When obviously angel investing. One of the unique things about it is that it is super early. Typically we know that super early investments are high risk. And so, you know, it is for a particular type of person and is different than the approach most people take, usually investing through professional fund managers or in a diversified portfolio of more mature investments. What drew you to Angel Investing is a discipline, and maybe it ties in to that, being able to counsel people in spiritual impact and those sorts of things. But what drew you to it and why has this become such an important part of your life and your investment portfolio?

Mark Klopp: Yeah, I think it goes back to my initial experience with investing was as a corporate venture capitalist, that was with Eastman Ventures, which is the corporate venture capital arm of Eastman Chemical Company. And through that I got to understand investing in the venture ecosystem. But that was secular and I always had a drive to try to find something that’s more impactful than just financial returns. So that was always been an underlying goal or objective. But I was constrained in what was strategic to Eastman at that time. And since I left there and learn some of the fundamentals and had a network build up in the investing world, I started consulting for corporations on VC best practices, which is kind of been my day job. And then investing also as an angel investor and serving on the boards and advisory boards for private companies, but from a spiritual standpoint. I read the book half time, which many of you may have also read and been influenced by as kind of, you know, what are you going to do to make an impact in your second phase of your career or life? And went through the master’s program at […]. Those have been big influences on my faith journey, especially as it relates to integrating faith and work. And I realize that the relationships, the knowledge, the learnings that I gained in the for profit world could be leveraged to make an impact in Christian ministry and start up arenas. So I started out with before the FDI community had been built by you guys, I was focused more on medical devices, which was my way of trying to make an impact or be involved with impactful investing, because I could understand as an engineer medical devices more easily and I could see where I was helping improve or save lives and many times. But then when FDI came along and kind of opened my eyes to the opportunity to make a kingdom impact beyond the secular play. So my interests as far as industries and application has broadened to more of a generalist with a kingdom impact being the central theme. It’s kind of been a lot of fun to learn about new technologies and industries, kind of keep me on a learning curve. And although many of the principles of investing apply across different technologies and business models, I still try to glean some wisdom from those experts that might be more experienced in the domain or space that may be new to me.

John Coleman: Well, if you don’t mind, I’d love to follow one quick tangent because you brought it up as your day job. And this is not exactly angel investing, it’s corporate venturing. And in my last role, I helped a bit around the edges. It was unique in that we were an investment firm, but as a corporate we were also thinking about new technologies, new innovative companies within asset management, etc. And so we we thought about this as well. And it’s a tough space to navigate, actually. I mean, you know, there are so many different stakeholders within a corporation. You know, you’re triangulating for different purposes with the investments that might be more multifaceted than you would as a pure VC. Maybe just as a quick tangent. Tell us a little bit more. What is corporate venturing and what makes it so both challenging and interesting for the corporations who choose to do it?

Mark Klopp: Yeah, it is. You’re right. It’s a very complicated algorithm to be able to balance the strategic desires of the corporation and the tastes and innovation outside with the startups. It kind of goes to the open innovation theme where corporations have started to realize and it’s becoming more mission critical to reach outside for open innovation and bring in technologies. Then while trying to find things that are relevant to the company to create options or to hedge or to build business intelligence for the company. And balancing that is a very difficult thing. And that’s why there is a need to kind of learn from the past about best practices and how that’s done. So a corporation might have a heavy emphasis on financial returns with a light on strategic. Another corporation may have almost all strategic and very little financial return objectives other than returning their capital. So it really depends on the corporate needs. But in general, they’re trying to do both because building a sustainable corporate venturing effort requires you to make a strategic impact to the company that is creating an M&A option, a licensing of new technology, a partnership or go to market collaboration, a new vendor to enable something or just in competitive intelligence and business knowledge. And those objectives are part of the investing. So you have the filter of what is strategic to the corporation. And you have the filter of a traditional venture capitalist. So many times corporations will co-invest with lead VCs, financial VCs, and just try to fit those deals that make sense strategically and then set up that collaboration almost in a business development role with a core corporate.

John Coleman: Yeah, love everything that you said, and we always thought about kind of you had to almost measure the return of the portfolio in a broader way because we were often investing for some sort of commercial acceleration. And so we might partner. We might invest, for example, with a natural language processing company in order to be their exclusive customer for a period of time in our space, right, in our industry. Yeah. So there were even if the financial return were modest in some respects, if it were able to accelerate a part of your business upon which you were relying, you know, you could think about multiple sources of return. And I think that’s what you’re describing is how do you do that while also, you know, everybody believes that in theory, although people do tend to look at your financial returns pretty aggressively when you’re doing that front line. And so, you know, you can say it’s a balance that everybody kind of wants both.

Mark Klopp: Yeah. When you’re like a 10 billion plus market cap corporation and you dedicate, let’s say, $50 million to a venture capital effort over multiple years, and if you get A5X return, that doesn’t make a huge impact to your now market cap. So you have to have a strategic leverage to that. And how do you measure that? It’s important. And that’s one of the best practices. Also, you’re not going to be around very long as a corporate VC if you lose money, right? So that’s right. The way to position is you’re a profit center inside a corporation that’s also doing innovation. And you can ultimately recycle and create kind of an evergreen fund yourself inside the corporation. And you’re returning more than the average return on invested capital for alternative uses of that allocation of resources.

John Coleman: Well, I could do a whole podcast on this, Mark. We might want to come back at some point, but maybe to return a bit to the angel investing side. You know, I’ve had such long experience here and you talked about deals in the abstract to give people a sense for the space, for the types of companies, for the role that you can play. Would you mind talking us through a couple of your more interesting deals that you’ve done and just how did those come about? How did you find them? What made you invest in them? Just talk us through those deals and give us a sense for what an angel deal looks like in the role that you can play.

Mark Klopp: Yeah, I just at a high level, I typically assist the CEOs on company strategy, financing, business development, licensing, corporate partnering and investor relations. Those are my kind of strengths where I can bring something unique to the table. And on top of that, I try to be kind of a coach or a mentor or encourager and sometimes a cheerleader or even a therapist as needed, since it’s kind of a very lonely and isolating to be a CEO of a startup because they’re looking for someone that can be vulnerable with and they can vent to other than their investors, employees or customers. So maybe a few examples of some deals that are been in the FDI space that I’ve done. One is called FRDM, headed up by Justin Dillon. That was a deal that was led by Tom Blaisdell and I co-invested with him. Justin worked for years in the nonprofit sector to build awareness of forced labor and human trafficking. And he recently was part of a FDI feature demo day type of webinar. So some of you may have heard his story and FRDM story, but they’re really trying to identify that forced labor and human trafficking as well as environmental issues in the supply chain. And he really learned that through his not for profit work, being an advocate in that area, so that right now they’re getting some great traction helping and some of the world’s best brands build transparent and responsible supply chains aligned with their company’s values. So that’s a really good example of one that has a kingdom mission, but also is solving a real problem in B2B. On the more consumer side. This is one where I’ve kind of ventured out beyond my normal focus is a company called Flaire F-L-A-I-R-E, and it’s led by Julia Carter. And this was fueled by her faith and desire for social justice, the work she did with IJM in Uganda. And with flaire, she wanted to build community and social interactions with the Generation Z. And she’s established a great culture. The company that’s one of the things I look for is, is there a cultural goal within the company to have kind of Christ’s values, even if it’s not such a clear kingdom impact, but influencing through culture. She’s building what she calls a friend powered AI that maps where your friends have been and what they recommend while keeping track of your own travel history. Adaptic Health is led by Luke Stewart. This was a deal was actually referred to me by Phil Jung at Sovereigns and something that you guys are looking at for a later stage. And that’s where I like to get some flow from venture capitalists who say, I like this, but it’s a little early. You might be interested in it. And Luke is actually a pastor and a board member at Vive Church, and he’s formed this company called Adaptic Health, which offers a software as a service or SAS platform that helps accelerate clinical development for drug and biotech development from the early stage of design through optimization. And it’s kind of like a copilot leveraging generative AI to streamline collaboration, dynamic literature, review, what if analysis tools and other kind of analytics to improve the efficiency and bring to life drugs that save lives as well as improve lives. Debbie Chen is the founder and CEO of Hydrostasis that provides real time hydration, monitoring and guidance. So from a wellness standpoint or health, dehydration is a universal problem, and that’s three out of four adults, in the US are chronically dehydrated, especially older. One of the lead causes for emergency. I know my mom’s suffered this many times having to go to emergency to get hydrated through IV and she had a monitor. It might alert that problem earlier.

John Coleman: I mean, what you’re describing is a really broad array of companies at a similar stage. Yeah. And you know, what I love here is, as you said, for a lot of venture firms, including ours, even if you’re early stage, there’s a stage that’s too early even for us, right, where Angel often play a critical role. You also you mentioned all these folks by name. And I know a big part of angel investing is that counseling role that you can play the coaching role. Would you mind talking to us a little bit more in depth about what that looks like, like when you come alongside one of these entrepreneurs? What are they going through typically that you can be helpful on? And what is that counseling, relationship or coaching relationship look like between the two of you?

Mark Klopp: Yeah, it varies depending on kind of the need. Many times it’s positioning for the next round of financing as well as rounding out the current round of financing, because I’m coming in many times right after friends and family. I may be one of the first angels. And generally at that stage. So it’s about making sure the structure of whatever their vehicle they’re using, whether it’s a stage node or a convertible or a priced round, is the right one to go after the target audience suggesting who the target investors might be, referring investors that might align with their values, giving them ideas of investment firms and corporates that they might want to think about approaching later and kind of the financing strategy in general. Also, many times there’s a need for a proof of concept or some kind of test evaluation and how to work with the corporation and make that palatable and appeal to the corporation. There’s a lot of insight that I can give. I’ve got a lot of experience with licensing and intellectual property strategy. So we talk about that many times and then just building out a board of advisors, if there’s not one in place or let’s say finalizing the board of advisors and rounding that out. And then just the encouragement, a lot of it’s encouragement and the subtleties of building a business that I try to bring in. Like I said, it’s sometimes it’s just someone to talk with on topics that aren’t comfortable for them to talk about with their investors or employees or customers. Is that specific enough?

John Coleman: Yeah. No, no, no. I think that’s a great overview and it is an opportunity because you’re coming at a unique point in time where, as you said, you’re kind of the first port of call after friends and family and they’re really often looking for counsel, especially if this is their first venture. Now, you have an extensive track record and experience in venture capital through corporate venturing, through more traditional venture. So you came at this with a lot of experience that angel investing is a different beast even than conventional venture investing comes with a lot of risks. It’s a different structure. And I suspect you maybe made some mistakes along the way. You know, as people are thinking about getting into angel investing because we hear about this all the time. I mean, people who have done well for themselves, who picked up great experience, who want to be an encouragement to others, who really want to take some risks. But, you know, it comes with some pitfalls, too. What are some of the mistakes you made along the way that others might learn from?

Mark Klopp: How long do you have?

John Coleman: This is a whole podcast, right?

Mark Klopp: Okay. Well, yeah, what is our time limit, there’s a lot to choose from. And you would think I would have known better in many cases. So let me give you a few examples. Early on in my angel investing experience, and this shouldn’t have been a mistake due to lack of planning, it was me failing to plan or at least accept that I should reserve adequate funds for follow on rounds. And that’s assuming conservatively on the time to return, because as an angel, you’re going to be in for the long haul. The interesting thing is that some of you may be aware of the J curve, which basically means you get the bad news early. And the good news comes later as far as financial returns. So the really good companies are going to take a while to generate a financial return through an M&A or an IPO or some other kind of exit. And this should have been obvious to me because we did that all the time in eastman ventures. And I knew how venture capital worked, but I didn’t plan well. And the other mistake I made in the early days was when I came from a secular. Angel investing standpoint. I many times got enamored with the technology or the application or the business opportunity and didn’t do enough due diligence around the character or the ability of the CEO to raise money or be a talent magnet or even execute on the business. I just got so excited about the product or the market, although, you know, market is important, but ultimately when you’re Angel, you’re kind of betting on the jockey as much as the horse. So as I moved into FDI, one of the challenges I have currently is time management and juggling kind of the day job like I talked about. But let me give you a couple of specific examples where I really messed up. One deal that I did early on before FDI was a medical device that treated emphysema with a less invasive approach. i was the first investor in on a convertible node, played an interim. I actually played an operational role for a period of time, VP biz dad role, and I received additional founders shares for that because I came in really early. So first money in and kind of played a role. So I kind of leveraged up my angel investing with some founder shares and the company did quite well. They were lined up for a Series C and then this is right in the middle of the financial curve, right at the start of the financial crisis. Oh, wow. A Series C came about. They signed the deal and literally everybody was signed up and in the syndicate. And the day of the wiring of money, they pulled out. Wow. Yeah. So the existing inside investors stepped up, but they did our very own arrests pay to play with a reverse split and all these other investor friendly terms. And my founder shares basically got wiped out. And then I had to come up with some money to pay to play and be in line for the liquidation preference. So that was a painful lesson. On reserving follow on zero. If you don’t do it, at least you have it if you need it. And then another mistake I made was on an exit. I invest in a company and advised In Touch Health, which is kind of a telehealth company that was acquired by Teladoc, which is kind of the leader in telehealth now and a public company. It was an all stock deal after the acquisition. During that time, when you’re locked up and you can’t sell. They had a run up in the Teladoc stock price. And once the window opened up that I could sell the Teladoc stock and liquidate some. I took out some like 15% of the shares and gifted some of it to the donor advised fund. And I left the rest right thinking it would go up further or they stay pretty stable because they’re a leader and then use that Teladoc stock as a kind of a holding stock for my source of funds going forward and then sell it when I had the investment opportunity. Unfortunately, with many Covid pandemic run ups, this one went down like 90% and it’s remained at that lower level. So I really beat myself up for being greedy and not contributing more of the stock to my DAF or selling more of it to hold in cash and reinvest in FDI companies or using some type of option to protect the downside. And so that was a very painful lesson and still hurts and one that I hope not to repeat any time with our investments going forward when there’s a stock consideration, take some gains, take more than you think you need, and use that to recycle into other companies.

John Coleman: Well, it’s just a good lesson on venture and public equities being dramatically different. Right. Which I think gets underestimated. You know, we’ve always talked about in the context of a fund manager, for example, people will hire you to manage the asset class. They’ve hired you to manage, not what that might turn into. You know, for a venture firm. Obviously, you want to be intelligent about the way that you exit a position even in public markets position and thoughtful about that. But ultimately they hire us for our venture fund to do venture capital not told public stocks and you know rather than capital to them so that they can diversify. And I think the same holds true when you’re an individual where unless you just have a very strong thesis and conviction around that resulting security, as you said, keeping your powder dry for the activity that you’re engaged in and a more diversified portfolio or these days you even get returns on cash market’s fascinating. We haven’t had that in 15 years.

Mark Klopp: […] Percent on a money market. Who would have thought?

John Coleman: Who knew? It’s like I’m a kid again. Yeah. You know, as you get into that, you touched on this earlier. But one of the unique things about your approach is how you play a spiritual role in the companies that you invest with and you are targeting faith driven leaders. It sounds like companies with redemptive impact. Where do you see opportunities for redemptive impact as an angel investor just for those who are thinking about getting in and, you know, whether that’s alongside teams that are faith driven, whether that’s the types of products and services or markets. You sort of you mentioned like I loved the example of I think it was called Freedom earlier, which obviously has an impact on human trafficking and supply chains, which is redemptive product, redemptive founder. But just talk to us about how you think about redemptive impact in your angel investing.

Mark Klopp: Yeah, that’s a tough one. And you can get pretty deep from a theology standpoint. And I have a lot of learning to do in this regard. For me, it’s a constant battle to avoid the temptation of a focus on financial return, because I’m kind of wired that way as an investor. So, you know, from a definitional standpoint, you know, I believe redemption to a Christian means that Jesus Christ, through his sacrificial death, paid a ransom for us as believers from the slavery of sin. And that’s to set us free from the bondage of sin. So how do you find that in your investing? I do believe that there is a redemptive potential in angel investing when you can find some kind of spiritual, social, economic impact and a results and also some financial returns because you want to be prudent and find a way to return that capital back into the system and recycle it to others that are doing the same on the for profit side or in your tithing or gifting on the not for profit side. So you might have a an investment goal or a theme to support ventures that renew or reshape or restore individuals, communities and culture Now so you can as an angel investor, I think you can not only provide funding to support a business that has a kingdom objective and a culture that models Jesus, but you have that opportunity to kind of get into it from a higher touch standpoint as a spiritual mentor and encourager kind of a Barnabas, as well as provide strategic advice and connections and basically think about how can you help? I always think before I do a deal is can I help this company some way beyond the cash? And what is that way? And have that discussion with the entrepreneur ahead of time. And sometimes that results in an informal mentoring. Sometimes they ask me to be an advisor in addition to being an investor, and I’m formalize that agreement as an advisor and an investor. And then when it’s formalized and we literally outline what I will do to help them in a document.

John Coleman: That’s fantastic, Mark. And I love the structure that you’re bringing to that. You know, I think often we see people without as clear a playbook, especially as they’re getting started. And so the idea that you’ve got these learnings that you can structure that provide a framework which you can interact even on the redemptive side, I think is is incredibly helpful. Maybe to pivot a bit to portfolio construction, we kind of talked about your experience for Teladoc. And you had mentioned, you know, you’ve got redemptive being financial return as a criteria. I presume that not all of your assets are in your angel investing. You’ve got a broader portfolio, although I may be wrong about that, as people are thinking about getting into angel investing. How do you think about that as a part of your portfolio and what percentage of your broader investment portfolio that should be and just how you allocate from your own financial picture knowing that this is a relatively risky asset class?

Mark Klopp: Yeah. And I can tell you what we do, and this is with my wife and I, Meghan, discussing and agreeing because you have to have your partner on board or it’s going to be ugly and you want support and encouragement yourself when you mess up. And forgiveness when you mess up as well as cheerleading when you do well as an angel. So our first priority when we think about investing is actually giving in the tithing standpoint. And we use a donor advised fund as a tool to tithe and then make grants from there to utilize the balance of each year and not have a huge overhang. So we have kind of a given autopilot thing going on with DAF and then we use opportunistically donate when we have unexpected gains. So we’re very involved with supporting on a continuing basis several Christian ministries. And our theme is basic needs, rescue and education. So some of the ones that we’ve supported are opportunity International, which is microfinance edify as Christian schools place in developing countries. IJM International Justice Mission, which is rescuing trafficking, slavery, Fuller Seminary down in Southern California. Jessup University, which is the only real Christian university in Northern California. Teen esteem, which helps kids and parents with making biblical based choices. Shepherd’s Gate, which is Women’s and Children’s Rescue City Team Miracle Messages and Mobilize Love. So those are the ministries that we try to support first with giving. And then on the Angel side, we’ve allocated 4 to 5% of our net worth to direct angel investing. And we kind of think of that as the riskiest and most illiquid part of our investment portfolio. And kind of also think of it like an extension or increase in the tithe that might have the bonus of a recycle and a return component. So when you make a grant, then that goes away and doesn’t come back. But if you make an investment that can come back and if we return at least the capital, then we’ve leveraged that up. That’s the way we kind of think about it. And the principal and the gains can be reinvested. But that doesn’t mean we don’t support not for profits because they’re all part of the kingdom and they have their own business structures and you’re getting eternal rewards. There’s not financial rewards for the grants. And we’re trying to move to something along the lines of what Greg and Tom Lernihan have done a great job articulating and a very evolved investment philosophy where they’ve broken it down into four quadrants with high and low spiritual and social impact and financial returns and kind of bucketing and compartmentalizing those investment objectives. So we’ve got when you talk about our overall asset allocation, we’ve got a rainy day fund, which is really cash that deals with some of my insecurity. And we’ve got about two years in money markets, Treasury bills, two years of runway in case anything ever came about that was unanticipated. And that also gives us a psychological confidence or boldness in pursuing riskier investments if we’ve got that safe investment to fall back on in case something comes about. And then most of the portfolio is a mix of brokerage and IRA accounts invested in diversified ETFs with about an 85 to 15% equity bond ratio. And then we’ve done some private limited partnerships in real estate, VC and private equity, and we’re an investor or a limited partner. And as you know, in the Sovereign’s Capital Access Fund, which is a fund of funds, and we’re excited about that because it’s not only focused on faith driven entrepreneurs and faith driven investors as funds, but, you know, we expect to get a great financial return, but it’s also an opportunity to learn and network and possibly consider direct deal flow coming from that portfolio. So these limited partnerships are also illiquid in the short term, but the goal is capital appreciation in the medium and long term. So that’s kind of the overall structure of our allocation, maybe more detail than we wanted to hear.

John Coleman: No it’s awesome because I think, you know, it’s easy to look at this from the outside as you’re thinking about getting started and really think that others have kind of their whole portfolio in this. And, you know, for some people that might be right. It is a risky asset class. Right. And so being thoughtful about your giving, about the needs of your family, about the way in which you allocate, like you said, can give you some security to chase down some of the more fun stuff that you can do as an angel. I will say your bond portfolio is typically not quite as exciting as your as your angel investing work, but I guess the money markets certainly are. But that’s the goal, is to have them not be very exciting, but to be able to pay for, you know, a bathroom renovation if there’s a roof leak and that kind of thing. Yeah. Mark, those are great comments. In summary, you’ve been doing this for a while. What would you say to those who are looking to get started in angel investing?

Mark Klopp: Well, probably the first thing is pray about it and talk with your spouse. If you have a spouse or a significant other and make sure that you guys are both on board and that you’re willing to kind of move forward in that regard because you don’t want that to create stress in the family and conflict. So that would be the first step. The second would be kind of jointly decide what percentage of your net worth or you’re comfortable risking and allocating for an illiquid investment that might not return in 5 to 10 years or maybe even longer. And then be prepared to understand those risks that you’re going to require a high tolerance for the risk and you should be prepared and really not shocked to lose your entire investment in any one deal if the startup fails or just winds down in some way. And then be prepared, as I mentioned earlier in follow ons, be prepared to include and set aside enough money for follow on investments in case that’s required or desire and maybe to the tune of 30 to 50% of your initial investment. Diversification is very important as a angel like it is in any venture capital. So make sure you invest in multiple startups can help you spread your risk and increase your chances of success and also making an impact. And then when you’re getting started picking an initial focus, if there’s a particular industry that you’re interested in or an expert with connections that you have where you can add value and maybe syndicate or introduce to customers, you might even think about a horizontal focus versus a vertical focus in maybe the kind of impact that you’re targeting, a theme in that regard, and then understand where you can add value and be ready, be willing and able to offer help and assistance in areas that you particularly skilled or experienced in which align with the needs of the company, not just pushing those areas, but having the venture leadership team kind of pull you into that with what they require. So you could have a set of capabilities you can bring and say, which one of these can I help you with? And then once you’re evaluating deals, make sure you do your due diligence and research. And before investing in a startup, you should really get to know the founders and the industry. And if you’re looking as a faith driven investor, convince yourself that the investment in the team aligns with your values and Christian values and objectives. And then as far as generating deal flow, you know, network with other investors and the FDI marketplace where you can find potential investment opportunities and syndication with other investors. You can do that through sharing due diligence and learn from those other experienced investors and FDI community. And there’s a sort of a bulletin board for the FDI community called the Marketplace. And that’s a great way to get exposure as a Christian investor. And then you can look at companies that are coming from Christian based accelerators like Praxis or Ocean and participate in those demo days and get access to what’s going on, because those have been kind of preveted. Prescreened for faith driven investors, faith driven entrepreneurs, and also potential financial return. Those will be some of the areas that I would start with as an angel.

John Coleman: Mark. You know, one way we love to end these podcasts and this has been remarkably informative is to ask people about something they’ve been reading in Scripture that they might like to share with others, something that they’re learning through Scripture or through their own study that they might like to share with others. Is there something that stands out to you right now that you feel like you’re learning that might make sense for others?

Mark Klopp: Well, you know, I’m just hearing the constant whisper from God to devote more of my time and talent and treasure to the kingdom and transitioning from, you know, I’ve got to regarding treasures. My families and friends know that my personal biggest struggle is guarding against the worship of financial security as an idol. And many verses in the Bible deal with that. And the Bible addresses money more than any other topic. And there’s a lot of great FDI content around mana and management and being a steward. So I’m constantly learning and struggling with that. So angel investing is kind of one way I’m trying to battle that worship of financial security by willing to part with some of this security in the form of investing in startups and then recycling those capital gains to reinvest. Another is supporting the church and various ministries. And my wife and I have been involved with the journey of generosity in the past, which made a big impact on our intentional giving plan, giving and tithing. And then I’m trying to back off of chasing consulting fees with corporations, which is tempting on those engagements that pay well. And some of that. Activity kind of allows me to take the focus off of making money while freeing up more time and attention. Apply my talents to kind of give advice, encouragement and make connections to faith driven entrepreneurs, our church and and ministries that we support.

John Coleman: Well, that’s that’s a really thoughtful reflection. I had the opportunity to speak at a breakfast just last week on this topic of what I termed good money. Right. Which is, you know, the Bible warns that the love of money is the root of all kinds of evil. And, you know, we all know that money can be destructive. We also know that money can be a tool for good. And there are some verses about that. You mentioned there are more verses in the Bible about money than almost anything else. I think it’s the research I saw said 2350 references to money, many of which concern its dangers, some of which concern its proper stewardship and the opportunity to create. And I know one thing that you agree with, and it’s kind of become a motto for us sovereigns that all investing is impact investing. It’s just a question of what kind of impact you’re going to have an idea that money is just one more thing in your life. There is a tool that God has given you to steward that you can submit to his purposes and that can ultimately make a positive impact in the world, but only if you’ve kind of let go of it and tried to put those resources at his disposal. And I think that message is a great reminder. You know, we don’t want anyone to take undue risks or do not provide for their family, but sometimes it can become an idol to hang on to things too securely rather than dedicating them to investments in nonprofits or start up companies or other ventures that might make sense for the kingdom. And so I think that’s a wonderful reminder in the way that you live your life.

Mark Klopp: Thank you.

John Coleman: This has been a remarkable conversation. I love how invested you are in the States. How much of a pioneer you’ve been in faith driven investing and your passion for those enterprises and those individuals and just your openness with us today given us a real download on what it could look like to be an angel investor. I know the FDI community is grateful and I hope we get to talk to you again soon. Thanks so much.

Mark Klopp: Thank you. John.

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The collapse of institutions like Silicon Valley Bank sent ripple effects around the world and brought many to a place of fear, doubt, and instability.  

So how should we faithfully think through these recent events?

We tackle this topic on this special episode of Marks on the Markets.

Host John Coleman is joined by Justin Speer, a Principal and Senior Analyst on the Public Equities team at Sovereign’s Capital, and Zack Mansfield, who has over 15 years of experience working with high growth entrepreneurs, venture capitalists, and other members of the innovation economy. 

As the current Managing Director of Venture Banking Group at Signature Bank, Zack has a deeply personal connection to this conversation.

Join these three as they wrestle through challenging questions and discuss how they have found hope in Christ despite the instability surrounding all of us.

Episode Transcript

John Coleman: Welcome back to the Faith Driven Investor podcast for our monthly Mark’s on the Markets episode. This is John Coleman and I am very privileged to have with me today two guests to speak about the banking crisis, the recent banking crisis that’s kind of erupted over the course of the last several weeks. Obviously, this is still real time, although some of the biggest movements have settled a bit. And we’re trying to figure out what happened as well as what the banking sector will look like moving forward, what venture banking might look like moving forward, and how investors in Faith Driven Investor should think about the marketplace to explore this topic. I’m really privileged to have two guests on the podcast today. The first is Justin Speer. Justin, who was one of the portfolio managers in public equity at Sovereign’s Capital. I’ve been privileged to be getting updates from Justin throughout, and he’s just a really wise person on public markets generally and also on what’s happening in the financial markets right now. The second is Zack Mansfield and Zack, maybe new to some of you, but he’s not new to us at sovereigns. He was one of the original architects of the firm, one of the original investment committee members, and is one of the most senior executives in venture banking in the country. And Zack is currently hoping to lead the venture banking group at Signature Bank, which has obviously been a part of the news that’s come out over the last several weeks and and will be able to provide us with just an extraordinary insider’s perspective to this as well as a perspective on the banking sector generally. So Zack, Justin, thank you so much for joining today.

Zack Mansfield: Good to be here.

John Coleman: Well, and I know I should note upfront, we’re going to talk about a lot of real time issues right now. These are not advice to buy or sell securities. They’re not advice on where you should bank or how you should bank. But we do want to try and visit this topic. And and the first thing I want to dive in on before we try and dissect what’s happened is just where we stand today. And maybe, Justin, we could start with you. You know, the last couple of weeks have been very rocky, but where does this mini financial crisis that we’ve experienced stand today?

Justin Speer: Well, we’re certainly not out of the woods, but it now appears that some of that fevered panic has been quelled by some important moves from regulators, the Fed, and from large banking institutions. In the past couple of weeks. They’ve done some things that we’ll discuss today in more detail a bit, but their efforts have been very important in quieting some of the fever panic that was cropping up across multiple lenders.

John Coleman: That’s great. And I think we’ve seen that in some of the stock prices leveling of these banks that have swung so wildly and they’re still down pretty precipitously, especially the regional banks. But those prices seem to be swinging with less volatility at the moment. Is that accurate Justin?

Justin Speer: Correct. Yeah, we’ve seen significant pressure. We’ve seen 20% declines in regional banking equities with the most challenged banks. And we’ll talk about those banks down 90 plus percent, but we’ve stabilized here. The broader regional banking index has stabilized here in recent days, and we’ve learned that deposit outflows and withdrawals have begun to stabilize as well, which is a real good sign. After about 5% withdrawals from banks U.S. wide in the week following the two bank closures. So we’ve seen some stabilization. A real important thing that we’ll be watching very closely in the coming weeks and months.

John Coleman: That’s right. We’ve ended up with effectively three major bank failures that happened really in the course of that first week and subsequently haven’t experienced any major failures. We’ve seen SBB sold to first citizens now and stabilizing the infrastructure that’s left there. Zack, obviously you work at Signature Bank, which the FDIC took over over the weekend subsequent to the Silicon Valley Bank failure. What was your personal experience like there, if you wouldn’t mind walking us through that?

Zack Mansfield: Yeah, it was a really wild few days. It turned into a week or two. I was actually traveling. My kids were on spring break. We had just gone over to the UK, we were in London and then we left on a Wednesday evening and the news was just coming out that I should be was looking into and I think ended up announcing plans to do a stock offering to help cover some of their issues on their balance sheet related to the securities portfolio. And that was big news. My experience over the last 17 years or so has all been in the venture banking world, and that should be is really the proverbial 800 pounds gorilla in that space. They dominated the market. And to see that was really huge news for us because they had been such a steady, you know, powerful bank and we knew it was going to hit their stock price. And yet the reaction to that was fairly immediate. And there was a lot of, you know, basically panic and concern from their customers who then started to pull deposits. And that just started this ripple effect and we began to see it the next day. So on the Friday of that week, we all remember we actually be started to really experience those outflows, all of the banks, including ours. I think most of the regional banks started to experience similar questions from client. Around the stability of other banks. And so our team really started working feverishly with really one main goal, which was to try to make sure that our clients deposits were as safe as possible. And really, that was, I think, the one kind of resounding message from every bank was like, we really care most about the deposits and making sure people feel safe. And there’s a bunch of different ways that we could look at doing that, including certain products that we had and had been offering clients and were, you know, in an effort to try to get more people into those fully insured products. And really it was a whirlwind of that day where everyone was trying to do as much as they could to get into the weekend and sort of everyone did. And at that point SVB was taken over and then everyone had a chance to breathe a little bit, and yet everyone knew that it was fairly unstable still. And so, you know, I guess I’ll stop there. It was wild, it was hectic. Our teams who were dealing day to day with clients, I had a guy tell me yesterday he opened nine months worth of insured cash sweep products for customers in five days. It was that sort of volume and just frankly, incredible, incredible efforts by folks, you know, in the trenches to deal with this madness. And yeah, so in some ways, it was really heartening to see everyone pulling in the same direction. And yet in other ways, you know, it was kind of mad.

John Coleman: Yeah. And I think that can get overlooked, honestly, in a crisis like this is people caricature institutions or segments of institutions. And my experience in general with a lot of these institutions, Signature First Republic, others included, is they’re staffed by awesome people who really want to do the right thing, who want to serve clients. And that gets lost in the noise sometimes of a panic like this. And that’s been disappointing, although predictable probably in the way that these things are reported on or reacted to. Exactly. If I might ask, on the personal side of things, you’re a person of faith. I mean, it had to be a stressful weekend week, two weeks. How have you personally reacted to that or what have you leaned on during that time as a person of faith as you’ve endured it?

Zack Mansfield: Yeah, absolutely. Yeah. One of my first reactions, you know, really, frankly, with the SVB News, at first I mentioned they were just this behemoth was just this realization that like all of the institutions and things of this world that seem just so strong and powerful, like at the end of the day, are relatively fragile. All of our systems, all of our you know, that’s not to say that there’s not value in that. I think there’s great value in them. And yet at the end of the day, there is a lot of fragility that was really exposed. A lot of it has to do with the interconnectedness of relationships and the ways that things can move at really rapid speeds nowadays. And so ultimately you have to choose how you’re going to deal with that. You kind of touched on it a second ago. I was really heartened by the response of so many people. The immediate reaction is like you’re in a sort of a crisis like this, is are you going to sort of deal with it emotionally and just kind of lose your mind and go crazy? Or are you going to dig in and, you know, strap together and work together? And you really did had a sense of being with others in a way that was different that you only experience when you go through crisis. And also it just opened people up. There was emotions, there was hurt, there was the ability to kind of come in and meet people where they are and do it in a way winsomely as you could, and do it in a way where you kind of do have to look at something beyond, you know, sort of the here and now in any sort of material. There’s a lot of material wealth that was lost. And so you look at that and sort of say, well, what actually does matter? And, you know, for me it ended up being a chance to dig deeper into my faith and to understand what makes me tick and what really matters. And, you know, in a lot of ways like all sorts of things like this in life. They’re really hard. And yet you end up with a little bit of time perspective to look back and with gratefulness, because you do realize that there are much bigger things in life. And I was on a spring break trip with my kids and, and it gave us opportunities to talk about what’s going on. And this is what’s going on with dad’s work. And, you know, those are things that we don’t take for granted, the opportunities to live intentionally in that and then talk about what is the reason for the hope that we have. And for us, you know, it’s our faith in Jesus and in sort of the stability and long term internal perspective that that offers.

John Coleman: Yeah. Thank you for that perspective, Zack. And I know from my perspective, most of us have spent the last 20 years or so in financial markets. We’ve experienced a couple of crises during that time and probably been impacted in different ways. And when I’ve been impacting those crises, it’s been such a reassurance to me to know that my identity is in something greater than my work in the present moment, which for a Christian is just the kind of distance that you need. I think to put things in perspective and certainly work hard for people, but also have comfort that, you know, your future is in the right hands. Justin, as we turn to you, just what happened several weeks ago at SVB, because we’ve you know, we kind of seen the outcome of that. But what happened? Was it bad assets? Was it a bank run? Was it both? What precipitated this crisis?

Justin Speer: It was a bank run. It was deposit withdrawals requiring the sale of assets that had unrealized losses. And so this isn’t a credit performance issue. It’s simply an interest rate and duration mismatch issue. Sizable unrealized losses were ultimately realized to pay off depositors, and it resulted in banks being unable to cover their uninsured and insured depositors. So $42 billion of deposits fled Silicon Valley in 6 hours was shocking speed. And we learned that there was an expectation that if they didn’t shut it down. The FDIC thought another 100 billion would be gone The next day was just simply a mismatch in asset and liability duration and a significant surge in rates and draw down on deposits at some of these leading lending institutions that led to this thing really taking place. And Silicon Valley was really at the epicenter of the big shifts from extremely loose monetary policy that led to a big surge in deposits and risk appetite post-pandemic, particularly in the venture capital and startup realm. And that shifted because of inflation to extremely tight policy beginning last year. And unfortunately, Silicon Valley got caught up in that shift with just risk management that just didn’t see this, unfortunately. And so when you see central banks tighten monetary policy, particularly the speed, that’s what’s really sets this one apart, the speed with which it tightened conditions, this has dramatically impacted the value of the longer term assets on banks balance sheets, including commercial residential mortgages and treasury bonds and other similar types of securities. And I’ve seen estimates of as much as 10 to 20% haircuts, unrealized losses on the held to maturity assets for banks. In aggregate, an estimated $2 trillion of unrealized losses are currently in the background here. This was very large. So if deposits don’t flee, it’s not a problem for the banks can help. The assets. The maturity and the value of those assets will mature at par. Supposing that they perform and right now they’re performing again, it’s not a credit risk issue, but if deposits flake, the depositors withdraw their money and banks are forced to sell those held to maturity assets to fund those depositors, this can lead to this mismatch. And if a bank’s liabilities exceed the realized value of its assets, it can become insolvent. And that’s what’s happening.

John Coleman: Zack, Does that resonate with your understanding of what happened, and was it different between Silvergate SBB and signature in your mind?

Zack Mansfield: Yeah, I think that characterization is exactly right as it relates to SVB. Yeah, I think Silvergate had its own sort of story, which was definitely more tied up within crypto. They had defined a lean for themselves that was almost entirely, you know, correlated to crypto assets, you know, and then ultimately, you know, if you look at the ripple effect after SVB, their issue was as Justin described, and then the resulting sort of movement of deposits had the effect that it had on them. And then it did ripple down to other banks, including, you know, signature or some of the others. You mentioned First Republic. There was others that were in really all the regional banks that were, you know, at risk of the same efforts. And as you saw, you know, the Fed and others sort of step in. They were trying to provide support and liquidity and comfort to just stop that sort of changing of deposits every which way. And and that was really the thing that was causing this whipsaw effect. And really, yeah, the flight was happening too fast to respond to it, and they felt like they needed to step in and provide the stability.

John Coleman: And it really was in my mind, I agree with the characterization entirely. This is different than 2008, In 2008, we had a series of truly toxic assets, securitization of assets that was poorly understood, a crisis in the mortgage industry and inner linkages between assets that really put balance sheets at risk in a substantial way. For me, this was the kind of modern version of a 30 style bank run. And what was interesting is a lot of the things. That have made banking so much better, actually made the run so much easier. So from my point of view, frictionless banking, the ability to do banking anywhere at any time remotely on an app or online, you know, some of the banks that we’ve mentioned were extraordinary at that actually. Great customer service, great to deal with. You could move your money very quickly and you never had to visit a physical branch, right? The opposite of that is as easy as it is is to put money in. It’s easy to take out. Right. The idea of, you know, in the 1930s, taken out 42 and a half billion dollars from a bank in 6 hours would have been literally physically impossible. And now, of course, it can move quickly. And then the second component of that is just social media and communication now. And I think, you know, originally one of the big problems, as I understood it, was a lot of the big venture firms started to hear about weakness or potential to tell each other about weakness, which became its own narrative. And then they have these Slack channels and the signal channels and other things where their venture portfolio companies were on and they started telling all their workers to withdraw funds at the same time, which is the source of these rapid deposit flights. And then that became too spread on Twitter, right. And other social media platforms. And so what was interesting and what is almost more difficult to deal with than toxic assets in some ways is this idea that a bank run can happen so quickly with modern technology and with social media. And what I still grapple with is how do you protect against that moving forward? Right. I mean, that type of run seems to be difficult to guard against.

Zack Mansfield: It’s a really interesting point, John. I think you’re spot on. And the thing that makes it so interesting is that each person that was involved, each person that was deciding to pull money out, was making that decision in a completely logical way, in a way that could be justified as a fiduciary, as you say, hey, I’m doing my duty as a board member to call my CEO and tell them, Hey, do you have money? That should be should you be thinking about pulling it out and you can make a logical case or even like this is your role, this is your duty as a fiduciary to make this case. And yet, as you interconnect all this together, it ends up spinning the hamster wheel faster and causing the issue that exists to just be exacerbated. And is this like you hear about flywheel effects that are positive, right, when a business really starts humming and this got it moving in a different direction in a negative way. And I really you know, so when people described it as prisoner’s dilemma or ways where people are making it what they thought was a rational choice for themselves and yet collectively it wasn’t good for anyone, and then really for the venture market, for the VCs and their portfolio companies, you know, SVB not existing in the form it did prior to this is not ultimately good for them, right? Like, we don’t know what will happen with SVB within four systems, but the pain that this market has felt now is ultimately it’s painful for the entire asset class, but is the unfortunate result of everyone acting in a way that they thought was sort of like in their best interest, but maybe not?

John Coleman: Yeah, and I think we’ll come back to some of the longer term implications. But as you mentioned, Zack, apart from instability in the financial system, there’s a whole sector that’s dried up right now, at least temporarily, venture debt that played a role in the ecosystem. And that I think that’s an under-explored element of this particular crisis, at least in most circles, because of the impact that that will likely have. You’ve both touched on some of the other banks that thus far have managed to survive, received support, and whether the crisis First Republic Park West, some of the other regionals. Justin, as those banks became the center of attention coming out of the weekend, so impacted SVB and signature, how did they survive that attention? What’s happened so far that’s allowed them to persist?

Justin Speer: Well, yeah, Before I get into that, I just a little perspective, just in the immediate, broadly aftermath of the SVB and signature failures, the pressure has really been more acute within the regional community. Banks small plates lost about 120 billion in deposits and a portion that led to large institutions the quote unquote, too big to fail institutions in the week following the seizures of Silicon Valley and signature. So those seizures again sparked fears of a potential for a run at other banks and net outflows of nearly 6% from all U.S. banks, all 4800 institutions. So there’s been this particular focus on companies with a higher proportion of uninsured deposits. So deposits are the primary funding vehicle for these banks that make a spread on those low cost deposits, which they did lend out or put to work in other financial securities like U.S. Treasuries. So that reliance on the riskier, less sticky deposits was one of the things that really sealed Silicon Valley’s signature state. I think they just carried a lot of risk. In hindsight, we came to find that 97% of Silicon Valley’s deposits were uninsured deposits and 90% of signatures were uninsured. So in this current interest rate environment, that created real risk of deposit flight and even a hint of deposit flight when combined with the mark to market losses that we discussed on the asset side of their ledgers, it just led this uninsured depositor run. They made this rational decision, in my opinion, to flee, which left the banks with liabilities that outstripped their assets and that put them out of business.

John Coleman: But one interesting insight on that Justin just to interject, is I think the narrative has become, you know, Silicon Valley Bank, 97 and a half percent uninsured deposits were bailing out these wealthy people. The reality is, I understood it that basically the business model at those banks, the ones that came under pressure, was banking businesses. Right so dominantly the deposits that fled were not wealthy individuals. They were typically companies that were banking their deposits. And that was one of the big worries coming out, was not like, hey, we’re bailing out the wealthy, although I’m sure there were some wealthy people there, but there were a lot of companies that, at least in our portfolio, that were worried about payroll coming into the weekend. Right. And that’s been a misperception, I think, around the industry is like, oh, this huge number of uninsured deposits. But actually, as I understand it, the vast majority of those were business accounts with companies trying to meet payroll and things of that nature. Is that understanding correct?

Justin Speer: Yeah. So if you look at First Republic, their uninsured depositor base is lower than the two banks that went under. They’re at 68% of their deposit base was uninsured. So still well above the industry average Park West is another one had about 52% of its deposits are uninsured, not too far from the industry average, but they’re both regarded as capital providers to the venture capitalist startup community. So that was another stress point, as those companies tend to be heavier consumers of cash. The other thing going on in the background that we haven’t talked about, the venture capital funding was slowing during this tightening phase when tech stocks were coming under pressure in terms of valuations. And so that also led to more consumption of the deposits, more deposit withdrawals from these entities that are consumers of cash. And so we learned last week that nearly 40% of First Republic’s deposits were withdrawn from the bank, roughly about 20% at PAC West is what they disclosed. 20% of their deposits left the firm since the beginning of the year. So given the unrealized losses on the asset letter for those banks, their capital base came under significant pressure. And what we’ve also noticed is while depositors have been taking care of the equity holders and the bondholders have not, and so the equities have seen a lot of pressure positively outside of government intervention. For first Republic, we saw 11 of the big lenders, the consortium of 11 big lenders, including Jp morgan. They passed 30 billion of deposits at First Republic. And so that large bank stepped in to help inspire confidence, help stem some of the tide a further flight of capital from that institution. We’ve seen the FDIC and Fed step in with communications and facilities to help calm some of the fear and hopefully restore more confidence in depositors across the banking landscape. It still remains to be seen whether or not it will be enough to save the equity holders and some of these banks and some suspect that with some downgrades of first Republic to job by the ratings agencies, unfortunately, that a suitor may need to ultimately come in to fill the void.

John Coleman: Zack Maybe to dig in on a couple of those topics really quickly, Justin started to unpack what happened in the two weeks since both at the Fed and FDIC, as well as in the private sector, where some of these big banks have come together, effectively giving back some of the deposits that have fled First Republic onto their balance sheets. They parked back at First Republic. And I mean, it’s worth noting we’re talking about regional banks here. But first, Republic and Silicon Valley Bank were both a couple hundred billion dollars in deposits. These were very large institutions. The difference is there is a category of institution for our listeners who aren’t familiar called systemically important financial institutions. I’m blanking on the exact threshold there, but they’re basically the 12 largest banks in the United States. There’s a set of global systemically important financial institutions, and effectively they accept higher regulation in return for an implicit government guarantee of their balance sheet. And so people view those as too big to fail. As you mentioned, Justin is a safe spot, which is why so many fled to these systemically important financial institutions. Zack, if you don’t mind unpacking a bit more, picking up where Justin left off, what have federal agencies or entities done to try and stem the crisis and what have you seen happening at the banks as well?

Zack Mansfield: Yeah, I think I alluded to in one of my answers. Yeah, the real concern was how do we stem the deposit outflow and the ripple effect and how do we just sort of like stop the game of musical chairs so that everyone can just take a breath? That was really I think if you try to create the analogy, that’s what they tried to do. And so they’ve done a couple of different things. They did step in after they took over signature and bridge and created the Silicon Valley Bridge Bank and signature Bridge Bank. They put not just implicit guarantees, but actual guarantees on any deposits that were at those institutions, which, you know, for us like what that meant for us was, you know, we were able to call our clients on that Sunday evening and say, here’s what happened. This is what the FDIC is doing. And hey, by the way, what they’ve told us is all of your deposits are 100% FDIC insured or they’re guaranteed. I’m not sure if they. Exactly which is FDIC insured, but which means they’re safe. And what that meant is that allowed those companies who were companies who, you know, had lots and lots of employees who were trying to think through how do we make sure we can send payroll out on Monday? That was literally the exact conversation I had a dozen times, which was how do we make sure that we can send payroll out? Because that’s what’s really important and we’ll solve for the other stuff later. And really, that was kind of the interesting thing, you know, underlies all this, is that, yes, these were quote unquote, startups or companies in the innovation community for the most part. But they really are the drivers of a lot of economic activity in this country. And the underlying employees are not the super wealthy venture capitalists, PE funds, etc.. They’re just the folks who live in your neighborhood. It’s the software engineer or the marketing manager or the sales development rep, and you just wanted to know if they were going to get paid. And so that’s why the federal agency stepped in. And I think, you know, Justin touched on a couple of the banks also stepped in, and there’s been really this thrust to say, hey, let’s make sure that everyone knows that the banks are safe. And then beyond that, there’s a much bigger conversation around regulation and all the the other parts of it. But really, I think it was about making sure that there was safety and then enough liquidity in the system that if there were more deposit outflows, that the banks could cover the liquidity either through borrowing from the discount window or from, you know, other federal entities.

Justin Speer: One of the approaches used by the Fed, in addition to the discount window, was that the bank term funding program that they installed, that was a new innovative feature that I thought was well-placed given the problem. So what they’re doing is they’re providing additional funding to banks by extending loans with a one year term limit to par value of eligible pledge collateral so banks can utilize their eligible help to maturity loans, which are currently trading below par value. The way I understand it is the Fed will lend them funds up to the par value of that underlying collateral that’s eligible so they don’t have to realize a loss on the books which would put them in jeopardy of running insolvent. But it was important facility and through last week I think institutions had drawn about $50 billion against that facility and over 100 billion, I guess, the discount window. So my question is, is that something that you’re aware of and how does that work? What are the eligible securities that they will take?

Zack Mansfield: Yeah, that’s for me. I don’t know. I did read the same thing and I think it was really like, if you think about what happened to SVB, you know, if that program had been in place prior to when SVB went under the issue on their balance sheet around the market, they’re held to maturity securities portfolio. They would have been able to access liquidity in a different way had that program been fully up and operational. And so I do think that that was a reaction to that. And so I think it was an interesting, you know, solution, unfortunately for us to be it was maybe a bit too late for them. But I do think it’s an interesting piece as you think about the picture you painted earlier, which is these are ultimately not toxic assets. These are securities for the most part, you know, government, you know, backed effectively securities that will pay out at par over a long period of time and yet do the way you have to account for them. You know, there are unrealized losses on the balance sheet which do impact the bank’s balance sheet.

John Coleman: And that’s why this it’s so interesting what people kind of understand and don’t understand. To me, this is a feature of fractional reserve banking, right? I mean, this has been the case for hundreds of years actually, where in a model fractional reserve banking, where banks only are required to keep a small percentage of cash on hand to cover deposits, and then they lend out those others, which creates economic dynamism. Right. That’s why it was invented in the first place, literally hundreds of years ago. But the weakness of that has been in a panic. There can be a bank run, right? I mean, you remember it’s a Wonderful Life with people lining up outside Jimmy Stewart’s bank. And I mean, this was a regular feature actually, in banking prior to the feds stepping in and offering FDIC insurance and things like that. It stabilized it. But more recently, we saw elements of it in the financial crisis, and now we’re kind of seeing it again. I want to switch topics just a bit here. You know, the other big thing that was under scrutiny was the Fed’s interest rate. Policy. And obviously at the time that the banks were in crisis, especially over that first weekend, the Fed was planning, many people thought, to raise the interest rate by another 50 basis points, as many people have noted, including you, Justin and Zack. Those high interest rate raises over a short period of time caused the duration problems in banks. And so people began to debate, Is the Fed going to lower rates? Should they? Is this going to pop the economy and lead to a decline in inflation? There was this big, big debate about Fed policy. The Fed came out and ended up not going 50 basis points, but 25 basis points. But that was more than a lot of people thought it would be. They thought maybe it would stick at zero or even decline because the Fed would be worried about a liquidity crisis. Justin, maybe I’ll start with you, but we’d love to get your perspective as well. Zack was 25. The right numbers, the Fed pursuing the right policy right now.

Justin Speer: You know, my opinion know, I think they wanted to send a message that they remain vigilant in combating inflation and are confident that they can confine and contain the damage from the banking failures. I think that they have done nothing after just a couple of weeks saying they intimating 50. If they’d done nothing, I think that would have maybe inspired a little bit more fear. So the market expects however, you know, the Fed has their plots. It’s interesting that the market expects that there’s a high degree of likelihood that the Fed is going to need to cut rates fairly dramatically by the end of the year. The Fed swaps suggests the market believes this banking crisis may potentially spill into the broader economy. So I think that’s a little bit of a debate that we all need to wrestle with. But from my perspective, at sovereigns prior to this crisis really coming to light, we’ve been on the opinion that the Fed has already done more than enough to snuff out inflation, and we’ve been hoping that they would cease hiking rates. We’ve yet to see the full impact from the actions They’ve already taken a dramatic increase in the Fed funds rate. We’ve seen M2 actually contract in December, money supply, broader money supply contracted for the first time in at least 60 years. And it takes time for that to ripple through the economy, 12 to 24 months for monetary policy to really ripple through. And now this banking pressure is a symptom of those measures and will likely result in further slowing in the broader economy in the coming quarter. So we’re hoping that they pause here because we’re of the opinion that even before thinking about the banking pressures that we’ve seen, the by the third or fourth quarter, we’re going to see a marked deceleration in inflation and potentially some pressures in the economy that we’re going have to deal with.

Zack Mansfield: Way outside of my sweet spot in terms of expertise. I don’t think that my opinion on this is all that much value. I will say, you know, the rate environment with how it affected, you know, the venture debt world, Right. So, you know, Silicon Valley Bank ourselves, a bunch of others that are involved in this, you know, a couple of different ways this affected it. Number one, and this is also maybe not as well understood point. It relates to the deposit profile. Any company that had commercial venture debt with Silicon Valley Bank or any of the others, part of the loan agreement was you needed to maintain your primary and banking relationship with the debt provider. And so the reason that most of these companies had all of their deposits with SVB or with us or whomever was because they had a loan facility, a debt facility that required it, and there was a part of that that wouldn’t allow you to have this diversification of deposits. And so a lot of those companies had all their deposits with SVB. And then for the longest period of time when rates were effectively zero or very low, no one really cared what their deposits were doing, right? There was no yield to be had. And yet over the last year, as rates have risen so rapidly, we started to get a lot of calls from folks are. Hold on, wait a second, what are my deposits doing for me? And there is this kind of like risk on mentality a little bit with their deposits around, you know, Well, actually, if I can get 4% of my money, like if I have $10 million in the bank or $20 billion because I just raised a big venture round that’s actually, you know, real money that could pay for another developer to or that could pay for some projects that we want to run. And so you started to see this sort of mentality and psychology that flowed down even into the operating companies. And then all of a sudden that mindset has completely shifted where no one cares at all what yield they’re getting. All they want to know is that the deposits are safe. And it really goes back to this broader question of like, how will this impact I mean, credit, definitely this is not a credit issue, but it definitely has tightened credit significantly. Right. And so there’s all sorts of psychological effects of these unrelated things which all play into this macro story, which I think I agree with what you guys said. It takes a really long time for that stuff to fully play out. And so the policy is going to be the policy and they’re going to make the decisions, but it’s going to take a while to figure out how these sort of unrelated and yet interconnected things are all going to work together in the economy.

John Coleman: So I want to ask one kind of quick question about where we are in the future, and then I want to switch to a couple of spiritual topics, if we could, given we’re on the FDI podcast. A simple question and maybe start with you, Zack. Is our banking system fragile and what have we learned here that we can do to improve our banking system moving forward?

Zack Mansfield: I think it’s the overarching sort of view is that the banking system is not fragile in the sense of I think people’s deposits are safe the way in which, you know, the reactions came and the magnitude and the manner in which the Fed and lawmakers and just everyone involved stepped in, It is very clear. We want everyone to know that the banking system is going to exist. We’re going to step in to protect it. So I think in that sense, it’s secure in all of the senses that we’ve talked about, about there are parts of it that are related to technology or the interconnectedness or the ways that there are a lot of ways that they are ultimately secure and yet very fragile. Right. And that there’s ways that people are going to have to look at the regulation. They’re going to have to look at what are the rules that we put in place to help make sure that we don’t have to come in and do this kind of like emergency stability. And we can just have an operating sort of structure that’s safe for everyone.

John Coleman: Yeah. Justin, any thoughts?

Justin Speer: I just add that, you know, this is a cyclical business, it’s a cyclical industry. And maybe start just offering a little perspective for why regulators and industry participants moved as they have. And it is encouraging that they have done as they’ve done. But in a recent academic research report on the subject that was published in mid-March, there were at least a couple of hundred banks that were seen as having potential for serious contagion risk due to unrealized losses in the asset portion of their balance sheets and the high exposure to uninsured deposits on the liability side. So before the Fed and the FDIC and others stepped in, as they did to help restore some measure of confidence for depositors, it was likely that these roughly 200 at risk institutions, if they would have witnessed half of their uninsured deposits, the part that they were withdrawn, they would have been taken over by the FDIC. Very high likelihood in a truly extreme scenario. Just to give you a sensitivity here, if there were such a panic that 100% of uninsured deposits bled all 4800 banks in the United States, nearly 1600 banks would have gone bust. And so there is a system of confidence and trust that needs to be instilled in the marketplace. I do think the measures taken by the FDIC and the Fed have been really good at ring fencing this thing. But there’s just been this race to determine which bank several largest uninsured deposit base is the degree of unrealized losses on the asset side of the balance sheets. I think that race is starting to calm down now that the deposits seem to be more secure, but it was a pretty big problem. So if you think about the weeks following the seizures, we have about 5% reduction in withdrawals for all banks. And that’s something that we’re certainly going to want to continue to monitor. Feel like that fever pitch is gone, as I mentioned earlier. But as we kind of zero in on this thing, the small and medium sized banks in particular are under a microscope. There are several headwinds for mid-sized banks. The uncertainty about their deposits in deposit costs, declining asset values due to higher rates. And and really important and new is the impact of regulatory headwinds that are likely to be on the horizon. And then lastly, if there’s any economic damage that results from this, then we’ll be forced to really turn our attention to the performance of bank loans. So we’re not out of the woods. The banking system fragile. I actually think it’s done pretty well in refinancing this thing around the woods now, but it’s certainly cyclical. And John, you harken back to 100 years ago. I think I’ve seen some interesting corollaries with the SNL crisis, gas and oil crisis from the eighties to the early nineties. So about 3000 institutions that buckled from the fire in interest rates. I’m betting that the moves that we’ve seen may hopefully can find that to a much smaller number by maybe invited to what we’ve just seen. That would be great news, I think so. I think our banking system has learned and hopefully will continue to learn from past mistakes.

John Coleman: One more quick question, guys, and then I’m going to ask you a question we always close with on the FDI podcast, which is to just share something you’re learning from God through Scripture right now that might be relevant to others. Before we do that, just any thoughts on how Christians should be thinking about this crisis and continuing to create a more redemptive financial ecosystem over time? And Zack, maybe start with you, if you don’t mind.

Zack Mansfield: Yeah, I mean, obviously I’ve been reflect a lot on that over the last couple of weeks and I think it’s in line a little bit with what I said earlier, which is there is an element of all of this which points to the fact that, you know, everything in this world will ultimately go away and you know, you’re going to die. Some everyone’s going to die some day and you can’t take everything with you. And, you know, there’s an element of like, you know, like I lost assets, right? Like, I had stock that’s not worth anything today. Right. And it’s a blow, right, when something like that happens. We had folks who were really scared and it just causes you to sort of realize that hope in material things is ultimately a dead hope. And so where do you go after that? And so, you know, the financial system and, you know, all the ways that, you know, we kind of sort of connect and, you know, in sort of a financial sense are ultimately good things. They lead to flourishing. They lead to things like credit. And banking also is good, and yet it’s not ultimate. And so that’s like a takeaway is that you can’t put hope in things that are not ultimate. And yet we should try to work to make them the best that they can be.

John Coleman: That’s awesome. Justin, any thoughts on just how Christians should be interpreting this moment?

Justin Speer: Well, you know, because we think about is like, you know, how do you handle these tough times? You know, there’s there’s many passages where God’s telling his people, Don’t be afraid, I’m with you Psalm 27 one and the Lord is my light and my salvation whom shall I fear the Lord is the strength of my life? Of whom shall I be afraid? I know I often forget these things when the going gets tough, you know, but scattered throughout God’s Word are these exhortations from them to just be at peace. And it’s truly one of the great blessings, the great promises from God. I will be with you, Jesus said that I will be with you always. So the challenge for me is really making sure that I’m with God. He’s with me. But am I with him? Is he a part of my walk? Part of my thoughts? Is he in my mind when I speak and when I do things? And so sometimes I notice for me personally, my struggle when I am in the middle of the storm or sometimes even with life, a steady I lose that focus. I lose the focus on my king and the king and glory. The king peace. And I lean on my own flesh, lean on my own understanding without even really considering the one who can handle every situation perfectly. And so as I think about this, I know that I really can live my life confidently and without fear. Certainly, you know, we’re going to face challenges. And there’s really no detailed roadmap for my future. But we have an in-depth strategic planning guide called the Bible. And for every occasion, it works. I have his word and he tells me to trust in him. Trust in the Lord with all your heart. Lean not on your own understanding in all your ways. Acknowledge Him and he will direct your paths. Proverbs Chapter three. So I think knowing this, these things really gives me the ability to face this uncertain future, because I really know that God is with me and he’s the one directing my paths and that peace that God offers. That really is a true blessing for us, and a lot of us fail to reach for it. But it’s there if we’ll have it.

John Coleman: Amen. You know what? Those are two great answers to end on today, I think, actually. Justin, thank you so much for your commentary. Zack, obviously right in the midst of the storm, just so grateful for you taking the time to talk to us and the maturity and perspective that you’ve brought to this. And I know that our listeners will be super grateful to you all for helping them interpret this crisis and think about the system moving forward. And also just think about what it means to process uncertainty as a Christian and as a person of faith. So thank you both for coming on the show today and hope to have you back very soon.

Justin Speer: Thank you.

Zack Mansfield: It’s a joy. Thank you.

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They say not to bring up religion and politics at the dinner table. Throw business in there, and you have the recipe for quite a complex conversation.

We tackle all three in this episode of the Faith Driven Investor podcast.

We’re joined by Michael Hall and Tim Hurley, two Christian leaders whose private organizations have partnered with public institutions to seek the common good in their communities. 

Michael does this as the VP of acquisitions for Launch Capital Partners, an impact private equity firm that welcomes refugees and internationals while promoting thriving communities through a relationship-oriented property management model and community partnerships. 

Tim Hurley is the executive director of the Movement Foundation, which is the philanthropic vessel for Movement Mortgage to pour profits back into their communities. The organization focuses on funding much-needed infrastructure, education and support to underserved areas in the U.S. and around the world.

The two join us today to talk about how Christian organizations can partner with the government to advance the common good while sustaining profitable returns for their stakeholders

Episode Transcript

Luke Roush: Welcome back, everyone, to the Faith Driven Investor podcast. What comes to mind when you think about Christians partnering with government institutions? Well, for many, the idea brings up quick responses about separating church and state. Some are understandably skeptical about how these two worlds could even work together. There’s a reason people say, not to bring up religion in politics at dinner parties. Well, you throw business in there as well, and you have the recipe for some pretty complex conversations. But Christians aren’t called to shy away from complexities. Sometimes we’re called into difficult spaces because they might lead to a greater sense of flourishing for more people. That’s what happened with our guests, Michael Hall and Tim Hurley. They joined the show today to talk about how Christian organizations can partner with government to advance the common good while sustaining profitable returns for their shareholders. Let’s jump in.

John Coleman: Welcome back to the Faith Driven Investor podcast. This is John Coleman, one of your hosts here with Luke Roush today. And Luke looks like he’s at his home in Nashville after a lot of travel. How are you doing today, Luke?

Luke Roush: I’m doing great and this is an important conversation that I’ve been looking forward to for a while.

John Coleman: It is an important conversation and we’re joined by two extraordinary people. The first is Tim Hurley, who’s the executive director of the Movement Foundation, which supports movement schools, among other things, a charter school network that’s been building started in North Carolina, but spreading out around the country. And the second is Michael Hall, who’s the VP of acquisitions at Launch Capital Partners. Good morning, guys. How are y’all?

Tim Hurley: Hey, good morning. Glad to be here.

Yeah, doing great.

John Coleman: Well, today we’re going to talk a lot about using private investment to solve public policy problems or public problems, and especially partnering with public organizations in the way that we do that as we dive in, given that this is such a unique space. Tim, would you mind just telling us a little bit more about the way that you handle that and what movement schools and the Movement Foundation do?

Tim Hurley: Sure. So I lead the Movement Foundation, which is a foundation that actually derives its profits from movement mortgage. And we do those profits. You know, I would say 95% of them is actually purchased, distressed or abandoned real estate that we then retrofit into a beautiful public school space. And we then rent that space out to movement schools, which is a separate private 1c3 that takes that space, turns it into a great school to serve primarily marginalized communities. And then on the foundation side, we also partner that with the faith based after school. So after the public school day is done, we have a program called Rise Christian after School that the foundation runs for parents that are interested in that.

John Coleman: Yeah, and that’s such an interesting model. I know that the integration of faith based programs on the premises of public schools, but outside of normal instructional hours has been something that’s been occurring for decades now. And it’s such a neat complement to the day to day school life that you all have incorporated. And then building the facilities for these charter schools that run through movement schools is an extraordinary service to those where you do deep partnerships with others. Michael, I know that Launch is a firm that we’ve talked to here on the FDE podcast before, but maybe to refresh us. Talk to us a little bit about Launch Capital Partners in the work that you do.

Michael Hall: Yeah, absolutely. So we are a impact private equity real estate firm and we sit at the intersection of the affordable housing crisis and the global migration force migration issues. And so we’re the largest refugee housing provider in the country. And so we are a for profit entity. We raise the source capital and acquire naturally occurring affordable housing and preserve that housing and seek to transform that into affordable and hospitable housing to welcome in newly arriving refugees and other people who need affordable housing. And so housing is the largest issue facing refugee resettlement in the United States, with only about 15% of landlords are willing to rent to newly arriving refugees. And so we do this in a vertically integrated model. So we manage all our own property through what we call relationship centered property management. So while most landlords are trying to automate and outsource things to apps to third party companies, we’re trying to create as much relationship as possible with those new arrivals so that we can help them integrate into a community and meet their your physical and spiritual needs. And so we partner with State Department, refugee resettlement agencies, local nonprofits, and then local faith communities and churches who do work in our partner communities.

John Coleman: And I want to dive into this kind of public private structure where you’re not conventional nonprofit, either of you. I mean, Tim you’re coming from more of a nonprofit focus, Michael. You’re coming from more of a for profit focus but integrated with other entities. Tim, I want to start with you. What made you choose the model that you’re pursuing where you do have this blend of almost private sector practices with building and leasing back to schools? You’re partnered with government entities. You’ve also got a conventional fundraiser or philanthropic structure. Talk to us a bit about how that structure works and why you chose to pursue something that wasn’t straightforward traditional philanthropy.

Tim Hurley: Yeah. I mean, I spent ten years in more straightforward philanthropy leading Teach for America, where it was, you know, we ran based on the donations of donors who want to see that advance with some government partnerships. You know, on this side, I think the main focus is just the product. You know, my desire has always been to build amazing schools, to serve students, especially our most marginalized students who need it most. And thanks to the governmental structures in place, charter schools are an amazing vehicle for that, where you have this sustainable government funding, but with the opportunity to experiment and do in different ways. And honestly, you know, it almost sounds smarter than I am. You know, God presented this opportunity. He put the same thing on Casey’s heart, who found that movement mortgage saying, hey, we want to, you know, use the profits from government mortgage to try to build amazing schools for kids. I know for him, he was motivated by some research he saw on private Christian schools serving the marginalized. And what he saw there was they just didn’t last. You know, they were started by a donor, maybe like him, who funded it for the first ten or 15 years. But then really inevitably, they ran out of money and the schools had to close. And so he was look for what’s a sustainable model that we can use to pour into kids on the education side. And then also, is there a way to also bring our faith based beliefs to bear also? And that’s how we came into this model.

John Coleman: Yeah, that’s great. And, you know, Casey has been a part of the FDE community FDE communities before Founder Movement Mortgage, but also tells the story of getting involved with movement schools based on his own upbringing in relatively difficult schools in the Washington, D.C. area, etc.. So I know that both of you have a real passion for that space. Michael, maybe over to you. You guys come from a more explicitly kind of private sector model that doing a lot of the work that many philanthropists reaching out to immigrants or others might do. Talk to us about why you chose the model you did and how that structure helps you to be more successful.

Michael Hall: Yeah, I think when we set out to start and build launch, there was obviously an inflection point where we could go as a nonprofit with the goal as a for profit. And really the decision was made that if we were going to scale and we were going to do this with excellence, that having a for profit model was necessary just because of the amount of capital that was necessary to get involved in real estate, the debt structures that were required that to go the nonprofit route would really be tying our hands. And so I think at the same time, the model that we have works really well. The refugee resettlement agencies have funding for about 3 to 6 months worth of the refugees rent, which de risks this public problem. So housing, these new arrivals is obviously a very pressing problem for communities all across the country. But the problem’s really thin when you start looking at it, you start looking at the data that immigrants and refugees, you know, they get employed, they start businesses, they become contributing stable members of society. And it is really just that bridge that’s necessary to allow them to get to stability. And so this huge problem is really solved by just giving people a chance. And so our partnership doesn’t really extend much beyond agreeing to allow them to come in. So we have some alternative underwriting mechanisms that allow a resettlement agency to place a refugee into our apartment communities. But we do all these wraparound services because it undergirds our investment. And so we get asked all the time, Well, how much profit are you giving up to do this work with these refugees? And the reality is it’s actually our competitive advantage. And so having refugees who are in our communities, who are building a community for themselves, they are much more stable tenants than a typical tenant base. So the turnover rate’s a lot lower. And all of these things actually undergird the investment by pushing additional profits straight to the bottom line.

Luke Roush: So I think that one of the things I love about the work that both of you are doing is that it’s thinking differently. It’s looking at problems that other Christians have looked at and thinking differently about how do you solve them. And part of that is just being open minded around the intersection between church and state, which are two things that most Christians see as being distinct and should be kept separate. And yet the reality of how you guys have waited in is actually finding common ground with unmet needs and then building this partnerships. I mean, you’ve both spoken to it already, but maybe just what are some of the things that you’ve had to navigate as a believer, wading into that partnership and maybe some things that the agencies that you’ve partnered with in the government, things that they’ve had to navigate and that you’ve had to educate them on in terms of creating this, you know, novel solution to a really significant issue both in education and then refugee resettlement. Tim, let’s start with you.

Tim Hurley: Yeah. You know, I think that’s a fun question because, you know, really for my entire career that’s been working in education and government and throughout this whole time, you know, I’ve been a believer since a young age. And I think about the misconceptions that I think there are. I think even the idea of like separation of church and state, you know, as you all know, that the really that is the state shouldn’t establish a religion. So this concept of, you know, totally separating out church and state, I don’t think that’s what the law is. And also as a Christian or as anybody with a worldview, I don’t think there’s a way to separate that out. What I do believe, though, is I believe deeply that the state shouldn’t be establishing a religion. So for me, honestly, you know, my journey to my career has just been this desire to build great schools for kids and with education. Like, that’s where the action is. It’s in public schools. Like that is a service that we provide. And so as I’ve gotten deeper and deeper into trying to provide these schools and as my faith has deepened, they’ve kind of just come together naturally on a parallel track. And there’s been challenges to that sometimes. But for the most part, I think what your listeners might be surprised to hear is sort of the lack of massive impediments to that. And I think people kind of assume that, you know, if I’m a believer, you know, maybe I shouldn’t go down this path. But the other thing is, if you look at our public schools, they are filled with believers. If you look at any governmental agency, it is filled with Christians. And so I think sometimes I think that’s where often I hate to say it, but I think the way the media kind of wants to get there, you know, a good story is the conflict. The good story is not, hey, this group has been working together for years and delivering some really good stuff.

Luke Roush: Yeah. That’s great. You kind of build a boogeyman in the closet and then it acts as a deterrent for people to actually go down a pathway that’s not that hard to go down. So a little bit of that. Tim. Michael.

Michael Hall: Yeah, no, I think Tim articulated it so well and I like what he said is like, I just want to build good schools. And I think that’s really the thing that if you are entering as a believer into kind of this public space, trying to solve these public problems, you really have to be able to solve the problem. And if you can, there’s usually a huge amount of desire to partner. I think where government entities really get skittish is there’s been disingenuous Christians throughout the years who’ve come and they want the government to fund their ministry while they’re not really trying to solve the problem. So they’ll have cut rate schools or they’ll have, you know, substandard housing. And then they’re trying to, you know, kind of hoist their Bible study or whatever that is on top of these communities. And so I think we have to do a lot of handholding with the state actors and these other nonprofits, like we are Christians and we are motivated by our faith. But primarily we’re here to solve this problem and that we don’t believe in a coerced faith. So we’re not going to withhold services, we’re not going to not repair someone’s apartment or not give someone the same quality education, that if you’re really stepping in and you have the answer and you can solve these problems in education or affordable housing, there’s just not a lot of good scalable solutions in these spaces. And if you have one, there is going to be a long list of people who want to partner if you’re doing that genuinely. And so I think that’s where we have to balance that kind of evangelicalism can shy away from giving people the cool drink of water and just want to talk about spiritual things. And if you’re legitimately trying to solve people’s physical problems, people’s educational problems, whatever that is, you know that there’s relational bridges that are open, there’s afterschool programing, there’s believers who are there, who in a relationship of mutuality with the person you’re helping, you know, can share their faith, but it’s not a bait and switch. I think that’s what everyone’s afraid of.

John Coleman: Yeah. You know, around our firm. So Luke and I work with a faith based, faith driven investment firm? And one of our core values is that our excellence is a witness. Michael, it’s kind of what you talked about. If you’re going to do something as a Christian and kind of make that more prominent, we feel there’s almost a higher standard of excellence that you have to hold yourself to because you realize that the quality of your work is reflecting on your faith. Right? And it has broader implications. And Tim, I love the way that you summed up the relationship between church and state. People forget that it’s not actually a part of the Constitution. It actually was originally raised in a letter from Thomas Jefferson to a religious congregation where he was promising them effectively exactly what you articulated, that the state would not impose a religion on others, given that so many people came to the United States or the continent before it was the United States as religious refugees, you both talked about the ways in which this can work really well. Tim, maybe starting with you, what challenges have you run into in these partnerships? And alongside that, have there been any misconceptions that you’ve had to dispel about faith based organizations with some of the government entities with which you’ve worked?

Tim Hurley: Yeah. I mean, you know, let me just, I think, relate to that. Following up what Michael said about the approach to the work. So I grew up, I would say I was a school brat, like some folks are military brats where they moved around the military. So my mom, she started three different schools, you know, private Christian schools. I grew up in one of hers in Mississippi. And so I was just immersed in the power of what a school could do and, you know, came out of school, taught back in Mississippi, and then went to law school to study really specifically educational policy. I thought that maybe there are some policy changes that are going to help us build schools. And during summer, around that time, I got to see, you know, what I would describe as folks who were coming at these problems from, let’s say, a political advocacy space. So folks who were looking to, I think, on ideological basis drive change. And what I’m excited about this space and talk to some of your investors is what I realize for me is that’s not who I am. I’m a builder like my passion. I said there are some laws we could change at the margin about education that might help. But fundamentally, if every law that I thought was good got passed, we would still have the fact there’s not enough great leaders wanting to go into education. And we don’t have models that actually are proven to work. So I said, you know, that where I want spend my time is let’s try to build something that works. And so I think a big problem comes to your question, John, is when people don’t understand those different sides, are you going to drive an ideological position or are you trying to build something great? And I think it’s different. Temperament is a different approach. And so I think, like Michael said, a lot of times in government, folks want to know, are you coming to just be a test case and drive an ideological challenge or are you actually trying to build something where we have a shared common ground? And I think, you know, Francis Schaeffer had the concept of cobelligerence, right, where he said a co belligerent is someone who I can work with against a common problem as a segue, which from, say, like a full ally, we agree on everything. And so I think there’s a ton of space as a believer, like, you know, our view I am a co belligerent against this idea that we are dramatically failing to educate our kids in the way that I think they could be. There’s a ton of people who want to jump out side with me if it’s I want to drive a specific position on the establishment clause or on freedom of religion. There’s a lot of people that want to jump in. So like, what’s your primary purpose, I think is something to get clear on at the outset.

John Coleman: One is, You know, Tim, I think I have a passion for education in my own right. And the other thing I’d say is, is people who believe in the truth of our faith, that faith does have a lot to say about the formation of a person, right. About what can make a person healthy, how you can help them grow up to flourish. And I do think that without being proselytizing, the values of that can actually inform the way in which you approach the character formation of kids, in the way in which you educate them in such a way that hopefully as adults, they can be flourishing individuals, that they can craft lives that are greater, especially in these difficult schools, greater than the circumstances from which they come. I have a friend who always says talent is universal, opportunity is not, which I know he ripped off from someone else. But but that’s usually true if you believe in the dignity and equality of all people. Michael, how do you see this manifest and what challenges do you run into on the refugee housing side or on housing generally?

Michael Hall: Yeah, I think we’re in a lot less regulated of a space. The bureaucratic state in the space that we play is a lot thinner than it is in education. And so our touch points are not, I think, as numerous and so there’s not as many friction points. I think one of the largest friction points for us is the fact that we are a for profit entity. The notion of a business who’s trying to maximize profit, trying to engage social service providers to solve a problem really is just it doesn’t fit a paradigm that a lot of people have. And so it’s just taken a lot of time and kind of faithfulness with our hands at the plow of the task to prove that. No, we actually we’re not trying to be a slumlord. We’re not trying to just get, you know, a couple of months free rent that we actually care about this problem. And so I think a lot of that actually kind of coalesced around operation allies. Welcome. After the fall of Afghanistan, we ended up kind of sitting on several White House formed task forces, Department of Homeland Security, those type of things. And so it was social service providers, government agencies, and then this for profit business out of Louisville, Kentucky, that was sitting at the table, you know, and actually being able to participate in that setting, trying to help solve the problem, doing things that didn’t undergird our bottom line, but instead were just trying to help these people, help these governmental agencies, these other nonprofits. They feel very hamstrung. And there’s oftentimes things that we can do that they can’t do. And so being able to use that leeway that we have as this independent entity to actually help them in a lot of ways has really just kind of lowered that bar. And so I think we oftentimes think, you know, we have this great idea. Everyone should get on board today and we undervalue longevity of a building, deep relationships and a track record of actually doing good work. And, you know, Tim and movement has done that, and I think you’re worth trying to do that in our space as well.

Luke Roush: One of the things that’s embedded in both of your answers to that question that reminds me of Neighbors prayer, which is the famous Lutheran theologian who prayed God grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference. And I think that, you know, when you get invited into a forum like the White House to problem solve what to do with all these refugees coming out of Afghanistan. My imagination would take me to just a temptation to get outside of my lane, get outside. And actually the mission that God called me on or in your case, you in launch on. And I think the discipline and wisdom to be able to stay focused on what the field that God has you playing on and not getting tempted over into some other field or use the opportunity in that forum to try to make a point or try to advance an agenda that separate from the one that is primary. It takes discipline and wisdom to be able to navigate through that. I love that. And actually both of what you guys shared. I want to go back over to just the big picture. And as you think about counsel that you would have for other investors or other educators who are maybe called in this direction of public private partnership, what would be the counsel that you give to them as they embark on their journey?

Michael Hall: I think when you’re trying to solve a problem, you’re in this kind of nonprofit governmental space. Some of the fundamentals of building a venture kind of get dropped of what is the value proposition that you think you’re actually bringing to bear here. It’s kind of, you know, circle back around of do you actually have a solution? Is your whatever your business, your program, whatever you’re offering, whatever you have on offer is actually solving the problem people are experiencing, expressing the need for. And so for investors, for venture builders and starters, I would really encourage them of really honing in on are we actually doing what we say we’re doing, not overselling what you are actually able to do and. Are we actually creating value for these entities? We’re trying to have partnerships with. And so I think it’s easy to look at the state as a funding source and not as a customer. And I think in most of these spaces, viewing the nonprofits, you’re going to be partnering with the local, state, federal government, as you know, kind of a money grab bag you can go and get some grants from as opposed to a shareholder you’re trying to derive value to. And I think that pivot really changes the type of institutions you build.

Tim Hurley: I would cosign everything, Michael said. You know, I think for me, I would recommend I’d say, don’t start with trying to build a public private partnership. Start with, you know, what do you desperately want to build for me, for 20 years, I’ve been chasing this idea that we can build dramatically better schools for the most vulnerable kids. And that has driven me down different lines. And I think that’s the fun of it, right, is like, what problem does God put on your heart where you’re going to make your impact? But then once you have that, follow that wherever it goes. And I do think it often will go back towards some kind of interaction with government and my exhortation instead of coming in sort of with preconceived notions or pushing back on it, hey, maybe just come in open and say, you know, how can we solve this thing together and then see where God takes you on that path?

John Coleman: You know, I love this conversation, and both of you are operating in areas of such great need, right? On the one hand, Tim to your point, talent is universal. Opportunity is not yet the United States public education system is all too often failing kids. Right? And there are kids who just don’t have equal opportunity in that system. And Michael, obviously, this idea of housing, particularly for immigrant communities and refugee communities, is huge. There is a long standing record of Christian individuals or institutions engaging big problems like this, right. I think of the Red Cross, for example, which has been around forever. I think about Habitat for Humanity, where our friend Jonathan Reckford at Habitat, which some people don’t realize is an explicitly Christian organization that’s been working at the intersection of these problems from a nonprofit perspective, but leveraging for profit models for a while and even at the presidential level, there’s been activity here. You know, George H.W. Bush had the Office of Faith-Based Initiatives. As you all look out beyond launch and beyond movement and have done your work, are there models that you’ve seen? Are there organizations that you’ve seen that you really admired or other entrepreneurs in these spaces that you’ve admired that have inspired you in the way that you do business? So our listeners can go find other models that they can learn from as well as they take on their own problems. And Michael, if you don’t mind, I might start with you on that question.

Michael Hall: Yeah, you know, I think unfortunately, I think it’s a space where the church has shiy away in many regards from stepping in and engaging the state as it’s trying to solve this problem. So I’m thinking, you know, I’m racking my brain and most of the organizations that I’m really inspired by have kind of just done it themselves. And they’ve almost made a parallel entity because the state’s not either partnering or is allocating money in those spaces. I think, you know, the comment was made of what plays well on the news isn’t always what reality is, and so there’s just not a lot of state spending on a lot of these really pernicious social problems of homelessness, of education. And so I think most of the groups that I can think of would probably be in this charter school space. The movement that Tim is in. Yeah.

John Coleman: Well to your point, Michael, I would say just the intersection of those worlds for a moment and then come to Tim, I sat on a big public school board for a while with about 100,000 kids in it, and about 8000 of those kids were refugees, many more immigrants and refugees. It was in DeKalb County, Georgia, which is a very diverse immigration landing spot. And the challenges that those kids would face, you know, there were problems with how the schools were structured, but we’d have kids come from war zones where they had lost limbs, where they’d lost their families, they’d come in at ten or 11 or 12 years old with no prior education, formal education in the school. I think we had something on the order of 120 languages spoken in the schools. I mean, just unreal. And there were structural challenges that would have required community investment, right? No school system is equipped to hire 120 interpreters. No fourth grade teacher is equipped to bring in alongside her other 30 students someone who’s never been in school and who’s experienced that kind of trauma. And so there really is, especially in these most challenging problems, I think, an opportunity for partnerships that can enhance what can be delivered. Tim, Any models that you’ve looked at in your history?

Michael Hall: You know, a couple come to mind. I mean, one is actually a group that we work with at our schools there. A counseling program is called C4, C4 for stands for Christ Centered Community Counseling. And so this is a program that was founded by JB and Melinda Bell, who were both black, and they looked at their community. And felt like, you know, when they looked at where the really office around the community were place, they were not in historically black communities or currently black communities. They said, we want to make that available more to black folks because we believe it’s beneficial. So they started to build this program for profit counseling program, but with, you know, a very mission driven focus. And so as we look for ways to care for students, that movement schools, they’re amazing practitioners. So they actually practice out of movement schools. But when you go see them, say, within the movement school, their context, the social context, they don’t counsel from an explicitly Christ referenced curriculum. Right. So they just give you the methods of family therapy, counseling. If you say, Hey, I’m a believer, I’d like to see part of it. They’re happy to add that in because that’s what they are, but they don’t have to do it from that perspective. My dad used the same model. He was a professor at Reformed Theological Seminary for 35 years and ran a counseling practice out of that. And he said, You know, I’m going to work from this frame, but that’s not the frame we’re in. And I’m glad to actually just counsel you with, you know, what he would call the God given methods. And I think the reference of that is I think our greatest challenges are being addressed by Christians already. Same thing for public school teachers. If you go into most of the traditional public schools that I work in, it is filled with believers. I think there’s a question, I think a little bit about music. Like I remember that like when I grew up late eighties, early nineties, there’s like the Christian music scene, right? And a lot of cultural arts they got on there because they just like slapped Christian, you know, on that label. But then you look at a band like, you know, I’ll date all of us, but right, like U2, where you’re like, Oh my gosh, this is just an amazing band. You’re like, Wait, But I think they’re believers. And then when you read some of their stuff, like, I think they’re clearly believers. I think with some of the stuff, it’s like, Are you okay with more of a YouTube model where you’re just delivering amazing services and answers and, hey, if anybody wants to ask and find out, of course you’re Christian or does Christian have to do the finding piece, you know, the most out front piece of what you do or can you let your product serve and then also say, Hey, if you want to know where this come from, it’s my work in serving Christ. But if you wanted to go the YouTube model like you were hard pressed to find a social issue that Christians are not already flocking to.

Luke Roush: Maybe speak Tim just because you share this with me before, but about the programing that you guys offer for families that opt into the after school program and movement.

Tim Hurley: Yeah, so, you know, we offer and this is through the foundation separate from the schools just a Christian after school program my kids were part of it. They said it was a combination of Sunday school and recess. So the kids come in and we focus on great homework, help activities, but then also teaching, you know, religious lessons from the Bible. And so it’s something we make available for families that want it. And I would say as a family, if you ever want a Christian after school program or you just want good after school program for your kids, like a lot of our families may not be explicitly believers, but they’re comfortable with it and they know it’s a great value program. So it’s like, hey, you know, go ahead, be a part of it. So that’s part of what we offer.

John Coleman: One, to your point Tim, you know, what’s interesting is the desire for some of those types of programs is, if anything, disproportionate among communities of color and also among less economically advantaged communities. I mean, that’s where you find some of the greatest prevalence, actually, of faith, Christian faith and other types of faith. And there’s a real hunger for that, I think, in many of those communities. And I imagine the parents are quite excited that that’s an option. You guys probably hear a lot of positive feedback, I would guess.

Tim Hurley: You know, we do. And this also I would say that this is the most I ever really talk about the rise Christian after school and movement schools in the same sentence, because really in our practical lived our day to day lives they operate separately and also I think in accordance with the law. So this it’s interesting cause this really is the most if you were to follow me throughout my week, I’m not talking about them in the same sentence because they actually run two separate entities, which I think is helpful. And for our movement school families, if you ask them, Hey, did you know Rise actually is run through the foundation to be like, No, I really do. We just run them as separate operations?

John Coleman: Well, guys, this has been a very fulfilling talk. What we’re going to do now, I can see Luke getting anxious. His favorite part of the FDI podcast is a lightning round. He will probably ask you about your favorite food in some city at some point, but maybe not. The exciting thing about Lightning around Luke is we never know where it’ll go exactly. We’re going to do that. And then just be forewarned, the last question we always ask folks on the podcast is just what you’re learning through Scripture right now you’d want to share for others. So we’ll have both of you after the lightning round, but maybe I’ll kick it over to my partner in crime here. First, Luke, I want to dig in and the point of Lightning Round, by the way, is 60 seconds or less answers to questions that are of variable quality. Very highly variable quality, Luke start us.

Luke Roush: The best answers are 30 seconds or less, but no pressure. So I want to know what one thing each of you guys do to unwind and rest and just be renewed.

Tim Hurley: I can go disc golf. It is the choice for the entrepreneurial investors to look at the growth numbers on its amazing golf as peak ball golf as I call it. Disc golf is on the rise.

Luke Roush: Even relative to pickleball.

Luke Roush: Would you look at all the stuff? I wouldn’t go that far.

John Coleman: Yeah. Tim, I’m getting a ninties flavor from Tim right now. He was vaguely referencing like DC Talk and Audio Adrenaline.

Tim Hurley: How you knew I was too.

John Coleman: That he’s talking about disc golf now.

Tim Hurley: Oh, speaking of DC, talk about seven DC to.

Luke Roush: Get your members and Lee jacket on. It’s awesome.

Michael Hall: That’s awesome. Yeah. So I love hiking. So if I don’t get out in nature in some solitude, at least once a week, I find my mental, spiritual, physical health all suffers dramatically. So hiking, backpacking, that type of stuff.

John Coleman: That’s awesome. All right. What is something that you do at your job that would surprise people? Michael, why don’t we start with you?

Michael Hall: Yeah, I think a lot of people will chat with me or they’ll see me an FDI or a Praxis man or something like that and feel like I’m an investor. You know, just this week was crawling around and making abandoned apartment units, stepping through unspeakable filth, trying to evaluate properties to make good buys and reposition them. So still very hands on, picking up trash, doing that type of stuff.

John Coleman: As the parent of four small children, I feel that I’m crawling around in a dilapidated space through unspeakable filth almost every day. So I can absolutely.

Michael Hall: I got four kids, so I just do it 24 seven. So that’s some of it. I’m paying for. Some of it I’m not.

John Coleman: Tim, what about you? What would surprise people that you do at work?

Tim Hurley: So last summer I was following around the snow cone truck. Well, it went to apartment complexes handing out information about the launch of our newest school. So I was slinging snow cones last summer.

Luke Roush: That’s good. That’s good. Give us one thing that you would say to Christian investors or entrepreneurs who are considering working with the government. One piece of advice Tim to you.

Tim Hurley: Just do it. It’s good.

John Coleman: That is a lightning round answer.

Tim Hurley: I can and I like it. He’s got it down, I’d say, Yeah, focus on your product, focus on your offering and be excellent.

John Coleman: All right. We got two more lightning round questions, and then we’re going to go to the scripture question. I know both of you are very philanthropic guys generally. I know you care about causes outside of the ones that you’re working on in your full time work. Is there an organization you’d like to pump up that you think is doing great work that you like to support outside of your day jobs, so to speak? Michael, maybe we’ll start with you.

Michael Hall: Yeah, I actually sit on the board of and have worked with for a long time an organization called Scarlet Hope, and they have locations all across the country, but they reach out to women who are in the sex industry or are being trafficked in some way, shape or form. And Rochelle Starr is an amazing founder and leader. And they’re doing a really, really, really cool and good work in very dark spaces.

Tim Hurley: Yeah. I mean, I would say your local church. You know, I think giving faithfully to your church and asking if you can give more, there is a pretty good place to start.

Luke Roush: Some of our audience members maybe want to know more either about Movement schools or the RISE program after school or Michael, you know, some folks may want to know more about refugee housing and what options exist for folks and what’s the best way for our audience to be able to learn more about your respective organizations? Michael.

Michael Hall: Yeah, FDI did a great video. If you want to see kind of high level, you can find that on the FDI YouTube channel. And then on our website you can fill out a contact form and we’ll reach out and be in touch.

Tim Hurley: Yeah, well, if you want to about the schools go to movement schools dot com. If you want to know about rise Christian after school go to rise Christian after school.

John Coleman: And Tim, are there ways for people to get involved in either of those at this point or is it I know you guys are dominantly funding it independently. There any ways in which people can be involved?

Tim Hurley: I’m so glad you asked that, John. Yes, especially for our Christian after school program, because that is a place where we do more traditional fundraising. So if you go to the rise, if you Google a rise, Christian schools would come up for you and there will be a donate link. If it’s not up there now, it’ll be up there by the time this comes out.

John Coleman: Excellent, of course, the mechanism. All right. You guys have been so great. Let’s conclude with the question about Scripture. And Tim, I’ll start with you. What is God teaching you through scripture right now that you’d like to share with others?

Tim Hurley: Yeah. So there’s an app actually, it’s called the Dwell App. Have you heard of the Dwell app? So this is what I would a free plug. It’s a you can listen to the Bible on audio. It’s incredibly well done, but I’ve been driving a lot. So I was listening to the Book of Job but it takes 4 hours to listen to it and 75% of that. So three of the 4 hours are jobs. Friends giving him terrible advice and just living there. Job where you just fess up to what you did before God like just admit it or you got to do this or that. And so I wonder why did God choose to make 75% of it? Terrible advice, friends. But my takeaway, because I’ve had a lot of friends go through some tough stuff recently is like I’m just trying not to be bad guy. I’m trying not to be Job’s friend, trying to like Spiritualized explain something I don’t understand and be more just the person that says what that and said, I’m so sorry this happened.

John Coleman: It’s awesome.

Tim Hurley: That’s good. Yeah. I think, you know, as I’ve journey with Faith Driven Investor and other entrepreneurs and venture founders, I’m just continually stunned by watching some of them kind of grow weary and doing good. And so Hebrews 10:24 has really been resting on me, that is. And let us watch out for one another to provoke love and good works, not neglecting to gather together. And I just that’s really, I think, resonated with me in this season of life. And I love that it’s so evocative of let’s provoke each other, let’s pester each other, let’s let’s stir up each other to love well and to do good things.

John Coleman: That’s awesome.

Luke Roush: Michael Hall, Tim Hurley, we are grateful for your presence on the podcast today. We appreciate the example that you guys are setting and what it looks like to partner with the government and address real systemic issues that exist in our society. So we really appreciate the wisdom that you shared and grateful for you being on the podcast today.

Tim Hurley: Glad to be here.

Michael Hall: Thanks for having us.

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The venture capital landscape has changed dramatically in recent years. 

How can investors move forward responsibly? How can we care for the entrepreneurs we’ve invested in? How do we find hope in the midst of challenges?

We cover these questions and more in this month’s edition of Marks on the Markets.

Host John Coleman is joined by two leaders in the venture capital and growth equity space: Brandon Allen, Co-founder and Managing Partner at TXV Ventures and Phil Jung, Partner at Sovereign’s Capital to discuss how they’re navigating the rocky state of venture capital and growth equity.

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Episode Transcript

John Coleman: Welcome back to the Faith Driven Investor podcast. This is John Coleman and I am joined today by two absolutely extraordinary guests who are going to talk to us about the current markets in venture capital and growth equity. This is our monthly marks on the Market podcast, keeping up with the most recent events in markets. And I think the expertise that these gentlemen bring to venture capital investing is going to be really enlightening at a time when venture capital investing has been a bit rockier than it was for the 15 years prior. Joining me first is Brandon Allen. Brandon is a co-founder and managing partner at TXV Partners in Austin, Texas. Then secondly, coming to us from the DC area is Phil Jung, who’s a partner at Sovereign’s Capital in the venture capital team. After a successful career as an entrepreneur, as a business leader and a venture capitalist as well. Brandon Phil, thanks for joining today.

Phil Jung: Thanks for having me.

Brandon Allen: John. Thank you so much for having us.

John Coleman: So we have a lot to talk about because there have been a few things happening in venture capital markets over the last two years. But before we get into the tumult of that time, including bank collapses and all manner of interesting occurrences, I wanted to throw it out to you all. I know you gentlemen are both motivated by your faith, your people for whom mission is really important. What motivated you to get into venture investing and how does that play into your values? And Brandon, I might start with you, if that’s okay.

Brandon Allen: Absolutely. Thank you again for having us John that’s really exciting and just to be a part of the FDI FDE Sovereign’s Capital family, it’s been such a blessing to Marcus and I, as we’ve been starting this fund, I am reminded oftentimes of the Bible that I got when I was in third grade at my church and the verse that was underlined, there was a challenge. There’s a verse to underline within it, Go try and find it. By God’s grace. I actually found it that day and it was Luke 4:18. The Spirit of the Lord is upon me for he hath anointed me to bring good news to the poor. He has sent me to proclaim the innocence of the captives, recovery of sight to the blind, and to let the oppressed get free, such that they can declare the year of the Lord’s favor. And so when Marcus and I think about what we’re building here, we really think we’re just building something for the kingdom. And there’s an incredible social element to that. We want to support through our focus in human performance technologies that actually increase our ability to live happier, healthier lives. We want to build a culture that people want to come into and that people will grow into and learn from. And then we just want to align with great partners and create value for his kingdom. So our faith is really at the center and the core of what we’re trying to do here in every single aspect and the aspects that it’s not. We’re working on it and the Lord is working on us to make it more so.

John Coleman: That’s awesome. Phil, how do you think about it?

Phil Jung: Yes, I’ve spent most of my career at various early stage venture capital firms, both at a firm on the West Coast in Silicon Valley, as well as here on the East Coast, where I currently am based. And I had a stint where I joined one of my portfolio companies as CFO back when it was an early stage company and we were a tech company in the mental health space. So during COVID, we were one of those companies that were very fortunate to be in a position to help a lot of folks in their mental health behavioral journeys. So we scaled very quickly from about 50 to 350 or so employees. So I’ve been very fortunate to have that experience of being both on the investor And then on the operator side, I met Jake Thompson, who’s the managing partner of sovereign’s venture capital firm, something like eight or nine years ago. We actually were neighbors. We lived on the same street in Capitol Hill in Washington, DC, and he had just joined sovereigns from Booz Allen, a consulting firm at the time. And I started my career in consulting. And so we kind of hit it off. And as I was getting to know him, seeing each other at events and conferences, and he shared more about this thesis at Sovereign’s of investing in excellent entrepreneurs that are building great businesses for good market rate return, but also doing so from a place of deep conviction that how you can love your neighbor is through how you steward a business and how you care for one another and love your neighbor through how you scale a tech company. You know, that was a that was a new concept for me. I was a little skeptical at first, but as we continued to grow our friendship and and I got to meet Henry and the others eventually on the team, and most importantly, I met some of the CEOs in the portfolio. And at the time I hadn’t invested in many entrepreneurs, but seeing and meeting some of these entrepreneurs, they had such a clear conviction that they were building these businesses for the kingdom and not building, quote unquote, Christian businesses, but businesses for the world, but doing so from a foundational layer of bringing forth the kingdom perspective. I thought that was really powerful. And so about a year ago, I had the opportunity to consider joining the team. I met folks like John. I was impressed with what the Sovereign’s team was doing. And in fast forward, I have the privilege of helping to support entrepreneurs as they go about scaling and building their tech companies in the entrepreneurship venture capital space. So it’s been great. It’s been a lot of fun and life giving at the same time.

John Coleman: I guess We managed to talk you into joining in spite of knowing Jake for […..] me, the Phil I’m. To throw it right back to you. And then, Brandon, you can jump in as well if you want. Obviously, the venture environment has changed. You’re a nice old man here. You’ve witnessed a lot of changes in venture capital up to 2021. We were really on something like a 13 year bull run, maybe even longer than that. Talk to us about what that environment was like as a set up so that we can now talk about what it’s been like over the last couple of years.

Phil Jung: Yeah, so I started in the investment world in 2015 and it was an interesting time. As every year passed, the market continued to get hotter and hotter. Back in 2018, you started to see more of a drastic, a rapid change in 19, certainly 19 and 20, where the venture capital market was white hot. You know, everything from seeing headlines in TechCrunch or venture beat of entrepreneurs raising tens of millions of dollars where entrepreneurship really became sexy and people wanted to be entrepreneurs. That’s what people wanted to do to all the funding and capital that was being raised around that time and therefore needed to be deployed. There was lots of funding available for early stage startups, term sheet who are getting done in a matter of weeks and sometimes days with a very light diligence. FOMO was very, very real. Rounds were coming together very, very quickly and companies were raising therefore very quickly. Every 12 months or so, for instance, there was an emphasis on top line revenue growth as opposed to profitability targets. And as companies were running out of cash, it wasn’t a problem because they were able to go out to market, get five or six term sheets and raise their next round of capital at significant mark ups from the last round. So it was it was a very robust time to be a startup founder or even a venture capitalist as you were deploying. When I saw this firsthand being on the operator side as well. So in 2019, i joined Mindoula as CFO and head of h.R. And yes, we’re in the right space at the right time. We’re a tech company in the mental health and behavioral health space. So during covid, we’re able to help tens of thousands of people with their mental health journeys. And that was one of the sectors in the digital health space that was white hot as well. Every other week, it seemed like we had VCs and folks wanting to take us public via SPAC to reach out cold. We got term sheets over the transom from folks that did very little diligence. I remember in 2021 we got a term sheet for $150 million in half in equity and half in debt. And at the time we were only burning a couple of million dollars a year. I had no idea what I would do with $150 million. So it was a very different environment, especially in the last few years from a venture funding perspective, and things have just completely changed in the landscape in 2022 and certainly in 2022 at this point in the game.

John Coleman: Now pick up on that thread Brandon because it has changed dramatically. And of course some of that is driven by the most macro of environments, which is the interest rate environment. Some of it is probably a natural pull down from a white hot market. Previously, if that was the environment up to 2021-22. Brandon talked to us about what the last couple of years have been like.

Brandon Allen: Absolutely, I mean, the last couple of years we just got started. I was a freshman in high school in 2008, so I couldn’t speak to the venture mindset as much back then. But, you know, I remember we kind of went through this exercise where every year it felt like the shoe was about to fall right. You know, the valuations on the public markets continued to expand. The valuations for early seed shows continued to expand. You had these huge capital vehicles, you know, the most prominent of which was SoftBank’s $100 billion vision fund, doubling, you know, the size of the asset class overnight that was coming in. And as a result you had a lot of companies raising megadeals. And so it was incredibly hot definitely at the top of the cycle. But to your point, you know, we have now seen that that cycle is now coming to an end. We see it specifically within our human performance sector, which had a little bit of a market cycle from 2019 to 2022 now, but then also in the macro cycle and then also in the venture capital cycle and the capital market cycle as well. To give you an idea, there was 85 billion of deal volume in 2020, there was 125 billion in 2021 and there was 2 billion and there was 200 billion this last year. And so, you know, a lot of expansion, doubling of the asset class, but we’re seeing a huge pullback right now.

John Coleman: Yeah. Brandon, you know, I’m a fan of your thesis because I’m buying new gadgets all the time. I’ve got my aura ring, I’ve got my GPS watch, my Garmin GPS watch. They’re not sponsors of the FDI podcast, but perhaps they should be. As you think about navigating this environment, you know, one topic that keeps coming up are the different stages of venture investing, right? I know both of you are actually more targeted towards the early stage, but for listeners who are less familiar with the market, you know, they hear early stage, late stage growth equity and they hear that maybe the opportunities are different across those different areas. Phil, would you mind offering some thoughts on just what are each of those categories for our listeners? And do you view them in different places right now?

Phil Jung: Yeah, absolutely. So, you know, there’s a certain journey that entrepreneurs are on for those that are raising, especially tech companies on this venture backed journey. Entrepreneurs may start off with an idea. They’ve identified a market opportunity, perhaps based on their years or decades of experience working in a certain industry. And so oftentimes a founder or founding team will bootstrap or raise a small round from friends and family to get an idea off the ground. Perhaps this is to build an initial MVP or do customer discovery to figure out is this a viable problem in a market that is in need of a solution? At that point is when entrepreneurs typically come to institutional investors, we often refer to that as early stage venture capital. This may be an early stage fund like sovereign’s. It may be others. Then there’s been a proliferation of early stage seed series types of funds that have popped up over the last decade especially. So at this stage, Institutional Capital Partners in the Seed and series A are investing in companies that are typically more than just an idea or a concept. There’s a working prototype. There’s customers. There’s revenue being generated. And entrepreneurs are looking to add fuel to the fire, start scaling the technology or solution out there. So investors are pouring capital in, hoping to invest in marketing or further building out of a sales team to really start scaling this effort of bringing this idea to life. As companies continue to mature into different parts of kind of the life journey of a startup. So perhaps in the mid-stage you now have built out at this point fully fleshed management teams and are building out departments now, you’re building more of a repeatable sales cycle. So it’s more of a rinse and repeat type of playbook. So you may raise capital from VCs or other institutional partners that may be focused on call it the series B or the C rounds. And as companies continue to mature from that point, they’ll hit the growth or late stage part of the ecosystem where these are big, big funders, oftentimes in the billions of dollars that are looking to void capital and companies that are preparing right before they go public. And so this market in that late stage mirrors a lot of what we’re seeing in the public markets most closely, because as a next kind of life stage of the company. So these companies have an eye towards profitability if they aren’t already. There’s an absolute focus on strong repeatable unit economics and margins that investors hope to see a return on. And even in terms of valuation, it’ll most closely mirror what we’re seeing in the public markets, what the goal of these companies eventually going public and becoming IPO’d and providing a return for investors. So there are different funds that focus on different parts of the market segment and happy to touch on any of those segments further. And Brandon can probably share more expertise as he does early and both a little bit of mid-stage investing as well. But at sovereign’s and in the group that I help lead or focused on the early stage typically around the seed or series A.

John Coleman: A Yeah. Brandon, pick up on that if you would.

Brandon Allen: How would you double click? One of the big things that we saw, one of the really huge major trends was the emergence of micro VCs, which Phil just pointed out. And so you had people like Brandon Allen and Marcus Stroud getting an opportunity to raise a fund. If you’re raising your first friend, you’re typically not going out for $500 million or $1,000,000,000 or a billion and a half because you have to prove yourself out. Right, So start small and then grow larger. There was a cultural emphasis on really getting people into business. This is where we get the whole concept of emerging managers. And so when we look at it, we see the capital markets, you know, some of the cultural trends that were happening there, emerging managers coming in and then driving the availability of capital for early stage ventures. And so there was nothing better to be than an early stage founder over the past couple of years that has now definitively changed and changed in a couple of ways. Number one, just anecdotally, in the data that we capture through TXV, we’ve noticed that people haven’t even been coming in to do priced rounds. Right. And so when we talk about seed valuations or C Plus or series A, we’re talking about things that are defined in announced. We’ve seen a lot of investors or excuse me, a lot of companies coming in and saying, oh, we need open ended capital arrangements, we need a convertible note, we want to do some debt, we want to do other types of things. We want to extend our last round. And so that just reflects that. It’s a pretty tough time in the seed markets right now. Another thing that’s happened is even within the seed investing within our sector, we’ve seen about a third drop. And so while a typical seed funding would have been about 8.8 million just last year, now it’s dropped 29% to 6.2 million. And that’s reflecting, you know, just a larger drawdown in valuations as well within human performance. One of the craziest things that’s happening. And this starts to shift over into the growth equity in the later stage is that 40% of the digital health funding was accounted for in the mega deals that happened over the past quarter, too. So 40% of all the funding in the market went to basically about ten deals.

John Coleman: Oh, wow.

Brandon Allen: Which is crazy. So, number one, it’s is that there’s not a lot of early stage version is happening right now, within human performance. And secondly, there’s consolidation at the end of the sector where people are saying, okay, we have all of these companies that have had all this availability to Koppel so far. We need to, number one, choose some winners, and then we need to number two create operational efficiencies within that. Those stories haven’t always been uniformly positive. We think of the example of Tono, which is a really hot, connected fitness device. You put it on your wall and used ML, trained you, and then it used electromagnets to simulate the weight that you were pushing out. We had the operation to look at it back in 2019, Marcus said. We didn’t have a lot of conviction around the early stage connected fitness. At that time we thought Peloton and a lot of these other things were simply, you know, logos slapped on things that we already had. Internal actually just had a round where they lost 90% of their value. Wow. Firms, you know, multi, you know, an over billion dollar unicorn to now needing to take, you know, 110 million because of problems with supply chain because they were growing too fast in a bunch of other different reasons as well. And so, you know, this is new. This is changing. We’re seeing it, you know, again, from the capital markets into the early stage. Markets are down. And that’s really the entrepreneurs who are at the end of that, their behavior has changed as well. And so we’re seeing the feedback cycle come from the LP. So there is founders and back.

John Coleman: Wow. You’re painting a relatively dire picture, Brandon, of the market. We’re going to come to a more optimistic picture here shortly, but I want to pick up on that thread. You’d mentioned how a lot of companies really are struggling with the business model that have been supported by this easy money, low interest rate environment that we were living in, much more availability of venture debt, which is obviously drying up a bit. And we haven’t talked about with signature in Silicon Valley Bank and others, you both have portfolio companies already in the portfolio, entrepreneurs who are living now in this environment where capital is not as available, where they’re having to do layoffs in certain circumstances, reprice rounds down to raise additional capital, to try and extend capital, you know, longer so that hopefully markets recover. As you counsel the entrepreneurs that you’re partnered with, what are you advising them on right now? And Phil, maybe you could start how were you counseling those entrepreneurs now? And maybe it’s FDI podcast, so maybe on a kind of technical business level, but also to spiritually, how are you helping them to weather this storm at the moment?

Phil Jung: Yeah, it’s a great question and it’s just a different time today than it was two years ago. And so the advice and how we partner with entrepreneurs looks different to, you know, from a macro funding environment. You know, typically companies have raised every especially you call it the last five years, companies are raising every 12 to 18 months. They’re going back out market. There’s plenty of capital today. That’s no longer the case. We’re telling our companies to plan for at least 24 months in between rounds of funding and to start. Now, look at your budgets now. Every line item there are probably ways to optimize now instead of when you’re at six months before a cash update. We’re working closely with our finance heads and CFOs to help them in the budgeting cycle, to plan for the year and ways to think about profitability as an option as opposed to just waiting to get to the next round of funding when the existing cash runs out. We’re advising companies that 2023 will continue to look challenging from a fundraising perspective. So if you raised last year and are able to stretch the existing runway to get to 2024, we think that’ll probably be a more fertile opportunity to raise where VCs are looking to actively deploy capital, especially as you enter the main or late stage type funding rounds that we alluded to earlier today. And then touch on this for profitability. You know, it’s interesting, it’s not just our portfolio companies, but even early stage companies that are out in market right now. We’re seeing a lot more pitch decks and in meetings that entrepreneurs are thinking about what the clear path towards profitability looks like, not in some distant future, three or four years out, but what it might look like in 12 months and 18 months, and how this round of funding gives them the optionality to get to those goals of profitability. From a spiritual integration standpoint, lots of companies are having to make tough decisions right now. We’re hearing of rifts in the market all the way from big tech down to smaller startups as well. And how do you be a good partner even in those difficult moments? And sometimes it is a business decision, but there’s still a way to honor individuals and employees if you have to make those types of decisions. It’s doing so treating them with respect, being able to communicate very clearly why the decision was made, helping people find, hopefully the next landing spot, vouching for them, or being a reference or being willing to open up your Rolodex of contacts and making intros for folks passing around resumes to your networks or other entrepreneurs that may be hiring and putting in a good word. So there are ways to, I think, honor individuals and employees, even in tough circumstances. And if things are going well, too, it also presents opportunities to really lead by example to be a vocal leader and. Demonstrating, you know, why you’re building what you’re doing and not just because entrepreneurship or startups are sexy or because people want to work at a high growth tech company. But there is definitely an emphasis on the whys today of why you are building, why this company or startup exists and why it’s important, why there is a redemptive element to what you’re building. And I think all of those things matter in where people spend 40 plus hours of their week working and spending time with building.

John Coleman: That background as a CFO is probably helpful for you right now, having run a venture backed startup as a CFO. You know, Brandon, you’ve kind of heard Phil weigh in on this. How are those conversations going for you and Marcus right now? How can you lean in with your portfolio company leaders?

Brandon Allen: Yeah, I mean, we are having those conversations with every single portfolio right now. Some of them are different. Some companies are doing really well, some companies are plateauing. Luckily, we haven’t had any companies that have had a lot of difficulty yet. But, you know, to really double click on what Phil says, you one of the things that we’re looking for, for a company and for a leader is to have a really strong idea of what it is they’re trying to accomplish in this next stage. Right. And so when we talk about even the categories of Seed series A, series B, we’re investing into a seed company. We’re saying, hey, we need to achieve some level of product market fit. We need to know what we’re doing and we need to have an economic story that makes sense by the time we get to our series A. Now, what’s changed relative to what used to happen is now your series A, you get one shot. There’s no Series A one, two and three. You’re not going to have a convertible note before in a convertible note after it. You have to assume that the level of capital that you’ve been able to bring in is largely going to be the capital that you’re going to need to prove whatever it is that that business goal is. On a personal level, yeah, the reductions are really difficult. Market discipline comes for us all. You know, what I found is oftentimes speaking to entrepreneurs, there is such a hesitation to fire people because of the personal relationships that we all have with our companies. But, you know, with the point that we are in the market, you know, right sizing the team and making sure that everything’s operating in the right way is the number one thing that all companies have to be focused on. You’re coming out of that clarity of vision. And so clarity of vision, clarity of operations would be the two things from TXV perspective. We like to help in a bunch of different ways. When we think about platform, we’re talking about capital introductions, we’re talking about help with talent, we’re talking about help with customers as well. You know, in as much as talent is one of the most important things, it is not the most important thing. When you have a company that needs customers. And just the way that we’ve been orienting our scope of action, bringing in customers, making sure we’re really honing the commercial aspect of how the companies are running has been top of mind for us to the point where we’ve actually started saying, Hey, when we talk to our CEOs, we’d love for whoever that Chief Revenue Officer, the Chief commercialization officer, whatever it is should be on or the sales officer to be in on those conversations as well. Because at the end of the day, and this is part of what happens when you don’t have market discipline, people chase these different things, these different macguffins. But, you know, this is a business that has to sell. The economics have to be good. And so just having a focus on that and really walking through those numbers very tightly without being overly driven by a vision of what you could accomplish has really been kind of the conversations we’ve been having with certain entrepreneurs to pull them back a little bit.

John Coleman: And I want to pivot a little bit now because you guys are leaning in with entrepreneurs every day. You’re keeping a close watch on the market. We have painted this dire picture of the last couple of years, and frankly, I’m with you I think the next year. I mean, given what we’re seeing with the financial system, much less financial markets, with the interest rate environment, probably at least staying flat right now, perhaps going up even a bit more depending on things and the likelihood that we are already in a recession or potentially entering a recession. You know, it’s one of those periods that you have to weather. At the same time, I think history would tell us that periods like this create some of the greatest opportunities for investing and frankly, also for startups. You know, my old firm and Jake Thompson and I talked about this, we did an analysis of what happens when tech companies get hit the hardest, like the tech bubble of the late nineties, early 2000. It actually creates a vibrant startup ecosystem because all these folks at big companies that have options that are now not worth as much, you know, the golden handcuffs are off. They go start some new things. You see valuations coming down. So investors have a chance to enter in at a better valuation for companies that are likely to be long term successful. And there are always innovations needed in market, right? Life doesn’t slow down. I mean, I think the most obvious example right now is artificial intelligence, where I think everyone is paying attention to what’s happening with chat GPT right now. And you know, many people saying this is the biggest thing since the Internet, right? Artificial intelligence. So I don’t mean to leave the witness there, but Brandon, maybe start with you. As you look ahead and as you think about investing right now, what are the opportunities that you see in this market to make great investments?

Brandon Allen: Yeah, you need to double click on what you just said, you know, just because we are in a different point in the macroeconomic cycle or the market cycle or the tech cycle does not mean that opportunities is not out there and it doesn’t mean that people should be pursuing opportunities. Right? We had a long ten year bull market run driven by monetary loosening that results in the situation that we’re in now. It is very natural and correct for there to be some sort of rebalancing in that. And all of the people and all of the resources that are being redistributed throughout the economy will hopefully go find the types of companies that we’re talking about right now. And to your point, John, one of the most exciting things that we’re looking at is AI right? And so when we focus on human performance, we’re talking about the modalities of eating, sleeping, moving and mental health. Health care, the healthcare industry writ large is actually one of the industries that is the toughest to go in and to digitize and to go in to innovate because of the heavily structured regulatory environment. What we’re seeing right now is that outside of health care is where a lot of the innovations are being driven, especially through tech. And with the emergence of technologies like AI, we’re going to see a fundamentally different everything over the next couple of years from a, you know, just a human being in front of a computer, chat GPT is amazing. And what happens when chat GPT then becomes integrated into all of the different applications that we see across human performance? What does it look like to have a new generation of companies being built upon emerging technologies? That work is being done right now. We’re starting to see a resurgence, see companies come in that don’t just put AI in the deck, but that have ai really built into their core model. And that technology is really going to even in the limited way that we’re understanding it as a natural language model through chat GPT. There’s going to be a lot of things that are going to change over the next couple of years, and we’re excited about the companies that are going to do.

John Coleman: Yeah. Phil, what are you looking at right now?

Phil Jung: Yeah, and just to really highlight one of the points that you alluded to, John, of why this is a great time to build a company. And what we’re seeing on the investor side, you know, when comp packages for engineers and developers are no longer in the $500,000 a year packages, startups can actually hire great engineers and developers. You don’t have to compete with these big tech firms that are offering these types of packages. And even if you’re working at some of these bigger tech companies and you’re feeling uninspired or don’t feel a call to the mission of an organization, you know, it gives them opportunity to build something that they actually care about. So we’re actually seeing a lot more companies being built from teams and founding teams that are being very intentional and passionate about what they’re building. And you’re able to access talent much more easily than you were able to even two years ago out in the tech market in terms of opportunities that we’re seeing. Yeah, we see everything from large generative, AI, ambitious companies to a lot more unsexy businesses too, that are definitely worth and deserving of outside funding because of the problems thay are addressing. You know, one of the most recent investments that we’ve made from our team is in a company called Relay, or it’s a hardware enabled SAS platform that equips frontline workers. And in today’s world we often think about engineers and white collar jobs, but we don’t think about the front lines. And with the labor shortages that many industries are facing, you think about retail, our restaurants, or even at our hospitality chains. These are workers that are looking to boost productivity and find safer and more compelling opportunities for meaningful work. But these categories of folks are often left behind in terms of how technology can advance the productivity and the work that they do. So Relay as a company that equips them with a hardware enabled communications platform where everything from providing data analytics on tracking to where they can optimize a place in a hospital, depending on where a patient needs are and where your labor personnel are staffed at a hospital to providing panic buttons for hotel workers who unfortunately, there’s been some statistics that have shown that up to 25% of hotel workers made workers have been sexually harassed at some point in their careers. Really, it provides and equips these frontline workers with technology and tools to optimize productivity and communications. So that was a recent investment that we made. We also look at, you know, when it comes to A.I., there’s been a lot of buzz and really interesting and compelling use cases of how AI can apply for everything from shooting movies without having to animate a single sketch, you know, creating music or art, which is all great, and creating LinkedIn photos, simply uploading three or four side shots of your face and creating AI image of whatever context and background that you can desire. But we also think that some of that pickax and shovel plays as it relates to A.I. is going to be where big opportunity lays. So data, place. Everyone needs access to data. So do you have proprietary data that you can support a lot of these AI companies for their training models, for instance? We think a lot of these infrastructure types of unsexy industries and infrastructure, there will be really big opportunities that present themselves in the current cycle.

John Coleman: Yeah, it’s interesting. I do think AI is a real phenomenon right now. I mean, you can’t look at what’s happening with chat GPT with images. Etc. without thinking that it does carry echoes of the whole distributed ledger technology blockchain thing though, where I’m sure a lot of companies are just going to slap artificial intelligence on the name of the company or in what they do and hope that that uses the the valuation guy a lot. It’s got to be discerning about it. And I am entirely confident that the very last field that artificial intelligence can replace will be venture investing. Right. That’s certainly those jobs are safe.

Brandon Allen: The thought has occurred to us or like I say, positioned pretty well over here. You know, no, AI bot is going to talk to John Coleman and we are going to.

John Coleman: Ironically this is actually chat GPT creating this podcast listeners we wanted to spring that on you at the end. Listen guys, I think this has been remarkably informative to our listeners. We’re going to move to this idea of a scripture or a lesson that you’re learning from Scripture that’s moving you right now to conclude the podcast. But before we do, I just wanted to ask you if there are any final thoughts that you would leave our listeners with as they think about investing in venture capital this year? And Brandon, if it’s okay, we might start with you.

Brandon Allen: Absolutely. One of the things I guess we didn’t touch on was Silicon Valley Bank and oh, yeah, you know, I personally and I’m sure I join with a lot of people and just mourning the loss of that bank, especially in the way that it actually ended up turning out. While it was clear that the bank didn’t have the risk management that it needed to. There was a degree to which tech cannibalized itself and created the conditions around a run on the bank that we should be a little worried about. Obviously, with First Republic Now, which is also a big player in our industry as well, and having a stronger balance sheet, having had $30 billion placed on it by some of the bigger banks and JPMorgan still having to come by it. It is unfortunate and there is a degree of capriciousness, I would say, in what’s happening. But, you know, it’ll all buff out and we’ll see how it all lands. But yeah, it is for sure an incredible time.

Phil Jung: One of the things that we’ve been talking about on our team and as we support our portfolio further is especially as capital allocators, the role that we play. Yes, we can do our parts as VCs as investors. You know, we have certain levels of influence where that you may be on a board where that’s formalized as a board vote on certain items. But even if you’re an informal adviser, we have influence. And so how you support the entrepreneurs or companies that you’re backing, maybe it’s, you know, quietly as you’re praying for the companies that you’re partnering with. And they may never know that because you’re doing that in your personal quiet time to sharing insights of what you’re seeing in the market in real time, to being willing to roll up your sleeves a little bit more than you normally would in a different environment, you know, offering your expertise to review a financial model, going out of your way to make a couple more intros than you normally would to potential funding sources or potential customers leaning in to help with HR related issues at the executive level or even at the manager level or below, helping to recruit an interview because your HR team may be a little bit more thinned out than it was a couple of years ago. There are ways that we as capital allocators can have influence on our companies asking how entrepreneurs are doing outside of work right with their home life, with their communities, and just putting aside the business for a moment to care about an individual and their whole self. You know, all these small and big ways we can have influence on the ecosystem. And so I challenge all of us to not lose sight of that. Then even though we support our LPs, you know, Brandon has raised from outside partners, At Sovereign’s, we have as well, you know, keeping them abreast in a period of rapid market dynamism and uncertainty, keeping them updated on how we are thinking through our operations, whether it’s your banking relationships or your portfolio, because in the absence of communications, people will tend to worry or perhaps assume the worst. So being a sound of a steady hand and the sound of reason during a period of otherwise market uncertainty, I think those are all slow and big ways that we can play a role in supporting the broader ecosystem.

John Coleman: That’s great. That’s great. And Brandon, I will mention that our crack producer, Joey Honescko, texted me during this and said to remind people that just last month the marks on the market episode was about the Silicon Valley bank collapse with Zach Mansfield and Justin Sphere. You should check it out if you’re a regular listener because there was a good explainer. Brandon It looked like you wanted to add something there as well.

Brandon Allen: Yeah, we think about the parables a lot here and about verses in a way that they play out in terms of just any of our interactions. And one of the ones is kind of top of mind for us now is a friend loveth at all times, and a brother is born for adversity. And so, you know, when the markets are up and everybody is happy, it is very easy to be a friend that love is at all times. But right now, you know what? We are trying to be just as Christians, as people, here at TXV is the person that you call upon in adversity. You’re not going to call us and we’re going to eat. A lot of companies are going out for follow on rounds. It’s easy to say, Oh, well, the market, you know, we’ve had to pause right now. But having those more difficult conversations both about the companies, about, you know, the willingness of people to strip checks right now and about what may need to change within the company and the leadership in a way that’s loving and really honoring of Christ, I think is one of the things that we’re thinking about at this point in market cycle.

John Coleman: That is an awesome spiritual lesson that the concluding question we always ask on the podcast is just what is God teaching you through Scripture right now that you want to share with others? And Brandon it feels like a pretty good encapsulation of a lesson that we could all learn that you’re ruminating on right now. Anything you’d add that God’s really pressing on your heart right now?

Brandon Allen: Parable of the Sower, you know, reflects the ways in which, you know, you make bets, you spread the seed over the field. And this time, just as you know, an investor or some of those responsible to other people. Just wondering, you know, looking back, why did we take the bets we took? How are they doing? What are the conditions in which we actually made those and how have people responded to it? And so, you know, in that verse in particular, it talks about the different types of things that can happen that would result in a seed not flowering. And, you know, that’s very top of mind right now as well.

John Coleman: Bill closes out on a high note here. What is God teaching you through scripture at the moment?

Phil Jung: You know, what’s been lately on my heart is, you know, the concept in scripture over and over of God’s promises and his covenant with his people, you know, in Genesis with Noah after the flooding, promising covenant to never do that again to the ultimate fulfillment of God’s promises in Jesus Christ, in the gospel message. And I’ve been reading this book, Habits of the Household, at the beckoning of some of my colleagues, and it’s been great, or I have been reminded of the commitments and the promises that we’ve made, for example, in marriage to your spouse of, you know, despite how you may feel or despite what you may cost you as an individual and your desires and what your wants may be at the time that you’ve made a covenant to support and love that individual. And I’ve been thinking a lot about that. We have a young child, we have a puppy. So sometimes, you know, patience is thin, but we’re being reminded of that has been top of mind and it actually has permeated through how I think about our portfolio to right when we enter in a partnership with a company, you know, one of the promises that we’re making not just to be there when things are good, but to go the extra step, to go the extra mile despite what it might cost me on a time and resource perspective from our connections to really care and serve our entrepreneurs and our companies, especially during this market time, that’s been something that God has been challenging me on.

John Coleman: Phil, Brandon, we’re really grateful for you joining us today. I know you guys are experts at what you do. You’re doing a great job throughout these markets and it’s a privilege to be able to host you on the Faith Driven Investor podcast and I hope we can get you back very soon or maybe a year from now. We’ll do a Mark’s in the Market podcast about the recovery in venture capital markets and get to revisit. Thank you both for joining today.

Brandon Allen: Thank you so much, John. So encouraged by you and the rest of the sovereigns team.

Phil Jung: Thanks, John. Thanks, Brandon. It’s been fun.