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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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Can finances lead to a more loving world?

Former NBA star Jeremy Lin and his business partner, Robert Kim believe so. The two of them, along with Patricia Sun, lead JLIN LLC, an organization dedicated to redefining love through entrepreneurship and investing. 

In this special episode of Faith Driven Investor, Jeremy and Robert join Henry Kaestner and Faith Driven Entrepreneur Africa host, Wen Li Lim, for a compelling conversation about their passion to use capital for good and why they chose to use investing in addition to philanthropy.

You can also hear more about Jeremy’s entrepreneurial efforts on the most recent episode Faith Driven Entrepreneur podcast. 

Don’t forget to follow both shows on your favorite podcast streaming platform.

Episode Transcript

Rusty Rueff: Welcome back, everyone, to the Faith Driven Investor podcast. When Jeremy Lin rose to Linsanity fame back in February of 2012, his name became associated with the fastest growing athlete brand in the world. But the buzzing fanfare of his success came with a cost. Jeremy experienced the immense pressure of having to measure up to Linsanity heroics. In this episode, Jeremy shares with the Faith Driven Entrepreneur Asia team how he has navigated these challenges and why he has since focused his energy on faith driven investing. We’ll also hear from Robert Kim, the managing director of JLIN LLC. Let’s dive in. Hey, everyone. All opinions expressed on this podcast, including the team and guests, are solely their opinions. Hosted guests may maintain positions in the companies of securities discussed. And 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 to a special edition of the Faith Driven Investor podcast. This is what I’ve been looking forward to for a long time. For lots of reasons. We’ve got Jeremy Lin in the house. We have Robert Kim, great friend of mine, a great encouragement to the Faith Driven Investor movement for a long time. And I have Wen with me, Wen and I have never done a Faith Driven Investor podcast together. But for those of you within the Faith Driven Investor community, Wen is awesome. Wen is in Singapore. Wen is a regional coordinator for Faith Driven Entrepreneur, an investor in Asia out of Singapore and my co-host on Faith Driven Entrepreneur Asia Wen. Good morning. Good evening.

Wen Li Lim: We do this all the time. Good evening. Good morning. We are on the other side of the world from each other.

Henry Kaestner: And most of the time is on different days. And we also have Robert Kim before I introduce Jeremy. Robert and I have known each other since almost the week I moved to California seven and a half years ago. And he struck me as a person who he is, is somebody who completely gets this movement, a wealth advisor, somebody who has really thought through the theology and studied this about what is God doing as we look to start investment assets? And, you know, C.S. Lewis talks about friendship being when you meet somebody and you say, gosh, I thought I was the only person who fill in the blanks. Well, Robert is that type of person who really gets in, leans into driven investing, and he’s got a special friendship and relationship with Jeremy and introduced us to Jeremy three or four years ago. But Robert, before we meet Jeremy. Good morning.

Robert Kim: Morning. How you doing? Or good evening for.

Henry Kaestner: That’s right. It’s in Korea, too?

Henry Kaestner: Yes, and you’re in Korea. So you just moved back to Korea, right?

Robert Kim: Yeah, three months ago.

Henry Kaestner: So for those of you can see this on video which is not most of you. You can see that Robert has wasted no time in decorating his apartment. He’s just getting right into the mission field is making it happen. We need to, Wen we need to send him something like some sort of like a movie poster or something. Right

Wen Li Lim: Ok, to anyone who’s in a zoom with Henry. He’ll look at every single thing in your background and he will comment on it, just like Robert’s background that has nothing. So, listen, Henry’s actually poking fun at Robert’s blank.

Robert Kim: Next time you come over to bring something, I’ll put it on my wall.

Henry Kaestner: Yeah. And we need to bring something for Jeremy, too, because Jeremy is on Zoom right now, and Jeremy’s maybe feeling a little self-conscious as well. Jeremy, good morning.

Jeremy Lin: Good morning. Good evening. I am definitely extremely self-conscious at this point, but I feel a little bit better because I’m you know, I’m in a hotel and this is just the hotel room. I guess I can just put this Faith Driven Entrepreneur book right behind me and have it kind of be the beautiful you wallpaper.

Henry Kaestner: There’s never been a better wallpaper. Major, major props, so Jeremy welcome to the Faith Driven Investor podcast. Prior to this episode, of course, we had a really, really great conversation with you and Patricia, Faith Driven Entrepreneurship and your identity as a basketball player, your identity as a human and your identity as a Faith Driven Entrepreneur, really one of the favorite episodes that I’ve ever done. You just got on the concept of identity, motive, joy, gratitude, Sabbath, rest, and that was awesome. I want to encourage our listeners to go back and listen to that. That was really special as we talked about Jeremy’s career and journey through Faith driven entrepreneurship and this conversation. As you may have gathered, we’re going to be talking about investing and what does it look like to steward the investment capital that God has given us all. And then you in particular, as you’ve done this in partnership with Robert, as he’s sought to provide sound counsel to you as you think about again stewarding that investment capital, on whether participates in the work that God is doing. So thank you for joining.

Jeremy Lin: I’m excited. Thanks for having me and this is really cool to be on. I’m excited for this one as well.

Henry Kaestner: Cool. Okay. So as we start out, give us some backstory. So you’re launched in the spotlight in 2011 in a big, big way, an incredible documentary called Linsanity. And maybe I’ll just a personal anecdote on this. I guess three or four years ago when we met, the kids were just off of school. That morning, we watched the documentary Linsanity. And my boys were probably, I don’t know, ten, 12, 14 at the time. And then I got a chance to say, hey, guess who I’m having lunch with, like the guy who is just in this documentary. And then we met and had this great lunch. And then you’re just incredibly gracious with your time and and spent time that evening with a group of faith driven entrepreneurs sharing about identity. But it was all about this identity as you are thrust into the limelight as a really young person in 2011. And what follows from that is these big, big time million dollar contracts. God gave you a lot of success on that with different teams in the years that followed that. But when did you start viewing investing the money that you’re earning? When did you start viewing investing as a tool for impact?

Jeremy Lin: Yeah, I mean, this was definitely a journey as well. And I think, you know, for a little bit of backstory, Robert Kim, before coming on, you know, he’s here a part of JLIN LLC now and we’re able to start this capital initiative. But before that he was with Caprock and he was my financial advisor for Robert. How long?

Robert Kim: Eight years. Yeah.

Jeremy Lin: And I just remember, you know, he saw the way that I was kind of going about my finances. And he would always kind of mention, like, you know, like investing is a really powerful way to, like, build God’s kingdom where you can really think about it. And for me, I was always so focused on philanthropy and I always knew, like from a young age, like, oh, philanthropic work foundation, where this is like where my heart is, is what I’m going to do. And Robert kept giving me different anecdotes, challenging my paradigm, saying, like, look, the nonprofit sector is great and it can help. There’s also a ceiling and there’s the nonprofit and the for profit sectors don’t merge together. You know, there are certain limitations to how much you can help somebody. And he gave this great anecdote about somebody who might be, you know, an NGO or a nonprofit, would be working with the child, getting him to a great place. They make it to college and want to attend and there’s no loans available or the for profit space has nothing available for him to be able to get to that next level of higher education to continue down this path, among other anecdotes. And that’s when I realized, wow, I really think that God has uniquely positioned our company and our brand to be able to touch and potentially connect and bridge both sides. And so that’s when we started really looking more deeply into investing as a huge vehicle to be able to build God’s kingdom. And honestly, like I didn’t even know that existed. You know, for me it was like it was so far out of the realm of what I could understand. And Robert continually over time, was able to, you know, develop that conviction within my heart. And now we get the chance to work together.

Henry Kaestner: […] so Robert. So let’s back up a little bit, because you came to this realization a long time ago. You and I remember talking about it, and now, as soon as I moved out here seven, half years ago. How did you come to that understanding that investments can participate in God’s kingdom with such conviction that you’re able to take this really high profile client and then boldly go in and suggest the same to him.

Robert Kim: Yeah. Really good question. I think for me, it wasn’t an understanding that it started really. It was more of a conviction that in my mind. So backing up a little bit in my twenties. I was working in New York City management consulting firm, working with some of the large tech companies in New York City. And at the same time, I was doing these short term global missions, right? I would go to Mongolia, I would go to different parts of Central America, Europe. And I just really kind of became friends with these people because I would go back, you know, every year. And these are like amazing people, super talented, super resilient, yet like they just didn’t have the access to the resources that I was enjoying. And I remember thinking I was living on Wall Street. I’m like, why isn’t the capital markets looking at this community? And I think that’s when I started praying, God, I want to invest your resources into communities like that. And I didn’t have enough means to do that on my own. But I think God was faithful. He just listened to that and he gave me an opportunity to learn how to invest, he gives opportunity to meet amazing people like Jeremy. And so I think it was more of like just a desire really and understanding sort of came after. And I think like I met Jeremy and as you can tell, you know, Jeremy, as authentic as it gets and I sense a deep desire to really meaningfully impact the communities through his platform. And I felt like God really knitted us together. I had a sense of that and that kind of sense developed over several years. And I started talking to him about, Hey, what about this area? You can do a lot here. It’s new, but you can do a lot here. And and I think naturally our friendships sort of got formed and it was more comfortable to share also. And as the ecosystem also matured, there were more investible projects they could actually place capital into as well.

Wen Li Lim: Right. And part of the mission of JLIN LLC is to impact culture and redefine love. And at Faith Driven Investor, we talk a lot about the idea that all investing is actually impact investing. And we believe that our capital has the power to shape cultures, communities, cities and even nations and Christians especially can use the capital to work for good. What do you hope JLIN has on the rest of the world through the impact investing that you do?

Jeremy Lin: I mean, I think wow, I didn’t think I was going to do this, but I’m like almost plugging the other the Faith Driven Entrepreneur podcast because Patricia had, you know, she was just on me like, you know, JLIN LLC needs this big long term goal. And she made me sit through like hours of meetings and asked me and picked the card everything I said and was like, I need more specifics. I need more like I need more. And I had to think for a year, literally like 12 months. And that’s when we kind of came up with this concept of redefining love. And we’re like, Man, if we could redefine love for the next generation, I think that’s what I would. That’s what I would want to go for. And it was just so divine because me and Patricia had talked about for so long. Like, we would love to work with Robert, but we don’t want to poach. And so we never mentioned to Robert like I mean, for four years. For four years we never mentioned anything. And then all of a sudden, Robert came to us and was like, Hey, what do you think about this and this? And me and Patrica we’re like, Oh, my goodness, like, what a divine.

Jeremy Lin: Like. I mean, the whole how we even got here was just really amazing. And so I think, you know, that’s when we started on this concept of can we redefine love and impact investing or investing in general is just one of those ways that we think we can do that. Can we start to view our investments, our wealth, our network, everything that within that realm? Can we view that as an opportunity to, you know, redefine love, give the next generation more opportunities to be there for ourselves and to be able to do it in ways that are really like dignifying and humanizing for each individual person, not just the people that are being affected by the company or the product or whatever that is. But also the the founders, the employees, the fund managers, like everybody across the board. Can we approach it from a way where we’re humanizing and really loving deeply on those people, as well as obviously bringing this new level of radical love through how we use our wealth or how we even view our wealth. I think, you know, Robert can go more into this because this is something that he is working a lot on right now and thinking a lot more on, but that is kind of the birth of it all.

Henry Kaestner: That’s amazing. So you and Patricia work on this loftier, bigger purpose about why are we doing all of this and what does success look like? And over the course of 12 months of going back and forth and her challenging you, you come up with something pretty ethereal. I mean, it’s pretty big, like redefining love. And I’d love to hear what that means in terms of like how you invest differently. So, Robert. You’re constructing a portfolio for a friend and a client that’s saying, I want my finances to be involved in the redefinition of love. What does that mean? What do you do with that?

Robert Kim: Yeah, that exact reaction that you have right now was and so is my reaction till today. You know, we talk a lot about this topic, but when I first heard Jeremy and Patricia kind of talk about redefining love and can we talk about what does that mean in the world of investing? Honestly, as somebody who has been deep into impact investing for a while, I was very shocked. I was like, I don’t know. I don’t even know what that means. And so I moved on from Caprock and joined JLIN LLC at the beginning of 2022. And so over the last nine months or so, I’ve been really thinking intentionally about what does that mean? Right? And I think we’re not quite there yet in terms of clearly defining what that means. But we know the following. We think that one is really around this notion that impact happens in the context of a relationship. I think the impact that we want to see really happens at dinner meals, in a coffee chats, right. And when we think about the founders that just face immense level of pressure, when we think about first time high impact potential fund manager, they’re starting out. They’re putting their life on the line. Right. And they go through incredible journey of highs and lows. What does it mean to really redefine love in that context as we invest in them? I think it’s spending time with them, I think is really creating an atmosphere for founders to be themselves without the sort of pressure to put up sort of this persona that, well, for the next fundraising, we’ve got to look like this. Right? And so we’ve been thinking really deeply about post investments. How do we create an environment or an atmosphere where founders can come freely and just really experience the love that we experienced personally? And same thing for the first time, general partners or fund managers as well. And so we’re working on that right now. And so that’s kind of first piece. The second piece I won’t really go into too much is really investing to improve access for the marginalized communities throughout Asia in the US. And so when I think about GDP per capita in Southeast Asia and a lot of it coming out of service sectors, the innovation happening on the technology side I think can really multiply that in the coming decade. And I think the impact that can happen in the context of that growth is going to be pretty special. So we’re pretty excited about that. So I would say like the relationship with the people we invest, how do we thoughtfully forge relationships and then improving access through the technology and business models that we invest in?

Henry Kaestner: So you guys have worked together for a while first, as you know, a client relationship with Caprock and then of course, now with JLIN. But you have made some investments together, of course, in the past. Can you speak to some that you’ve done that you think are good exemplars of the type of stewardship that you want to do that you’ve done?

Robert Kim: Yeah, definitely. The most recent one is a company called Ascent Funding. They’re based in the US and they’re in a education financing industry. So typically in the US and then also in Southeast Asia, if you want to get a student loan, really it depends on your parents credit score, how wealthy your parents are. And I think what that does is it immediately excludes people; one without parents or people with parents without too much means or wealth, because as soon as you don’t have a credit score, you know, you just started to build credit. And so this company called ascent funding created a, in our mind, relatively new way to underwrite a loan based on the student’s academic ability. And so they spent a lot of time understanding, you know, their academic ability and therefore that student’s ability to find a job post-graduation. And they really take a look at that sort of factor. And if they have a high sort of academic potential, regardless of your background, you know, regardless of whether you come from a, you know, high income or low income, you can get a loan. And that is really special because we care a lot about access, as we talked about. And that company is tremendously improving access to education through new financing structure. So I would say that’s the most recent one that we really love and that sort of exemplifies the type of companies we are looking to invest into.

Wen Li Lim: I’m going to ask Jeremy, earlier you were just talking about like philanthropy and then really then moving along and doing impact investing. Is there a particular project or even issue that is really close to your heart that you started out to kind of doing philanthropic work and just through, you know, talking to Robert and learning more that you’ve kind of moved into looking at impact investing in that specific area.

Jeremy Lin: That’s the unique part about this is I am extremely excited about my foundation and the stuff that we’re doing, the Jeremy Lin foundation we center around really empowering, overlooked API. And then at the same time, you know, when we think about investments and different things like that, we’re looking at different companies that will also provide, you know, and the thing that Robert will talk a lot about is access and mental health. I think those are two of the primary drivers that we’re looking at. And when we think about the pandemic, when we think about, you know, what I’m learning from everything on the foundation side and all the work that we’re doing, so much of it centers around mental health and what the kids have been going through. And, you know, even when I’m doing my UNICEF stuff, like it’s all about mental health. And when we talk to Congress, congressman and congresswoman and public officials, they talk about bullying and mental health. And these are things that we are trying to also provide. Can we provide more access to mental health resources? Can we invest in companies? Can we even approach the mental health of founders in a way that is able to help them get there? And I think that’s something that’s really unique, is, you know, when I think about a great coach, she helps me, all my great coaches in my life. That helped me become better basketball players, but they haven’t redefined love. Right? Like the coaches that have really redefined love for me are the ones who became mentors and lifelong friends because they cared more than just the results and what I was able to bring, right? Like it wasn’t just the profit or the numbers or it was being willing to walk through life with me and being able to meet me in my highs, in my lows, and to be able to care about me outside of my performance on the court. And, you know, these are the things that we want to bring to the people that we invest in because we won’t be the ones coming up with the product. But if we can meet them where they’re at and then even just to challenge them a little bit or to give them almost like a different perspective or to give ideas, maybe the product changes. And maybe because of that small tweak, it affects an entire territory of children, whether it’s mental health or access to education. But I know I’m a little bit all over the place right now, but it’s kind of just a snapshot into what we’re trying to do. And we talk about like what is Redefining Love look like. It definitely requires more radical love, being willing to grind it out and go through the rougher parts of the process that maybe other people wouldn’t be willing to go through and then caring more beyond just what the final result and the statistic shows.

Henry Kaestner: So either of you can answer this for listeners on this. Can you illustrate where you are and the spectrum between and maybe you have investments all across the spectrum, but between philanthropy through to social impact, which might have a patient or concessionary return all the way to market return. Do you look at the portfolio holistically that way, guided by this principle of love, guided by issues like community, which I know is big in mental health, which you just mentioned, but can you talk about and maybe even represent investments that might represent philanthropy, impact investing, which connotes that there’s going to be some sort of a financial return as well as a social return, and then also where you might make an investment that might be consistent with your ethos and what your call to that might be. More on the market return side.

Robert Kim: I can take a crack at it first and then Jeremy can obviously add on to that, I think. So across that spectrum, my good friend calls it One Pocket Investing. Right. So most investors have for profit pocket and then invest in pocket. So from a sort of a Jeremy Lin family office perspective, right. There’s a Jeremy Lin foundation that does the grantmaking right around underserved API communities with a theme of cross-racial solidarity. So we definitely have a focus there. Jeremy also does quite a bit of philanthropic activity or has some philanthropic activities over in Asia as well. And so we have that. We also have market rate sort of traditional investments and market rate impact investments they are right in the middle of sort of what you laid out Henry of like the lower return impact investments such as like program related investments, things like that. We have not done a ton of that there in sort of that middle category. So most of our impact investments have actually achieved market rate, whether that was a venture strategy or a real estate strategy or a private credit strategies. And so that’s kind of been sort of how we’ve been positioning the overall.

Henry Kaestner: Can you do those? Can you do a real estate strategy? Can you do a private credit strategy in a way that is different than the way the world might invest in it? That’s driven by your faith and just drawn to that a little bit.

Robert Kim: Yeah. So I think example always helps. So in real estate we invest in a bunch of properties and it was affordable housing. So because it goes back to access, you know, access to housing near the workplaces have a tremendous impact on the quality of life for the family and the kids. So we care a lot about affordable housing. So we invest in properties that are affordable to low to moderate income households, but driven out of our faith. And we’re not you know, I’m sure there’s more to be done. We are always learning honestly. But one of the things we sough out to do is can we serve the tenants a little bit more meaningfully? Right. I totally get that. They can live there at a lower rent free. What else they need? Right. Can we provide certain services at the properties? Around medical care, around budgeting? So what the property owner and the property management team did is they invited local churches and local nonprofits to deliver those services. So it was like, hey, free blood exam from 2 to 4 p.m.. Or you can learn how to manage financials, learn how to do budgeting, come and learn at this sort of hallway. Right? And for the kids before the school week, they would have like donation right coming from churches and other places. And you know that these churches. Right. And local churches like the big why of the reason they’re doing this is to share the gospel. And so they don’t explicitly say that to the property management teams, but that’s the motive. And we try to scan, you know, the local churches and local nonprofits and I think like driven out of our continue to seek out sort of like redefining what love means. I think there’s no limit there. But one expression of it is always asking what else they need? What else can we do? And I think that’s an example. And in terms of the financial return achieved what it was supposed to from when we were initially reviewing the opportunity.

Henry Kaestner: So this is market rate, so guided by your principles of loving on communities. This is actually an investment vehicle where you’re actually able to get a market rate return.

Robert Kim: Correct. Correct. And when I say market rate, market rate for these types of properties and I won’t go into like the difference between sort of a market rate properties versus affordable housing, but within the category of the properties definitely achieved what we expected.

Wen Li Lim: Jeremy, would you like to add to that?

Robert Kim: No, I mean, I think that’s a great example. I mean, there was, you know, even earlier well, I’m not going to add too much on to it, but there’s another company that we invested in a while back that also turned just plots of land into affordable housing, but then also targeted or tried to be more intentional about who we were renting out to whether it was, you know, widows or single parents or different, you know. And so these are all different ways that, you know, I think maybe you could just view things a little bit differently beyond just what has been the status quo. So those are just small examples of what we try to, you know, target, I guess.

Wen Li Lim: Well, I’m super excited that Robert’s out here in Asia, and I mean even before Robert moved over was to started chatting about the impact investment seen here and the kind of projects and the people that are on the ground working. So really glad to I mean, Jeremy, you’re in Asia as well, so just really glad to have you guys doing the work over here and really looking forward to see what it looks like to see. I know Robert’s coming to Singapore and we’re meaning a bunch of people together as well, just exchanging stories and learning from each other. So really exciting days ahead. But usually part of the episode we do this like Rapid Fire Round. So I ask a question something light, you got 30 seconds to answer, so I’m going to go to Robert first. Let’s start with you, what’s the favorite place you ever vacationed at?

Robert Kim: I think there’s a small island south of Korea called Jeju.

Wen Li Lim: Oh, I’ve been there.

Robert Kim: Oh, okay. So, yeah, it’s like the Hawaii of Korea. And every summer growing up in Korea, during my childhood, we went there. And so I think that stays with me pretty deep. And I would say that’s the spot for me.

Wen Li Lim: Well, I went there because it’s Winter Sonata, that Korean drama that came up like 15, 20 years ago.

Robert Kim: Right? Right. Right.

Wen Li Lim: Now, this is I know this is Henry’s favorite topic, dessert. So you’re both of Northern Californian. Where is the best place that you go to for dessert? And then I know Henry Henry’s going to chime in as well. Jeremy

Jeremy Lin: Well, I. If I want a nice desert, I usually go to Sundance Steakhouse in Palo Alto. Then I get the mud pie, which is a coffee ice cream pie with an Oreo crust. And I get no whipped cream, extra fudge. And they got the candied pecans on there. Oh, it’s a coffee Oreo chocolate blend of goodness.

Wen Li Lim: It’s like every ingredient you could think of Henry gone.

Henry Kaestner: Well, I tell you, we’re overindexed for listeners from Silicon Valley, so I fully expect that that advertising plug is going to result in Jeremy never having to pay for another mud pie ever again. I’m trying to figure out if I can kind of get in on that deal. For me, it’s got to be Dolce Spazio unless gosh it’s just incredible, incredible gelato. But the way that Jeremy described it, at first I thought I was going to say no whipped cream because he’s like watching his, you know, you know, he’s a professional athlete. But then he said, well, then extra hot fudge. And I’m like, Well, I guess that’s probably not the motive, but that sounds really good.

Wen Li Lim: Robert, what’s your favorite dessert up there?

Robert Kim: I don’t think I can be very top. Henry or Jeremy is honestly like I’m pretty simple when it comes to dessert. I just like anything chocolate. It’s a little bit more anything like dark chocolate, anything above 70%. I love as any dessert place that has that in there.

Wen Li Lim: I kind of feel anything above 80% taste like cardboard. So I’m with you there. Okay, my last question. So we’ve got an athlete here with us and so let’s go into that direction. If you could be excellent at one spot that you currently are not good at, what would it be and why? Neither one.

Jeremy Lin: I would say, MMA, because then I would feel really like I can protect people around me and myself in the majority of situations. It’s also like it’s pretty wild. I mean, you never know when you’re going to need some type of survival skills.

Wen Li Lim: Very practical. Robert

Robert Kim: I don’t know what the name is, but you know, like people like jump off a cliff with a little like sort of wings that they have and they kind of like videotape, like the mountains and the cliffs and whatever that is. I want to be really good at that.

Wen Li Lim: Is that handgliding.

Robert Kim: They’ll be like, really cool.

Henry Kaestner: No, no, no.

Robert Kim: It’s like, it’s not like it’s a suit they wear.

Wen Li Lim: Yeah, it’s like a squirrel jumping out.

Henry Kaestner: Squirrelsuit, that’s what it is.

Robert Kim: Yeah, yeah, yeah, yeah. That one.

Henry Kaestner: Robert, I would not have picked that for you. That’s amazing. I just got a glimpse into your personality that I didn’t know. That’s unbelievable.

Wen Li Lim: Well, over to you, Henry.

Henry Kaestner: To me, this first lightning round I’ve ever been involved, I don’t think anybody cares what I think. But I’ll throw in I throw in basketball from basketball because I had three boys, all of whom can beat me, on one and one handily. And I’d like to kind of throw down on them. I mean, I just I have had the fantasy that God would give me just for 5 seconds, the ability to dunk, and I’d go in with a 360 dunk. And then I just looked at the boys like, Yeah, what do you got now? And I’d only need to do it once, and it would only need to be in front of my three boys. We need to be in front of anybody else. And it’s okay if the film wasn’t on, but it would be awesome if it was. And then then that be done. Then that would be my […] moment God could take me up to heaven.

Wen Li Lim: It’s my job. Okay. Well, thanks, everyone. I love this part, but. Yeah, over to you, Henry, to close this out.

Henry Kaestner: Well, this has been awesome. And Jeremy has been really gracious with his time because we spent time on Faith Driven Entrepreneur, which, again, I hope that you all get a chance to listen to that because he talks so much, so eloquently about his identity as a Christ follower. But we finish out every one of our episodes across faith driven entrepreneur and all the different reasons we’ve got Africa now, Asia, and Global Podcast, and then of course FDI with endeavoring to understand what God is speaking to our guest about through His Word. And it doesn’t need to be this morning necessarily. It can be within the last week or last month, but a time in which you feel that God is just saying, here’s a message I have for you through the Bible. So, Jeremy, we’ll start with you.

Jeremy Lin: I shared one on the other podcast, but a different one is Exodus 14:14, where the Lord will fight for you and you have only to be still. And I think about when Moses and the Israelites were surrounded on three sides by water and Pharaoh’s army on the other side. And there’s a cloud separating them. And they’re. Going to basically like, okay, we’re trapped that we’re going to die. And this concept that God tells Moses, like, I will fight for you only to be still. And I never knew this. I never knew this until recently. But the Red Sea, when it parted, it did not happen right away. Like in some of the movies, it was An East Wind that took all night. And I think that’s, you know, very relevant to investing to entrepreneurship. But that sometimes when God moves, he doesn’t move right away. It takes him some time. He’ll use you know, it was an east wind that it took all night. And I’m imagining what those like seven, 8 hours would feel like for, you know, being trapped and thinking that this army is going to just come and slaughter me. Right. And knowing that God will sometimes take longer than you expect. But if we’re faithful, if we stayed true and connected to him, he will move and he will fight. And we have only to be still sometimes. And I think that was something that’s really encouraging to me.

Henry Kaestner: That’s a very, very good word. I’ve never read the passage that way. That’s really encouraging.

Henry Kaestner: Robert.

Robert Kim: For me, it’s Romans 8:38, very famous passage, neither death nor life, neither angels and demons. And it goes on, you know, neither hide nor death or anything else and all creation will be able to separate us from the love of Christ. I think that’s a really, really powerful message for me. Like as God reminds me, like, man I love you and nothing else matters. And he reminds me of that on multiple fronts, multiple parts of my life every day and truly blessed. And I almost feel like tying it to kind of what we’re doing here at JLIN. And it’s like, I love you so abundantly. Go share that. Go share that with people you co-invest with, go share that with people you invest in. You know, go share just the love in ways that you can. And it’s a privilege to do this with Patricia to do this with Jeremy. It’s a real privilege. And, you know, another sign of God’s love. It’s like, man, like God put amazing people around me that are just truly, truly special. Right. And so, you know, when Henry and Luke you know, all the other people in the Bay Area also just like amazing people working toward a collective mission, it’s it’s a great reminder that God blessed me abundantly. So this message means it means a lot.

Henry Kaestner: It does, Robert. He does. And you, Jeremy and you Wen, Patricia team awesome being with you, Jeremy. Thank you for your time. Thank you for your leadership, your humility, your candor, and your partnership in the gospel.

Jeremy Lin: I appreciate thank you guys so much for having me. We’ll talk soon.

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Education is a fundamental part of thriving societies, and technology has brought about more learning opportunities for all people.

That’s why Christian investors like Evan Baehr and James Tieng see the space as a way to promote human flourishing across various communities.

The two also discuss the unique opportunities available in education, their thoughts on less-traditional forms of learning, and who they listened to most on Spotify in 2022. It’s a light-hearted and insightful episode that you won’t want to miss..

Episode Transcript

John Coleman: Welcome back to the Faith Driven Investor podcast. This is John Coleman and I am here with my colleague Luke Roush. Luke, how are you doing today?

Luke Roush: I’m doing great. I’ve got a couple of great guests and fired up.

John Coleman: It is a couple of great guests today. We can say that very authentically. Always great guests on the Faith Driven Investor podcast. But particularly today, we welcome two very close friends of ours and extraordinary investors and influencers in the venture capital and growth equity space. Evan Baehr and James Tieng. Evan is the managing partner of Learn an education oriented venture capital firm. Evan has had a long and storied history, all that he and James talk about, but they actually were undergraduates at Princeton together and then graduate students at HBS together. And Evan has worked in a variety of capacities. James has been a venture investor for most of his professional career, at least recently, and has been a real leader in the education investing space across a number of different firms. I know he has a deep heart for education and then co-founded the firm Lumos with his partner Victor, just a couple of years ago. And now they’re a leader in growth equity, education, investing. And so we’re very excited to talk to both of them about investing in education, about venture capital and growth equity, and just about why they do what they do. James and Evan, welcome.

James Tieng: Thanks, John.

Evan Baehr: Good to be here, John.

John Coleman: Awesome. Well, I’m going to kick us off, guys, and I just want to just set the ball upfront. What does it mean to invest in education and what types of businesses are you looking at? When we talk about investing in education and maybe, James, you could kick us off.

James Tieng: Thanks, John. For us, and I think it is true for learn as well, it’s really about investing in companies across the full age spectrum of learning. So that covers early education into K-12, into traditional higher education and workforce development, which touches on things like upskilling, reskilling and even corporate learning and to invest in education for us and I believe for learn as well. It’s about driving outcomes from an academic standpoint for employment standpoint, broadening access and equity as it relates to everything that really is the ingredient for human flourishing through building the skills across the entire age spectrum could be a B-to-B company, a B to C company, domestic and or global. But that’s the catch all across a sector for us.

Evan Baehr: Agree with everything that James laid out. One misconception we hear a lot is that when you hear education, people think that you’re selling into K-12 schools. Really only about 20% of our companies, which is about 180 in total, actually directly provide services to K-12 schools. So obviously something like upskilling or corporate workforce training happens outside of the classroom. But we’re really into thinking about and recognizing that a lot of education happens not inside the walls of the classroom. And it doesn’t only happen when you’re young, so that means you get up in different places and different ages. A phrase that our firm co-founder Rob Hutter, uses. He says that we’re focused on investing in companies that innovate, in delivering payload to the brain. That’s a really unique definition of education, but will use sort of the space X analogy, right? So their amazing innovation is lowering the cost, cutting payload into outer space so you can ship all kinds of new things to outer space satellites, etc.. So if you imagine whatever payload we’re talking about, traditional, you might think of it as physics or math or the ability to build a welder or social emotional, whatever it is, we’re really interested in the innovative approaches of how you take whatever that core subject area or area of expertise is and how do you actually impart it on the brain. And so that explains why we might be in a medical device company that puts a helmet on your brain and spins tiny magnets that recalibrate your alpha brainwaves. Because if your brainwaves are not coordinated correctly, you’re not able to process information and impart it on your brain. And so when we step back and say it’s basically the case with the Internet that nearly all information in the world, all skills, all facts, anything you could possibly need is on the Internet right now for free, and almost no one does anything with it. So how do you wrestle through that, that it’s out there for free everywhere, but people are not soaking it up, learning it, and sort of changing their lives as a result.

John Coleman: That’s awesome, guys. And maybe just to dig into that really quickly. One step further, Evan, you mentioned a couple of specific applications there. We’d love to hear from both of you. Just examples. So give us a deeper understanding of this space. What are examples of a couple of the innovative companies you’re investing with or that you’ve seen in what they do so that listeners can kind of understand the breadth of that innovation more deeply?

Evan Baehr: So we’re invested and really involved in a company called Sharpen. They have secured the patent on a genetic test for dyslexia. So to a three year old child, you can do a mouth swab combined with family history and have a 90% accuracy of predicting if they will have developed dyslexia. So if they test positive at the age of three, the second half of what the company does is they acquired the most successful and largest off line reading intervention program and built an app to be able to deliver it digitally. So a trial that is screening to be likely dyslexic is essentially taught to read in a different way. And so you can imagine that from sort of a public health perspective, our society wide perspective, if you can screen and understand, I think early major driver of kids finding it difficult to read and to learn generally and then do the intervention, the intervention is far less expensive and far more effective when done at an earlier level. So, you know, when you think about genetic testing, you don’t normally think of, you know, an education company. But for us, it sort of helps stitch some of those concepts together.

James Tieng: One example I would have for you, John, is Transfer VR company that some of your investors have seen through some of the videos we’ve done with you. But it’s company that provides simulations delivered currently through VR headsets and related accessories that allows for a few different things. One is career discovery. So for kids and learners and aspiring workers to really touch and feel and experience, what is it like to work in the automotive plants, an aerospace manufacturing facility, even in a health care setting, etc. and to then to bring to bear real skills building and proficiencies that are demonstrable, that are accessible, such that when somebody gets through a program and realizes they have the interest in that specific field, they also have competencies that allow them to be more hirable once they step foot in that setting. And so an example would be working with an automotive manufacturer in Huntsville, Alabama, connecting the dots between K-12 community college and also workforce development boards to bring that talent to an employer.

Luke Roush: Those are great examples. You know, and I think actually some of our work around diagnosis, being able to diagnose either vision disorders or hearing disorders or dyslexia and then being able to intervene early allows people to become learners where they otherwise might be misdiagnosed as slow or some other form of special needs. I want to go back to just Simon Sinek and start with the why. Why did each of you guys wade into this space? Why is innovation in education important as you kind of vision here? What the next 20 or 30 years looks like? Maybe just speak a little bit about the impact that you believe educational innovation can have.

James Tieng: For me, it’s an accumulation or it’s an evolution that goes back prior to even attending business school, sitting down, you know, 15 plus years ago, thinking about life, think about which sectors gave me excitement and mission around where I can spend my time as an investor. And this was a bit more of a hypothesis, but this was what I articulated going into business school. And I remember having one transformative experience in business school, taking a course at HBC, taught by a woman named Stacy Childress around innovation in the sector. But this is going back many years ago. And so what is innovation, what does innovation look like? Back then it meant a palm pilot to assess literacy competencies. So innovation was very different, but that wasn’t lost on me in terms of the opportunity being just massive, in terms of the pain points that exist and had existed across every part of that learning spectrum that I mentioned and wanting to be a part of something that could really start to move the needle. And I know it’s hard work, but that also ties in eventually to why we’re all here today, which is our faith intersects so much with our work and our professional calling. And over time it just kept and pull me forward and forward up to the point of actually co-founding Lumos with another Faith Driven Investor. And so it’s really this evolution that has spanned nearly two decades now.

Evan Baehr: I am tiny in the relative scheme of giants on this call. Also, James has been doing this for decades. I’m newer directly into the education space. Joining this firm, we’re in capital. It ties in to a lot of the themes that I’ve been really interested in, which are both around venture building, but specifically around building venture backed tech enabled businesses that solve big public problems that tie in to really critical global macro issues. There’s a wonderful chart, I think Marc Andreessen called it the chart of the century, and it looks at essentially inflation across different bundles of goods over the last 20 years. And his great line is essentially the three components of the American dream are essentially up 100 to 200% in terms of inflation and the growth of the prices. The number one is hospital services, which is up 220%. But the two just below that are college tuition and fees and college textbooks. And so if you were to really ask the question, on one hand, there’s this sort of political economic side, which is like, what is the greatest existential threat to the United States as a nation state or Western nations in general to continue to drive their competition? Certainly our ability to educate not just higher ed, but K-12 would certainly be a huge one. So I find it very interesting from a geopolitical component, if we do not figure out how to und bankrupt, how we fund education and how we improve our education. We will absolutely no longer be a leading nation. We need to spend on the education side. The United States is number four in the world behind Luxembourg, Austria and Norway, and we’re ranked number 31. So something is really broken with how we spend money and how we produce results on more personal and sort of spiritual level. Rob as well, these great lines. And he said the following. You said, Why is it that we know more about the minerals under the ground of a tiny town in West Texas than we do about an African-American boy on the south side of Chicago in second grade. And it was this really cool tape to just say, gosh, the human person is this amazing, beautiful creature that has all this potential. But many of them, especially low income ones, the United States, we know so little about. And so that contrast of how we put all this brainpower or anything of stewarding a resource of crude oil into the ground relative to how we think about the children, you know, in our own family or in our own backyards was a really powerful one for me.

James Tieng: I’ll just add on to that. I mean, I mean, I think that’s a great example because it just showcases, you know, we’re all children of God and the often said talent being evenly distributed, but opportunity not. I think that is common amongst all of us, right. And to really just driving us forward to solve these very pressing issues you mentioned Evan.

John Coleman: Yeah. Let’s continue to dig into that because you touched on a couple of really important topics. I think there one is the power of the private sector to really solve public policy problems or social problems. And then secondly is a component of that impact. You know, and that dovetails with what we’re hearing a lot in the news today about ESG investing and values based investing, impact investing. What I hear you all talking about is not what I consider standard ESG principles, but rather aligned with your Christian faith, human flourishing, and really investing in people and the impact that you can have on those individual lives in the way in which they can further impact the world. Talk to me about how you think about impact in the context of your portfolio. And James, I know you have a formal screen on this or way of looking at this, so I’d love maybe to start with you, but how do you think about impact and how does that fit with the way that Christian investors should think about the impact of their capital?

James Tieng: It’s a great question, John. It is something that we thought about from the beginning and still think about regularly in terms of refining. What is the approach and sort of what is the level of accountability and reporting and where is this all going. But fundamentally, it started with three pillars that Victor and the whole team aligned with, which is each and every one of our companies, we want to really align with at least one, if not two. And all three would be kind of magical. But number one, again, I said outcomes. So do we have sufficiency of proof that whatever company we’re backing really does improve the status quo as it relates to academic and or employment outcomes? You can measure that with tests, grades, progression up to competencies, completion, graduation, employment rates, etc.. Number two, are we doing something about access that allows more people to capture those opportunities to get the skills they need to be successful during K-12 and higher ed, but more importantly to the ultimate job as well? And that’s not just about costs bringing down the cost for all the reasons Evan has just mentioned, but also the modality, because we all sit in different parts of the world. And this pandemic taught us very clearly that you don’t have to be somewhere necessarily to be productive and get to where you need to get to. And so allowing people from all different sort of walks of life wherever they are to get access to high quality education, and then somebody really think about equity from a couple of different lenses. But it really just. Is there a gap that systemically just exists today that need to be addressed and broken and reimagined? And are our companies really in service of that as well, whether it’s target populations or how we build out of those organizations to serve more and more people? So those are the three dimensions that we then had to create frameworks around, then create sort of systems internally and externally to allow us to do that. But it really comes down to those three pillars.

Evan Baehr: Yeah, just to pick up on the ESG frame. So we are very much in the conversation. A number of our LPs are coming from an impact perspective, and we have had a dedicated impact partner who only works on these topics from screening to supporting to reporting. So we take it really seriously and talk to LP prospects a lot about this attention that I’ve found in the sort of global conversation on ESG, maybe, I may, illustrated in the following example. So let’s say that a standard approach from a capital allocator to drive an ESG agenda would involve a survey asking about various factors of one of the companies we invest in. And those kinds of questions would be things like, you know, number or percentage of representatives of members of you know how many women, how many racial minorities, how many members of [….]. They would ask about the carbon production of the company itself. Does this startup of 12 people have solar panels on the roof? And I think there’s a little bit of something lost in translation here where if you’re coming at ESG from a sort of Fortune 1000 perspective, where the agent of attack is really changing the operating business, to say to Ford, you’ve got to put up solar panels like that, moves the needle to say to a startup, you’ve got to put up solar panels. It really annoys the founder and they probably go out of business. And so the way I like to think about it is let’s get to some of the underlying fundamental areas of human languishing, the opposite of human flourishing. Let’s expose what those are and let’s invite our best and brightest founders to build venture backed tech enabled companies to run after those problems. And so if your concern is carbon, your attack vector is not, does the company at all have solar panels? It is. Are they building a startup, which is this engine that combines a culture with talent, with risk capital, with a set of advisers around it that has the ability to scale solutions and deliver results like no corporate entity has ever in history. So we have opinions on it, and we get a lot of these survey questions and where we can try to nudge people to say, Hey, let’s start from first principles here. What are areas of human languishing and are we organizing the brightest minds and the best capital like a laser beam on those problems we all agree we want to solve?

Luke Roush: And so, I mean, one of the things you’re getting at is just this risk of scope creep where you start to the end. And and I think it’s layered on early stage companies in a way that may be distracting from their core primary mission. One of the things that I want to touch on, because both of you guys have been hinting around and we talked about primary education, secondary education, higher ed, skilled trades. I want to dig in on that last bucket of like skilled trades just sort of where we are. When you think about trying to correlate outcomes in preparing people for jobs, good paying jobs that also maybe circumvent the student debt trap that a lot of students find themselves in in higher ed. How are you guys thinking about skilled trades as investors in that space, whether it’s skilling or reskilling?

James Tieng: I would say we think a lot about sort of what is the ROI of education. And I think when you just look at the data, it’s clear that ROI is lacking in many of the traditional pathways. And so the opportunity for data and technology and innovation to drive forward to have a better matching system, you know, has been true for many years and sits in front of us right now. Still, the massive opportunity, right? You look at student loan debt as one indicator of the problems of how most people have kind of gone through called this the traditional pathways or you look at the for profit post-secondary world that crashed a bit when it got overextended in terms of what it looked like. But ultimately, what are we all trying to do? We’re trying to find the right pathways for the right people to embark on that career journey that does create that sustainable life ahead. Right? Because we all know that, you know, depending where you sit in the US right now, being a lineman might be a transformative career for you relative to where you are now. You have kind of direct exposure to that and we respect that work deeply. But that is true in so many different professions that, you know, blue collar, white collar, whatever it is. So you got to guide people the right way. And that does start in K-12, right? It starts because you need exposure to these professions that you’re not entering that decision point of, do I go to college or not? You know, not understanding what you’re actually trying to get to, Right. And then once you get to college, you need further guidance to get to the right place so that it is a fulfilling career, but also a sustainable one where you can meet all the ambitions you might have in terms of raising a family and providing for a family and whatnot. And there are so many complexities of what that looks like. And I think that is something that we all have to be aware of as investors and backing these entrepreneurs, because it can’t be a concentrated bet on something that only serves the person that will ultimately be a web developer, for example. That is certainly a need that has been felt over the years. But many of these other professions have been under med health care, included blue collar jobs that touch on electrician work. In fact, all these things that we’ve seen this part of the country. So I think you just need to have that broader lens of what that all means.

Evan Baehr: My friend Wyatt Smith has built a business called up Smith right in this space has taught me a lot about this. And just a glaring stat that he points out is that for every one skilled tradesman that enters the workforce in the United States, four are retiring. And the way he phrases that I think is really amazing. He thinks that the United States, when you think about higher ed in STEM, remains definitely in the top five of producing credentials to preserve the United States as a designer nation. We are able to design things. We can generate intellectual property. We are already falling behind and are at risk of losing our ability to be a maker nation and especially set against a backdrop of repatriation of whether it’s ingredients for pharmaceuticals or semiconductors or other things that we now see greater geopolitical realm. That is a huge challenge. And the stats, as I dug more into it, NCIS did a survey and suggest that 23% of American adults, about one in four, are functionally illiterate. So the state of education among America’s workforce is pretty appalling. So when you think our scores on a PISA, for example, have us at 37, that’s been around for 20, 30 years, meaning 30 years, a 50 year old who graduated ranked number 37 is functioning, literate, is not able to contribute to workforce in a practical way that generates economic outcome, in a way that produces a work and an income that gives them dignity. So there’s a lot to be figured out here.

John Coleman: Yeah. And I love that you tied in the global perspective, too. And James touched on this. I do love the phrase talent is universal, opportunity is not. And a lot of this discussion is, you know, the college market or the four year college market is such an incredibly small portion of the global education framework. Right. And whether in the U.S. or abroad, the opportunity to reach people for the critical needs in their communities around the world with differentiated learning programs that can be lower cost, that are lower time intensity, I think is just a remarkable way to move the needle on giving more people opportunity globally and also meeting the critical infrastructure needs from a public policy perspective. Evan as you mentioned of countries around the world. I might pivot just a moment here. So both of you are in venture and in growth equity right now. Obviously, it’s a relatively tumultuous time in markets. We’ve seen changes in valuation in that space. We’ve seen some concerns about the space, the potential that we’re headed into a recessionary period here in 2023. How do you think about the reset that you’ve seen in venture and growth equity this year? And why do you think this is still an important place to play?

James Tieng: I think even a more holistic approach, by the way. And so, you know, we set out as a private equity firm that would invest at the growth stage. And that one distinction allows us to have the flexibility to do growth recapitalizations, if not buyouts as well. And so I do think that as the world normalizes for all the reasons that you described in terms of the stock market valuations and also just what’s happening on a lagged basis with many of the venture back in growth backed businesses as well. There’s going to be ripeness for doing very interesting deals at valuations that frankly will feel more sane versus the froth of several years ago. And so as an entry point sort of time period, this should be quite good. And you can look at obviously every sort of recessionary period that we’ve seen in decades, and there’s always been good vintages of private equity and other investing that emerge. And so I think that is one thing that’s going to happen or has been happening through this year and certainly into next year that will benefit LPs. It’ll benefit us in terms of be able to create value over time. But you do need a long term mindset in that right there. Think about one, two, three year windows. It’s hard to time the market, but I think all of us here, we have a long term mindset. We have a capital base that allows us to kind of spread across different cycles. And so we are seeing that correction and believe that there will be a net benefit in this kind of coming few years.

Evan Baehr: And look, times of recession, capital scarcity, having to trim and think about capital efficiency, there’s history for really amazing companies emerging out of downturns in the 2008 nine recession at WhatsApp, Instagram, Groupon, Uber, Slack, Square, Venmo like pretty epic market capital by companies that were developed during that time. They’re probably the most extreme example is obviously the massive firings, layoffs, resignations, whatever you want to say at Twitter. And it’s like, wow, they seem to be shipping more product improvements more quickly than they did before with five times the people. So might be a little extreme, but there are ways to do heroic things in times of cuts.

John Coleman: Well, and you know, I used to work with a great venture investor named Evan Dar and Evan pointed out on the ground what happens during periods like this where valuations come down and where there are layoffs at tech companies, etc., is that creates the framework for people to leave and start companies? Because the problem, when values are rising and you’ve got options is you got golden handcuffs at the big tech companies, right? In a period where the stock prices have collapsed and those options are no longer valuable or they’re indeed doing layoffs, a number of really good people then have the freedom to leave and go start their own thing with less risk or leaving less money on the table. And so it does enable this cycle where in periods like the late nineties, early 2000, during the great financial crisis and potentially now you see this burst of innovation of new company founding, a really intelligent people, leaving big corporate jobs to go do something interesting. And I’m interested to see if all these waves of people leaving Meta or Twitter or others or the folks who are leaving voluntarily because their options aren’t worth something are going to spur a similar wave of innovation now.

James Tieng: And I will say, I mean, it may not be as quite epic as the floods and, you know, Noah’s Ark and whatnot, but I mean, there is kind of back to faith for a moment. I mean, God humbling all of our hearts at this moment. Right. Is an important correction that just everybody needs more and more. And it just you know, you look around sort of the past few years and there was just such unbridled behavior, unconstrained behaviors that, you know, when it’s too good, you lose sight of certain things, whether it’s like cash flow management or sustainable business building or whatnot. But I think having that humility, reintroducing the system, at least for those of us that are accepting of it, I think that is a critical time to. Really just reflect and retool and continue in this kind of path forward.

Luke Roush: I want to hear just each of you is really serious about your Christian faith, and I’m sure that is reflected in how you shepherd capital. Love to just understand kind of why that is important to you and how that influences and shapes your role as a capital allocator and ultimately as a counselor to many of the companies that you’re investing.

Evan Baehr: There’s a line from a mentor across Praxis, which many of us are tied into, and they do really great work helping me and others think more deeply about this. And this investor likes to ask the question, Will your business exist in heaven? Now, that’s probably not a question that most investors should ask. It’s not when I ask. There’s all sorts of reasons you may not want to do that, but it’s an interesting thought exercise to think about if a version of heaven is heaven on earth. It is people with work and in marriages and going places and doing stuff and making stuff. What would this company look like in an Edenic state if heaven came back to earth? How would this company exist? I don’t use that as an investment criteria, but I do like that. It draws us to what are the garden look like? What were the conditions of it? How did humanity flourish when it was in the garden? And I want to believe that when you find a company that truly in the long term drives the human flourishing of its employees, its investors and its users, probably the largest base. I believe that in a long arc of capitalism will reward that company in market cap. The short term it may not, but in long term I think it will. So I think even as an investment criteria, does this company drive the flourishing of the users? Are they operating and living in a way that they were intended to live? If there were a handbook, a playbook, a user’s manual for the human person? Does this help them live more as they were made? Tim Keller line of work is definition of work is following, he says quotation definition of work is rearranging the raw material of God’s creation in such a way that it helps the world in general and people in particular thrive and flourish. So our work as investors rearranging the raw material God, we’re taking various forms of capital, financial capital, human capital, spiritual capital, rearranging them in ways and kneedings and encouragement and high fives. And I can’t believe your company died. Hey, I kill your company soul so that they flourish. Gives me excited to bring these conversations into the context of how we allocate capital.

John Coleman: man Evan Baehr dropping some deeply philosophic truth bombs here on the FDI podcast.

Evan Baehr: John on that one. Question would the FDI podcast exist in heaven?

John Coleman: I think the FDI podcast would exist, but it probably wouldn’t be hosted by me. Would that be? I think they could do better. I have a feeling there are some great people up there. So we’re going to close in just a debt asking you guys what you’re learning through scripture. Before we do that, we’re going to do something fun we call Lightning Round, and we’re going to ask you guys simple questions and look for kind of short answers in 60 seconds or less. Some of these may be serious, some of them maybe less serious. I’ll start us on a semi-serious one, which is, as you look around education right now, what is the innovation you’re most excited about over the next 2 to 3 years? James, we’ll start with you.

James Tieng: It’s a really tough question. I am excited by apprenticeships applied more broadly than they have been globally, but certainly in the US, and that’s not a bleeding edge sort of, you know, metaverse type thing. It’s really just the idea that we have so much more to do to my earlier points around bridging education to employment and so practical skills training and even on a paid basis, allowing people to really get their hands on the meat and substance of work will just be transformative. And we can embrace that globally, but certainly just in the US right now. And so I realize that’s not really a tech forward. I mean, there’s a lot of tech ways to bring that to bear, but that’s a simple concept that I think is very disruptive still.

Evan Baehr: We are at the beginning of a massive change of public opinion and public policy in the United States that will radically change to make it so that money follows child. When that happened to the form of charter voucher […] Or other policy instruments, it invites entrepreneurs to create all kinds of solutions that we can’t even imagine today. And what used to be more of a partizan issue is in really amazing ways, because we know when parents have more control and educators have to compete. Results dramatically grow. So that’s sort of the meta issue I’m really excited about. I think invites more founders into the space on the backside of massive […] voucher, charter, etc.. I think we need a whole new generation of entrepreneurs who want to build schools. There’s a challenge of people that come in to build schools. They’re often from a nonprofit background that are often teachers. If you’re a teacher, it doesn’t mean you can’t be an entrepreneur. It’s just very different skill sets. And so we learn, spend a lot of time thinking about on the back end of a massive wave of millions of parents getting to choose where the kids go to school. How are we going to build the supply chain to generate all kinds of new school concepts that are scalable and kept most aggressive year? They built three schools. One of our companies, New Globe, which powers of micro schools across Africa, has a contract provider for the government. So Kip’s biggest year of preschool last year, new globe built 3800 schools for profit venture backed companies have the ability to scale. And that’s really what we need to talk about mass education, especially of low income people, obviously in their states, but certainly 10-20 x that around the world.

John Coleman: An extraordinary answer in greater than 60 seconds. So I’m giving that round to James over to you Luke.

Evan Baehr: Hey, your podcast will not exist in heaven. John will never.

Luke Roush: Be so one example in 30 seconds or less for each of a benefit in a risk of remote or virtual education.

James Tieng: Benefits clearly is just you can be anywhere at any time. Risk is that people element. I mean in K 12, we understand to be like that high quality teacher that transforms lives and I guess just gets played out across all of education. So losing that in-person element is the biggest risk for my perspective.

Evan Baehr: I just air on the risk side, McKinsey report out suggests that the extended COVID school lockdowns and alleged Zoom classroom from home has an estimated about an additional 1.6 million students dropping out from high school because of learning loss.

John Coleman: Unreal.

Evan Baehr: Take that one John.

Luke Roush: Man you made up for the long answer the first time Evan, I’ve got one more.

John Coleman: It is very concise. Go ahead, Luke.

Luke Roush: So about this time of the year, every year Spotify comes out with kind of the rap. It’s sort of like your year rap. Who showed up more in your playlist, Justin Bieber or Taylor Swift, please. James, to you first.

James Tieng: Neither because my top ten were all Lauren Daigle songs. So you could go, Oh.

Luke Roush: Okay.

Evan Baehr: Lauren Daigle. Really? That’s right. Well, all of my top ones were Michael W Smith and just kidding just kidding. Okay. Mine’s definitely. Taylor Swift. My son is a big Taylor Swift fan. I spend about 6 hours during the great Ticketmaster controversy waiting in the ticketmaster line to get the tickets. And we did secure tickets. We’re going in a few months. And I only had to sell my third child to afford them.

John Coleman: And Luke, this is a fundamentally silly question. I mean, in a year when Taylor Swift releases a banger like Midnight 3 a.m. Edition, I think there’s only one appropriate response to that. Question. I know you’ve been doing your Turnstyle with the Bee Gees on repeat for the entire holiday. Well, we are going to wrap up now. That was great Lightning round. Before we leave, we like to ask every guest just to share with listeners something that they’re learning through Scripture right now in their faith that they’d like to share with others. And Evan, maybe we’ll start with you and end with James.

Evan Baehr: I’ll just offer this contrast to a good friend of mine. Joel Bryce has been preaching and thinking a lot about human flourishing and the nature of work and where those concepts emerge in Scripture. And he taught me the following two definitions, which I’ll just leave with you guys. And so there’s two notions of work translated versus agathos. And this version of work is that many people sort of set our hearts to this. It is good work, it is good natured, is well-intentioned, and even can do good in the world, is a different kind of work from the word kalos, and that is work only possible after the gospel message has transformed the human heart. And this kind of good work it is a beautiful work. It’s work that creates beauty on the outside after a transformation has happened to make the inside beautiful as well.

James Tieng: Mm hmm. For me, you know, it’s been a year where I think my heart has been closer to Scripture than many years. I lost a parent this year, and that kind of put a lot of weight to sort through kind of of those questions of aging and end of life. This one isn’t specifically about that. But as I shift through kind of many of the different passages I reflect on this year, one is from the Billy Graham Center on that hike that I think I saw you jogging on John back in February, but it’s from Psalm 145. The Lord is near to all who call on him to all that call on him in truth. And this year has been just complex because of all that going on. And I’ve had to distill it into the simplest way to pray when it’s the hardest to pray. Right? And it’s simple for me because I boil it down to simple statements that I can say both in my heart and out loud. I am listening. I surrender to you, Lord, and I need you. And I boil it down to that because we need to call on God to be present our lives. You know, we can sit back and be passive Christians or we can actually call on him. And that is such a powerful way to approach prayer.

Luke Roush: On that note, we are grateful, Evan and James, for you being able to participate with us on this podcast. You know, our view is that almost any business can be creative or redemptive or restorative, but there are certain types of businesses that have unique potential to really impact the world and humanity and what human flourishing looks like. And certainly businesses in the educational sector fall in that category. So we’re grateful for you and appreciate you taking the time to be with us.

James Tieng: Thank you both.

Evan Baehr: Thanks, guys.

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Faith Driven Investing has been around for much longer than this podcast and ministry.

It is an international movement of leaders deploying capital for Kingdom impact. Our host John Coleman likes to joke that it’s been around for at least 5,000 years.

But even with its rich history, there has been an obvious uptick in activity in recent years.

Today’s Marks of the Markets episode functions as a “state of the movement” with two long-time advocates and practitioners of Faith Driven Investing: Henry Kaestner and Ross Roggensack. 

Check out the full episode to hear how the movement has evolved and where these leaders think it will go next.

Episode Transcript

John Coleman: Welcome back to the Faith Driven Investor podcast. This is John Coleman and this is our monthly marks on the Markets episode. However, we have a unique twist on marks on the markets this month. Typically, we just check in on the state of markets, some of the underlying dynamics in financial markets. But today is a very special episode on the state of faith driven investing here at the beginning of 2023. And we have two very special guests as a result. First off, is a longtime friend of Faith Driven Investor, as well as a leader in the faith driven investing movement, Ross Roggensack, who’s the founder and CEO of Oak City Consulting, which advises institutions, religiously aligned institutions on how to allocate their capital and invest both for performance as well as for faith integration. And then we have on the other side of the podcast, mic today taking a step away from Faith Driven Entrepreneur Henry Kaestner, the founder of Faith Driven Investor, founder of Faith Driven Entrepreneur, founder of Sovereign’s Capital and Bandwidth and a longtime leader in the faith driven investing movement. Ros Henry, it’s so great to have you all on today.

Ross Roggensack: Thank you.

Henry Kaestner: What a great treat. Its co-founder. I love that you’re making me sound so important. Special this morning. It makes me feel good. And yet it is the case that there are some amazing people around that have been instrumental in starting Faith Driven Entrepreneur and Faith Driven Investor. And when I think about people who have gotten this movement from the beginning, I can’t thank much beyond Ross Roggensack, I get to know Ross maybe a decade ago or so, which feels like a century ago in dog years in terms of the movement. But for me to be doing this podcast with both of you is really special. Thank you. Thanks for having me.

Ross Roggensack: Yeah me too hear here.

John Coleman: Well, Henry, I want to tee up right where you just started. You and Ross have been longtime leaders in the faith driven investing movement. Give us a little bit of that history for listeners who are unfamiliar, both of you, I’d love to hear how you got started in faith driven investing and what got you motivated to get involved.

Henry Kaestner: Yeah, maybe I’ll go first, Ross and then you pile on, please. So from my perspective, my experience is that I was an entrepreneur and worked on Wall Street, came to North Carolina in 1998, came to faith, most importantly, and then together with David Morgan, started bandwith. I had a company based on the foundational values of faith first and family, then worked in fitness and got six, seven years into it. Dave and I realized that through the grace of God and despite making a lot of mistakes along the way, we were able, through God’s providence to be a witness to His love for us and endeavor to run the business a bit differently and and saw, of course, how business can be used as a means for sharing Christ’s love, making a redemptive product and service, doing things differently. And the question was, well, what might we do outside of Bandwidth to encourage more of that with others we’d met and the idea was maybe we’d go ahead and start a fund. So that was the beginning of Sovereign’s Capital six years in, maybe we realized that we were say no to most of the companies who are coming to us for financing. And since we got into the business because we wanted to be an encouragement to faith driven entrepreneurs, if you say no 99 out of 100 times, not really being an encouragement to them. So we started the ministry called Faith Driven Entrepreneur then, and Faith Driven Entrepreneur is known for a content and community blog, podcast conference, monthly groups. But two years in to that, I got a call from a guy from Uganda and he said, Listen, I actually Rwanda. Sorry, he said, I’d really like for you to invest in my business? I said, Well, we can’t because we don’t invest in Africa, but we’ve got this other ministry. I realized that in talking to him, while he appreciated the different offerings that we had at Faith Driven Entrepreneur, we really weren’t scratching his head. He was still, at the end of day, he’s still looking for investment capital. And we decided then that we would start a ministry called Faith Driven Investor on one hand, Yes, to help some of these entrepreneurs from around the world to find like minded capital. But then more broadly, what might it look like to encourage the development of a larger movement of faith driven investing, especially in private markets, especially in [….] to be clear, there had been a lot of work done for a long time in lots of different sectors of investing, particularly in public markets. But not a lot had been done on the outside. And so we felt led to start Faith Driven Investor as a complement to Faith Driven Entrepreneur. And it was gosh, four and a half, five years ago I think we got together with Ross in Park City, Utah, to talk about what it might look like to create a movement or almost an industry trade group, but really, really a movement, just men and women coming together that were stewarding institutional capital. How might, we’re motivated by our Christian faith, allocate that capital in a way that might honor God. How might we encourage faith driven entrepreneurs? How might we encourage the thoughtful deployment of capital in segments like real estate and all sorts of different asset classes? But it’s been unbelievable over the course of the last five years how much supply there now is across virtually every asset class. Dozens of players in the space on the supply side with excellent track records. It’s unbelievable. And there are hundreds and hundreds of families that are looking to deploy their capital consistent with their faith. Thousands, really, and dozens and dozens of institutions that are getting really, really serious about it, too. So it’s been a beautiful run. But I’m eager to hear about Ross’s background because I’ve seen Ross and I can’t, I can tell you this is a means to further introduce Ross. I can’t think of another individual that has got in this space of faith driven investing more than Ross. Ross How that become the case.

Ross Roggensack: Oh, my goodness. That’s so scary to walk into that area, but I’ll try. I started in the business in 1989 as a stockbroker, very traditional, you know, broker dealer selling Cracker Barrel stock. And Ginnie made collateralized bonds to anybody who would answer the phone and just kind of just dragged along until one day I was just pulled into a Christian foundation who needed help. And really, it was just I think the Lord just dragged me in. It really wasn’t any sort of a grand master plan. I wish I could say it was, but it wasn’t. And that was back when I was at a wirehouse on a team. A great team. Still love those people and still loved working there. But in 1999, I came to know the Lord. He captured me on a rooftop on a mission trip in Mexico. It’s a long story. I won’t tell it. But he gripped me and shook me and it took me a while. But finally, in 09, after the crash, after a lot of things revealed themselves to each other, I just decided it was time for me to go off on my own and to live out my faith in a way where we could serve only Christian institutions. So we really don’t do any financial planning. We don’t help people save for a beach house, We don’t do retirement planning. All we do is work with faith led Christian institutions to try to help them invest capital. And so that’s all that we do. The kind of the start of it was really you know, I’m a hockey fan. I love to watch hockey, and I’m always muttering under my breath when I’m watching my team play, like shoot the puck, shoot it, shoot the puck, because you can’t you know, you can’t make a shot, you don’t take. And so we just shot a lot of pucks, you know, we just tried a lot of stuff and some of it looked right or felt right but wasn’t right. Some of it we couldn’t quite tell what we were doing, but it just took a while until we finally, I think, started finding things, found us, and now I think we have a pretty good handle on what we’re trying to do to help institutions do different things. You know, you’re not going to look any different if you do everything the same. So we try to encourage institutions that are faith led to allow themselves to be faith led, you know, allow it to happen.

John Coleman: When you both talked through your legacy in the area and I like to joke with people, you know, Faith Driven Investor thing is at least 5000 years old if you think about the history of Judaism. But it does seem to have accelerated quite a lot over the last decade since you got in Ross In 2009. Henry Since you founded Sovereign’s Capital in 2012, what has changed and what are you most excited about here at the beginning of 2023? And maybe, Ross, we can start with you.

Ross Roggensack: Well, I mean, maybe part of it is my own understanding of what it is when you think about what is it me preaching to the choir. Now I’m looking at Faith Driven Entrepreneur on the screen. When I think about what’s faith driven, what is faith, you know, and faith is action. Faith is when the woman touches Jesus’s garment. You know, nothing really happened until she did that and nothing really happened until Abraham took Isaac up on the altar and began to sacrifice him. You know, that was action. And so I think for me, what’s changed is that we’re becoming more active and we’re seeing more action, which is faith. Right. And it’s fun to watch people who are stepping out in faith, people that have real investment chops, you know, people that are leaving Goldman and leaving big firms, smart firms that are saying, I want to do this. You know, I think about Victor Hu, people like that that just they could make a killing. Right. If they just stuck right where they were. But they are acting on their faith, their faith driven and they’re moving. And it’s just so fun to find them and to watch them. And I make the correlation that when my girls were growing up, which was a long time ago because I’m old, but we started to try to find Christian music for them to listen to. And trust me, in the year 2000 or so, it was Sandi, Patty and Michael W Smith, and that was it. And so it wasn’t that encouraging to find music for them to listen to. But as time grew, as the movement grew, you know, there’s now there’s lots of high quality options to choose from. And it kind of feels like we’re getting there on the investment side. There’s we’re not conceding all the time or dreaming. We’re finding stuff. It’s great. So I might have gone on too long. Sorry.

John Coleman: No, the only objection I have is in 1990s kid, Ross’s the notable exclusion of bands like Jars of Clay and Audio Adrenaline from the 1987.

Ross Roggensack: That was on purpose John.

John Coleman: Music. But Henry, what about you? You’ve been in for a decade now really thinking about this consciously. What’s changed and how do you feel about the current state of the movement?

Henry Kaestner: Oh, so much has changed. So many things to point to. I think about selection and entrance in the space. I think about professional fund managers getting together to encourage and worship God together. I think about what’s going on overseas. So those are three broad categories. Maybe we don’t [….] all in the same question. So maybe I’ll just hit the selection first. You know, when we started, it really wasn’t a whole lot going on in the private and the alt space. There was quite a bit of work done on the negative screen space, which is let’s not invest in companies that might advocate for adult entertainment, abortifacients. A whole bunch of different things had been around for a while, and yet this concept of Christ followers would be knowing what they’re for rather than just what we’re against wasn’t really built out at all. And especially, again, not in the old space. You fast forward though, five years on and it’s really amazing what’s out there. So I’d put that in three broad categories. One is I’d say that there are fund managers that existed that we just didn’t know about five years ago, and I think quite a bit quite a few of them are on the real estate side, multifamily ten or 15 years ago, Apartment Life, which is a great ministry out of Dallas, started partnering with Secular fund managers and Christian fund managers. But to put apartment chaplains in place in communities where there are a couple hundred spaces, finding that by doing so that they were decreasing the turnover, which means increasing the profits of these multifamily apartment holdings. And so I didn’t even know that that existed. I think back to the way we were investing funds out of our family office. We had a lot of real estate investments, but we didn’t have any. And these fund managers, I just didn’t know they existed. Well, we know that they exist now and there are dozens of them, and it really is amazing. I love this is one of the things I think needs to characterize the movement is that you get better returns when you love on the people that live in your properties. And that was really neat. That was a bit of revelation. And the next one is funds that has started over the course the last five years. So Ross mentioned one of them. Victor Hu left Goldman Sachs. He had started the education technology practice at Goldman, was there for a decade left and with Goldman Sachs as his largest LP started Lumos Capital to invest consistent with his faith with a chaplain on board. So what is consistent with your faith mean, well, it can mean a lot of different things in this movement. A faith driven investing is not meant to be prescriptive or presumptuous. It’s got to be X, Y, and Z. It is, however, about us getting down on our knees and asking God, how would you have us deploy the capital you’ve entrusted with? An outcome for somebody might be to invest in solar farms in the divided desert because you’re called to creation care for somebody else who might be investing in Faith driven entrepreneurs in Africa. There’s no right answer other than the process by which we ask God how we might steward the capital that He’s entrusted us with. So you’ve got people like in this case, though, with Victor, he sees an opportunity to love on these entrepreneurs that are really setting themselves out there. You know, they’ve delivered a hockey stick type of projection in their PowerPoint presentation. There’s a lot of stress in being an entrepreneur as you try to deliver on what you promise. You’re trying to do a good job of leading your family in your community, in your company, and you’re always selling something to somebody, you are selling something to your customers, your employees to come on board or sometimes your employees to stay. You come home from work and your spouse says, Honey, how is it at work today? And and they’re like, Well, it is great. And because your spouse thinks he knows you left a great job, you headed IBM or fill in the blank. Right? And so Victor realized that he had an opportunity to really love on these portfolio CEOs. So to be able to offer chaplaincy up in an anonymous way in an environment where mental illness is five X among entrepreneurs, suicide rates are two X among entrepreneurs is doing a countercultural thing by saying, you know what? There is an opportunity to be able to have a chaplain in place and gosh it is amazing. If you think about [….] Wang, who left Warburg Pincus to get a $575 million fund. Zuckerberg Chan, one of his largest LPs, excellent health care investing. So a whole bunch of funds that have been started with people who have come into this space, having had great track record, so important that this movement is characterized by excellence. And I think of dozens of funds like that. And then maybe my favorite section of funds are the funds that have been recast, reinvented, if you will, in light of the Faith Driven Investor movement. A good example. There’s good water capital, good water with more than $3 billion under management, a great consumer technology venture capitalist [….] Chen, Eric Kim, guys who invest in some of the biggest names ever [….] was the first institutional investor in Facebook way back when. And these guys got together and said, You know what, We started our fund eight years ago. We knew we were serious about our Christian faith but didn’t really know what that meant. And what’s not really clear that our portfolio and what that meant or our employees. And so we’re going to go ahead and have a little bit of a restart. We’re going to go ahead and recast our fund in light of Micah six eight. We’ll let everybody know and I’m going to go ahead and take Dave Gibbons, one of the most popular pastors and speakers on Christian faith in the marketplace out here on the West Coast, going to have Dave Gibbons be our corporate chaplain so that we can be intentional about how we bring God’s love into the work we do. And so, gosh, that’s one area. Maybe we’ll talk about some of the other things going on in other places later, but that’s a big development that none of that happened aside from some of those real estate funds I mentioned. But five years ago it looked a lot different.

John Coleman: Yeah, and that was one of the surprising things for me when I came out of mainstream asset management a couple of years ago and joined sovereigns, Henry was just, I did have questions. We did joke about the Christian music problem. Ross And just if we were going to do this, we had to do it really well, right? If we were going to do this, that all the faith driven products needed to be at least as good as their mainstream counterparts. And we thought that that was possible because being faith driven, abiding by those values actually created the kind of cultures that could outperforming companies or in real estate developments and hopefully serve both the interests of investors for whom you’re a fiduciary as well as the kingdom through faith align impact. And I’ve just been continuously surprised by the breadth of different offerings that are out there and continue to believe that there’s almost no asset class where you can’t have some sort of faith driven impact. I’m sure there are a few we can snipe over time, maybe gold commodities or treasuries or something like that. But it feels like most of your portfolio can get there. Before we dive into portfolio construction, I want to pick up with you, Ross, on a thread that Henry mentioned and then get both of you to weigh in. Henry had mentioned not just the managers, which we’ve just talked about a bit, but also the community. Talk to us a little bit about how you’ve seen the community around faith driven investing broaden and get more active. I know, Ross, you hosts parts of that community at various times. Henry you do as well. Ross what’s happened to that small community of Faith Driven Investor over time?

Ross Roggensack: I think it’s growing. It feels like it’s growing. COVID was certainly a, you know, slowed everybody down in terms of momentum. So it was a little hard to gauge where people are at. I kind of feel like more and more are understanding it, but yet there are many that don’t. And we kind of joke in our shop kind of sometimes we meet with potential clients and you can just tell they’re not engaging. And it’s more a matter of just shaking the dust off and going to the next one instead of trying to coerce or convince someone. I think you either you either grab this or it grabs you or it just passes you by. And so we are more and more satisfied that the Lord will just lead us to people that want to do this, that embrace this, that are looking for ways to do this, to activate and engage their faith in the way that they actually invest money. So I think it’s growing. It feels like it is it’s moving past the negative screening into the positive impact. I think ESG has had a great influence on us, not that we’re becoming ESG investors, but I think we’ve sat back and watched ESG and thought, Oh, I’m wonder if we could do that on our side now. And I think a lot of us and a lot of that talent that Henry was talking about has seen the same thing. And probably thought, man, if they can do that on the social governance side, surely on the faith driven side, we can do it. And so I think it’s growing. I feel like it is. You know, there are moments of discouragement for all of us, but there also are moments of great joy when we get to connect with somebody who says, yeah, let’s go for this, or we engage a new client that two years later says, This is even better than what I expected it to be like this.

John Coleman: I agree Ross.

Ross Roggensack: more joyful than where I thought it would be.

John Coleman: I think the ESG movement in particular has woken people up to the idea that they can invest according to their values and that there are a set of Christian values that are not necessarily running totally contrary to those expressed in ESG, but are probably distinct from those in that there’s an opportunity for Christians to identify those values that they want to see expressed in capital specifically. I mean, Henry, you’ve created two of the biggest ministries in this space, and especially with Faith Driven Investor, you’ve co-founded a ministry that’s seeking to expand the community here domestically and internationally. Talk to us about what you’re seeing on the community side.

Henry Kaestner: Well, I think it’s exploding. I mean, I think it’s I’ll tell you some of the things we’ve seen. So we decided the hallmark to the Faith Driven Entrepreneur ministry over the last two years has been groups, groups of faith driven entrepreneurs to get together and look at content, community gather. So we have just great storytelling mini documentaries coupled with teaching from a guy named J.D. Greer, and it’s groups of 12 or 15 entrepreneurs getting together over eight weeks and then every month going forward and these different types of groups. And we’ve been really, really encouraged by the growth of them. We now have more than 10,000 entrepreneurs that have gone through groups all around the world. So huge growth that we decided based on the success we’d seen with content and community, that we would go ahead and create a beta product to see if we could do something on Faith Driven Investor. So we put together some content from some friends of the movement. We had Tim Keller do a talk for us on the identity of an investor. Andy Crouch on one on God and Mammon. Greg Lernihan on the framework of how to actually go ahead and deploy capital consist with Faith Driven Investor and had 650 folks go through a beta last year and total and we had 400 go through just this most recent nine week cohort. And so it just is growing. So we’re going we’re doing 400 a quarter over the course of this coming year. And we decided that we might take some of those that are going through these groups that are institutional investors. You don’t need to be an institutional investor to go through a group, just need to be an investor. And we tend to bring together groups of accredited investors and groups of peers coming together. We have groups for advisors, but we had some of my friend I live in Silicon Valley, so I’ve got some good friends of mine that are Christian, that are in venture capital. So I had some of them go through a couple of groups that I led, and we decided to do a reunion of sorts out at the Rosewood Hotel out here in Palo Alto. And long story short, we had 164 Christian general partners of venture capital funds and private equity funds at the Rosewood Hotel three weeks ago. And these are people from Andreessen Horowitz from Madrona, Good Water, as we talked about some of the biggest names in the world of private equity venture capital. Most of these in secular funds, but all of them very committed to their Christian faith. And how is it manifests itself at their otherwise secular fund? How does it manifest itself as they work with secular CEOs of portfolio companies? What does that look like? How can we praise God together? How can we pray together? How can we share what God has done in our life together? And this is the first time that most of these folks had ever gathered with other Christians in their profession. And yet there is 164 of them. And then ten days later, we did the same thing in Nairobi, where we had 55 Christian fund managers getting together. And these are I don’t know what the audience is thinking of right now in terms of what a an African fund manager looks like or does or invest in. But we’re talking about people like Richard Okello came out of Bridgewater. He was a partner with Ray Dalio. He’s running just about $400 million in a fund of funds out of Johannesburg, South Africa. Top tier, you know, […] who I met when he was at Wharton, running a couple hundred million dollars, investing in Africa. You know, we’re talking about a continent with greater GDP growth than any other continent in the world and with the demographics. So I could talk about Africa forever. I think it’s amazing. But 55 of these Christians, all of whom are fund managers, getting together to worship together and say, gosh, what does it look like in light of ESG, in light of where God has us to come together and community and to encourage and challenge each other as we allocate capital? And then and to be clear, they’re fiduciary. So they’re not all themselves just investing in faith driven entrepreneurs, though some are. But how do we recognize that God has placed us where he has not just to make a ton of money for our clients or for ourselves, but to be his hands and feet and to be a blessing in the market place, what does that look like? So I’m extraordinarily encouraged by the uptake. And then we’ve had thousands of families come in through the Faith Driven Investor website to go to the marketplace to say who are some of the funds that are out there? And then increasingly, the big question is knowing that we have the supply now and we have the demand. Who are the fund advisors? Who are the river guides out there? They kind of know how to make this happen, understand a family’s need for income or interest in a market or an investment class, and put that together. And that’s what we’re focusing on most in the movement over the course of the coming year. How do we help fund advisors who are, you know, back to Ross in the hockey thing, who understand where the puck is going and seeing that Christian families, Christian institutions are going to get more excited about participating in this space. How do we help them come along, particularly with individual families?

John Coleman: Yes.

Henry Kaestner: Because alts have been difficult for many individual families and then Faith Driven investing has been difficult. But Ross has done such a good job to position himself as this institutional fund advisor that Ross, my prediction is that this is going to be very good year for you.

John Coleman: Well, and Henry to pile on that, I think another question I had coming into the space a couple of years ago is how our clients going to find these products, right? Because almost everything in investing happens through an intermediary like Oak City Ross. And it is encouraging. I mean, Ross is stewarding capital through Oak city for institutions. There are big wealth managers like Ronald Blue Trust and Eversource that are now explicitly serving faith driven communities. We’re seeing firms like LPL develop model portfolios for faith driven investors. I think they have 1000 kingdom advisors now on the LPL platform, and we’ve even seen big firms like NCF recently introduced faith aligned model portfolios for its investments through its donor advice funds. And so a lot of these intermediaries by which individuals or institutions access the market are becoming a lot more open to faith driven investing, even if they are mainstream institutions like LPL. And I think the call to action we probably have for anyone out there is if you’re getting advice, seek out someone who’s going to offer you these options like Ross or lobby the place that you’re at to try and introduce those. I know we’ve got a lot of active discussions going through FDI, through sovereigns and others with big firms that are seeking to serve their Christian clients better. And a part of that is introducing them to the ideas of faith driven investing. Ross, one thing I wanted to dig in on, because you’ve got such a good view of this from where you set your advising a number of different clients with complicated portfolios. You’ve both talked about how we’ve drifted away from just negative screening into some sort of positive engagement, and we hear a lot of frameworks [….] around. We hear avoid, embrace, engage, for example, there are some other frameworks out there. Ross as you think about faith driven investing in 2023, what framework are you introducing to clients to understand that?

Ross Roggensack: Well, we’ve used the framework of redemptive institutional investing, and it sort of stands on four pillars, one being that ownership, that God owns it all, that it’s not ours, that we’re just stewards, we’re just managing it for him, for the ultimate manager. The second pillar is design, that our design is not nearly as good as his, that we need to get under his authority and under his design. Third is that capital has influence. So directed institutional capital towards a cause, towards a movement, can influence culture, can influence living conditions, can influence medicine, can influence housing, can influence clean water, whatever you want, but money can change things. And then last excellence matters that everything we do in word or deed, right? Everything is unto the Lord. And so we should do it really well. We should really focus not on just providing product, but on really solving the problems, both on the investing side and the impact side for institutions. So we call it redemptive institutional investing, avoid, embrace, engage. It’s fine too there’s lots of different monikers. But yeah, we especially believe that that institutional capital, when directed collectively, can really change the world. And again, back to ESG, we’ve seen it change the world some good, some not so good. But we think once especially larger institutions can understand this and grab it, we will, in our day, see change and it will be so great, now I am seeing some. But I’m really anxious to see more.

John Coleman: It’s super encouraging. Ross and I want to zero in your fourth pillar was excellence, and both of you have talked about that a bit. You know, Ross, you’re stewarding client money every day. Henry. You’ve stewarded your own capital as well as the capital of others in a way that’s almost entirely faith aligned for some time. We’ve talked about how important it is that these faith driven investments perform at or above market, at least some of them. Some of them might be concessionary, but many of them you’d want to perform at or above market. Are we seeing that excellence materialize? Henry? Are you able to get the same types of returns in faith driven investments that you can get in mainstream investments today?

Henry Kaestner: Absolutely. So five years ago, I came back from this conference we had in Park City and realized that aside from sovereigns and the stock I had in Bandwidth and Republic, I didn’t have any Faith Driven Investment. And so I thought that’s that’s a challenge. We had lots of secular fund managers because venture capital and real estate and so decided to put together a portfolio just of Faith Driven Investor across pretty much every asset class. And we hired of course in Kenny you’re now works at sovereigns to do that for us. And over the course of two and a half years, you put together a portfolio and gosh. Maybe we’ve got 35 fund managers now that have some level of spiritual integration or written spiritual integration plan to talk about how they want to steward capital. And that goes across the spectrum. And you alluded to this just a second ago, and that is that faith driven investing doesn’t just include market return capital, but really what we look at Faith Driven Investor is it includes a spectrum from market return capital through to patient or concessionary capital, where it’s the outcome that’s most important, not the return that’s much more. With market return capital, the outcome, the return is the most important. Now it’s table stakes. It needs to have some spiritual integration in it. And yet there are lots of opportunities, particularly in frontier and emerging markets, where the outcome can be the most important, where maybe it’s employment or it can be the end of disease. And yet it’s not philanthropy, which we’ll talk about in a second. The best way to accomplish that intervention is through investing in innovation. And yet, in order to get the best maximum outcome, you might sacrifice some return. Maybe that’s because of currency, maybe that’s because of a long term investment in R&D. Whole bunch of different reasons that could be. And then on the other side, of course, there’s philanthropy, all of that. I think that God, well God owns it all. In all, three of those tools are at disposal to be able to be faithful and obedient with number one, understand he owns it all. But then to experience the joy is another thing I want to make sure that our listeners here hear is that we’re talking about an investment strategy that isn’t just born out of faithfulness and obedience, and we’re going to take up our cross and we have to die to self. And all those things are true in Scripture. And yet I think with faith driven investing, God’s calling us into something much greater. It’s a Technicolor existence, a participate in the work that he’s doing in the world and experiencing his joy. But back to your point. Absolutely. Market return is a big, big, big piece of that. And we have found over the course of last five years that our market return investments that we classify as such when we invest in it, when the manager says I seek to meet or exceed that of the secular benchmarks and private equity could be endeavoring to be a top quartile fund, we found that those investments have done better than their secular alternatives. And so about, gosh, in the family office, maybe 50% of the funds that we run are just market return and they have outperformed their secular counterparts.

John Coleman: That’s hugely encouraging. Henry And I know through Faith Driven Investor you actually help make available the holdings in that portfolio and things like that. And so that’s something that others can dig into based on the research that you, Henry, are doing or you’re doing. Ross As you think about and Ross, I want to turn to you obviously were pursuing excellence. There are some strategies that end up being more concessionary, but we’re pursuing excellence. We’ve talked about a number of categories that are being built out. So public equities, negative screening has been around for quite some time. Henry You mentioned 164 GP’s from private equity and venture firms dominantly gathering recently in the explosion of those funds. Where are you seeing gaps in a Faith Driven Investor portfolio right now and where are there asset classes that we need to further innovate to make excellent within faith driven investing? And Ross, maybe kick us off, if you would.

Ross Roggensack: That’s hard. I think that for us we’ve had a real focus on real assets and whether that be oil and gas, farmland, you know, even water. It feels like there’s been some gaps there for us to be able to really bring a a redemptive faith led offering there, you know, growing food, growing it wisely. Protecting the environment are all really important things and they’re redemptive in nature and they promote human flourishing for sure. But to be specifically faith driven, not sure there’s a lot really offered outside of the real estate portion that Henry mentioned. In real assets, I don’t see a lot, but Henry probably sees a lot more than I do there, there is probably a little bit of a gap. I wish there were more offerings in medicine. I don’t see enough there. I wish there were more because I really think that’s an area where we can really have great impact if we harness institutional capital towards that, I think we could really make a difference in drug pricing in lots of different ways that we could affect the marketplace. So those are probably two areas.

John Coleman: Henry, what do you seeing?

Henry Kaestner: Let me just say, I just love the fact that Ross used the word medicine. You know, it’s so many institutional investing conversation and everybody’s talking about pharmaceuticals. When I talk to my wife about needing something, I say, don’t get a pharmaceutical firm. They’re going to give me a medicine. I need medicine. And that’s what we need in America and that’s what we need overseas, which is where I think I’m brought to in terms of the way I think about gaps. And I suppose you could say that there are gaps in a bunch of different places. I remember actually thinking a guy called me up, said, I want to talk to you about this fund that we’ve got and putting together a spiritual integration plan for oil and natural gas. I’m like, How do you do that? I mean, you know, how are you sharing your faith with a barrel of oil or something like that and say that, thank goodness, Because he then talked about an incredible search integration plan about being able to provide ministry to the roughnecks out in the West, Texas, oil fields in the back and oil fields in North Dakota, and really, really impressive. We had a guy on the Faith Driven Investor podcast three or four years ago, Jimmy Song talking about Thank God for Bitcoin. I don’t know that I completely get that yet. Maybe that’s just a function I’m not smart enough to follow, but I don’t know that there are huge gaps. I’ll tell you, there’s a gap though, that I see in the way that faith driven investors are looking to deploy capital. I don’t think that we generally are looking at Africa or frontier emerging markets the way we could, and yet there are some really good fund managers there. I alluded to it a little bit before, but I think it’s important that we as Christ followers look differently at risk. The traditional mindset, and I’ll speak from the perspective of a family office for a second, the traditional mindset has been really that we want to make as much money as we possibly can and to just take whatever pile of money we have and to grow it. Now, if we’re Christians, maybe we think about it a little differently. But you know, if we’re looking to grow that, to what end are we investing our capital, especially if it’s excess capital? Now, to be clear, college planning, retirement planning are incredibly important, and I don’t want to minimize that. And that is the primary need for the vast majority numbers of Americans. And yet there are quite a few family offices that have excess capital, and they’re managing excess capital and they’re looking to get better return. But to what end is it to spend more? Is it to save, to build up for the next generation more? Maybe it’s to give more of its give more. I would challenge us all to think about how we might actually place an investment capital now in a way that maybe philanthropy is not as needed in ten years. So say we want to go ahead. See, I think that you can make a really good case that investing in Africa makes a lot of sense. Right now, you’ve got GDP per capita growing faster than any other continent out there. You’ve got an age of political stability unlike the continent’s ever seen before. Demographics are a huge issue. You know, you have these bulges of population. They’re going to be producing and consuming because the average age in Africa is so young, more entrants in their marketplace in Africa than any other content coming up. I mean, there’s lots of different reasons to invest in Africa, but say you can make the case that you could get a better risk adjusted return by investing in America, and maybe you could make that case. But again, to what end? If it’s to give money to Africa in ten years, we should rethink that. Mm hmm. Philanthropy has not done very well in Africa. Not to say it doesn’t still play an important role. Philanthropy is not dead. We need to be able to give to people who are in need of relief after floods and all sorts of different issues. We need to be able to give into some of the education infrastructure that’s out there. There’s a whole bunch of reasons for philanthropy. And yet if we’re actually invest and there are some incredible funds run with excellence in Africa right now that 99.9% of Americans don’t even know about aren’t even investing. And if we can invest, maybe in investing in job creation, economic development and market forces now toward innovation, especially what’s going on in fintech in Africa, leapfrogging over what we otherwise see in developing economies. Maybe if we invest it now in job creation, maybe you don’t need our philanthropy in ten years.

John Coleman: Before we conclude today, I wanted to kind of circle back to the broad topic of faith driven investing and in kind of 30 or 60 seconds or less, I wanted to hit two questions. The first. What are your big predictions for FDI in 2023? Ross, What do you think you might see this year that’s different for FDI?

Ross Roggensack: Oh. Not sure about different. I know that in 22, biotechnology did very, very poorly. And our firm, we think in five and ten year increments. So we don’t really try to think in one year predictions. But I do think medicine and biotechnology specifically are huge themes for us. And we still believe there’s going to be breakthroughs, maybe even because of COVID, because of the money that was generated. But I think that we’ll see. I think we’re going to see great breakthroughs in medicine, especially in biotechnology this year.

John Coleman: Henry, what’s your prediction for 2023 in FDI?

Henry Kaestner: I think the biggest opportunity out there is investing in lower and middle markets. When you can get in and partner with some really great companies that are making profits right now and get in and attract the multiples, I think we’re going to see a little bit of a cooling with some of the high fliers in the technology sector and venture capital. Venture capital remains a great place for faith driven investors to look at or with a long term horizon. Short term, just incredible opportunities in lower and middle markets.

John Coleman: All right, last question and then I’m going to ask you all to just give us a verse that you’ve been meditating on recently or something you’ve learned from scripture. Very quickly, a lot of folks are on the sidelines right now, or they’ve relegated Faith Driven Investor thing to a small impact bucket in the larger portfolio that they have. What’s your advice to someone who just wants to get in the game Ross?

Ross Roggensack: Well, I guess my advice would be much like the woman who touches the garment. Like I mentioned before, I think just act on your faith. If you want to be faith led, then move yourself to action. And I don’t think the Lord is going to bless the performance, but he’s certainly going to bless us if we act. And so don’t be afraid. You know, just move, act, act in faith. And I think that just too many people have bought into the lie that it doesn’t work. And I think that people just need to act.

Henry Kaestner: Jon, knowing that your last question is going to be about what is God teaching us through his word, I’ll combine the two answers into one and then maybe you’ll finish with Ross with asking what he’s hearing from God in his Word. So for me, the thing that’s really been sobering as I go back through the Old Testament is the lessons from the Good Kings of Judah. Of course, in the bad kings of Judah. Well, don’t do what the bad kings of Judah did. But interestingly, you know, don’t do what the […..] share of the Good Kings of Judah did as well, which is that just about every one of them didn’t ask God before they went off into battle or did a trade deal. And these are men that had great common sense, were godly people. They were men after God’s heart, Scripture tells us. And yet, at a critical venture, they didn’t seek God. And so that’s a sobering lesson for me. I think back over the last year about how many decisions I made without seeking God first. And I want to endeavor to do that. And so absolutely, as I look to allocate his capital, I got to get down on my knees. I guess I got to ask, God, what would you have me do practically that would be the most important thing, followed by looking to find a good river guide. There are lots of different options now, and that’s the good news. But it does present a little bit more of a challenge. What is the right strategy for the pool of capital that you’ve been asked to steward? And we’re not meant to do this alone. So finding a good river guide.

John Coleman: Yeah. Ross Henry’s right. He introduced this question and knew it was coming. And we try and conclude every podcast with just what God is teaching you through scripture that you want to share right now. Any thoughts on your end?

Ross Roggensack: Well, I meditate often on first Timothy six two, which is a verse that means a lot to me. It basically is Paul is really encouraging us to. It says rather, they must serve all the better since those who benefit by their good service are believers in beloved. If we are serving fellow believers, I think it’s required of us that we should serve. It says all the better that people should not do this expecting Christian results that they should expect for us to serve them even better because they’re believers and beloved. And so I think that what we do can really have great impact because the Lord’s with us and because he expects us to do it all the better. So, yeah, I think that Paul’s words really ring in my ears often to really serve all the better.

John Coleman: What an awesome way to conclude the podcast. Ross. Ross. Henry, Very grateful for you all. As a relative newcomer to the space, I’m still learning at the feet of giants here like you too. Ross You’re certainly conducting a great ministry through your work at Oak City.

Ross Roggensack: I’m just old John I am just old John

John Coleman: Appearances wise, weathered and wise. And Henry, of course, deeply grateful to be your partner, business partner, as well as to see the ministries at FDE FDI flourishing. And we’re grateful to you all for your leadership in the space. Thank you for coming on the FDI podcast today.

Ross Roggensack: Thank you, John.

Henry Kaestner: John, thanks for your leadership. Great doing with you guys. Thanks Ross.

Ross Roggensack: You bet.

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We all want our careers to be an endless upward trend, but that’s not always the case.

Mike Asem, who took a less-than-traditional road to investing, has experienced the wonderful highs and the challenging lows that come with being a venture capitalist. 

While the founding partner of M25–a midwest-focused early stage investment group–has plenty of success stories to share, he’s also graciously agreed to join us to talk about some of the less glamorous aspects of stewarding capital. 

Throughout the episode, he and our hosts, John Coleman and Luke Roush, open up about difficult questions like “how do you know when to let a venture go?” And “how do you protect your identity when you feel like a failure?”

Tune in to hear how we can wrestle through tough realities while maintaining hope in something bigger than our circumstances.

If you like the episode, feel free to share it with others, leave us a rating, and follow the show wherever you get your podcasts.

Episode Transcript

Luke Roush: Welcome to the FDI podcast. I am your host, Luke Roush. I’m here with my co-host, John Coleman. Good to have you with us.

John Coleman: Luke I’m feeling very great being the co-host today in your capable hands. Glad to be here.

Luke Roush: This is a plot twist. It’s the plot twist. It’s always exciting. We are overjoyed to have as our guest today. Mike Asem. Mike is a co-founder managing partner at M 25, has been an early stage investor for a number of years. Has a great background at the Great College of Purdue University and is going to talk to us about a number of topics, one of which is when do you know it’s time to let an investment go and to not continue to invest? And so. Mike, welcome to the show.

Mike Asem: Thanks, Luke. Thanks, John. I’m happy to be here and looking forward to this.

Luke Roush: So we can come back to some of the challenges of being an early stage venture capitalist. But let’s start with the positives. So how did you go from being a public relations student at Purdue to becoming a venture capitalist? Walk us through that journey.

Mike Asem: Yeah, no, I appreciate that. I mean, it’s kind of funny. I tell people I went to Purdue and those are familiar pretty, are familiar with all the great STEM programs it has, and they asked what I study. And it was public relations and rhetorical advocacy, which is in the liberal arts College is one of those majors that comes in and out as they kind of decide if it’s worth having or not. And, you know, I appreciated it because I was really interested in how organizations communicate and people relate with each other, but it was not your traditional path to venture. For me, I think it was, you know, a lot of divine scenarios I was put in that helped me get to where I’m at. I was a really bad student entrepreneur at the time. I had some really bad ideas but some really good energy behind them and kept meeting great people like Rusty Rueff, who I know is very involved with Faith Driven Investor Faith Driven Entrepreneur and and see some opportunities. I ended up at one point first year out of undergrad working for a nanotech company. So the running joke against all my buddies who studied engineering was Hey, look who’s mixing electrode material and assembling 80 micron thick supercapacitors thinner than a human hair in a bio clean room first year out of undergrad. So my way of saying some really interesting opportunities happened and I’m fortunate where I’m at right now.

John Coleman: Your friend’s idea of a joke is not super funny to those outside technical disciplines.

Luke Roush: Well, talk us through Mike. I mean, it’s super interesting just in terms of that entry point, but talk us through the anvil, which was a co-working space that you helped to co-found. Love to hear more about that.

Mike Asem: Yeah, so I put a lot more of good energy behind my efforts in this category. So when I was working on some bad startup ideas, I also had a student organization that I started called the Purdue Gold Standard, and we were focused on promoting physical fitness, financial well-being and leadership development among students at Purdue. That was kind of my goal and a lot of that’s entrepreneurial and tie that to my, you know, like I said, that hobbies. I got invited to a lunch by an alumni who was an early gentleman at Oracle did quite well and was back on campus looking to talk to entrepreneurs and leaders about how to solve entrepreneurship on campus. And I was really energized. I raised my hand when he asked who who like to put together a proposal to give to the president of the university to solve the problem. And that proposal for me turned into six months later me opening the doors to a place called the Anvil, which was a separate five one C3 nonprofit that I started the sole purpose of supplementing the existing resources at Purdue and creating mentorship and coaching and other resources for entrepreneurs on campus. And we ended up launching the first Purdue companies to go to Y Combinator. For those familiar with some of the top tier accelerators in the country and subsequently have had multiple acquisitions and lots of venture dollars raised across the companies of that program. So again, that was something that was kind of my first data on my resume. I guess as I got into tech and entrepreneurship, I mentioned the role in the startup after that and yeah, that’s how it came together.

John Coleman: It’s really cool trend that’s been happening and it sounds like you were pretty early in it. This ability to meld the energy and the youth and enthusiasm of a university with the ability to structure startup world and provide the right support for it is kind of a magical combination. I wasn’t aware that Purdue had that kind of program, but it’s really neat to see that happening. And I think you see more and more great startups coming out of the same type of incubators on college campuses or university campuses today. You know, one thing we wanted to dig into Mike, obviously you’ve started things. You’ve also been a venture capitalist for a while now. There is a ton of joy in venture capital. We know we do it. We do it as well. But there are also a lot of struggles or challenges. What surprised you on the challenging side since you got into venture capital?

Mike Asem: Absolutely. I think I kind of go in semi chronological order of my realizations of some of these challenges. But, you know, if you go back to my roots, which was primarily the anvil and then being a first employee, it was a venture backed company and then subsequently actually joining the Purdue Research Foundation as a director to help do similar things. I did the Anvil, but more within the pretty proper house of their incubation systems. My career was very much on the operator slash operator support side of the house. My job was very much about meeting with entrepreneurs and saying like, okay, but how can this work? How do we make this work? Let’s let’s make this happen, Let’s build this, and here’s how we’re going to build a strategy for success. As soon as I crossed the other side of the table, it very quickly became how do I apply very rigorous skepticism and say no as many times as possible? I mean, I that was probably one of the first realizations that really struck me was not only the amount of times I had to say no, but the type of quality of entrepreneur I had to say no to. Oftentimes for even things that weren’t even an issue for them, maybe they just want to fit for our fund model or our fund pieces. And I’d say that was a big realization, I think as and we’ll get into this, but there’s definitely some learnings as well, and you model out that not every company will make it, but seeing how some of the companies don’t make it and and going through that process with that entrepreneur has definitely been a learning, especially as someone who they look to as I think you can actually solve my problems because I just need more. I just need more money. Right? And that can be a challenging reality to try to confront.

John Coleman: One you’re right as an investor, you have to be a fiduciary for the people who’ve entrusted capital to you. So you’ve got to maintain this objectivity. At the same time, you know, this is the biggest professional thing in the other person’s life and that they’ve really got everything at stake on this. And it can be a challenging thing to say no initially or eventually to move on. You mentioned you kind of model in the fact that a number of these companies will struggle. Could you just talk us through examples where you’ve seen a company struggle and you as an investor or you as a team had to think about then moving on from a person or a venture that you really believed in when you made the investment, but you know, it’s time to move on.

Mike Asem: Sure. Well, I think the framework is a lot easier for me to speak to because, you know, when you make an investment, to your point, what got you so excited at the beginning versus where you’re at in the current state of affairs? I think it’s always been helpful for us as we’ve continued to draft our own internal memos and build upon them. We are definitely trying to spell out very consistently our thesis about the investment. What has this excited about it, what we think it can become and why? Because over the course of time you’re definitely going to see those things come into fruition or not. You know, I might think this company is a great business because I believe that CEO will have the ability to attract a great CTO and a great sales team, and we’ll go from this revenue to that revenue in this amount of time. And the way that industry will flow is going to be in this direction. And in 24 months, maybe half those things are true or none of those things are true, or rarely all of those things are true. But that can be a really objective way, I think, for us to and we like to apply to think about why we are not so excited about a company. And then the other thing I think is with that founder, you know, once you’re invested, you’re on the same side of the table and it’s really important for that to be really felt and owned by both parties. And to the extent that’s true, I have said many times that the best founders are true truth seekers. They’re not afraid of the truth, whether it’s convenient or not. And more often for founders, that truth is very inconvenient. But what do you do once you get that truth? And if a founder is able to not only own the truth, but also pivot off of it or adapt to it or find successful paths through it, that’s where I think you can continue to maintain conviction that you are involved in the right company. You’re spending time in the right things. The founders that shy away from that tend to be the ones where you add up those objective measures and kind of these subjective pieces, and it’s easier to start to look at it and say, this is probably one of those that’s not going to get through. Yeah.

John Coleman: Luke I mean, we’ve dealt with the same types of things. I mean, any observations on what Mike just laid out? There are examples where, where you felt like you’ve lived through that.

Luke Roush: Yeah. You know, one of the things that we talk a lot about is in the underwriting and original investment, we always try to understand like, what are the things that can go wrong? And then in the postmortem, if it works out, did they succeed for the right reasons? If it doesn’t work out, did they fail for kind of the right reasons or the wrong reasons? And there can be good reasons why, you know, companies don’t make it right. Sometimes a new drug or a new medical device doesn’t get approved and, you know, be impossible to understand how the FDA interprets a new application, but it just doesn’t make it past that step. Sometimes the market shifts. Sometimes there’s a competitor that barges in and just starts to, you know, create a red ocean based on pricing behavior. Those are kind of the right reasons that early stage companies don’t make it. I think where we have focused more is sort of like when companies don’t make it, there are some kind of wrong reasons. Some of them are within our control as the investor. So like we try to be really objective in like understanding what is the go forward financing risk of this business, how much more money is going to be required, and are there tools of capital for the company to be able to draw from? You know, and so that’s kind of on us as if we’re leading around. It’s on us to really look around the corner and see what’s likely to be required and do we know where we’re going to go to be able to get that financing rounded up if we can’t do it all ourselves? There are also, you know, I think the most challenging situations that we face are when, you know, the market’s there, the product is there, but just execution isn’t there because that involves people, right? And other things are more easily addressed. People are hard to address. Sometimes it’s founders that can’t make the jump from kind of an early stage company to a later stage company. Sometimes we hire the wrong person, maybe somebody from a big organization that we think can come in and they just can’t make that shift into more of an entrepreneurial environment. So I think in the most challenging situations that I think of when I look back over the last ten years is where we had great people that just for whatever reason, didn’t have the right supporting cast or couldn’t individually do the work that was required.

Mike Asem: And I love what you just said there. I think though, where I would. And so on on one hand it’s really hard. On the other hand, it’s really easy, right? Because there is the personal side of Mike. There’s the emotional side of Mike right that I need to temper, right as I’m, you know, continue to be the best steward of capital I can be. And sometimes I think it’s the hardest when the founders are really good executor. But there’s not that business there that we thought was there. Right. Or for whatever reason, like this outcome is not what we thought it was going to be. Maybe it’ll be a great lifestyle business, but it won’t be a venture fund returning type company. And that’s gets really tough because then you’re like, I think about as a human being, I’m like, you know, this founder, She’s doing everything. She is amazing. She’s a rock star. She’s everything I asked her to be and more. It’s just this wasn’t the right company. And then you start to have some do some really tough decisions. Where do you let it fail? Do you keep investing? How do you support? Whereas if someone’s just really not delivering the mail and consistently doesn’t deliver the mail, that it’s pretty easy for me pretty fast because I can say, I mean, I’ve time and time again, we’ve seen companies where, let’s say the thesis for the business is this, but I know that I’m no longer an operator, I can’t run this company for them. And the biggest mistake I can make as an investor is like invest in a company because I know what I want it to be, but I haven’t really captured what the founder wants it to be or what they’re going to actually do with it. Yeah. And so, yeah, that’s what I would throw into this piece.

Luke Roush: So what you just said is so on point, Mike, because it’s the difference between falling in love with the founders vision for where they want to take the company and falling in love with our own vision for where we want to take the company. And none of us has time to be able to effectively do that across the portfolio. I want to just maybe talk a little bit about, you know, when things aren’t going well. We talk a lot as investors about identity and sort of what is our identity rooted in and how do we make sure that the business failure doesn’t mean that I’m a failure as an individual or that you’re a failure as a founder. Maybe just talk a little bit about how you navigate through that with portfolio company CEOs that you’re part of.

Mike Asem: Yeah. And sorry, just to clarify, we’re talking about my identity or the founder’s identity?

Luke Roush: Both.

Mike Asem: Both great. Okay. Yes. Yeah. So I’ll start with the founders identity. So I try to start really early by just trying to establish a lot of trust and rapport with the founders I’m invested in even before we made an investment, because I want them to know that whether it’s whether negotiating a term sheet, whether we’re negotiating a future CEO compensation package, whether we’re negotiating whatever it might be, that they know where my heart comes from and they know the. Type of man I am. And they can trust that we can have a meaningful conversation. And I also want them to know that I see them as more than their company. I think that’s a really hard thing, even for a founder sometimes to see themselves as, especially as they get really into it. But it’s really important. I wrote an article a couple of years ago called Founders Need Stewards, Not Masters. And part of that piece was around this topic, and part of it was outlining a good friend of mine story where I cut to the chase. His business situation was very trying and he considered taking his life. And it wasn’t for outside of him hearing the voice of God tell him to stop doing what he was thinking about doing. He might not have had his son. He might not have kept going. And of course, now looking forward, he’s built an amazing business. He’s got an amazing family. He’s amazing man of God. And that could have been all for nothing if he would have been convinced that he wasn’t more than his company. And I firmly believe that whether it comes from a point of I’m just understanding the side of the human or even more selfishly understanding that, hey, again, let’s go to that counter. Who? She’s amazing. This isn’t the right business. I want to be there for the next one. Right. I mean, there’s we all know we’ve met entrepreneurs, very successful men and women who are rock stars, not once, not twice or three times, but however many times God has decided. Right. So that’s where I try to just kind of lay into that and and make sure I’m checking in on them outside of the business. And then for myself, I think, you know, it’s really tempting, especially in a world like jam packed full of egos, whether it’s the entrepreneurs or investors like myself or whatever. You know, I think we’re all tempted at times to check the ego and be like, man, I’m, you know, this is great. I’m a self-made fill in the blank, you know? And in the same way that we can say that, you know, God, you know, I’m here because God’s blessed me with talents and abilities, but he’s also blessed me with opportunities. And he’s also made things happen through me. Right. And I think that’s the way you have to look at it. Like the same way success happens through me is the same way. You know, failure happens through me. And we all know that God uses all things to his glory. And I don’t know how a failure is going to positively impact me or the founder or someone in relation to this that I don’t even know. And so I think there’s just taking root in that helps me at least think about how I know that my identity is I’m a child of God. I’m here to do my best. And so long as I’m actually working my tail off to do the best, my ability and glorify God in the process, then like I have to take that on the chin to take this one on the chin so that, you know, I can continue to fulfill the mission. So that’s where I believe that.

John Coleman: Well, we are. I mean, almost everyone in this field is at some level a competitive person. Right. And we all want to be successful. We all want to do well, even if we have good motivations for that. And when we’ve done very well, the temptation is always to credit ourself a little too much. And when things have gone poorly, the temptation is to wet our identity to that and not really think about it. And it’s, you know, it’s kind of ditches on both sides, right. You’ve got to find a way to stay anchored in truth. You know, one thing that you touched on is with that entrepreneur where you do have to make the decision to pull out of additional financing or maybe even to wind down a company, etc.. Sometimes you do invest with that person again, sometimes you don’t. What do those relationships look like for you after you’ve made a decision to part ways professionally with an investment? And how do you maintain those after that?

Mike Asem: Yeah, I think that’s a great question. I think it is highly dependent on the individual. I generally have a stand of if I’ve ever gotten to a place where I’ve decided, like I’ve underwritten you as the founder that I’d like to back and participate in. I think that’s something I like to retain is an offer like I’m not changing my phone number. You can still reach out. My email is going to be the same. Probably the [….] note if it changes and you know, didn’t come with any particular promises, but at least on a human level, you know, I’m there. And, you know, I think it’s interesting. We’ve seen some really good opportunities, not just for them to start a new company, but sometimes founders also realize things about themselves that tell them, hey, maybe I shouldn’t be a founder, but I am a phenomenal technical lead, right like or I’m a phenomenal X, Y, Z, and we like to pride ourselves in our ability to continue to help our founders, you know, bring another great people into their vision. And so that can be a way that we do that as well. So I would say, you know, outside of of course, you know, unfortunately, if we do learn something through the process of being an investor, your business, that I couldn’t recommend you to be a part of someone else’s company, then that’s a different situation. But but for the most part, I think, you know, being partner with people of high character and high integrity makes it easy to say, Yeah, let’s stay in touch. And if opportunities arise, we’ll be thinking of you and and vice versa.

John Coleman: So much of that is a heart orientation. Mike I love what you’re saying. And it you know, this springs to mind for me too, about founders wanting to be careful about who their capital partner is. Right? That that financial capital does have influence. The person across the table matters. And what I love you saying is, I mean, you can just tell your heart orientation going in is that you actually want to see that person flourish. Right? We say we love God and love our neighbor through investing. Love of neighbor can look like different things. I mean, certainly it can be encouraging them, cheering them on. It can be delivering hard truths. It can be helping them come to decisions that are ultimately better for them, even if it’s hard. But if you’re doing that from the perspective of trying to also help that person achieve what’s best for them, I think that can make all the difference. And Luke. I always think of our we have a colleague, Jake Thompson, who I think you know, who I think is just extraordinary about this. Right. Because he actually does really care about and love all the founders he’s interacting with. And I think that makes a huge difference in the way those conversations go. So I want to pivot to another topic. If it’s okay. You know, right now we’re living through a downturn in venture. Arguably, this will be the most pressing adjustment in venture in 15 to 20 years or so. And we’re already seeing compression evaluations. The economy may be heading into recession. We just got additional inflation numbers where inflation continues to proceed at a pace that’s problematic. And what a lot of people are having to sort through now is whether a venture is in temporary trouble because of the economic environment. Right. Or whether there is a structural problem with the business model. And to Luke’s prior point, you know, whether you should then continue to bridge financing to help them get to the other side of this temporary blip or whether there’s something structurally wrong. How are you? And in M 25, thinking about this right now in terms of the portfolio, and how are you trying to determine how much of this is a temporary economic problem and how much of this is a structural problem where we do need to exit?

Mike Asem: No, it’s a great question. And in that for many of us is the question right now, especially for those of us in our profession that, you know, haven’t been through a cycle or haven’t been through anything that even closely resembles what we’re going through right now. And, you know, I’ll throw a disclaimer here is you’re getting this from a someone with a public relations and rhetorical advocacy background prior to venture. And then from there, my exposure is really through early stage venture capital. So take that for what you will. But I do think that fundamentally, if you look at where we were before things started to look uglier can only be described as a remarkable moment in venture capital in the way that valuations were happening, in the way that, you know, rounds were getting done and the amount of capital being invested in these companies. And I think that that was just, you know, inherently unsustainable. Like I think everyone that was participating in it understood it. But for a lot of folks, it still made sense to participate. I think if you even just think about the, you know, incentive structures within a lot of the VC firms that may have participated in some of these rounds where you maybe have more junior partners or folks that are they have dual authority, but they don’t have the same sort of like responsibility and stewardship and ownership in the firm as a more long standing general partner. That’s where you start to see some really strange incentives where if a person like that can get their name on a logo that gets them a partner role at another firm, but you start to see some really weird rounds start to shake out. I think you look at stuff like that and you ask yourself, Do VC firms need to be a little bit more careful and a little bit some of their practices and that sort of thing. But as far as like valuations and things of that nature, I still think the reality is that good businesses are good businesses. There’s still a lot of great companies building with great business fundamentals. I think one of our favorite examples recently is a company that is building verticalized [….] software for salvage Yards. It is not exciting. It is salvage is software projects. Unless you like great business models and great like totally antiquated industries right for digitization and disruption. Then it is exciting. And this company has been kind of an outlier in this space where, you know, we actually preceded the company not too long ago and they’ve already had a significant markup and things are going great. We’ve got companies in the logistics space that have similar stories, right. So I think that, you know, our view at this moment is that, well, first and foremost, we need to be the best stewards we can be. And for myself, my partner Victor, who and many of you know, Victor, we’re both younger than your average general partner per se, and we are very focused on surrounding ourselves with great mentors who can advise us on how to be great stewards, how to think about markets like we’re currently in, but being very precise on how we make our decisions on this is a company, we’re going to lean more into This is how we are thinking about cash reserves. This is how we’re thinking about their ability to actually grow in a macro environment like the one we’re considering and don’t need to depend on some very like very theoretical ideas versus. No, this is something that we can actually build a business model around and understand. I would say that’s at a high level how we’re really thinking about it, but I wouldn’t be shying away. I think another great mentor of mine is is a managing partner at one of the top five firms in the country. And he told me years ago that one of his regrets, if he had one mind you, this is a very successful venture capitalist I was talking about, was not being a little bit more aggressive in 2012, nine, ten, ten, because the deals that he did then were some of his best deals and somebody else he passed on that he could have done would have maybe been even better. So I think about that. I think about the ability to be contrarian. I think about the ability to run a sophisticated strategy even through scary conditions when others are pulling back the upside on that can be, you know, game changing.

Luke Roush: Yeah, one of our little bit of partners who was just on the phone with earlier today likes to say that the time to buy is when the cannons are thunder and the time to sell is when the violins are playing. And, you know, against the backdrop of the last few years, a lot of dry powder, you know, capital markets, effectively money’s free for the better part of the last decade, there’s been a certainly an orientation amongst some firms to start going full lifecycle. So doing everything from ten or $15,000 pre-seed checks to, you know, $100 million growth equity financings, sometimes doing it all within the same fund, sometimes having different vehicles. So you’ve got kind of that full lifecycle and then you’ve got, you know, things like crypto and blockchain and there’s a real FOMO driven kind of how do I not miss out on this big trend that’s going to change the world? And then all of a sudden SBF happens, you’ve got a denominator problem, you’ve got turbulence and uncertainty in public markets and things start to pull back. And then, you know, it’s a great timing of your comment, which is there’s probably going to be some really interesting things that come up as the market resets over the next two or three years, particularly for businesses that have demonstrated traction. And so I love the example that you gave of like, you know, who cares about, you know, scrap yards except, you know, there’s a lot of people that care about scrap yards. There’s actually a lot of value in there. And if you’ve ever had to buy a used car part from a scrap yard, you realize how much value there actually is in there. It’s not cheap.

John Coleman: One thing I’d add to that, Luke, and we’ve talked about this a little bit internally is to emphasize what you’re saying. Mike Some of the most interesting times, especially in early stage venture, are right after crises, right? Particularly the crises that hit the bigger technology companies are publicly traded, growth companies, etc. Because what people don’t think about is a lot of great engineering talent is there are a lot of great product talent is there. They’ve kind of got golden handcuffs, often with options when the right is going well, when the market collapses. You know, we’re seeing massive layoffs in tech right now. A lot of people’s options are worthless. And so there tends to be a boom in early stage venture startups. So among founders, right after a correction among bigger tech companies, because these folks go out and they no longer have any disincentive to start something. Right. And so there’s just emphasize what you’re saying. I think it’s obviously a difficult time, but it’s also an exciting time to get into markets and try and think about these folks who are now leaving and starting really phenomenal ventures. And we love scrapyard type stuff. So you speaking our language.

Mike Asem: Yeah.

Luke Roush: I’d love to actually transition to just the origin of your firm’s name M 25, Where does that originate from and how do you think about it with Victor?

Mike Asem: Yeah, absolutely. So M 25 comes from Matthew 25, specifically the parable of the talents. And I think, Victor and I you know, it’s interesting when we get asked this question, for those who do not know our fund, we focus on Pre-seed in the Midwest, there’s a lot of folks that are like, Oh, I just kind of assumed it was Midwest 25. But yeah, what does it mean? And we’re like, what, 25 would apply? Anyway, we’ll keep going. But it applies to Matthew 25, the Parable of the Talents, and we get a chance to tell the story. And for those familiar right, there’s a master that leaves his estate amongst three servants and gives them the kind of order to take care of his assets while he’s gone. And when he returns, he finds that one takes appropriate risk and creates value and another does the same to a lesser degree, but still does the same in the third out of fear buries it in the ground and the master greatly rewards the first two and greatly punishes the third one. But what we really derive from this is we see ourselves and aspire to be both master and servant in that we want to find great entrepreneurs that take appropriate risk with what we entrust them with, with our capital and build something of value and return. And for our LPs, we want to be servants in that we want to take appropriate risk. We proper stewards of their capital and creates a meaningful value for them as well. So that’s where it comes from.

Luke Roush: Maybe share. Before we go, the Lightning Round, which John, I know is excited to kick off, maybe share just a moment on how your faith informs your work daily, right at a macro perspective. M 25 Matthew 25 is awesome, but how does it actually impact what you do daily? And maybe talk a little bit about the artwork that’s behind you?

Mike Asem: No, absolutely. So how my faith impacts my work daily? I mean, I think, you know, first and foremost, we do have a bit of a lens in that we won’t invest in anything that we think is destructive. We don’t invest in anything in the vice categories and try to stay away from anything that we frankly think is has a risk of not being kingdom building and being destructive to society. Outside of that, I mean, I think, you know, I mentioned the piece on how I try to be a really good ally to my founders, a confidant, someone that they can trust and try to, you know, be that light and a hill for them and that like they can at least experience what it’s like to work with somebody else that’s hopefully highly competent and and skilled in this area that can help them, but also has some strong belief in values and faith behind what they do. And I think maybe the larger, more like categorical view is I just get a lot of passion. John, you mentioned liking to see people flourish. I have a big heart for access and opportunity and seeing people be the best they can be and, you know, to God’s glory living out like their purpose in their lives. And, you know, I really feel energized and fulfilled by being able to provide some sort of tangible value, helping them along their journey, having God kind of help them through me in that way and be, you know, I think sometimes it’s easy to be just a cheerleader in those ways, but also be a trusted accountability person. I think that we’re talking about something where letting companies go the markets tough, dealing with tough times, you know from Romans that suffering, please, the perseverance, perseverance, character and character, hope. And this is a lot of times working through founders, through the tough times, although it’s not the funnest part. The funnest part might be the violins. Luke, But it is a rewarding part because these are some of the moments that really kind of become cornerstone moments, I think, for people oftentimes professionally, but also very oftentimes personally. And so it’s always something I’m thinking about is how can my work continue to be more redemptive? But those are the things that I think thematically kind of carry through how my faith affects how I approach my work.

John Coleman: That’s awesome. Mike So we like to insert in the middle of these conversations a lightning round. And the only rule of the lightning round is 60 seconds or less for the answers. So we’re going to hit you with a different set of questions. Some will be fun, some will be serious. I’m going to throw your big time softball at the beginning based on a couple of your prior comments. You are engaged with a bunch of nonprofits and a bunch of causes that you care about a lot. Are there a couple you’d like to tell us about today?

Mike Asem: Yeah. So I would say like Equal Justice Initiative is one that I think is a really important philanthropy. So they focus on individuals of color that were unjustly charged and prosecuted for crimes that they didn’t commit when they spent a lot of time in areas around incarceration and kind of redeeming individuals in that way. So I love the work that they do. And I would also call out very specific [….] a group called Black V.C. I also lead the Midwest chapter based in Chicago, but I also sit on the national board, and this is a nonprofit focused solely on exposing and engaging and helping promote individuals of color in venture capital, because as we know, there’s not a lot of folks that look like myself in venture capital, and especially not, you know, in senior positions or check writing positions or areas of advancement. And so we’re really trying to create equal opportunity and just kind of help individuals from diverse backgrounds.

Luke Roush: That’s great and love the fact that you’re taking initiative and taking leadership and having your voice be heard in shaping that discussion. So that’s awesome. Mike, I want to switch gears and on a slightly less serious note, we had Shundrawn Thomas on a couple of weeks ago and we had a spirited dialog around the great Chicago and traditions of Italian beef sandwiches and deep dish pizza. Today we need to know which is your preferred cuisine, deep dish pizza or Italian beef?

Mike Asem: Well, the answer is definitely situational in and what it means is if it’s game day, then it’s probably Italian beef.

Luke Roush: Let’s go.

Mike Asem: If it’s not game day, then you’re probably going to deep dish pizza.

Luke Roush: And what is game day for you? Are you Bears fan? Are you a Cubbies? Talk to me about what game day means.

Mike Asem: Oh yeah I’m I’m a Chicago sports diehard. So for better or worse. Hey, look, we’re having one of the most aggressive rebuilds I’ve ever seen in the NFL, so I’m putting my hope in that. But yeah, for better or worse, go Bears.

John Coleman: I was ready to accuse him of waffling, but that was actually a pretty good response. On the situation ality of the cuisine there. That was that was solid. Mike, you know, apart from the bears and deep dish pizzas. Why the focus on the Midwest? Why is that important to you as a venture capitalist?

Mike Asem: Yeah, I’m from here, Victor is from the Midwest as well, we feel like we have an unfair advantage here. We understand the culture here. For better or worse, it’s like it’s a different cultural reality in the Midwest than New York or San Francisco or pretty much any other part of the country. And so given our network, given our roots, also given what we feel is like an underserved reality from a venture capital perspective in the region, we thought we had a good opportunity to win and create a lot of value here.

Luke Roush: Next question is around your one of your hobbies, which is actually making wine with your dad. So what’s the timeline around being able to anticipate some vineyards being available at the local grocery store?

Mike Asem: Well, it’s a great question. The well, first of all, it’s fruit wine. So we have made wine from grapes, but generally we make it from blueberries. And I do have a really good strawberry that’s won a couple awards locally, but unfortunately for a few reasons. One, we don’t want to make our hobby our job to I have drinking a lot more wine since then. I actually am not sure how good it is. And three, you know, just selling alcohol at the grocery store. I know if that’s in the cards for me. So TBD.

John Coleman: That’s great. As a Southerner, I can tell you even the mention of strawberry wine brings to mind nostalgic memories for country music fans. We’ll do the last question of the Lightning Round right here, which is in this tough season, what advice would you give to other investors going through this for the first time? Young investors?

Mike Asem: Yeah, I mean, I would lean towards surrounding yourselves with individuals who have been through a season like this before and gleaning as much wisdom as you can. You know, we know that the pursuit of wisdom never lets us down. And I think this is definitely one of those times where it’s the most valuable and also like watch how that unfolds because especially if you’re young in your career, there’s likely more and more time ahead of you where you’re going to be able to put this experience and learning to work. And it’s going to be extremely valuable and learn some lessons. And, you know, I think back to the ego. You’re more than your career. You’re more than the next deal, you’re more than the losses you’re building right now. And odds are, if you’re in your career that your losses will help, you have an unfair advantage for the wins you gain in the future.

Luke Roush: That’s great, Mike. That’s an awesome word for all of our listeners. I want to pivot just to how we always like to close each episode by asking what God is teaching you right now. So what have you found recently in God’s word that has stuck out?

Mike Asem: Yeah. So I’ll go with a recent piece and a kind of life piece here. So the recently my wife and I are 20 when you read through the Bible again and this morning I read the story about Balam and the donkey, that that was not helping him out and then spoke to him directly. And it reminded me that, you know, a lot of times we’re trying to force a square peg in a round hole. I think a lot of times God puts things on our heart or we have things in our heart that maybe God says, just like we’re not getting that signal to lean into this and we’re trying to force things and, you know, being able to like, step back and try to listen for God’s voice and like feel from the spirit, like we’re actually we should be moving forward. Is this God’s will or my will? So that’s the word that I think hit me recently as of this morning’s reading. And then I’d be remiss if I didn’t point back to the painting behind me, which I know you guys can see. But it actually it’s this local Chicago artist that did this and I had them paint R 12:2, for Romans 12 two, which is my longtime favorite life verse, which is do not conform to the patterns of this world, but be transformed by the renewing of your mind. That way you can attest and approve of God’s will is his holy, pleasing and perfect will. And I love that verse because I just love how much it speaks to how, you know, God wants us to be critical thinkers. God wants us to be constantly pursuing knowledge and have strong intellectual curiosity for the purpose of fully owning and understanding his will for our lives. And in some of these deeper questions, because, you know, I think having that spiritual relationship as well as that pursuit of intellectual curiosity is something that’s very God ordained and like makes life as a Christian really rewarding.

John Coleman: Mike That’s a good word. We have loved this conversation today. Obviously super encouraged by what you’re doing at M 25 and beyond with the different things that you’re involved in. You’re just such a bright light for the industry. I know our team thinks incredibly highly of you, and entrepreneurs would be very fortunate to partner with you and with M 25 And so we’re grateful for you coming on today, sharing some of the more difficult things. With vulnerability that you have to go through. And also just providing a great example for the way that a Christian can navigate those. So really appreciate you coming on today, Mike. Thanks for sharing with us.

Mike Asem: Yeah, thanks for having me. It’s been great.

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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.