Hello everybody, it's Sam from Financial Samurai. And in this episode, I want to talk about how I started investing in private funds, specifically venture debt and venture capital. Because I published a post called "How I'd Invest $1 Million Today." And I think you should take a look at it, because I've gone through a series of how I'd invest $100,000, how I'd invest $250,000, and now how I'd invest $1 million.

And I know not too many folks have a million dollars to invest, but I thought it was a good exercise to go through, given we're in this interesting time in the stock market, the real estate market, and alternative investments. But onto the topic of how I started investing in venture capital and venture debt.

It all comes down to relationships. It really does. My first venture debt investing was, I would say, 10 years ago now. And the reason why I started investing in venture debt was because my business school classmate decided to go into venture debt after business school. And then he was at a large venture debt company for, I think, five years.

And then he started to start his own. He wanted to start his own venture debt business. And because we were friends, I said, OK, well, let me invest in your initial fund. And that was a leap of faith on my part, because he'd never run a fund before. He had the experience working in venture debt.

I knew he was smart, because he went to UC Berkeley's Haas School of Business. And I liked him, because I've known him for years. And so I invested in his first fund, which I think ended up doing OK. It was only like 8%. It was nothing spectacular. He had a couple of misses.

But overall, it returned capital to initial shareholders. And then, because of that, he was able to launch a second fund, and a third fund, and a fourth fund. And with the fourth fund, he started getting significant institutional investors. So the fourth fund, I think, was over $250 million in size, whereas the first fund was, I think it was something like $50 million in size.

So the fund sizes started going up, and the opportunities started going up based on his track record. So now, the venture debt fund is in good shape. And so for those who started with him in the beginning, they will always have a look, because there is a lot of demand-- or at least there was a lot of demand before 2022, because they haven't raised a new fund, a fifth fund, since the bear market yet.

And so for those who've been with the fund since the beginning, they'll always get a first look, because a lot of demand comes from institutional investors now. And for folks writing a $250,000 check, it's not going to move the difference in a $500 million fund, let's say. They want to get an institutional investor who invests $50 million, $100 million, a family office, those type of folks.

It's just a different level of business now. In terms of investing in a venture capital fund, now, this is also due to relationships. I have a 10-plus-year-long friend who has been an angel investor and an investor in different venture capital funds over the years. And due to his network, he invited me along and said, hey, I have an old co-worker who started a fund or a second fund.

Would you like to invest? And I took a look, and I said, yeah, why not? Let's invest. And so I was actually at one of the parties of a venture capital fund hosted at the San Francisco Giants game the other night. And there, there were probably 70, 80 people-- entrepreneurs, limited partners, and the general partners.

And from there, you just talk to people. I learned about a new AI investment they had invested in. It has to do with making new types of music by combining different types of music into one to create a new song or a new melody. And I thought that was really interesting.

And the fund that I'm investing in invested in that. And so did Diplo and the Chainsmokers. Oh, that's pretty interesting. So there was the founder there. Get to talk to him. And then talk to other investors who have been investing in other types of businesses. And you basically just build relationships.

You be a good person. You trade information. And you just keep in touch. Another example of networking is that I was at a tennis tournament a couple months ago. And several of the people who showed up were VCs. So I showed interest in what they were investing in-- new technologies, new trends, what's going on, what's the hardest thing about being a VC.

And by showing interest in what someone is doing, they show interest back. And then they ask, what you're doing? And I say, oh, I run this site called Financial Samurai. It has a platform. And they're like, oh, really? Well, we have these people who are called scouts who have these large social media followings who try to find deals.

And if they bring a deal to us and we invest in those deals, they will earn some carry. And that carry will pay out if the company is successful. And that's how these things happen. And then finally, another example of networking is that I met a dad who started a fintech company-- I think it was like 10, 12 years ago.

And they sold it. They sold it to a large financial institution that we've all heard of. And their incubator is a very famous incubator here in the San Francisco Bay Area. So he gets to invest in a lot of the private companies the incubator invests in, as well as the funds of the incubator.

Not only that, because he is an accomplished entrepreneur, he gets looks in the fintech space, in artificial intelligence, in health tech, in all sorts of different areas that he's interested in and that he has an experience in all across the country. So if you want to invest in top venture debt or venture capital or private equity funds, it's really about networking.

It's about being a good person. It's about adding value somehow. Because capital, there's a lot of capital out there. And there's not a lot of space. The funds can only raise so much because they say, look, I'm going to target raising a billion dollar fund. They can't just say, OK, there's $3 billion in demand.

Let's raise that. I mean, they can obviously raise the amount higher than the initial target. But there has to be some discipline here. Because if the fund gets too large, then it's harder to put as much capital to work and get a positive return. I also want to emphasize being able to add value.

I think about this a lot because I think about recently college admissions. A lot of people have top test scores, top GPAs. So what's unique about them? You have to have something that stands out. So if there's so much demand trying to get into one of the top funds, you need to offer something of value.

So for example, if you are a successful entrepreneur who's been through seed to exit, I mean, that's phenomenal. And you probably have the experience to consult and provide guidance for some of the companies in the portfolio. That adds value. Let's say you have a huge social media following and can help amplify the message of one of the companies the fund invested in.

That has huge value. And I was thinking about from my point of view, if you have a large personal finance site and you want to invest in a fund that has several fintech investments, hey, I could add value to that fund as well. My problem is that I don't have that hunger, that drive anymore to make a lot of money, which is part of the reason why I'm investing in these funds in the first place, because I want people who have that hunger, who have that competitive advantage and that network to find those deals for me, of course, and then in return, I just pay them their fee.

You know, this hunger, this hunger to earn, to invest, to discover really takes, I think, a special someone. And your hunger to make more money is higher in your 20s and 30s than it is in your 40s, 50s, and 60s, because rationally, most people have less money right out of school and they want to make that money.

And so this is something to think about as you invest going forward. Your desire to make money will probably fade as you have more money. And therefore, if you are a self-directed investor, maybe you'll start slacking off a little bit. Maybe you won't asset allocate as appropriately. Maybe you'll just get a little sloppy in terms of your risk exposure, right, which could be dangerous.

And so that is a case as you get wealthier to outsource your wealth to people whose profession, whose day job 24/7, hopefully not 24/7, but at least 40 hours a week is to ensure that your capital is being optimized. Just the other day, instead of, I don't know, networking, doing business development, writing on Financial Samurai or podcasting, I spent three hours with my three and a half year old daughter at the zoo.

We saw all the animals. We said hi to Norman, her favorite gorilla. We said hi to the giraffes. And then afterwards, we went to take the train, the little puffer train at the San Francisco Zoo. And it was just like a magical moment. It was just father, daughter, enjoying the breeze in our air and hearing the choo-choo and the steam on our face.

It was great and we did it again. And then we went to the playground and played for an hour. And it's just like these moments, they're just so much more valuable than trying to look at my portfolio to optimize and make more money. So to be able to outsource your capital to the people who do this for a living, I think becomes more and more valuable as you get older and wealthier.

There is one final point I want to make and that is our network, I think, is way stronger, way more powerful than we know. I'm looking at my own network. If tens of thousands of people listen to this podcast and a million people read Financial Samurai every single month, surely there are people in the venture capital, venture debt, and private equity space I could get to know.

But I haven't reached out. I haven't asked any questions. I haven't asked for any help. But I'm sure if I did, someone is going to reach out and say, "Hey, I'd like to introduce you to XYZ. Hey, I have this fund. It's open. We're raising money. Would you be interested in investing in it?" Or "Hey, we're looking at this private company.

I'd like for you to take a look and maybe you'd want to co-invest and talk about it." So if you really want something or you're really interested in something, go take a look in your own backyard, your own Rolodex, and see who is in that space you could talk to.

I think you'll be surprised. All right, everybody. If you enjoyed this podcast, please share it, subscribe it, rate it. If you'd like to stay in touch, please subscribe to my free weekly newsletter at FinancialSamurai.com/news. And if you want to receive my posts every time they come out in your inbox, you can go to FinancialSamurai.com/email without dash.