What does a California VC do with money?

Written by 
Polina Median
/
September 2, 2022

Answer: Samsung

Hover your cursor over the buildings and look at the connections between the companies
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Julian Zegelman investor attorney

This interview is from our series of IG live streams about what people of different professions do with money. Today we have Julian, technology and venture capitalist with prior experience as an investment banker, startup attorney and a serial entrepreneur.

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I’m gonna start with a non-finance-related question. I've seen in your stories that you're doing a running challenge. Could you tell me what's the purpose of it?

Yeah, I'm happy to do it. I'm not a big runner this is something…cardio is hard for me and years have gone by since I was running consistently, but lately, I decided to pick it up for a couple of reasons. One reason was just a fun bet with a friend, that we're gonna do it for 45 days. Reason number two it's a great way to de-stress and enjoy the weather here in Southern California. And reason number three, I think running is very illustrative of small gains that together represent a really big positive contribution, as long as you do a little each day. So that's why I started running again and it's been a good stretch so far.

Amazing! Do you have any price for your word? For example, if you skip a day do you owe something?

Yes, absolutely. So whoever skips a day has to buy a very fancy sushi dinner to the other party, so I figured that I can get in shape and save a couple of hundred bucks, so why not? But I'll be happy to pay the price if I'm the one who loses. You know, it's similar to the market, sometimes you win, sometimes you lose. You just gotta understand what's at stake.

Exactly, so talking about the market, how are you feeling currently with this crypto winter, the market and all the warnings about recession? 

I think there is a short-term sentiment and then there's like a longer term sentiment. The short-term sentiment I think is not very surprising. I took a certain hit to my personal portfolio. Fortunately, not so much to our funds portfolio, because as venture capitalists we invest with a bit of a longer outlook, so we'll see how it turns out. But personally the public equities portfolio took a hit, the crypto portfolio took a hit, probably some of the valuations of my personal angel investments, they're lower than what they were reported to be last year. But all in all, from a short-term perspective I know that I shifted my attention to more careful cash flow management and also being more defensive and more conservative in my current investments. Long term I think this is not the first of the last economic cycle that we go through and unfortunately after every up cycle there is a down cycle. The question is how severe and is it going to turn into a recession or not. 

Exactly. And you gave a TedTalk four years ago about blockchain and the crypto industry. It was in 2018 and I don't know exactly if it was before bitcoin fell or after. But how did you survive um last crypto winter and do you see the same signs that it's gonna be the same this time?

You know, it's hard to predict because I think some things are very different from what they were in 2018. It sounds like in 2018, in my opinion at least, without like digging into all the macro factors there was a lot of exuberance and a lot of expectations from you know what blockchain is going to do to the overall economy. And like with any other transformative technology, once we got into that reality that things take longer, are more complicated and more expensive than originally anticipated, that scared a lot of people away from the market in 2018, so you have a big correction in cryptocurrency pricing. But as it was demonstrated then in 2019 through last year, that wave of exuberance started to raise again. 

I think today we're looking at a situation that's more complicated, because the macro environment is complicated by the effects of Covid, shutdowns, global logistics disruption, the war in Ukraine, some of the economic policies here domestically in the U.S. So I wouldn't…it's hard for me to predict if it's gonna be the same two-year three-year recovery first, but how did I survive the crypto winter? I think I survived it by not being overly focused on crypto speculation to begin with. I continue to view crypto as a useful part of the portfolio but one that's still fairly new and very volatile, so to me personally I would not feel comfortable putting more than five to maybe ten percent of my investable income or investable net worth into crypto. And as long as you follow that and you're conservative and you look at what the projects are doing and you look at the underlying value and the underlying technology I think like with any other cycle there will be value they'll be retained even if temporarily it's depressed. So that's my philosophy. 

I see. So you look positive into crypto you look positive in the markets that they will gonna pick up later but are you trying to time the market? Are you looking into like when it's gonna hit the bottom or like or no? 

I don't time the market because I think much smarter, more experienced and more successful public market investors have tried to do it and very few of them have succeeded. And even the ones who did succeed there's a lot of arguments that go into why they succeeded and could you replicate their model. For example, could you replicate Warren Buffett's model without access to very cheap investment capital, you know, flowing from the insurance premiums? I don't know, would be difficult to do. So I don't time the market. Being on the market for the last 20 years one thing that I learned is that compounded growth, a diversified portfolio and avoiding emotional panic buys or emotional panic sells, it's probably a healthy way to have the market work for you. And by work for you I mean beating the inflation and beating the other benchmarks that you typically measure your performance against.

Exactly, I see. And it looks like a very sensible approach. How did you develop it over time? I mean, did you read some books or did you only learn by mistakes, how did it happen? 

Yeah, it's a great question. Honestly, for me personally it was was trial and error, it was mistakes. I mean of course I read books, I've gone through the typical cycles that a lot of the investors go through in their personal investment practice. I tried to time things, I looked at the technical analysis… 

So did you trade?

I did some trading and one thing I learned, it's easy to be a trader when two things are happening. It's easy to be a trader when everything is rising, you know. Everybody is a guru and you see a lot of people quitting their day jobs and becoming day traders. I’ve seen that phenomenon back in the late 90s and then it reappears every few years. It's fairly easy to be a trader on the market that's just going down consistently. We saw that, for example, in March of 2020 where folks were shorting until they weren't, right? But in the long run I still feel that it's hard to time the market consistently. That typically requires a couple of factors which are not typical for individual investors. It requires the ability to absorb pretty significant losses in the short term, because especially in those high volatile special situations where people are trying to time it, the market can churn very quickly. So you need to have pockets deep enough to absorb pretty significant losses. You need to have a lot of free time and, last but not least, even from a technology standpoint, you need to have the type of technology infrastructure that will allow you to beat and to compete with the algo traders, the giant algo trading firms that frankly their entire business model is skating individual traders who are trying to be market timers. So it's important to just always keep in mind that a trade like a relationship takes two to tango. And when you're playing long in the market there are less chances for bigger, smarter, better informed people to trade against you. When you're trying to time the market you've got all those factors typically not working in your favor, at least in the long run. Although yeah, of course everybody can have isolated successes here and there, and they're fun, and I look at them as a sort of gambling, but I don't look at it for me personally as an investment strategy in the long haul.

I've been investing much less than you, I've been there for six years. I have a similar approach, but every time somewhere in the news or I don't know a person tells me that there is a new trading approach. For example, last year I learned about Elliot waves and I really went deep into it, because what they say what they show about how they predicted this market crash or that for a hundred years, a bit less. But do you think like oh maybe that's the thing. So you try to dig into it and then like it doesn't work somehow. Does it ever bug you or you are like super focused on your strategy and never get distracted? 

No no, of course, I get distracted as well, and again the only difference is when I look at doing something new or something fun in terms of like maybe following a more volatile strategy or investing in a special situation that I learned about by reading the news and then trying to do the intellectual analysis of like okay is there a trait here? I do that typically to me it's more of intellectual stimulation as opposed to trying to deploy for significant personally significant amounts of capital because again I just realized that with an inability to absorb significant losses and not being able to be on 24/7 to research the trade, time the trade and then, most importantly, execute the trade, sometimes you'll get lucky, sometimes you'll get unlucky. And just like gambling, probably at the end of the day the market wins and the casino wins and whoever's trading against you in those situations probably will have a better chance. But, having said that, it's educational also to be aware of the trading trends and what's happening in the markets in general. Because, frankly, it does affect your long-term investment strategy as well. One example is when meme stocks were all the craze, it was important for fund managers and for individual investors to understand that phenomenon and be aware of that, because you probably remember a couple of short-seller hedge funds got blown out of the water and liquidated, because they underestimated the power, the momentum and the sheer lack of logic of the individual retail meme traders, right? So they got punished for it because in their book it didn't exist. It was something that was so illogical that they just didn't take it seriously. But the liquidity was there, the trend was there and they got liquidated. 

That's how I feel about current markets, it’s illogical, many things that are happening now. But again I'm thinking like why am I surprised because that's if everything were logical we would all be value investors always learning. If there was an algorithm that PE is supposed to be like this or debt to equity is supposed to be like this, we would all be millionaires. But that's the trick here, that's why it's interesting and attracts many people. Your activity is diversified as far as I understood, so you're a venture capitalist, you're an entrepreneur, you're also like a legal counsel. Would you say that this is your passion and has it always been your passion because how did you do build it?

Yeah sure, it's interesting. Right now I spend my time on making late-stage venture capital investments through our firms that have capital. And we invest in later-stage software companies that are private. So technology always fascinated me and the intersection of entrepreneurship, business and technology always fascinated me. I was interested in the markets probably more so I always as an attorney earlier in my career I represented technology startups and public companies most of them technology-based. So I think I was always biased towards growth assets, tech stocks new things that came up etc. And then I think just the responsibility of having some disposable income and thinking about the best way to manage it. And running experiments of outsourcing to outside money managers versus myself. Throughout the years I kind of came up with a formula that's not ideal, maybe not the most efficient, but it works for me and I'm generally happy about the type of returns it produced in the long run, especially when taking into consideration the losses or the risks, right? Because I think what's important to keep in mind is that any type of potential return doesn't tell you the whole picture, you're really going to think about the volatility and the potential downside risk as well. And then when you take all three together, maybe you will opt for that potential 10 percent annual target return in some value utilities in Northwestern U.S. versus going for that 60 percent annual return and you know fast-growing SPACE tax. 

So it's always that balance of like am I going for wealth preservation am I going for potentially aggressive growth with the understanding that I'm okay with the bigger downside potential etc. I also want to say that another thing that probably I learned through the years is that over-diversification is not necessarily the answer either. And, last but not least, for some folks who do know a particular space very well, if they're okay with the volatility of that space, sometimes it does make sense to really focus on that space. So I have friends of mine for example who are software entrepreneurs and they understand enterprise software very well and if you look at their portfolios just in the abstract it looks like terribly concentrated on tech or even specifically on certain types of public software companies. But then you look at their returns and for some of them they're quite impressive. But that's because they have the combination of deep industry knowledge, time and effort to do stock picking and actively manage the portfolio. I think for most of us that's not the case. 

And by overly diversifying I mean two things. One thing is trying to hit every single type of asset available out there, I think that's just kind of hard to manage. And second thing, even in the public portfolios there is a certain point, at least to me personally, where if you don't have general conviction and a few sectors or a few ideas — sure it's good to diversify within them — but if you're trying to diversify so much that you're really trailing the market you are sacrificing returns. And I'm not convinced necessarily personally, I'm not convinced that by sacrificing those returns you're getting a better risk profile not always 

Could you tell how diversified are you? I mean, you don't have to name all stocks sure like what other sectors?

In my case, whether this is right or not, time will tell. In my case, I'm a lot more biased towards private to liquid investments, but that's kind of nature of the business, because I have a passion for startups. So a big part of my personal portfolio I think that if I wasn't in the industry I don't think I would be comfortable having that much of a percentage of my investable assets in those assets. So I'm probably more biased towards technology startups, a few venture capital funds where I'm an LP and then it's the basics, right? I've got a certain percentage there, it's larger than what I would probably expect to see in an average portfolio. So if in an average portfolio I would expect to see probably five to ten percent max, in these alternative illiquid assets, in my case it's higher. And then public equity is where I go both ways. I do some stock picking in the areas where I feel like I have an understanding of the overall sector and then I rely on thematic ETFs where I feel that I understand the theme and then I let the ETF manager do the rest. And then there is a bit of real estate and yeah, that's really it. So things I don't really understand I don't go into it.

So I haven't heard any NFTs in your portfolio do you hold?.. 

Yeah you know it's a great question…so I have exposure to NFTs through a venture capital fund, and I feel like this is an area where you really got to be on point and laser-focused on this area. I don't have the time or necessarily that knowledge right now, so I’m more comfortable, like, you raise a great example that like in certain cases I feel a lot more comfortable after doing my due diligence, outsourcing to others, whether it's a private venture capital fund, or like in the case of NFTs. Or whether, for example, I feel bullish about certain emerging markets about the potential of their public companies. 

But I also understand that for me to go and pick the best companies in Latin America for example, it's going to be very difficult so I would rather do the research about the best-performing Latin American-focused ETFs and then invest into that theme and then just let the ETF management or the mutual fund management do the rest. 

But by not over-diversifying I guess what I mean is that I'm not trying to go into everything and everywhere, because today I think one of the advantages, which can also be a disadvantage, because it's hard to decide, is that the combination of technological advancement and then legislation have created a lot of opportunities. 

You can invest into crowdfunded real estate, you can play in the forex markets, you can invest into crowdfunded litigation finance. You can invest into debt funds, you can invest into venture capital, hedge funds. You can do robo trading, you know, there's just so many things you could do, algo trading. And those are traditionally things reserved to the larger investors, now they're available to in most cases are created in industries but that's still a much lower threshold. But my philosophy is that if I don't understand the asset class enough, I'm not super inclined to go there. 

I think um since you have a background in law like I've been this is a very interesting question that I get to ask you…Why do law firms…like are there any public law firms like why don't they go for IPO? 

That's a wonderful question, and that actually shows you like how because of legislation and also just social traditions certain businesses develop very differently in very different countries. If I'm not mistaken there are some publicly-traded law firms not in the U.S., in the U.S. it's not possible legally because in the U.S. the owner of a law firm the partner shareholder of a law firm has to be a licensed attorney. So that would be like no ability to raise capital from the outside because you wouldn't be able to sell shares to anybody but lawyers, and lawyers probably wouldn't buy shares of other firms because of conflicts of interest and other things. Having said that, I haven't checked but when I was curious about this last a few years ago, I saw a publicly traded law firm in Australia for example. So in Australia legislation is different, you have publicly traded law firms there. In the U.S. I think historically people always viewed law firms, accounting firms and some other licensed professions as more of a profession that's supposed to generate profit but should be more conservative and more stable, which precludes your ability to grow as fast as you could if you were able to tap the public markets.

I see, thank you for the answer. 

Of course.

Now I know, the last question that I got because we are running out of time…so you have all assets under management, like you're in control of everything do you have an ambition to become a billionaire? 

No, you know, honestly I don't, because like I think if it happened I wouldn't say no, but there's a couple of things I've noticed in my life. The satisfaction of making money starts to decrease once you have some of your basic and extended needs met. So once you have financial independence, ability to travel, good healthcare, ability to share it with your family and friends, which, you know like, you could argue but probably living in the Bay Area, in California in general you probably can execute a lot of that having a net worth like I don't know like $10 million and up. Then, you know, the satisfaction from having more diminishes, unless you want to launch rockets into space or run for political office, or beat cancer, all of which are extremely ambitious and I think extremely useful things. But if you don't have that burning passion I think sitting on a billion dollars is unlikely in my case to dramatically improve my quality of life. But it's probably likely to dramatically increase the amount of responsibility I would have of managing that money and dealing with that. So I don't think I have an ambition to become a billionaire. I do think I have an ambition to become better at what I do and, you know, reap the maximum possible rewards that typically come up naturally when you're really good at something. 

That's true. Well thank you so much for this amazing interview thank you have an amazing day and good luck with your running challenge 

What is Julian Zegelman's attitude to crypto?

I continue to view crypto as a useful part of the portfolio but one that's still fairly new and very volatile, so to me personally I would not feel comfortable putting more than five to maybe ten percent of my investable income or investable net worth into crypto. And as long as you follow that and you're conservative and you look at what the projects are doing and you look at the underlying value and the underlying technology I think like with any other cycle there will be value they'll be retained even if temporarily it's depressed. So that's my philosophy.

Does Julian Zegelman time the market?

I don't time the market because I think much smarter, more experienced and more successful public market investors have tried to do it and very few of them have succeeded. And even the ones who did succeed there's a lot of arguments that go into why they succeeded and could you replicate their model. For example, could you replicate Warren Buffett's model without access to very cheap investment capital, you know, flowing from the insurance premiums? I don't know, would be difficult to do. So I don't time the market. Being on the market for the last 20 years one thing that I learned is that compounded growth, a diversified portfolio and avoiding emotional panic buys or emotional panic sells, it's probably a healthy way to have the market work for you.

Is becoming a billionaire a good ambition?

The satisfaction of making money starts to decrease once you have some of your basic and extended needs met. So once you have financial independence, ability to travel, good healthcare, ability to share it with your family and friends, which, you know like, you could argue but probably living in the Bay Area, in California in general you probably can execute a lot of that having a net worth like I don't know like $10 million and up. Then, you know, the satisfaction from having more diminishes, unless you want to launch rockets into space or run for political office, or beat cancer, all of which are extremely ambitious and I think extremely useful things.

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