Private Market Funds

All right guys, I am your host Sam McGough and I have with me Chris Norton, who is one of my personal financial advisors and also helps a lot of people I know get into some interesting deals. Chris also loves fishing. Chris, welcome to the show.

Yeah, thanks Sam. Thanks for asking me to join.

Can you give us a little bit of history about yourself and how you got into your job?

I’ve been in traditional financial services now for 18 years. I started in a traditional capacity, advising guys on stocks, bonds, mutual funds. Then seven or eight years ago I noticed that my high net worth clients had a lot of demand for opportunities that were taking longer to go public. Companies like, at the time, Palantir, that was the first deal we did, SoFi Financial, SpaceX, names like that that were taking longer to go public and seeing a lot of their value accrue while they were private. We started setting up funds to buy those shares and offer them out to our clients. It’s been a lucrative business so far, and for the clients they’ve done exceptionally well.

Every once in a while I tell people what I’ve gotten into, the SpaceX or the xAI and some other things, and people always ask me how do you get those, how do you find them. Even traditional financial advisors ask. How did you do that, without giving away the special sauce?

I’ll give you the nuts and bolts of it. What you’re seeing is that the capital markets are changing. Companies are taking longer to go public and a big portion of the value is accruing while these companies are still private. If high net worth investors don’t invest while the company is private, by the time it becomes publicly traded a lot of the meat is already off the bone. So there’s a big demand for these names. When we got into this business seven or eight years ago, you didn’t see JP Morgan have their own fund, you didn’t see Merrill Lynch offer this out to their clients. Now these products are being offered at the biggest banks in the world. They’re offering SpaceX, they’re offering xAI. Morgan Stanley is doing it too, and they’re really reserving it for clients with 50 million dollar net worths and above.

Right.

What they’re looking to do is leverage those opportunities to get even more business out of those clients. Hey, if you have 50 million with us, we’ll give you access to these things. But on a deeper level, for what we do, there are wholesalers out there, for lack of a better word. We don’t maintain a Rolodex of SpaceX employees or SpaceX early investors, or Prometheus employees and early investors. What we do is go to a mid to large investment bank that has a private markets desk. Because we transact in these names, they’ll reach out to us when they have access to Prometheus, to xAI, to SpaceX, and they’ll say, hey Chris, we have a VC that’s direct to the company’s cap table. That VC may have the ability to buy 200 million worth of the deal, but they have their own book of business too, and their clients may only have demand for 150 million. So either they buy only 150 million and they lose out on the 50 million they could sell to funds like mine, or we pay them a fee to access the shares, and that’s what gives my clients the ability to buy them in our fund. From an economic perspective, on a 20 million dollar transaction they may charge us a 5% fee, so that’s a significant amount of revenue they’d be letting slip through their fingers if they couldn’t syndicate out the piece they don’t have demand for.

So your business changed and evolved once you started doing that. Is that now most of your business?

I have a traditional advisory business too, but I don’t run the day to day there. A buddy of mine worked at New York Life advising other financial advisors on where to put capital for their clients in their wealth management division, and we brought him on full time to do stocks, bonds, the traditional stuff. We have an RIA for that, Sutter Capital Partners, and Nick essentially handles that piece of the business. I focus exclusively on the fund, vetting the opportunities, making sure we’re right with the fund administrator, all the back office stuff, and offering the fund to clients.

How much due diligence do you go into? Is it pure numbers, or is there a lot more that goes into it when you’re looking at these pre IPO deals?

We do quite a bit of due diligence and we have an analyst who conducts it for us. We also have a team of two assistants that go into it. But the big piece when you’re buying a SpaceX or an xAI is that you’re going to see that in the round of financing Andreessen Horowitz thought the business was credible enough to write a 100 million dollar check. You’re going to see in these bigger names that Sequoia thought the business was credible enough to write a 200 million dollar check, let’s just say.

Mm.

The reality is we’re a small fund. With the capacity we have, there’s no way we’re going to conduct due diligence that supersedes the biggest funds in the world. So when we see who’s participating in the round, we have a pretty good idea that this is a credible opportunity. Obviously we do our own due diligence to make sure that matches up, but the most important part is making sure the counterparty you’re transacting with is a reputable counterparty, and that’s where we spend most of our time in due diligence.

What is the perfect client for you? When you’re going after clients, what are you looking for?

Generally we’re looking for guys that have relationships with multiple advisors. They may have a wealth management guy with a foundation of stocks, bonds and mutual funds, and now he wants to take 10% to 20% of his portfolio and be a little more aggressive with it, seek opportunities where you can get exponential returns. Clients that want wholesale financial planning, those relationships I pass off to Nick, because that’s Nick’s specialty. For what we do with the fund, we’re really looking for guys that have a traditional financial plan in place and want to seek the opportunities where they could see higher levels of growth.

That puts you in an interesting position, because you get to be around a lot of high net worth people. Have you seen a trend or similarities between those guys?

What I’ve seen, and what I’ve also been told by CPAs, is that the way they’ve seen their clients get extremely wealthy, and this is not just as it relates to my deals, is that they create a traditional financial plan, they create a bedrock, and then they start investing off of that bedrock. When they invest in early opportunities, it can make a significant difference in their net worth. Going to the next level and impacting your net worth can be done by investing, but when you do that you have to be willing to risk what you’re building. High risk, high reward. What we do is kind of in that medium stage. We don’t do Series A, very rarely will we do a Series B, we don’t do seed. We really do later stage where the investment has been de-risked a little bit. You may have a little less upside, but you have more certainty that you’re going to see a return of principal and a good return on your money.

There’s a lot more risk when you’re looking at a company that has no revenue and no name, it’s just got a good idea. The things you brought to me had already been established. People know their name, they’ve got things happening. Think of SpaceX, everybody knew about it. I’ve invested in some things where nobody knows about it. We’re part of some of the same groups, and sometimes people come in with this thing and it’s an idea, it’s not really a business right now, and if I’m investing in it I’ve got to really believe in the idea.

Yeah, I’ve done some of those myself, and most don’t work, not because they’re not good ideas, but most businesses fail because they need more funding and they can’t get it.

So generally what we’ll do is try to back established entrepreneurs that have already had a large exit in public markets, that have very deep pockets, access to capital, the connections, and businesses that are producing revenue. That’s kind of the sweet spot we look to play in.

You’ve been in business over 20 years doing this. Tell me a story about one that went really bad.

We did a deal in 2021, a company called Energy Vault. We did the deal at about 8 dollars, and when the lockup expired I think the stock was around 20. This was right before rates went up. Energy Vault was a small cap, I think about a half billion dollar valuation when we invested, so they were going to need access to capital. When rates went up 500 basis points, they had no access to capital, and the stock dropped from 16 to a dollar. Recently it got back up to eight or nine bucks in the last six months, but you would have had to hold the deal for about five years just to break even. At one point we thought it was going to be a complete bust. That’s earlier stage, higher risk, higher reward. For example, we passed on a deal called Figure AI a year or two ago because we thought it was too early at a 1.8 billion dollar valuation, and they just raised money at 30 or 40 billion. That’s within two years.

And I know you’ve had some hit really big. Tell me about one of those.

SpaceX is an example. We’ve been doing SpaceX since 2020. We initially bought in 2020 at 524 dollars. They then did a 10 for one split, which reduced our basis to 52, and then a five for one split, which reduced our basis again by a factor of five. So we own the stock extremely cheap, and if you look at where it is now, it’s in the hundreds of dollars, 110 I think was the last trade. We have guys up 20, 30X on the cheapest basis we have. A smaller one, we did a company called HydroForum back in 2019, their Series B. We got stock and warrants, and when the lockup expired we had stock at 10 and warrants at 17. Between the stock and the warrants I think that was between a 10 and 12X, so that was a really good exit. Palantir’s another one, we did that at four. When the lockup expired the stock was around 30. This is the good and the bad, we sold at 20, we sold at 28 thinking we scored, and it went from 28 to nine, and now it’s 150 bucks.

Where do you think SpaceX lands in a couple of years?

I think the stock price will be north of 400 or 500 dollars. That’s my belief in the next couple of years. I think there’s a really good shot of that happening.

How many people that got in early do you think hold on that long? Do people do that, or do they sell out right away?

Out of 100% of the float in SpaceX, 60% of it is locked up for 12 months. The majority of Elon’s shares and most of the super early shareholders agreed to extend their lockup for 12 months, because I would imagine they believe in the long term of the business. The people that have supported Elon from the very beginning, the Tesla days, they’re the major shareholders of SpaceX, and I think those guys hold long term. There will be some people with funds like mine that own it at five and 10 dollars and they’ll liquidate as soon as they can, so it’ll be a mixed bag. But Musk creates a cult-like following with his stock, and once these short term sellers with lockups expiring are out of the stock, I think you’re going to see that same fanatical fanbase he had with Tesla in the early days establish itself within SpaceX, which builds a really stable group of investors to take the stock higher as they increase revenue more and more in Starlink and compute. And potentially what they do with the orbital data center, that could be worth 10 trillion dollars by itself.

Data centers are getting out of control. We’re putting them everywhere. I didn’t even know they were thinking about doing that, data centers in space.

They’re looking to use space to cool and the sun to heat, which takes out one of the biggest cost components of a data center, the energy, the cooling and the heating. They could drop the price of energy needed within AI by a massive factor that no one else could compete with, because with Falcon 9 they reduced the cost to get things into space by a factor of 10X. Nobody has that technology besides SpaceX, and with Starship it’s going to drop by a factor of 20 to 30X. The space business itself doesn’t necessarily generate a ton of revenue, because there are only so many people who want to send things into space, but it’s the keys to everything else. The reason Starlink can’t be replicated is that no one else can launch a constellation of satellites at that cost. Same thing with the orbital data centers.

You obviously do a lot of research into the companies you’re bringing to the table. How much time do you spend doing that?

That’s an ongoing thing. You’re spending weeks and weeks at a time, sometimes months, before making a decision on a company, and then you continue to monitor as the company builds and develops. I’d probably say I dedicate 35 to 40 hours a week to it, a significant amount of my time.

How many deals are you working on at all times?

We generally do four to five a year, and sometimes we don’t have one in the hopper. Right now is one of those times, because we’re dealing with the distributions from SpaceX. We want to make sure this is right, because if this isn’t right nothing’s going to be right. Everyone needs to get what they’re supposed to get when they’re supposed to get it, even if clients aren’t expecting to sell. Once that’s done we’ll pursue the next thing. We’re always looking, but we don’t have anything active. Four or five deals a year at most is what we shoot for.

Are there certain sectors you stick to?

Mostly technology. We try to go where innovation is, where we think the most disruptive technologies are, and right now that’s AI. A lot of what we’ve done over the last two years has been within AI.

Are there any other sectors you like? I know you’ve done some oil and energy in the past.

The energy deal you and I talked about was more of a tax benefit play, so that wouldn’t necessarily be for the fund. That’s more along the lines of someone who has a big liability, they sell a business and they want to invest it into US energy. That would give them an 88 cents on the dollar intangible drilling cost deduction, so they could reduce their taxes predicated on whatever they contribute into the oil and gas partnership. In the startup space, I haven’t seen anything within energy that’s piqued our interest enough to say this makes sense. Right now I think tech is definitely the best place to be.

Are those companies pitching you ideas on a regular basis?

There are companies pitching us constantly, but those are generally smaller companies, and I’d say if we see a thousand of them, we may do one. The companies we go after are the companies that don’t need our money, and the only way we can get access to those names is through the structure I told you about, where we buy through another VC that owns the shares. Or, because these companies are taking longer to go public, they generally let their employees tender their shares every so often. So the other gateway is, say Sam works for Shield AI, Sam has a life event coming up and needs to liquidate two million of his twenty million dollar position. Chris buys that two million, puts it in the fund and offers it out to clients. We’re not necessarily going after companies that are pitching us, we’re seeking out the opportunities where we think the most upside is.

You know the saying, scared money doesn’t make money. What are the keys to success you’ve seen the best investors use? There’s the aggressive strategy, and then there’s the Buffett strategy of safe and compounding. What do you think the best strategies are?

I think the best way is not to mix the two. Just because you see the shiny new thing, I might have the best idea in the world, but if your plan for that year is to build up your foundation, your safe bucket, build that up first. One of the CPAs I work with said, look, I put 20 million into a foundational investment strategy, stocks, bonds, mutual funds, some alternatives. He goes, I’m not adding to that. I’m set for my life if I allow this to grow and I continue to work, and then I’m going to start investing off of that. Maybe those aren’t the numbers for you or anyone else, but get to that point where you have the foundational piece established. Let it do what it’s going to do. Don’t suck from the foundational piece to fund more speculative investments. Keep the safe stuff safe and keep the aggressive stuff aggressive. Now, with what I do it’s a little different, because I’m not investing in early stage companies. If a client wants to sell 100,000 dollars out of his stock portfolio to put it into SpaceX, SpaceX is a trillion dollar company, that makes sense. But I wouldn’t pull money out of the foundational piece for super early stage opportunities, because that’s not what it’s for.

Right, get your foundation set and then take some shots after that. Those risks may 10X, where traditionally in the market good returns are what, 8 or 10%?

8 to 10% a year. The other thing I would tell people is that what hurts them the most is not having conviction in the plan or in the companies they own. The market gets extremely volatile, they sell at the wrong time, they try to buy back when it runs. I’ve been doing this a very long time, and trying to time the market very rarely works even for professionals. If you’re at home trying to time the market while you run a business, eventually that ends up very bad. The probability that it works is slim to none. Establish a plan and invest incrementally.

Like set it and forget it, right?

Set it and monitor what’s going on. If something crazy happens, I’m not saying you can’t make a change, but you don’t want to start becoming a day trader.

I tried that. It was terrible. When you were talking about Palantir, I remember Palantir when it was around a dollar, maybe a dollar fifty, and I was trying to day trade it. This was during the early stages of COVID. If I hadn’t day traded it and just bought and held what I had, I would have done very well, because I had about 1,000 shares at a time at a dollar fifty apiece. I literally just lost money. I’d have a little bit of a gain and then lose it back on the next trade. Same with Tesla. If I’d just bought some stock and let it sit there, I would have made a lot more money.

That’s the other thing, a lot of times investors want it both ways. They want the highest possible returns with the least amount of volatility, and it just doesn’t work that way. If you want the best returns, you need to be able to stomach a significant amount of volatility, and everyone has to figure out what that level is for them. It doesn’t mean put all your investments into something super speculative and deal with the volatility. Get yourself to a position where you say, this bucket here, I’m comfortable with the volatility. Whatever those numbers are for you, establish how much money you have in something you consider safe, money markets, bonds, something established, and then something you can be a little more aggressive with. They say the price of admission is the volatility.

Well, let’s switch gears and talk about fishing a little bit. I know you fished a lot when you were younger. Tell me about that. What do you like?

I grew up in Long Island, and I come from humble beginnings. My uncle was a mate on a charter boat, so I used to go out with him pretty much every weekend, every chance I could get. On the charter boat we fished for fluke and striped bass and things of that nature.

Stripers. That’s my favorite fish to catch, to fight, so I love them. What do you think people learn out there? I’ve talked about this with a lot of the guys I interview, there are a lot of things you learn about life when you’re out on the water or out in the woods. Did that experience give you anything that helps you now?

One that comes to mind is that location beats technique. If you’re in a market where no one wants your product or your service, you’re going to have a really difficult time selling it and a really difficult time succeeding. You need to find a market that has appetite for what you’re offering and provide value, and figure out the people that most need that product. If you’re in the wrong area, whether it’s fishing or business, you’re going to have really poor results.

Exactly, you’ve got to be in the right area, otherwise you’re selling ice cream to Eskimos. Do you get a chance to fish much now that you live down in the Tampa area?

I haven’t, just because I’ve been so busy with work, so the majority of the fishing I did was up there. We had a little center console boat that me and my buddy bought with money we made over the summer waiting tables and washing cars. It was probably a boat somebody just wanted to get rid of, and it was properly named The Gambler. Every time we took it out there was a gamble whether we’d have to beach it because we ran it aground. Bluefish, fluke, stripers, that’s what we caught. We didn’t eat much of the bluefish because they’re not really good eating. There were smokestacks in Northport that pushed off warm water, so you could cast and pop bluefish left and right, but I didn’t know if it was the healthiest thing to eat them coming from near a smokestack. It was always a good time, man.

We’ve got to get you back on the water. I’ve been trying to put together a fishing trip down that way, because I love fishing the area you live in, Tampa, Sarasota, St. Pete, Anna Maria Island. We tarpon fish down there, and tarpon is my white whale. I’ve had so many on and I’ve never gotten one to the boat. It’s comical now, because the guy I go fishing with doesn’t even charge me anymore. He’ll just call and say they’re running, and I’ll drop everything.

That’s a good point in business too. One big fish can completely change the game. If the whole day is slow and then at the end of the day you catch a huge one, it’s a massive game changer.

You don’t have to give specifics, but have you ever had a guy invest where the return completely changed his life?

Yeah, I have. Not to keep going back to SpaceX, but even with that. I have one guy, he’s probably my best client, nicest guy in the world, and this is another thing with business, the best clients you have are usually the least amount of work, whereas that 20% that produces the smallest amount of revenue are the biggest headaches. This guy never calls to complain, very rarely calls, and when he does he just wants information. Over the last couple of years, going back to 2022, he’s built about a 150,000 share position in SpaceX. For him this will be a game changer in his life, and it couldn’t happen to a better guy.

Put that into figures. What do you think that guy’s sitting on, just an estimate?

Fifteen, sixteen million, something like that.

And if you do your tax strategies right, you never have to do anything again. I’m sure the guy is pretty successful already if he’s investing with you, but for people who have never done the math on that, if he takes those winnings and puts them somewhere safe, that churns into a lot of money for his family.

They’ve said there’s a similar effect to what you saw with Google, where the janitors became millionaires. Even for guys that didn’t have the biggest investments, the ones who did it in 2020 have held it six years now, and a 100,000 dollar investment turning into a couple million dollars is a significant dent for people.

Typically a guy invests 100 grand into his own business, works his tail off for three or four years, and he still doesn’t have three or four million dollars. He may have some assets. It happens, but it’s not typical. So that’s a pretty good little business deal when you hit it.

Right, but you’ve got to go through a lot to get to one. It’s usually a culmination where the guy has done four or five deals and you’ll have one that just completely explodes. That’s usually the way it works.

I want to go back to what you said, because you’re 100% right about the good client being the least headache. I try to tell people in my companies, when they have a headache customer, it’s not a problem, just let them go. It’s the best thing that can happen, that they never come back.

They gave you a present, they showed you who they are. It’s no different than fishing. You’ve got to know when to throw them back. In business you have to be able to distinguish between what’s right for your company and what’s headache money. When I was younger you’re chasing dollars, taking everything you can get, but you don’t realize that spending energy with those people only takes you further away from your goals. It’s one of those mental things that’s more difficult to see when you’re starting, but the older I get the more opportunities I say no to rather than yes.

A mentor of mine told me you make more money saying no than yes, and he’s been right about that. The more successful you get, the more opportunities come in. I’m very open to hearing things out, but saying no is powerful, because then you can keep going. I’d rather someone give me a no too, just tell me like it is and I’ll move on. The other thing I started thinking about is when I look at a company’s reviews, if they don’t have at least a couple of bad reviews, I don’t believe they’re real. Even doing the best job possible you’re going to let somebody down or drop the ball, especially if you have employees, so what really matters is how you handle it afterwards.

I just dealt with that with an HVAC company. I got two brand new units in and one of them already has water in it. A new company came out and said it’s completely pitched wrong, the HVAC’s in the attic, there’s garbage everywhere, and all the reviews are five star reviews. That’s what I look at when I do business with people. Things are going to go wrong, but do they gloss over it? If there’s an error, own up to it. Hey, this is my bad, I got this wrong, we’re going to fix it for you. If they go the other route, that’s definitely not someone you want to do business with.

You were talking about letting them go, so I’ll give you a fishing story. My first tarpon, I was in a kayak and I had never tarpon fished before. I wasn’t even tarpon fishing, I was fishing for redfish, which are manageable in a kayak. A tarpon can be 100 or 150 pounds. So I hook a tarpon, it’s jumping, and I’m basically nothing to it. It’s just dragging me, I’m skiing behind it. I’m in Port St. Joe Bay up in the Panhandle of Florida, and at first I’m thinking I’ve hit the winning lottery ticket. Then I realize this thing is probably half as long as the kayak, and I thought, what am I going to do with it if I get it in? And I’m getting further and further away from shore. I had to let it go, I cut the line. Sometimes you just have to let it go. It hooked me, but it was probably going to drag me so far out I couldn’t get back.

That goes back to preparation and how it relates to business. The opportunities that I miss, if you put your best foot forward and something doesn’t work out, so be it. But the ones that keep me up at night are the ones where I wasn’t prepared correctly. That’s where preparation comes into play in a big way.

Exactly. Hindsight is tough when something gets away. I bet you do that with businesses too, you look at the ones that got away.

Probably the biggest mistake in my career by far, we were trying to buy Anthropic. This was when Sam Bankman-Fried and FTX imploded, and they had a portfolio of venture companies they needed to sell off. We engaged with their receiver and we were going to buy Anthropic at about a 5 billion dollar valuation. Long story short, they changed the price to 10 billion, and we felt like they were trying to get one over on us because they had changed the price. The company today is worth a trillion dollars. Had we bought it at 10 billion, it would have been a life changer. But for my pride, not wanting to pay more. Lesson learned. Some lessons are more expensive than others.

I’ve started trying not to judge myself so badly, because you’re working with the information you have right now. You look at it and say, the information I have tells me this is not a good deal, and you can’t predict the future. I’ve had several situations like that, real estate deals and a couple of businesses, where if I’d just done this. But I made a decision, and it was a sound decision at the time with the information I had.

Right. I look back on it as a lesson, but like you said, it’s good not to beat yourself up. My business partner is always kind of looking in the rear view, and I say, look, it’s done, let’s keep our blinders on and move forward.

Exactly. Same thing with that fish. I can look back and think about how great it would have been, but there was a good chance it was going to drag me out into open water and I’d have had a real hard time paddling back, or gotten into a bad situation. And if I had a 50 to 60 pound tarpon sitting on my kayak bleeding, I probably would have just become shark bait anyway. Man, I always enjoy talking with you. I’m putting together some different trips for the guys who have been on the show, and one of them is going to be a fishing trip down your way, so make sure you get invited to that.

It’s easy to chase those opportunities, that’s for sure. It takes a lot of self-restraint to know when to cut them off. And if you guys come down this way, I’m down to go for sure.

We’ll get it done. Well guys, this is Sam McGough again for The Hunt for Success signing off this week. Next week we have some more people coming up, but today Chris gave us a lesson in investing and we appreciate it. Thanks Chris for coming on.

Thanks Sam. Appreciate it.