00:10:04 · Guillaume Moubeche, Larry Aschebrook
[00:10:04] S1: So you... Did you, like, keep the shares of Spotify after, like, it goes public, or how how exactly does that work? [00:10:12] S0: Yeah. So for us at G Squared, we're focused on a kinda cash in, cash out situation. So we we send cash to our to our LPs post public sometime. We develop a strategy on on slowly moving out of the position after the company doesn't need our support anymore. But building that position in Spotify was was one that I think really set the framework for how we were going to establish our business going forward. Now it came with a lot of stress. There was very large transaction they sent to us. We didn't have all the money. We had to find it. In fact, we... I actually had to personally borrow some of the money to close the transaction, but I didn't have anything to back up the loan. So I put a lot of risk in it, and it worked out. [00:11:08] S1: Yeah. Great rewards. [00:11:11] S0: Yeah. I mean, it was a very tense time in in G Squared's history, but, you know, the conviction [00:11:19] S1: Did you have, like, such a conviction at the time, like, that your loan would be reimbursed? Like, how do you build, like, such strong conviction on a company? Was it because you had access to all the data and you knew that it was going to be a hit or, like
00:11:34 · Larry Aschebrook
[00:11:34] S0: Well, there was a lot of stress in the in the market related to streaming services at the time. Obviously, Netflix had gone on to fantastic journey, and that kinda laid the groundwork for music streaming. And Spotify had a number of formidable competitors that still exist today with with, you know, Apple Music being the the primary one. And you remember there was a lot of noise about Taylor Swift and Adele leaving the platform? Yep. You know, one of the, I think, the benefits today that that we still enjoy, and we really figured it out with Spotify and a few others, including Coursera and Uber and Airbnb, was that if you can get the information like a primary investor, you can really use the secondary market to have an arbitrage that the market doesn't know about and buy at your option, not at the company's timing of preferred investment. And I think that's one of the major benefits of secondary direct investing. And in Spotify, there was a point in time where there was a lot of noise, but the record labels were also shareholders. Most people don't realize this. Early on, coming off of the whole Napster debacle, the record labels realized that there was something going to change in their business models. So when Spotify came along, Daniel Ek did a great job and team of of getting the record labels on board. Well, as this noise took place, we had data. We had the updates, and we could see that the record labels actually were trying to buy more stock in Spotify when all this noise and headlines... And and and not in small ways. You know? Free cash flow of those record label companies were in the, you know, several 100,000,100 million dollars a year, and they were spending a significant portion of their free cash flow on buying Spotify stock. And to me, that was the moment that, look. They're here to support it. They're not gonna kill it, and let's use the market turbulence to buy a bunch of stock. And we did. And history shows it was right, thankfully. And we became a top 10 shareholder at Spotify amongst giants, and and the the the the shares that I purchased through the loan ended up being worth significantly greater than than the value that Automatt, and it worked out. I would not advise that to young entrepreneurs trying to start a secondary business today, but that's my mentality, and and I went with it.
00:14:17 · Larry Aschebrook, Guillaume Moubeche
I think that's one of the benefits of coming from nothing is you're not afraid of what that's like. And so it was it was a great journey, and and Daniel and team working with us, developing a strategy to stay private longer, rewarding their employees, and really develop the playbook for us going forward. And that was the foundation that changed the trajectory of our business. [00:14:43] S1: And how did you get the info that the music companies were actually purchasing, like, more shares? Was it, like, publicly documented by the company? Or [00:14:54] S0: Yes. So they're... They had this hidden option really to exercise to own a certain percentage of the company. And I I I frankly didn't know it going into the investments. I don't think most shareholders knew it. And all of sudden, one day, we got this notice that we are being diluted by 3%, and the company was getting several $100,000,000 from record labels. And it was right at the same time of all this headline risk. And that just... For a minute, it was a head scratcher. Right? You're like, well, the record labels and their stars are leaving. Why would they give the company hundreds of millions of dollars? And then the light bulb kinda went off, and it was like, well, they kinda know what the future brings, and they're gonna support it. And let's go load up on stock here. [00:15:43] S1: Nice. Yeah. And who do you... Who did you, like, purchase from? Like, at the time, was it employees or other funds who were looking to Other
00:15:43 · Guillaume Moubeche, Larry Aschebrook
[00:15:43] S1: Nice. Yeah. And who do you... Who did you, like, purchase from? Like, at the time, was it employees or other funds who were looking to Other [00:15:51] S0: other funds that... Yeah. I I think that, you know, today, it's very commonplace that funds have very little DPI. You know? And when this time period was taking place, you know, two thousand twelve ish, thirteen, fourteen, it wasn't as a big of a problem. I think some of the the large investors got a little spooked and read the tea leaves slightly differently than we did. And there probably was a higher possibility or per chance that they were correct, by the way. And they needed... You know, they wanted to sell. And so we found a large block the company sent to us. It was a 150,000,000 in size from a very well known Nordic venture firm. And we... You know, the Spotify had an interesting transfer process because it was a Luxembourg company. So you would notice your transfer. It would be approved, and then there was, like, a sixty day settlement. [00:16:50] S1: Okay. [00:16:50] S0: So during that sixty days, we went around the world and rounded up a $141,000,000, and we had not... We were 9,000,000 short, and that's the shortfall that I backfilled with a loan. [00:17:04] S1: Okay. And that ended up being one of the best investments
00:17:04 · Guillaume Moubeche, Larry Aschebrook
[00:17:04] S1: Okay. And that ended up being one of the best investments [00:17:07] S0: you've from? Being a life changing event, thankfully. You know? But at the time, you know, you know, half of nothing's nothing. So Yeah. You know, there wasn't a lot to back up the loan, and so I wasn't I wasn't too bad off. But... Yeah. No. It was a... It was an amazing opportunity for us that they gave us, and, you know, our team worked tirelessly for those sixty days, made it a very large position in our third pool of capital that we had managed. I think it was 40% of that vintage and 30% of earlier vintage. So concentration, I love. I'm a very concentrated bet person, kind of my personality, and the law of large numbers worked out for us there. [00:17:58] S1: Nice. And how exactly is is the whole business structured? Because you started with investing. I'm guessing you had, like, an early fund, then you raised, like, several funds. And on each opportunity, when you can increase your position in terms of size, do you, like, raise with existing LPs? Do you bring, like, new LPs? Like, how how is the world structure [00:18:24] S0: like that? The the pools of capital were small. Okay. The first pool of capital we deployed out of when total size was close to $35,000,000. But our LPs, you know, our investors alongside of of that vehicle invested several 100,000,000 in co investment. [00:18:43] S1: Wow. Okay.
00:18:43 · Guillaume Moubeche, Larry Aschebrook
[00:18:43] S1: Wow. Okay. [00:18:44] S0: As the business grew and we had success, it kinda normalized. And today, our vehicles are, you know, truly committed capital, two and twenty funds, about a billion, billion and 0.5 in size the last several. And our LPs still enjoy a very robust co investment business where they they top up. Now we've learned a lot of lessons along the way in how to manage that co investment because it can be a big risk to your firm if handled incorrectly because LPs love the shiny logos. You know? It's... But for instance, early days in Uber, great business, but we lost money. And that's... It's it's a head scratcher, right, because it's such a fantastic company, and we bought it at such a low value. But at the time of the exit, it's just the public market wasn't receptive. Now it's a juggernaut. So the thesis was right. The execution was not. [00:19:43] S1: So Because at the time, whenever it got public, I'm guessing you need to, like, hold the share for maybe, like, six months or something like this post IPO. But after that, for you, the goal is to sell and get liquidity and DPI. You don't have, like, a structure that says, hey. Let's let's keep holding on those public stocks because we believe they're under [00:20:02] S0: You're not a public market investor. Right? So [00:20:04] S1: our