Asset Trip with Josh Womack: From Angel Investing to Private Equity and Everything in BetweenAngel investor and fund manager talks leaving a comfortable job to start his own investment firm, vetting startups, buying real estate, and the future of the alternatives space in a post-pandemic world.
Oct 11, 2021
One of the best early-stage angel-type investments we made, the founder got a tattoo of the company on his arm. I'm like, that guy, he's bought in. He's going to do everything in his power to figure it out. And he did.
41 years old
Married, 3 kids
12-17% income invested
Big Ws & Ls
13 or 14
First Investing Platform:
Scottrade (Now TD Ameritrade)
Investing in his business, investing early in Tesla
Startup investments that have gone to zero
First Alternative Investment:
Favorite High-Liquidity Real Estate Investment:
So to start, could you just talk a little bit about what you invest in, how you divide up your assets and why?
I own an RIA firm. Most of my client's money is in the public markets and stocks. And most of mine is in stocks. I also manage a small hedge fund, and that's where I put the bulk of my personal assets. It's long-term; we don't do any shorting, so it's a long-only fund. And it focuses on very, very small public companies. We like to say they're private equity-sized companies, but they're publicly traded.
So we have the advantage of buying really small, really attractive companies where you can get to know management, you can get to know the customers, you can get to know a lot of facets of the business, but they're publicly traded. And for almost no transaction costs, we can buy and sell them. That's the world that I'm heavily involved in personally. Because that's the fund I manage, it's like, the chef needs to eat his own cooking. And I really believe in that strategy long-term. If you look at small-cap and micro-cap public stocks, they've outperformed mid-cap and large-cap US stocks over the past 80+ years. And there's a reason for that.
But we look at everything. While public stocks are the easiest to allocate to, and the cheapest historically, now we're seeing the world of VC, of private equity, of real estate, of collectibles, of crypto. All of these niches are opening up to where anyone can invest in them with almost no transaction cost or very little transaction cost. We don't want to try to fit a square peg in a round hole and try to make everyone invest in stocks, because frankly that's not what everyone wants to do and stocks don't fit the risk profile that everyone wants.
Can you talk a little bit about alternatives—I know you mentioned you do VC investing, some real estate, a little bit of crypto—about how those fit into your portfolio and why they align with your investing strategy?
I started in alts getting into angel investing. And the reason I did that is that I'm in Dallas, Texas, and there's a decent angel investment group, or deal flow here. So I started showing up at pitch events and pitch days, wherever I could, and just talking to people. I liked the idea of putting your dollars behind a small team that you can get to know. And a lot of times, if it's in a space that you're very familiar with, you can actually help them. You can make connections for them with other people in the industry. You can help them understand how people will use their technology or their service or their platform, and you can put your money behind it.
And then real estate came about. I'm just interested in real estate. I think there's something that's really interesting about owning something that's that tangible, specifically rental properties. Everyone needs a place to live. And I think we can all agree that most people like a clean, nice, safe environment to live in. And so if you can find that, or if you can make something into that—if you can buy a house that is not that, and you can put money and time into it to fix it up to make it safe and attractive and appealing—then you can provide something that's valuable to someone, a place to live.
You can also get really attractive loans for residential real estate. And I love the fact that you have a couple of different exit options. One, you can always rent it. The price point is the variable there, what you can rent it at, but you can always find someone to rent. Then two, you can always sell it if you want to. And so there's always an out if you've got a long-term horizon—again, super illiquid, and it costs a whole lot to get out of a real estate deal, with fees—so you do have to have a really long-term mindset.
At one time, I had a little bit of money that had a very long time horizon. I had a good friend that became a partner in a real estate deal. We split the costs, so it was half the amount of cash that I would have needed to go in by myself. We jointly bought a property and did that, and that was the first one. It was really interesting, and we met some great people with our tenants, and it turned out to be a great deal.
The early-stage investing turned into the VC stage and then the private equity stage, kind of moving down the ladder to more mature companies. For me, that was a natural evolution because I started learning that while the startup world is really fun and exciting, and it's sexy to be in that early-stage company, it's really hard to pick winners in that space. The stats bear that out. So I started exploring with VC companies that were a little more mature, that maybe had a million to $2 million of recurring revenue annually. And those were a little more predictable because you could see the history of growth. You can see where the challenges were a lot of times, you can see where they had pivoted and were they successful or not. So there was just more data to look at to say: Can they keep doing this? It got a little easier to make wise investments.
Then we kept going, and I was like, okay, now go further down the maturity scale, [look at] private equity companies that have been around for 20 years or more, that are very profitable, that do produce regular cash flow. You can look at those and be like, "wow, they made it through the '08-'09 recession. They made it through the last decade or so, and here's how they performed." That data is really powerful. And so when you find these kinds of bellwether companies, that gives you even more comfort in locking money up in an illiquid private equity investment. So then we started looking at more of those and that was kind of my natural evolution of investing down that ladder.
Do you have any advice for people who are looking to get started in startup investing or eventually maybe private equity?
My biggest piece of advice would be: You've got to get to know the people. The smaller the company is, the more you're betting on the people more than anything, because the only thing that's for sure is that the business model will likely change in some way. And you don't know which way. So more than anything, you're betting on: Are the people driven enough, smart enough? Will they hustle enough to figure it out and pivot the right way? So, even if you find [a startup] online, I would encourage people to get to know the human beings behind the company they're investing in, because that truly is what will make or break the success of the business.
That's not to say that if you've got great founders, it's all gonna work out. Because sometimes you can have fantastic human beings, running great companies that are great ideas and they still fail because of a reason no one ever thought of. That just happens. And that's a risk. I think you help your odds if you know who's behind it. We like to have founders that have skin in the game, that have some money in it, or that have really put in their time, effort, energy. We want to see founders that believe enough to truly go all in.
One of the best early-stage angel-type investments we made, and I won't say the company, the founder got a tattoo of the company on his arm. I'm like, that guy, he's bought in. And he had turned down some really nice job offers to go elsewhere and make really good money. So financially he was committed, his skin was committed, he was all in. I thought, “this guy will figure it out. He's going to do everything in his power to figure it out.” And he did.
Once you get up to private equity, people are absolutely important and they're probably still the most important factor, but the business itself...you can start to weigh the business and look at the financials. There is a track record. There is a history. So you can do more financial due diligence on the later-stage companies.
That's great advice. What about people who are looking to add real estate to their portfolio? Do you recommend getting started on crowdfunding apps or with REITs or just diving into buying property?
Totally depends. I think it goes back to liquidity. If you might have a need for liquidity, I think publicly-traded REITs are awesome because they have daily liquidity essentially. Most of them probably won't have the upside potential that buying a property directly would have, but you also have a lot less risk, because you're spreading it out among hundreds or thousands of properties as opposed to one or two or three that you may be able to own directly. The only thing I would say about real estate is that the old adage, “location, location, location,” is true. And you need to be an expert on the sub-market you're investing in. If you're not an expert on the sub-market you're investing in, you have to trust whoever's putting that deal together, or whoever's managing that deal, 100%. Because they're going to make that call for you.
So I would just stress that location is the key. And even if it's in a submarket that you love, if it's an office building or a residential house, and it backs up to a landfill that you didn't know about or to an auto repair shop you didn't know about, that's going to negatively impact the business or your tenants. Even if it's in a great sub-market, that's going to kill the deal, or it could. So I just think you've got to be intimately aware of the surroundings of where you are investing with real estate.
What kind of investor is the type for whom you would really push alternatives? Or rather, the opportunity to invest in alternatives that's now available to more people, what kind of investor is that good for?
[Alternatives] is such a broad category. Everyone refers to anything other than public stocks and bonds [as alternatives] for the most part. That's such a large bucket. You've got debt investments or real estate investments that may have a very low risk and return profile. Then you may have crypto or startup and VC-type investing that are extremely high risk. And especially in the startup space, a lot of them are going to go to zero, but you may get some grand slams in there. So when we talk about the alt space, I think depending on the category, there is an alt space that's suitable for almost everyone.
In general, I think people have to be okay with some level of illiquidity. If a client has stocks at Schwab, they can call me today, I can place the sell order and we can have the cash in their account tonight. We can wire funds out or ACH funds out. With some of the alt platforms, you don't have quite as fast of liquidity. I think it's generally for longer-term investors who have the mindset of like, “Hey, I'm going to buy an alt for a reason, and I'm going to let that thesis play out and I have the time to do that.”
Throughout your time as an investor and working in the investing space, how have you seen the proliferation of investing apps and platforms—especially in the alternative space with fractional ownership and crowdfunding, but also in stocks with robo-advisors—how has that changed investing for people?
I started managing money for people a little more than 10 years ago. And in the last 10 years, the proliferation of what you're talking about, the fractionalization of investing, whether it's public stocks or private entities or startups or debt or collectibles, it's unbelievable. It seems to have just sped up, as everything with technology does. I think it's a net win for investors. Anytime you can bring down the cost of investing, anytime you can bring down the barriers to entry for new investors, I think it's a good thing.
New investors to any space can always be taken advantage of, and they probably always will be taken advantage of in some respect. So I do think investors really have to know what they're stepping into and educate themselves first, or play with such a small amount of money that it's okay if they lose it all. Treat it as a learning experience of "I'm going to invest such an immaterial amount. I'm just going to do it to learn, and if I lose it all, so be it." There's nothing wrong with that if you look at that as your education expense. But I think it's an awesome thing that investors have such a broad choice now of asset classes. I mean, you can invest in almost anything on a fractionalized basis with very little transaction costs. I'm excited to see where it goes.
Yeah, definitely. The learning component is huge with these apps that are super easy to use and you can get started with a dollar and people can just kind of play around. Are there any asset classes that you have been eyeing or thinking about getting into and haven't yet?
If I'm eyeing it, I will usually dabble in it. I usually will try to get an immaterial amount of money on it just to learn myself.
I heard about, I think it was maybe one of your past guests, farmland. I mean, that's fascinating. I haven't done any of that or even seen that platform before now. That would be one I'd be very curious to get in and look around and play with.
The debt space really interests me. I like the idea that you can spread your money around, with various loans, almost as you would do in a mutual fund, right? There's a bond fund of corporate debt. You can almost do that yourself with very small private companies now, and fractionalize. "Hey, I'm going to build a small portfolio of small private company debt. I think that's really interesting.” Again, it has to fit someone that has the right time frame for that, because those are not usually as liquid.
But there will be more that comes out, right? I don't even know if this platform still exists, but at one point you could invest in fractional ownership of an athlete's endorsement deals. So you could say, I'm going to buy 10% of Luka Dončić, whatever endorsement he gets. Not that I'm saying he did this because I don't think he has, but just as an example. So Luka is going to get a big check upfront from this collective group of investors. And then for the next 10 years, this group of investors is going to get 10%, basically a royalty, of any endorsement deal he gets. And so it's a way, if you're an athlete, that you can monetize your current status or fame and basically get a guaranteed payment upfront. That way, for the athlete or the entertainer, if you're injured or can't perform, or you don't get endorsement deals, you've at least locked in some chunk of money upfront. And the investors take part of their risk. Are they going to continue to get contracts or payouts in the future?
Stuff like that is fascinating to me because that could be a win-win for both sides where an entertainer or an influencer can hedge their bets and say, “I'm going to monetize some of this today.” And the investors say, “I'll take the risk of the long tail of that.” But there will continue to be fractionalized options that we have never thought of that will open up. And I think that's where the fun is.
That's very exciting and also allows a larger amount of people to invest in things that they're interested in and know about. Maybe they don't necessarily know a ton about the stock market, or it's not exciting to them, but they know a lot about sports or farming or whatever it is.
A hundred percent. And I think a lot of this was sparked during the pandemic, right? When we were all home and didn't have anything to do. A good number of people had disposable income. So it was like, how can I put this money to work in things that are interesting and fun to me? Platforms opened up to fill that void, I think. The pandemic, as terrible as it's been for everyone, there will be positive things that come out of it. And I think this is one of those things. The technology has been pushed forward 5 or 10 years from where it would have been because of what happened. We'll see where this goes, but that is an exciting space.
Yeah, definitely. Can you talk a little bit about your very first investment, how you got started investing, what you invested in if you remember?
The first investment I remember making was actually...I don't remember the company. It was a biotech company in the public markets, and I was a teenager. It would have been 8th or 9th grade. I had an uncle that basically helped me open up a Scottrade account. He was telling me biotech stocks to look at. I was mowing yards at the time to make money. And so I put a little bit of money in there and at the time biotech stocks were just on fire. You did not have to be a talented investor. You could just throw darts at that space and you probably could do really well.
And so that was me. I was throwing darts and thought I was really, really smart and made a lot of money on paper. The account grew a lot. And as a kid, I remember thinking oh my goodness, if I can annualize these returns for the next 10 years, I can retire by the time I leave college. This is so easy. And then I rode that biotech wave up and the bubble burst, and I lost almost everything that I had. And it was such an awesome lesson at such a great time. You know, I didn't have a family to support. I didn't just lose our whole family savings.
But as a kid, and going into college, I was still doing this. I thought trading was the way to do it. I thought finding the hot sector or the hot stock was the way to do it. So I traded a lot, and I would stay home from classes in college and trade. And again, I thought I was smarter than I was and made and lost a lot of money—for a college kid, anyway, it's all relative. And that got me hooked. That got me hooked on, "This is not the way to do it. This is not the way you build wealth. So, how do people do it? How do people that have done this for decades, how did they do it?"
And that got me down the path of, it's so cliché, but the Warren Buffet, the Charlie Munger...reading their story of how they started. How did Berkshire get started? What did Warren do? What was his mindset? I just digested all that I could, and that got me hooked on investing in general. You can do well, but even in the public markets, you have to treat every investment as if it's an individual company that you're putting your money into. It's not a ticker with a number that magically goes up and down just like the lottery. That's not what it is. I think when you change your mindset to know that you're putting your money into fractional ownership of a real company, it changes what you're doing.
Those early lessons are very powerful and such a good reason to start investing early, not just for those initial returns, but because it can take years for people to find a strategy that works for them.
100% well said, I agree with that.
I like to finish up our interviews by putting you on the spot a little bit. So, can you name your biggest investing win and your biggest investing loss?
So I've read this, and I thought if she asks me that, what would I say? So I had a little bit of time to think about it. On the investment win, I'm going to give you two answers. One's kind of a cliché and it's like, well, of course, give us your real one. I'll give you both.
The first thing that comes to mind honestly is just investing in yourself. I started my wealth management business or investment management business 11 or 12 years ago. And I left an accounting job that was super safe, that had a steady climb, a path upward, and great benefits, all that stuff. And I gave that up and for two years, made almost nothing from [my business], and we had our first kid at the time, and blew through all of our savings. Like every penny. So not only did I blow through all of our savings, but I also passed up the opportunity to make a really nice salary for two years that I could have been making. So if you quantify all of that, that truly was the largest investment I have made. And it was just to get my business up and going. Now fast forward 11 years, that business is paying me back. That's been the best return. If you look at just pure return investing, my business has been the best return period.
But if we look at, what investment did you make that wasn't yours? I invested a small amount (I wish it would have been more) in Tesla back in 2013 or 2014. I saw Elon Musk at a South by Southwest panel in Austin, and they did a video stream of it. I was literally sitting over here at my kitchen table with my oldest son. At the time we were watching Elon talk about his crazy idea for this car company, what it could be. And I remember thinking man, this is crazy, but this guy is brilliant and determined. And I think if anyone can pull this off, he can do it. And so we put a little bit of money in Tesla in a retirement account and still hold those shares. And it's up over 1000% from when I put it in. So that's one of our biggest wins
We've had investment losses. I mean, we've invested in a handful of startups and several of them have gone to zero. Literally zero. And we've put in a decent amount of money. I keep everything in proportion, so it wasn't anything that would set our family back, but it was real money that we could have done really great stuff with elsewhere. On a financial basis, those 0% returns hurt and those are real. But each one of them taught me a lot. So I really don't view it as the worst investment. I view it as the price to learn something. I could have gone to school for another five years and paid a school some $50,000 to teach me what I learned with a $5,000 or $10,000 loss that was really painful in this early-stage company. We've had several of those that have gone to zero and we've learned a ton through it.
Take your own Asset Trip
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- Roofstock: A marketplace that lets you earn passive income by investing in tenant-occupied Single-Family Rental (SFR) properties. You can invest in SFRs across 40 states in the US and generate cash-flow from day one.
- NextSeed: NextSeed empowers everyday investors to invest directly in local businesses, enabling private companies across the US to raise capital directly from their community. Put your money to work in businesses you understand and projects that create jobs.
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