In this episode of Smart Humans, we talk with Arjun Sethi, who has not only one amazing role, but actually two as chairman and co-founder of Tribe Capital as well as co-CEO of Kraken. He talks to us about how he was all-in with his own net worth into those assets and doesn't really diversify into the public markets. He tells his point of view on the macro and actually what is happening in private markets, public markets and in the global economy at large. And finally, he of course gives us his perspectives on three years out.
Welcome to Smart Humans with Slava Rubin presented by Vincent. In this Alt Investing podcast, Slava talks to amazing minds about their investment journey and finds out what it takes to make it in the markets. And now, here's your host and smart human, Slava Rubin.
Hello and welcome to the latest episode of Smart Humans. I am very excited for today's guest. We have somebody who's doing some super exciting stuff and in two worlds of alternative investments. So we have Arjun Sethi who is the chairman and co-founder of Tribe Capital as well as co-CEO of Kraken. Arjun, welcome.
We're going to have to figure this all out. You have two huge jobs, so we'll get into that in just a second, but how did you even get into this world of alternative investments? Take us as far back as you'd like. Whether it's childhood, high school, your first job, how did you get into this world?
Yeah, I'd have to go a ways back, but so I mean first and foremost, I didn't start off as an investor. I started building probably since I was a little kid, but not companies, mostly products, tinkering around on stuff. So cars, wood shop classes. My dad was an investor and an operator. So very similar, but I just always got exposed to whatever he was doing. And a lot of them were not successful. I kind of watched people build in the garage, just had the California style dream. But when I say exposure, I was exposed to a lot of people in the industry. So, you know, Steve Jobs, working from where he lived in Palo Alto, just seeing these people all the time. While I was growing up here didn't seem like it was a big deal.
Sorry. You saw Steve Jobs regularly?
We lived nearby. He had crashed at my uncle's house. This was like a part of growing up at the time where they weren't famous and they hadn't built anything. And he's one of many that we had met. I remember I was in one of my dad's offices and he was doing a presentation to Bill Gates really really early and it was just like, you know, very similar to how we walk around here now with other entrepreneurs that have companies that are worth, you know, a billion or five or ten, etc. And it's commonplace and it's normal and I know that seems extreme but at that time the scale and size of these companies were much much smaller. I'm talking about when I was, you know, seven years old.
And what kind of investor was your father at the time?
So he was also a builder to an investor and he worked in venture capital for a bit. So going back to your question, I never started out as an investor. I started by building. So always drawn to systems. I didn't even go to school. I was just trying to build my own computers, tried to sell computers. And so I always was thinking about why do some product scales, others plateau. I used to think about gaming because I used to play a lot of games. I used to set up my own servers. So, like really, really early on, actually, I used to ask and think, why do users stay loyal to one product but abandon another? What are early signals of compounding behavior? I say the word compounding behavior now because it's more articulate, but at the time it was different, right? You started thinking about, wow, someone got these many page views and it's just so cool. There was a website called hamsterstyle.com way back in the day. I don't think a lot of people remember, but that used to be like my go-to to get an understanding of what the community was thinking about and what type of new codecs were out there that we could sort of use on top of websites. This, you know, way before Ajax and HTML 5. This is a long time ago. So, my early years, I was just an operator. I worked with teams. I interned with teams. I would just walk around during the dotcom boom and just do anything I could to be a part of what was happening and learn. So like network operators, network engineers, I would just sit listen, these guys were talking about, eat pizza with them just because I had exposure. And so over time after college and I started getting the opportunities that I then I just jumped right into it, tried to build my own teams. Maybe I had the audacity or the hubris that I could do it too. Started writing product specs because I had been exposed to it and then I wrote, you know, about how to think about LTVs, retention curves. This is maybe 2007-2008 time frame when these verbiages weren't used at all, and I would be thinking about the stuff 2 AM, 5 AM. I wouldn't go to sleep. I'd play video games in between for some sanity. And I think that experience has taught me something a little bit more fundamental. Honestly, I think data doesn't lie. And a lot of the times stories do. So I was reading people's blog posts about how this company was working or this product was working. This was the beginning of venture capitalists starting to post blogs and I would read what they wrote and I would just think, wow, these guys are just full of it. They're like rewriting history and they don't understand the nuances of what, like when you've lived through the grind of failing or the grind of scaling something from zero. I think you start to see markets very differently. You realize like the most important question is not necessarily how big is the market but is there any sort of market pull and is there proof of that pull and can you quantify that? And I think I was just obsessed with that no matter what I was building. You could say it was to my detriment in some cases because you could say, hey, well, you didn't have beliefs that something could happen. But I always used to go back to square one first principles and say, okay, well, what do I need to do in order to have proof points to figure out if there is something that I can build around it? And to be frank, that's it. It was in my mind for years and years and years around how investors thought. And I used to spend a lot of time reading private equity books because they had fundamental analysis. Not to say that they thought about the world better, but they had a different fundamental analysis around how they thought about a company. And I was always kind of obsessed. How do you bridge the gap between quantitative analysis that you saw from hedge funds and private equity funds, and then how do you take the operating and engineer prowess of what we're used to building a company, having a fast feedback loop and being able to test and iterate? Could you merge that? And I went around to every venture capitalist as I was building my companies to say, hey, this is how I build my companies. This is how I do mobile games and social games, gifts and quizzes. This is how I've, you know, scaled to millions if not now billions of touch points. Couldn't we do this across companies and help them along the way or invest in them? Is there a way to quantify it? And so I would make these pitches and I remember one investor, he just looked at me like I was crazy. He's like, look, this is never going to happen. Venture is never going to change and you'll never use data, like you have to look into the founder's eyes, you know, when it's the real person. And then I came back with, okay then why do you fail 95% of the time? It just didn't make sense. It didn't quantify. So I always thought about these concepts of how do you reduce that loss ratio, how do you start identifying. And I think I eventually capitulated and I just kind of stopped thinking about it for years and years and years until I got a shot at it again and had my own capital to sort of invest and invest in my friend's company and then start building around that thesis. I could go on forever, but like that's kind of the way in which I slowly went from operator to pitching to VCs to hating them to figuring out ways to work with them to building teams to sort of think in this systems-based approach.
There's a lot to unpack there. Thank you. So, you mentioned market pull versus TAM. I think a lot of people have heard TAM. What does market pull really mean and how do you compare that versus TAM?
So, take a step back. Let's not think about TAM for a second. We at Tribe had this thesis because we were building it at a firm previously at Social Capital by an individual named Chamath Palihapitiya, and he was famously in charge of growth at Facebook and built out a lot of this similar system style thinking and infrastructure. And a lot of companies and people were building their companies around this thesis as well, but again it was from the operator side. So a few of us when we spun out in 2018, this was kind of basically the birth of what I call Tribe. We basically, engineers, other founders, data scientists, we kind of sat down. It's not a famous story, but it's a cute story. There's this place called True Foods in Palo Alto. I think it's like the most woke food, LA style healthy foods possible. It's really gross. That's why I never forget about it. And we just started thinking about the structural flaw in venture capital. And as I had mentioned before, most investors talk about narratives. They don't think about evidence-based approach. So everyone wants to use this term and I see podcasts all day long pattern matching based on anecdotes and they say, well, this founder did this, so maybe it'll happen the same way here. But there was no quantifiable underwriting around any concept of product market fit. So we thought if we apply the same analytical discipline that defines when you work at a great company, you build this out as a product manager or data scientist, given that's how we were trained, and we apply that to different stages of venture. This isn't about AI or sourcing or anything like that. This is just purely can you take a look at the fundamental data set that exists within the company, given you've got tons of customer interaction, and from that can you quantify product market fit or the pull that I mentioned. And that became the seed of Tribe Capital, like a firm built from the bottom up like a startup where product market fit is the fundamental unit of our analysis. And we've written about this, the system, how we think about what it takes to have an NF1 company, what are the types of metrics that we look at. But we looked at that analysis across a distribution of customers and engagement of customers and how those customers monetize, and not every company may have all three. And so we call our north star an NF1 company, and the business is so distinct in their utility and network effects that they can stand alone in their category. That's our aim. That's our north star. It doesn't mean we do it. It's just that we wanted to take that what I call operator style DNA and then expand with that framework. And so it's actually the basis of everything we do regardless of if we are operating, if we're incubating, if we are running a company at the same time, or if we're investing or partnering, this is the system that we use and we built software around that and spun that out as well.
So I think you hopped around just a little bit, but can you connect some dots for me? So you finished college, do you become an entrepreneur at some point before you create Tribe Capital? What are the dots to Tribe Capital?
In a nutshell, I had always started companies prior to college. Almost none of them worked, but I was always finagling around. The one that had like a decent amount of success was this company called Advanced Tuning Products. If you go type in atpturbo.com, it was aftermarket car parts for Volkswagens, Supras, sorry, Toyota Supras at the time. It's kind of how we started. And then we moved from aftermarket to more OEM style products. And so in order to program an ECM on a car it means you have to learn how to code. I had to solder and desolder EPROMs. So you just do what you need to do to learn how to make sure that you can serve your customer.
This is before college. Yeah.
I actually got kicked out of high school and then I started the company because I didn't really have anything else to do. So I said, okay, well what should I... And the reason I got kicked out of high school is I almost just never attended.
Sorry, your parents are okay with that?
No, absolutely not. We're not okay with it. But like, what do you do when you know your kid can't go to school or they might be forced to go to like a continuation school, which is almost de facto like juvenile hall or junior jail in some cases. So, my parents were like, okay, well, I guess this is all you got. But I did go to community college at the same time because in California when you're 16 you can take this, it's called California proficiency exam and it's an equivalent to a high school diploma and that's what I took.
Awesome. So sorry. So you started doing some building pre-college and then after college what are the steps of like what you work on onto Tribe on the way to Tribe?
So I worked as a freelancer while I was in college mostly in PHP. I started doing a lot of consulting and freelancing. I worked for Orchid, worked for MySpace, worked for Facebook. When I came back to California, which is where I grew up, I started working at other companies as well. So micropayments and gaming, there's a company called PlaySpan. These I'm going really back in history. Then I started working for companies that were trying to make messaging products on J2ME and Brew. So I basically just hopped around from company to company. Along the way, I built a bunch of friendships and folks that were smart and the first company I started had merged into a company called Lolapps. The company I started was Rolling on the Floor Laughing Games and so Raffle Play and merged with Lolapps. And Lolapps built mobile games, social games and eventually a mobile platform which is where I built the analytical prowess. Then from Lolapps started a company called MessageMe, sold that to Yahoo. At Yahoo, I was in charge of mobile and emerging products. Again, used these frameworks to build out the portfolio. So, Yahoo at the time was moving from a web-based to a mobile-based platform and there was not a lot of expertise to do that. So, my team was in charge of that. So, the advertising side, built that from zero to a billion revenue from scratch. Moved Yahoo Games, Yahoo Fantasy, News, Mail all over to mobile. Pretty large effort given there wasn't a lot of expertise but essentially a mobile evolution. And then from there I went to Social Capital and then from Social Capital I started Tribe.
Great, I know that was very fast for a lot of time and then super high level because I know there could be an entire story here. How do you go from being at Tribe to becoming co-CEO of Kraken and we'll dive a little bit more into that later but I just want a high level here as part of your trajectory.
Sure. So, I had met a lot of crypto founders and companies at my time at Social Capital. I almost knew nothing about financial services. Pretty much zero. To be honest, I just assumed it works and I had read a little bit of the Bitcoin white paper. I kind of scoffed it off. I didn't take a lot of time to study it philosophically or architecturally, but we talked about it. And at Social Capital, I started meeting more fintech companies. This was kind of like what I call fintech wave 1 to 1.5. And so we had invested in a number of companies, a company called DCG which is Digital Currency Group, which was kind of a holdco crypto-based trading company, but it used to be a company called SecondMarket before that where they started off with a thesis before they got into crypto. We'd also invested in Wealthfront, I had invested in Carta. I just started deep diving into financial services, insurance companies, etc. And for me, actually, it just opened up a new world. I think for others, maybe they already knew it, but I just felt like this was a new universe. And I was infatuated about everything. Structured products, eventually crypto, the rails, the liquidity, the systems, public markets, the difference between private contracts and a publicly traded company, just the full stack. I just got enamored with it. And frankly, I never stopped. And so I just thought about, okay well as a venture capitalist how would I start thinking about this along the way. Just it was a thought process, nothing really materialized. And while I was finally at Tribe, all the relationships that I had built, I started thinking about okay well how do I get more inclusive with the companies rather than just being an investor. And so at Tribe one of the things that we had thought of was okay great well how do we incubate ideas from scratch, how do we partner, how do we take over a company in some cases, how do we think about building financial products, how do we think about credit? These were things that we were kind of debating at Social Capital, but I really wanted to do them and I had to figure out a way to find a facility to do it, find LPs that were supportive of that and then also have partners around the table that had that what I call long duration horizon thinking that we could use that mindset to be able to build into alternative investments and, you know, again, crypto, structured products, public markets, etc.
But so did you create Kraken? I mean what's the story there? How do you become co-CEO?
So, I became an independent board director with Jesse and Ton who are the two co-founders and same framework, thought about product market fit, how to help them expand. And again, this is about four or five years after the company had existed, but I was a shareholder earlier. So it built a relationship, which is what you do in the valley. You're kind of around, you may be friends, may not be friends. You're acquaintances. Everyone's got different experiences. And I over time just built more and more trust with the team and other folks in the industry. And while I was building my firm, while I was building other companies and incubating them, Jesse and Ton had asked that if I come in and spend more time with Kraken, which naturally led for me to be the co-CEO and run the company at the same time. It wasn't a one or two week process. I think it became a natural evolution as things happen in the crypto industry and you're forced to spend time as well with the company given regulatory pressures and it's just diving deeper. But along the way from individual investor shareholder to investing from Tribe, being on the board as an independent and just continuing to double down at the company and spending more time even building in crypto, it became much more natural for me to come in and step in and work much more closely with them.
So, from getting kicked out of high school to not only getting to invest a little bit, but actually creating an entire fund and then happening to become co-CEO of a massive crypto company, it's a pretty good trajectory. So, thanks for sharing all that. I'm going to change the page here for a second, which is you are a smart investor. You invest other people's money, but we would love to know how you invest your money. So, how do you invest your own net worth? So, the traditional portfolio is 60% public markets, 40% bonds, 0% alternative investments. Obviously, that's probably not what you have. How would your three numbers add up to 100%?
Sure. So, my full net worth is in Tribe, Bitcoin, and Kraken. And Tribe's got a full portfolio of companies and products that we have. But I don't trade public equities. It's not to say that I don't know how to. It's just that I spend so much time across all of these financial services and products that there's one conflict to another where I just don't trade my own capital.
Well, do you have like a retirement account in ETFs or something or not even?
Okay. So, you're not in the public markets really?
If our companies have gone public regardless of whether they're in the US or India, I hold on to them and I have my own sort of framework for keeping it or my team has it. If we're holding on to public equities at Tribe or if a protocol has gone or listed on an exchange and those are freely tradable, then I also will hold on to those all the way up, in some cases all the way down, and then all the way back up.
Incredible. And then how about bonds?
Not a surprise. So would you say that you're like 100% alternative investments?
I would yeah say 90, 99.99%. Of course there's some real estate that I own, but that is a very very small fraction of what I have.
So outside of your primary real estate that you have for your own use, do you have any real estate? What percentage would you say real estate is an investment? That's why you're putting it into that asset class of 100%.
Less than 1 to 2%. Everything is at least today, everything is in Kraken and Tribe. That's primarily where my own capital has gone. My own compensation is my own carry incentives. I'm all in to everything I work on.
So this is amazing because part of this show is really educating people to get a little bit of exposure to alternative investments and you're the exact opposite of a little bit. You're a lot of exposure to alternatives. So I'm going to ask you the counter.
I'll take a step back. So look, I think the way you invest your time and your capital is again I go back to my quantitative lens which is okay well I built this whole system not necessarily because I think I'm smarter in any case. It's just more that I have the system to make sure that I don't make the mistakes I would have made if I was thinking about pattern recognition the same way other people do. So through a quantitative lens with a full alignment between my personal capital and the firm's capital and then my time, I'm not passive. So every dollar I deploy whether personally through Tribe, I use the same frameworks. Right, so it's velocity of compounding signal, density, quality of the product market fit, that's what I care. So the personal capital philosophy for me is our Tribe Capital's values. If you just go to our website, I wrote that. I've continued to evolve it, which is can we continue to emphasize transparency, progress and open collaboration with employees, with customers, with investors. I am my own employee, my own investor in some cases and I want to be able to mirror that in how I manage my own personal capital through a disciplined, transparent approach. A lot of the times the LPs tell me, you know, why do you think about this this way? And I say, look, at the end of the day, you can hear anything I say, but the reason I have a high conviction bet or I'm very concentrated in this across any of our investment portfolio or our funds and why I've also historically warehoused some investments through my own vehicles to just get things up and running is that I'm putting my own skin in the game regardless of what I have at any given time. If I've got no liquidity, I'll borrow and I've done that too. So I think you can treat liquidity as an optionality. You keep reserve allocations for asymmetric opportunities just like I do with my own capital where I say okay great this is for something that might come in often in like a crossover or secondary transaction etc. But every dollar of DPI or liquidity I get in my own personal balance sheet I dump right back into the companies and the time that I'm spending. And it's exactly what I've done with Kraken. I've deployed my own capital into Kraken just because I'm spending time there and I'm voting with my time and my capital.
This is all fascinating for everybody. So, how do you balance that with, and you kind of mentioned this a little bit already, but how do you balance having all these high-risk investments, let's call it, or long-term deployments, with having any safer bets or liquidity needs?
Look, in venture, you mean as an individual? Of course, as you, Arjun... and I don't know if you're married or single or whatever, but what responsibilities you have, but everybody as they're listening has to try to balance all that.
As Arjun, and are, I don't know if you're married or single or whatever, but what responsibilities you have, but you know, everybody as they're listening has to try to balance all that.
Look, I think there's this term, right? Like you live within your means and that's a very hard thing to do. And then there's the other one which is how do you validate from the inside out versus outside in? I think the mistake I think people make is that there's a certain amount of capital that you have and so then you'll spend and so that becomes your standard. And by the way, companies run into this, governments run into this, which is I've got a certain amount of revenue stream so I need to keep up my lifestyle for it. So there's a lot of terms that I use to kind of educate people which is you prepare for the worst, you hope for the best. And so it just gives you the freedom and flexibility to do what you want. So even the real estate that I do own, it's very minimal because I don't want to be beholden to any sort of institution or infrastructure. I want to be able to use my own time, my own capital. I want to be free to move. I do have two kids. I used to be married. And I do what I can to make sure that the tools that are there for my family and friends are available, but that doesn't necessarily mean that you need this huge safety net because I think in some cases the safety net in people's mind is the shackles around your body at the same time and then it becomes hard for you to be able to do the things that you need to do. So, I would rather invest my own time and capital into companies or people that I work with than have a house. I'd rather if need be, and this I know this sounds extreme, like live in an apartment if I really needed to. Now I don't because I don't need to. And so I've kept a regular structure, but I know I live in the same house I started with almost 10 plus years ago. I haven't really moved. I bought it at a time like an investment where I said, okay, if I'm going to spend my time and capital somewhere and I have a workflow and I want my workflow to be as efficient as possible. If you were here right now, my computer's in the middle of the dining room. I've got a Zoom TV here. It probably looks ridiculous now that I'm looking at it, but this is how I live and this is how I bring people here. And I like the ability to have entrepreneurs and companies come here and feel that I am grinding at the same velocity that they are because I like to do it, not because I have to do it. So that's the goal.
Awesome. And thank you for sharing all that. You're a more unique person. So where are you keeping some of your let's minimal amount of safer dollars? Are you in USDC? Are you just in a bank account? Are you just knowing that you'll be able to trade out of some secondary position whenever you need? Are you going to take a loan against your assets because that's how you get some cash if there is a need? Where are you keeping your let's call it cash reserves, whatever that is, and I have heard you already say three times they don't try to keep too much of that, but where are you keeping any of your safer dollars, let's call it, just so people listening can have an understanding of the options.
Sure. I think it depends on what you define as safe, right? Which is like what is your monthly burn, what do you spend on. So the only monthly burn I really have is a small amount that I have to pay property taxes per year. With where I live and I co-bought it with my parents. I've been helping them here and there and then my kids' school, education, food, etc. So the burn is extremely small, right? Like I cook at home. I travel when need be, but when I travel, it's on behalf of Tribe or Kraken, etc. So, I keep my burn as low as possible. I don't have a boat. I don't have a yacht. I don't have fancy cars. I got a Tesla Cybertruck. It's probably like the most extreme thing that I've done. But I've always loved cars. So if your burn is low, then the safety net delta and definition becomes very different. And I just dedicate all my time and effort to what I work on. So there's not a moment that I'm not working on something that isn't Kraken related or Tribe related or portfolio related, 24 hours a day if need be depending on the structure, right? And so I think that's really important if you are working in alternative or if you're working in something that's 24/7 like crypto. So venture, crypto, SPVs, co-investments, SMAs that we do, late stage private structured liquidity secondary stakes, this is a lot of work and you have people around all the time. And so portfolio risk management, this is why I put everything into what I do because I am actively managing my capital as well as other people's capital all the time. And so you could say like, yeah, maybe we've got like a 10% liquidity management reserve used tactically for other opportunistic entries, but that capital is reserved to invest, not to save.
