Non-Consensus Investing & Startups

Frank Rotman [00:00:00] Fine. Good to see you.

Ram Ahluwalia [00:00:02] It's always, always a pleasure. Always a treat. I know folks are joining, over the next 30s or so. and we're, broadcasting out on LinkedIn YouTube and and Twitter. And this is one of our experiments to just bring in incredibly sharp, thoughtful people, and share perspective with the broader audience. You know, when I'm on a phone call with someone, I often think to myself, gee, I wish I could just take that conversation and publish it to the world. So in a way, what I'm doing here is just trying to share the perspectives and the conversations, and create some perspective around that for the world to see. I think that's insightful and can create education and a kind of level-up category. So I've known Frank for a long time, I think over a decade now more than my wife. That says a lot.

Frank Rotman [00:00:55] It's been a long time.

Ram Ahluwalia [00:00:56] For a long time, and I feel like I've known Frank and Nigel even before that, because in my 2000s shortly after school, Capital One was one of the first stocks that I ever bought, began my romance with banking. So Frank, I believe, is one of the modern era's great investors and the great venture investors. Of course, he's on the Midas List. If I had a fintech venture list, Frank would be in the tier-one bucket. He's, uh. Fantastic. and, you know, QED was formed by Nigel Morris, the former co-founder of Capital One, which is publicly t . and Frank, who is also an open, at Capital One. And I have a personal interest in operator investors, operators turned investors and business builders. I think they have a very unique perspective that's not just top-down, but also bottom. One of my recommendations is the three Body Pr . he has a great framework for explaining the storytelling process in the venture from the seed stage to the next stage and how you've got to underwrite that. Someone will buy the next chapter of the book. I'm just summarizing here because we're not going to talk about that today. That's out there in the public. We can go into kind of off territory in a new area here and his handle on Twitter is, is fintech. Frank and I are both framework junkies. So I always enjoy I always enjoy these conversations as well. And Frank also has a valuation discipline, which I appreciate as well. and navigating the last few years post-COVID with that disappointment and challenging. We'll see if we get to that. So some of the topics we're going to cover are, you know, Frank's journey, you know, from Capital One to here. Frank was almost fired once or twice at Capital One. I said, Frank, is it okay if I say that and ask that question? He said, I'm. I'm an open book. Go ahead. I said, all right. We can learn from that. not consensus since the early days. and, we'll we'll talk about investment philosophy. We'll talk about, the best relationship a VC can have with a founder. We'll talk about investment themes within the fintech subcategory. how do you approach, quote-unquote, new buzzwords, whether that's 3D printing or AI or crypto or Web3 or whatever else might be? and just other questions about the CIO process. Right. Do you need unanimity when you make a decision? What's your CIO process, you know, look like what happens when there's a disagreement? and how do you law for autonomy and freedom, but also creativity and, you know, so a lot of fun topics we'll get into. with that said, let's dive right in. So, Frank, how are you? Almost fired at Capital One.

Frank Rotman [00:04:08] Uh, let's jump right into the fun stuff.

Ram Ahluwalia [00:04:11] Um.

Frank Rotman [00:04:12] Yeah. So I was one of the early guard hires. and before it eve, Capital One, it was Signet Bank. And, you know, Rich and Nigel were hired away from their consu , gig at spa to figure out how to crack the credit card business for Signet Bank. and I was one of the early people hired to help them do that. so over the first handful of, after the company went public, I took on a lot of responsibilities. my responsibilities tended to be either building businesses from scratch that the company needed or fixing some of the big businesses when they were broken. I also played a horizontal role, which was the chief of credit of the first chief credit officer. Company before there even wants a title for the job. but given that context, at the time, I almost got fired, the first time I was managing the subprime business at Capital One. it was my team that had cracked the code. We had taken it from a handful of people, up to hundreds of people and thousands of people in the call c, a very large portfolio that we had built. And, you know, I remember looking at all of the options for where additional growth was going to come from, and someone on my team came up with a bold idea. And we have to date ourselves here. This goes back to 1997. So the internet was still a very new thing in 1997. It was not the thing that we see it as today, where it's a common place for people to go to find financial service products. But someone on my team was really studying the internet and they said, you know, we have two response cha . we have direct mail, right? So we would send direct mail to a customer. They could fill out an application and send it back. And we have found on the application there's a phone number. They can call us and they can give us all of the information. And why not use the internet as a response vehicle? Why not figure out how to say, here's a website, and if you put a website up, you already know who the customer is? You know a lot of information about them because you've already pre-selected them or pre-approved them. You have their name, you have their address, and you have all their credit information. So if you actually could just take an application over the internet, all you would need is an invitation code from, you know, the application that we would send them in the mail and they would be done. They could click a button and just say, yes, I want the credit card and accepted. And we thought this would be a really interesting experiment to see if we could get a lot more customers by reducing friction. So, you know, the internet was a very new thing. And I tried to find the right people within Capita , to help us, you know, execute this task. And at the time, Capital One created a horizontal team to go tackle the internet, which is what a lot of companies do. When something is new, a big incumbent will say, let's have a cross-functional team. Let's figure out how to assemble it. Let's let them prioritize what's important. You know, let's give them the keys to the kingdom of all the resources that are necessary to pull things off. So I went to this group and said, I want to conduct this experiment. And they said, well, you can get in line. It might be a year before you get this experiment conducted because we've got lots of other things that we've already touched. Mhm. Now to me, this is not the right answer. the subprime business at the time I won't explain exactly how much, but a very important percentage of all of the company's earnings. and it was a business that I was running and trying to deliver more earnings for the company. This was a test that I thought, as a PNL owner, I should be able to run a horizontal group, shouldn't be able to tell me what to do and what not to do, because ultimately, the business lines were the PNL owners of the company and generating the revenue. And this was a huge revenue-generation opportunity. So I decided, to talk to someone on the team. And I said, do you want to help me build a website? Do you want to launch this test? And they said I don't know how to build a website. And I said I didn't ask you if you know how to build a website. I said, do you want to build a website? And they said, yeah, it'd be fun to do it. So I registered the get my card.com domain using my credit card. I coded up the back end of the website, and someone on my team ended up coding up the front end of the website. We actually launched the test without any corporate reso . and lo and behold, when you get the results, you end up with a 20 to 25% response increase, which is massive. You know, for business, your marketing dollars just become incredibly efficient. So we're busy celebrating when we're getting the first couple of days of results back. You know, from the direct mail campaign that we launched with websites attached to it that said, go to get my car.com, you know, to claim your card, and I get a call. And it's a friend of mine from the IT department who says you're in trouble. And I said, what did I do? He explained to me that the team found out that I launched a website without permission, and that I was being called into the CIO's office. So I got called into the CEO's office and he said, why did you do this? Why did you, you know, do it yourself instead of going through the team? And I explained the why. Mhm. Explained how important this was. And you know I'll kind of skip to the conclusion here. But I got called into Nigel's office, I got called into Rich's office, I got called into the CEO's office because what I wanted to do was the right thing. The way I did it was not the way that the machinery wanted to get it done. So even though we ended up getting a great result, it wasn't done the right way. And part of the problem was they had protocols for putting it on the right side of the firewall. They had protocols for doing a lot of things that we didn't do the way the company wanted it to. So I did almost get fired, you know, for basically going around, you know, the machinery of the company and knowing that I was going around the machinery of the company. Now, to put it in perspective, though, it created you, massive increases in the PNL which was the most important PNL to the company at the time. And there's a lot of lessons to learn. almost every time that I got fired at Capital One, it was about knowing what the right answer was for the company encountering and knowing, and then figuring out how to get to a yes answer with the resources that I had. Then someone found out about it even though we got a good result, and then got in trouble for it. So eventually, I mean, I had to leave Capital One. It took me, you know, many, many years to figure out that my heart wasn't moving faster. more of a startup mentality. We're getting beat. Yes. Every single day was the important thing. And not letting the machinery stop you. but I did spend, you know, a good dozen plus years, you know, at Capital One and figured out how to let the machinery not stop me.

Ram Ahluwalia [00:11:28] And so you left Capital One that was born out of really a frustration with I want to use or bureaucracy. But I guess the fact that you do all these approvals and other things and you see the answer, you want to get stuff done, and then you rejoin Nigel later. Nigel was co-founder of Capital One. Of course. Richard there. You mean Richard Fairbanks, the co-founder and current CEO of Capital One to start QED, which was one of the first fintech venture funds. There was a handful of fintech venture funds when she was formed. Now there are way too many. Not just fintech, but also crypto venture funds. But anyway, so you how did you build trust with Nigel? So, Nigel, you know, incredible individual leaders, visionary builders and founders and operating executives are accustomed to making decisions because they quote-unquote, have the right answer, whether they do or they don't. Right. So how did you build that trust and, develop QED?

Frank Rotman [00:12:29] So as of August 9th, Nigel and I have spent 30 years together. So it's a long-standing relationship, and it dates me a bit. but Nigel and I built up trust over the years by being brutally honest with each other, but coming from a place of sincerity. You know, I knew from day one that he cared about me and my career and the things that mattered to me and made me happy, you know, through my journey at Capital One, he was kind of my shield because I would make lots of mistakes. You know, I was very young, and took on a lot of responsibility very early, which is what happens at startups. You know, if the board knew the responsibilities that I had and the experience I had, they would have told, you know, the executives that they needed to replace me with someone with more experience. But, you know, in a startup, you just do things for the first time and hopefully you do more right than you do wrong. And when I would do wrong, Nigel was there, you know, he was there to make sure that I landed okay, that the angry people, he would kind of calm the villagers, you know, with the torches that were very angry at me for different reasons. And then he would coach me and hopefully, I wouldn't make the same mistake again, you know. So, you know, he built up trust with me because I knew he came from a sincere place, and I built up trust with him because I was one of the few people who felt like I reported the truth and was willing to tell Nigel and to tell Rich as well, that, you know, the things that they thought might be the right answer, might not be the right answer, and not a lot of people in a bigger company are willing to tell, you know, the people in charge that the things they're working on or the things that they're setting his goals for the company might not be the right things. So we learned a way to interact with each other, to have honest conversations, to debate things without, you know, either party taking it, personally. you know, we tried to collapse everything to facts and frameworks so that we could, you know, put decisions into, a decision framework that we could kind of prosecute together. And then the most important thing is when we concluded, regardless of, you know, which direction we were heading, we both ended. So once I was listened to or once he was listened to. If we made a different decision, we had to own that decision together and move forward with it. So I think that's where trust came over 30 years of just many, many debates. But knowing that we had each other's backs and, you know, it wasn't just in the decision-making. It was after the decision-making.

Ram Ahluwalia [00:15:08] Yeah. There are a couple of key principles there. You know, one is, canned or radical canned and the second is ownership. third is, disengage and commit, which is one of Jeff Bezos's leadership principles as well. You can disagree. Go to the mat, have the debate, but then make a decision, support it in good faith and move forward. But another one is having that executive sponsor. So you have the freedom and latitude to lead and bring your best ideas to the table, which unfortunately matters in a corporate setting. speaking of radical candour, how do you engage with founders? What's the best relationship with a founder look like, especially when you've got to share bad news? And what's the kind of advice you want to give? But they perennially, you know, ignore the next crop of the bad.

Frank Rotman [00:16:00] Yeah, it's interesting because the strongest relationships that you build with founders, start in the diligence process where you're talking about their business, you know, you're talking about what they want to build and you're hopefully building a shared excitement and shared commitment for, you know, this vision that's going to take 7 to 10 years to figure out. And if you think about a 7 to 10-year journey with any person, it's a really big commitment. You know, so I was actually, I would say, disoriented during the peak of the super cycle where, you know, you're meeting a company. And term sheets were being issued in four days, right? Like, it didn't give me a chance to get to know the founder. And it didn't give the founder a chance to get to know me. But, you know, I find that spending a lot of time talking about the business, is the thing that the person is most passionate about in life from a business perspective. You know, and sometimes in life, like a full stop, it's the thing that they care about most. you can build a very solid relationship by helping the person avoid pitfalls. Helping them, understand what they should be doing tomorrow, not just years down the road, but helping them figure out in a very tangible way that if you were in their shoes, what you should be working on to build the vision that they were excited about. because talented founders, if you're additive and if you're taking away, potential flaws in the business model or you're increasing the odds of them succeeding, you know, that's how you build a relationship, because, again, you're doing it for the thing you're most passionate about in life. And you know, if you come from a place where it's not us versus them, it's not investors versus founders. You know, it's about being in the game together. You know, it buys you a lot of credibility over time so that you can have the tough conversations because they know you're coming from the right place. So something that I always tell founders and hopefully live up to is that, you know, the challenging part is negotiating a term sheet because you are on different sides of the table. Definitionally but after that, once the term sheet is designed and the money is wired, we tuck it away, you know, like it goes in a drawer and you hope you never pull it out again until there's a great, you know, exit liquidity event or something happens down the road. but it's about, you know, being the next employee of the company, right? Being someone who's doing work and helping someone that can be counted on for delivering against, you know, important commitments of the company and advising for big decisions.

Ram Ahluwalia [00:18:44] And how would you, um. Deliver bad news to a founder? Now, you talked about building trust with the founder, which permits you to do so. But there's this other concept out there of being entrepreneurial-friendly, right? So there are some funds, like Founders Fund where it's like, hey, like if you need advice, you know, don't come to us. We're trying to find the best founder. you know, that's one school of thought and the other is, hey, come to us because we have a platform, we have capability, we have expertise, we have playbooks. We can help you get that VP sales. Here's the playbook, you know, so there's there's a spectrum of approaches, around that.

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