How to Sound Smart About Money in Any Room

Okay so you're at dinner and someone says we just raised a series B. And then someone follows up and says private equity is circling the industrials and CPG space. And then you're just kind of standing there, nodding along, not sure what to say. You've been there? Yes I have. We both have. And you don't really want to interrupt. You don't want to ask questions and you definitely don't want to sound dumb. At work dinners, networking events, founder circles, money language is social currency. And if you're not already fluent in the language of wealthy people, this episode is going to teach you in 45 minutes. Today we are bringing back two of our favorite episodes, venture capital 101 and private equity 101, to help you sound smart in any room. You might not agree with it or you might love it. But this is capitalism decoded. I'm Shari. I'm Jean. And we're the Tiger Sisters. We are your Wall Street and Silicon Valley big sisters. And we're a top 10 business podcast bringing late night sister talk meets boardroom strategy. Hi Tiger fam, if you're ambitious like us, which I think you are because you're watching this episode, have you noticed more venture capital and private equity language and vocabulary coming up more and more often in social situations? And does it stress you out? Honestly, I do think it can feel really stressful. But once you learn a few key phrases and understand the vocabulary that wealthy people throw around all the time, you are going to feel calm and confident in any social situation. Trust. This episode is your toolkit for how to talk about all things money, even if you haven't worked on Wall Street or Sandhill Road like we have. By the end of this episode, you'll understand the difference between venture capital and private equity, the key vocabulary terms in both areas, and you'll be able to hold your own in any conversation about money and finance. As we've said before, we love being your cultural curators and business translators. You do not need an MBA to understand these concepts. You just need translation and we're here to give you that. Love that for us and for you. So let's get started with the shiny one first venture capital. VC sounds intimidating like something only insiders understand, but it doesn't have to be. Today we're going to break down the top five parts of venture capital. The first is what VC actually is and how it works. The second is how VC's evaluate startups. The third is why VC is actually a power game. The fourth is the dark side of VC that no one talks about. And the fifth is how to apply venture capital frameworks to your own career and life decisions. Okay, Sheree, let's start off with part one. What even is venture capital? Venture capital is high risk and high reward investing. VC companies give money to startups. Many of them early stage for a piece of ownership in their company. Yeah, and I think the key part of that is that they're not loaning the money. They're actually giving the money to buy a portion of that startup. So they're actually buying equity or ownership in the company. If the startup ends up taking off the VC's win big, but if the startup fails, then they lose all their money. Yeah, and another big component of venture capital is all about the stages of investing. So there's pre-seed, seed, series A, B, C, D onward. So Sheree, can you tell us about the stages? Yes. So you might have heard of these stages before that Gene just mentioned. They're pretty big. And if you're talking about startups raising money and valuation, these stages will definitely come up in conversation. And what these stages relate to is basically the size of the startup and the stage of growth that they're in. So if a company is just starting out and they haven't raised any money before, they're basically pre-seed and then you go up to seed and series A. And each stage denotes the amount of money generally of how much each startup is raising. So series A in general can be from like three million dollars to 10 to 15 million dollars. And when you get to series B or C, it's obviously much larger check sizes. And the stage that the startup is in, whether they're in growth mode or they're just starting out. Right. And then there's also something that we won't get into too much, but it's called growth equity. And that's kind of the most mature aspect of venture capital investing. It's usually after series E. Sometimes after either there's like other series, but typically that's when you're into the growth equity sort of bucket. And that's the part of venture capital where usually it's a lot more, I guess, like guaranteed stable. Right. It's much more of a stable business and they have sort of revenues and like numbers that they can predict the success of the company more reliably on. As opposed to early stage startups, which is everything before that, they are just starting out. And sometimes they're so early that they don't even have any numbers at all because they're just an idea and they haven't proven traction or product market fit yet. And as promised, we're going to be talking about different examples, different company examples for each of these sections, just like we do at Harvard Business School for the case studies. And for this one, a really good example is Airbnb. So they raised their seed round back in 2009. And that was a series of around $600,000. And they IPO'd 11 years later in 2020, I think, at a valuation of around $100 billion. So one question, actually, that people might have is why would VCs invest in different stages? Like what is the, I guess, appeal of investing in pre-seed versus series D? Yeah. So I would say it comes down to specialty. There are a bunch of VCs out there. And they usually have whether it's an industry specialty, like a vertical, like healthcare versus B2B SaaS, that's like an industry specialty. Or VCs can also or and VCs can specialize in the stage of investing. So the tactics in which a venture capital firm would look at a series A company is very different in how they would look at a series E company, for example. I would also add on that a lot of times those two sort of vectors are related. So the further on you go in the stages. So like series BCD beyond the more likely you are to specialize in an industry because then you know more information about it. And you need to kind of have more industry expertise to to navigate all the information and make an investment decision based on that. Yeah. I was going to say that AI was an industry vertical. But honestly these days, it's a horizontal because every single company is using AI now or is enabled. So that's not exactly a vertical, but maybe like five to ten years ago it was a vertical to invest in 100%. So I advise a few different startups. And for all the startups that I advise every single one of them is talking about like, hey, how can we use AI? And that's the questions that their investors are asking them, even if they're even if they weren't originally intended to be an AI native company. For sure. Every company is using AI now. Yeah. And then one more question. You mentioned the term B2B SaaS. What is that? B2B SaaS stands for business to business and SaaS stands for software as a service. And basically it's a vertical where a startup or a company creates a product for another company to use. So a good example of B2B SaaS which you'll hear people say a lot is Salesforce. They're a massive company and they're a CRM which basically is like a internal tool that companies use to keep track of their customers and different timelines that they need to sell into those customers. But it's B2B is because Salesforce is a business that sells to other businesses. Yeah. And the reason I had sure sort of clarify it is because this term comes up a lot in VC investing. B2B SaaS because it's a category that VCs really love to invest in because it's super scalable. All you need to do is build software and then sell to more and more people. Not all you need to do but you don't I mean. So onto the many exercise for this section, pick one of your favorite startups. It can be something that you read in the news and you can look it up on CrunchBase or if you have access to it, pitch book. These are two resources that a lot of people who work in the startup world use daily to figure out the valuation of a company and what they last raised at and who their investors are. Now into part two, Gene, how do VCs evaluate startups? Yeah. So VCs evaluate startups based on three main metrics. Team, market and traction. Honestly, I feel like the first one is probably the most important one. Team is everything. Yeah. I would agree especially I would say for the earlier stages because if you're looking at pre-seed or even seed, a lot of times like you mentioned earlier, they don't even have any customers. They don't even have any revenue. So there aren't really that many stats to look at. You're much more betting on the team and looking at their past experience and saying like kind of using that as the information that you're gathering and being like, okay, if these people have done XYZ things before, then I believe that they can execute on the startup. Yeah, they can pull it off. In many of the pitch decks for early stage companies, one of the first few slides that they have is exactly that. It's of the team makeup and some of their credentials where they went to school, where they've worked because it really signals to the investors some of the training that they've had. For example, like if you are a meta, former meta engineer or former Google engineer, that's like a lot of signaling. That'd be like I was raised in the corporate environment there and they have a certain level of training and hiring that they passed. So they are setting a higher bar. Yeah, and sometimes actually you can work against you in the same way that can help you because I think a lot of times people will try to start a company or try to raise money on a company and the VCs will be like, "Well, you don't have a technical co-founder, right? "Like your team is just you who's gonna actually help you build. "You're gonna spend all your money trying to hire an engineer "instead of having one that's already on staff." And it's actually really funny because a lot of the problems that end up happening later on in a company are people problems. So if the team is not the right makeup, if they don't have good conflict resolution, that can be a pretty big red flag for investors, something funny that I see or that I've witnessed is when there's a couple who's founding a company together. Like, they're married or dating, but that is a huge risk for investors. If something doesn't work out in their personal lives, it might affect the business on a professional level. - Mm-hmm. And then there's always counter examples. Like I think Canva is founded by a couple, right? So that one obviously, massive success. So it goes both ways. It goes both ways and investors will take a look at that and figure out what risk do they wanna take on. And the second one is market size. So basically, investors don't wanna invest in something that isn't going to have a billion dollar, multi-billion dollar outcome. And that's only possible if you have a really large tam, which is total addressable market. So that's a phrase we'll hear all the time in VC, tam. They'll be like, "Oh, what's the tam? "The tam is this, the tam is that." But also at the same time, it's kind of gotten so, it's almost like a joke now because the tam is so overused. And a lot of times, people when they put together a pitch deck for their company, they'll be like, "The tam is 10 trillion dollars "because our startup solves problems "for all men and women in the world." Like if you're not putting together a tam that's actually defensible and believable, it'll actually work against you as a founder. - Yeah, I think Tam is super interesting because taking the example of this podcast, it can go both ways. So our podcast, Tiger Sisters, one could argue that it is a pretty narrow tam in some ways, right? We're delivering like business, career, like personal finance advice for people who, you know, are strivers and who wanna get ahead. But then people have also asked us like, how do you increase the tam of that? Like for example, comedians have a large tam 'cause they're working with like jokes that are more applicable to everyone, but it might not hit people in a deep way. Right, so I think you're making a really good point which is that it's not just about your total addressable market, it's about of the total addressable market, what amount of those people are actually gonna convert and be your customers eventually. And the last big bucket that VCs look for when evaluating startups is traction, basically is your product working and do you have product market fit? And that can be measured in several ways, like people downloading your app that you've created, generating revenue, like month over month are people paying for your product. Those are just some examples. Okay, time for the mini exercise. So for this one, think about a problem that you wanna solve. Think about a company that you could potentially start. Then think about the tam. Is this the problem that millions of people have? Is it a problem that billions of people have? And then the second part is, think about why you're the right person to solve this problem 'cause you're the team. Quick pause, if you're enjoying the show, please make sure that you're subscribed. Tiger Sisters is where we break down the forces that are shaping modern life, money, power, and love. The goal is simple, to help you think more clearly about the decisions that matter. New episodes every Monday find us on YouTube, Spotify, and Apple Podcasts. Welcome to the Tiger Sisters' fam. And now back to the show. Now on to part three, why VC is the power game. Shree, why's VC power game? So venture capital isn't just about money. A lot of it is about signaling social proof, access, and warm intros. Yeah, and I think this is why a lot of times VC gets the reputation of being very clubby, very exclusive, very kind of, it's all about who you know, as opposed to necessarily always being about the merit of the idea and the merit of the team. True. And I think this is especially true when you think about the biggest or the most well-known VC funds. So think like Sequoia, now A16Z, maybe like light speed. These are kind of very brand name VC funds where a lot of times the founders will try to get someone from those funds to invest in them just because they know that is a super strong signal, that once they get someone from those funds, all of the other funds are gonna pile in. And this whole idea of social capital is also why accelerators like Y-combinator are super popular. Obviously they have a lot of structure and they have ways where they help the startup actually build at an accelerated pace. But what's also really important is that even getting into Y-combinator in itself is a signal that Y-combinator believed in you and then at the very end they have this really big demo day where all of the, you know, VCs come and even if they don't actually come, they look at all of the different demos and they watch all the videos and that's an amazing way for founders to get exposure to all these big VCs. - Yeah, because those major venture capitalist firms have seen a lot of success with past companies. So they have like an amazing reputation and having one of those companies on your cap table also signals that they see something in your startup which could be a success potentially. - And so you just use a phrase cap table, what's cap table? - It stands for capitalization table and basically it's just a table of all the investors who have put money into your startup. That's why it's so important for many startups to get the right investor because it's not necessarily just about the check or just about the money. And one example that's pretty easy to understand is the TV show Shark Tank. So when people are pitching their startups to the sharks sometimes they want a certain investor because they bring a specific expertise to that industry that could be super helpful. Like a Mr. Wonderful versus a Barbara versus a Lori versus a Robert Hershavik. Those people bring different specialties. - Yeah, that's totally true 'cause I feel like if you had a startup that was in the software space obviously you would wanna go with Robert. If you had something that was in the apparel space you would go with Damon. If you had something vaguely related to real estate you would want Barbara. - So we have a really fun and interesting mini exercise for you for this section. It's going to sound a little cringe but I think it really works and it helps. This is to map your social capital. This is actually something that Stanford graduate students were asked to do if you take a class called Paths to Power. Basically it's seeing who's in your network and are they the right people to help you make introductions? Do you have people who trust you enough, who know you enough to vouch for you? This is super important in the venture capital world and it's fun to reflect and see where you land in your life. So you know how every year I have a New Year's resolution around finances. - Oh, I have one two for 2026. New year, new opportunity to get our money right. - And part of that is having a bank that isn't just a place to park our cash but something that actually works for us. - Exactly. And that's where a sponsor SoFi Plus comes in. SoFi Plus is a premium membership that pulls everything together. Banking, investing, and financial planning all in one place. 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All right, next, let's talk about part four, which is the dark side of VC. - Dun, dun, dun. - So getting investment or money from venture capitalists is a lot of pressure. It's not free and it comes with a lot of expectation. - Yeah, and the main expectation is that you're gonna grow your company at this incredible rate. And so I think that's why a lot of startups have this sort of grow at all cost mentality where they're gonna take all the money that was invested in them by the venture capitalists and sort of like the row it into a lot of growth initiatives that might not even be the best for the company in the long run. So the mindset of spend now and figure out the business plan later, we have seen those examples with companies like WeWork or Quibi where they started out really strong, had a lot of funding from investors but then flamed out towards the end. - Yeah, and a big part of this is all about incentives. So in order to understand incentives, you need to really understand the way that VCs are typically set up. So venture capital funds, they actually invest in a whole portfolio of startups, right? So typically they have like 20, 30, 40, hundreds of startups that are all a part of their portfolio and what they're really looking for is a very small portion of them to become 100x 1000x companies. So those are the sort of like unicorns that you've heard about before. And they already know or sort of baked into their expectation that the vast majority of all those investments that they made are going to actually go to zero or like close to zero. It's gonna be kind of a nothing burger. That's why there always sort of like pushing the startups to have, like a sort of massive amount of growth, which it works for certain types of startups and certain industries and for other startups, it really might be kind of actually detrimental. - Yeah, and like with the expectation of a company growing 100X or 1000X, there are certain venture capital firms or investors who have a style of like being on the ass of the founder so that the founder will have to give updates on how their company is doing, how it's growing, where it's performing, where it's not, and those updates might have to come bi-weekly or monthly, but it is pressure on the founder to live up to the investment. It doesn't come for free. - Right, so actually I feel like it sounds very sexy to be like, oh, like I have VC investors or like I raise $4 million. - I raise $4 million. - Yeah, I raised X million dollars, but it's not always the right move for every type of company actually. And a lot of times, if you talk to startup founders, or if you talk to even like investors, a lot of times the advice you'll get is actually do not take on investment unless you really, really have to. - Actually, at Stanford's Business School, we have a famous class called Managing Growing Enterprises. We just have a bunch of like classes that focus on startups, how to build startups in different stages, and we invite the founders to come into our class to give a retrospective, like what worked, what didn't work, and how would they change their decisions, looking back on it. And advice that we've gotten time and time again is that one of the biggest mistakes that they've made is taking funding or taking investors - Too early. - Too early, or even taking it at all. Because it added unnecessary pressure where they could have gone a little bit longer, they had runway, whatever it is, and of course it's different for each startup. But like I've seen that and like my pattern matching is basically like it's a huge fricking deal to take investor money because it makes things so much more complicated for your own business and how you hire and just everything that you do operations-wise because then you have the man over you, or the woman. But you have someone, you have an overlord at that point. - Yeah, and just to put it kind of like a double underlying, under my point earlier, is that they are incentivized for you to be that 100x company, right? - And for you to have an exit. - Exactly, so if you end up being a 3x company, like you make three times the amount of money you put in or five times the amount of money you put in, for you as a founder, that could be incredibly successful and that could be your goal, but to the VC fund, you're basically like an egg, right? That's a loser for them. So they- - So an egg? - Yeah, is that a lot? Is that a thing? - An egg, or like a lemon? - No, an egg, like a zero, like a zero. - Enough. Enough. And so that's why they'll be pushing you to do things that would potentially have like a small chance of making you that 100,000x company as opposed to kind of like encouraging you to necessarily do things that would make you like a 3x or like a 5x growth company. So like you really have to think about the incentives and like even if they're giving you advice, it might be good advice in some cases but it might not be exactly advice for like if they were in your exact shoes. - Yeah, because they are trying to optimize for their bottom line, which might not be the same decision that you would wanna make for your own company as a founder. Investors investing venture capital. It's so much a people facing venture that like you're really putting your trust into the investor who is a person who has a certain style, a personality, a persona and that will dictate your relationship with them and how stressed, how stressed you are. It's really important who you take on as investors. - That's why actually a lot of times if you talk to investors, some of them will be like, "Yeah, we're super hands off." Or like we have all of these resources for you to use but we're never going to be like forcing you to use these resources and we're not gonna be telling you what to do, like we're just here to support you. Sometimes certain VCs, that's gonna be kind of their like sales pitch. - Yeah. - To be like, "Oh, we're really hands off." Like we're just here to be smart capital for you and like we can be strategic and like help you with strategy and XYZ and give you resources but we are not gonna be telling you what to do. And like startup founders will talk to one another behind the scenes to understand how their relationship is with their investors if they are seeking investment from the same people. - Oh, for sure. This is like a little bit of inside baseball but even within all the companies at YC, there's like a YC sort of intranet where you can look up all the different investors and you could see all of their reviews, like a Yelp from all the different people who have been in YC. So like if you look at, yeah, from all the different companies. So you can look at as B2B SaaS, just kidding. So like you can look up, you know, an investor like Scooby-Doo and some will be like, "Oh, Scooby-Doo." - Do not work with Scooby-Doo. - Yeah, like Scooby-Doo reached out to me. We had five meetings, we had a term sheet and we were about to sign it and then they just ghosted me out of nowhere. That's a really bad experience for founders and they're just basically warning one another. - Yeah, yeah, it's also a lot about reputation. - Yeah, going back to the original. - So the many exercise for this section is to think about any opportunity that you have and ask yourself before you take it on, what are the incentives who's involved and what are they optimizing for? And you really need to reflect and decide if it aligns with your own personal values. So our last part is part five, thinking like a VC, even if you're not one. So this then, I actually really like this part because VCs are obviously really, really smart and I think a lot of what they do really well is they have these sort of like tools and frameworks and structured thinking to help them make these potentially billion dollar investments. So why not have us use that exact same framework and apply it to making decisions in our lives, even if it's not related to raising capital? - Okay, so the first one we talked about is taking a portfolio approach. So basically, if you or VC wouldn't put all of your fund into one company, like we said they're investing in hundreds of companies at the same time so that they can actually capture upside without losing it all on one. So this is something that you can apply to your life in like dating, for example. Yeah, they say don't put your, all your eggs in one basket and that's why people have rosters. - People, huh? - People, people, people. People we know, people we, maybe people you know. People we know well. - Okay, and the next thing is conviction over consensus. So something that venture capitalists are known for is basically having contrarian views. So what is something that you deeply believe to be true that other people don't believe? - How do you, how do you even apply this to your everyday life? - No, I basically, what is something that you believe that no one else believes? - And then what do you do with that? - You live for contrarian life. - Okay, so what's one way that you live a contrarian life, Shuri? I have an answer for you. - Okay. - You're a creator. - Yeah. - You like literally move from like a totally corporate background and you have all the tools to be hyper-successful in corporate. And you were and then you kind of, you know, threw it all away to pursue your creator lifestyle. - Same for you. - Yeah. Same for you. Good on you for living that contrarian lifestyle. - Dude, I'm so contrarian. - She's so contrarian. - I don't even realize how contrarian I am. - Right, a hyper-contrarian. - It's also contrarian that I'm not married. - Well, he now, and I don't have kids. - He now. - I don't know if that was really on purpose, but. - Hey. - I'm living my contrarian lifestyle. - That was totally on purpose. - I'm so contrarian. - I was like marriage, no way. - And then the third thing is optionality. So this is something that VCs make sure to bake into all of their contracts. So for example, the ability to, once you invest in a company, make sure that you always get the ability to have pro-rata or invest into the next round if you want to. So optionality, this is something that you should always be looking out for in your own life. - Keeping your options open with your roster. (laughing) Or like, let's say you're applying for, you're doing a job search, right? You don't wanna just have one option and then just be like, "Hmm, buy now." - I wonder if this happened. - Should I take this? No, like you should always be trying to get a bunch of options so that you can do even just for yourself, like have an understanding of the options out there and then make a more informed choice and have like a little exhaust situation. - Well, the same with when you're applying to schools, whether it's undergrad or grad schools, you wanna apply to a wide variety of schools with different acceptance rates because you wanna have like a reach school, dream school, a target school, and safety schools because you never know which ones will work out with certainty. - Yeah, so did you apply to a wide variety of business school sherry? - Just two, Stanford or Harvard or Bust. - And did you have optionality? - I did, I got into both schools. Thank you for teeing that up because I don't get to talk about that enough. - Yeah, she's so badass, guys. Like who the hell gets into both HBS and GSB? - And as the law goes, my law goes, I went to Stanford. So then I turned down Harvard Business School, which is a great tagline that many people will hate me for saying. I mean, quite on in all honesty, it's like an amazing place to be in to have that decision. Like I never in a million years thought I would. - She turned down Harvard Business School. - Yeah, wait, can we have a banner running across this school? - Let's have a banner running across this video right now that says that. - What about me, mine says. - I knew Goldman Sachs rejected her twice. - Goldman Sachs rejected her twice. - Okay, so onto the mini exercise for this section. Think about one bet that you've honestly been too scared to make. Write it down and share it with us. We'd love to hear from you guys. And if you use some of these mindset techniques or frameworks that we just shared with you that venture capitalists use, share that with us as well. We'd love to hear from you. - Guys, that was such a fun episode. - It was actually, it's so good. And I'm actually still so proud of that episode. - Same. - And I'm also really happy that now I feel like, you know, the next time you guys are at a party and someone says, oh yeah, like this company just raised their seed round. You're like, hmm, they're not talking about Farmville. - Yeah, and then you can continue the conversation. You can ask the right questions and be like, oh, how much did you raise for seed? Oh, like, that's a pretty big seed round. Like you can, you know, then have the follow-up questions. - Yeah, you'll be like, oh, I wonder what they're gonna do for Series A, like who's gonna lead their Series A? - And also, like, oh wow, you raised a Series A. Like, what are the top, like, things you were gonna invest that money into first? Like, you could ask the questions now that you know. - Yeah, I'm just like so happy to be bringing this to you guys because I feel like once you have the vocabulary and at least just a minimum amount of understanding, you feel so much more confident in any conversation. And it's fun too to participate in the conversation. - Well, you know, Jean and I always say information is power and now you guys are armed with that power and all you had to do was listen to a podcast episode. - Yeah, what's it like to be so powerful? - Okay, so one thing we don't talk about enough is how much research goes into every episode of Tiger Sisters and every episode is chock full of research, facts, and stats. - And that's why one skin really stands out to us as a skincare company because it's not just fancy packaging. It's actually real science with real stats, real data, and also women with PhDs. - Yeah, and these longevity researchers have actually created OS1, which is one skin's proprietary peptide, which slow skin aging directly at the source. - I love how it fits in my everyday routine and my skin feels amazing. And this isn't just my own experience. One skin's products are backed by lab and clinical data, including four peer-reviewed clinical studies to validate their efficacy and safety on all skin types. - Yeah, I also love that they have over 10,000 five star reviews. - Born from a decade of longevity research, one skin's OS1 peptide is proven to target the visible signs of aging, helping you unlock your healthy skin now and as you age. For a limited time, try one skin for 15% off with code tiger sisters. That's oneskin.co/tiger sisters. That's 15% off with oneskin.co/tiger sisters. After you purchase, they'll ask you where you heard about them. Please support our show and say that the tiger sisters send you. Okay, so you guys are experts now on venture capital, but what happens next? Because companies don't stay in VC land forever. They either fail, which candidly most of them do, or they get bought or they go public. And that's when someone says private equity acquired them and that's a completely different journey with completely different problems. So now we're moving from the land of unicorns and big swings and big bets. It's the land of cash on cash. And if you don't know what that means, just keep watching. What is private equity? And why is everyone always saying it's ruining everything that you love? Your favorite store closes, your hospital gets worse and your childhood brands are unrecognizable. Chances are private equity probably bought it. Private equity sounds intimidating like something only insiders understand, but it doesn't have to be. Welcome to private equity for Hawk Girls. And Hawk Girls is a mindset, obviously. In this episode, we're going to break down private equity, no jargon and no judgment. Just cold hard insights and facts into the most mysterious corner of capitalism and finance. If you love business drama or you love succession, definitely listens to this episode all the way through. In this episode, we're going to break private equity down into five juicy parts. The first is what PE actually is. The second is how PE firms make their money, which is millions and billions. The third is what is a leveraged buyout, also known as an LBO. The fourth is why does PE always get dragged in the media. And the fifth is what it means for you as a founder, customer, or an employee of a PE purchased firm. Okay, so this is part one, what even is private equity? Let's get into the definition. There are three things that define private equity. The first is private ownership. For the most part, private equity firms invest in companies that aren't on the public market. They are private companies. Second is control. When private equity companies invest or buy companies, they usually buy a majority stake of the company. The third is a turnaround mindset. The goal is to buy the company, increase the value, and sell it for a profit. Yeah, so think of it like this. Instead of buying a few shares of a company on Robinhood or on the stock market, PE companies actually come in and they buy either the whole company or a majority stake. And then they go ahead and make improvements. They increase efficiencies, and then they turn it around and sell it for a profit. So PE is different from VC, venture capital, because venture capital usually goes for the big bets, the earlier companies that are much riskier, whereas private equity companies, generally target much larger companies that are bloated or have inefficiencies or real ways you can turn it around and then sell it for profit. Basically, these are larger companies that are more developed, but are fixer-uppers. Right, so it's kind of like flipping a house. You come in, you see the potential, you renovate it, you flip it, you sell it for more. Think of brands like Burger King, Neiman Marcus, Dollar General, Dunkin' Donuts, Dell Computers, so many different brands that you interact with on a weekly basis have been a part of private equity. Okay, sure, so let's move on to part two. How do PE firms actually make money? So there are two main ways PE firms make money. The first one is management fees, where they get typically 2% just to manage the PE fund. So let's say PE fund raises a billion dollars, that means they're getting $20 million a year just to manage the fund. The second one is the more important one. That's carried interest, and it's typically 20% on all the successful deals. And that's where the magic happens. So this sounds kind of complicated, but it's actually very common, and you'll hear people talk about it in two and 20. They'll just say that phrase two and 20, talking about the management fees and also the carried interest. So Jean, where do these private equity firms actually get their money from? Yeah, good question. So in this example before where I said, you know, this PE fund raised a billion dollars for their fund, they typically get that money from three different sources. The first one is LPs or Limited Partners, which is basically investors in the fund. These are typically big institutions, like endowments, high net worth individuals, other sorts of investment funds, and pensions, and pensions exactly. The second source is the PE fund itself. They always put in a little bit of money themselves just to have skin in the game. Yeah. And a lot of Limited Partners like to see this, because if you're the management team and you're charging those management fees, you also want to have some of your money invested into the firms as well. And the third one is debt, which brings us to the next section, which is leveraged by outs. When I first learned about private equity, I was most surprised to learn about the debt portion. It's actually a lot of borrowing that's going on to then invest. So this is where LBO's leveraged by outs come into play. So what exactly is a leveraged by out or an LBO? This is where private equity firms take on debt. They borrow money to then buy a company. And once the company starts doing well, you know, the private equity firm starts to turn it around. It's making profit. They use that profit to then pay off the debt of the purchase, of the original purchase. So that's where the leveraged by out comes in. Going back to the house slipping example that Jean gave before, if you think about a house, once you fix up the house and you rent the house out to people, you take in tenants, and then you use the monthly rent to pay off the mortgage. So that's a similar example of how an LBO type model would work with everyday housing. Yeah, or if you want to put some numbers to it, if you buy this house for $100,000, it's a million dollar house, you actually put in $100,000 of your own, and you take on $900,000 of debt, and then you actually improve the house and you make $100,000, you're actually already making a return of 2x on what you actually put in. So that's why LBO's are so powerful. The keyword is leveraged, right? The idea that you're taking on a lot of debt so that you can do a lot more with a lot less of your own money. But it's not always rainbows and butterflies, and sometimes an LBO goes wrong. So Shree, do you want to share an example? An example of that is Toys R Us. They took a $6.6 billion LBO out in 2005, and that was $5.2 billion of debt. And what ended up happening as the lower goes is that Toys R Us actually wasn't able to be turned around. It wasn't a successful company. And so they ended up having to pay millions of dollars in just interest. Yeah, so they actually had to spend all their money servicing their debt so they didn't really have as much money leftover to make the improvements that they needed to fight with, say, Amazon, which was coming up at the time. And a lot of people were buying Toys from Amazon. So Rip, I actually remember that we used to go to Toys R Us all the time when we were kids. It was like the place to go. Remember, you always used to be like, please, let's go to Toys R Us. It was amazing. It was a mecca, honestly. It was so gorgeous in there, all the lights and the colors. Yeah, so let that be a lesson. A lesson. Yeah, and by 2017, they were actually bankrupt. And that's the risk of taking on debt or leverage. It could work out really well. And you could make millions and millions of dollars, or it could really burn down the house. Okay, so Sheree tell us why is private equity always the bad guy? I think in media, private equity gets a really bad reputation. There's a lot of movies and films and TV show that just shows like the slimy parts of private equity. I think that's number one how it's portrayed in media, but also how customers, consumers and employees are treated does not help with the reputation of private equity. The first reason why it gets a bad reputation is because of layoffs often times when private equity firms are turning around companies. They have to do mass layoffs as a way to boost efficiency or improve the company and that impacts day-to-day people and the employees. I guess they don't have to do it, but that's typically a very strong lever for them to cut costs and therefore increase profits. Yeah. The second thing is prioritizing short-term benefits over long-term health. A lot of private equity firms have to be careful not to do this or else they risk improving the profits kind of artificially. Yeah. And this is, it actually depends on the PE fund and also kind of what size they are and what their plan is for the company that they purchase because a lot of times, I guess maybe this is like another dirty secret of PE is that their goal is to actually improve the efficiency of the company and then sell it to another PE fund. They just kind of want to hit a certain level of profit and then move on to the next one. Right. Because there's different sizes of PE funds and different types of companies that they buy. And so actually something that I learned when I was taking a private equity class at Stanford last year is that most of the exits of these PE firms is selling to another PE firm that takes on the company when it is grown to a certain size, which is how they make money. The third reason why private equity gets a bad reputation is because of the asset stripping like one lever they can pull in order to cut down cost is to sell things that the company owns. For example, if the company is a manufacturing company and they have really big machines or expensive machines, one thing that they can do is strip the assets and sell it, but that might not be good for the long term health of the company, although it does raise profit. And the fourth reason why private equity gets a really bad reputation is because of industry sensitivity, a lot of health care firms or hospitals are actually controlled by PE firms. And when incentives may not be necessarily aligned or there's different stakeholders in the entire equation, PE firms definitely their goal is to return money to the shareholder. And when that collides with hospitals or health care funds or education, it can get really sticky. Yeah. And I think especially when it comes to industries like hospitals, it's always just a really bad headline if it says like, you know, there's the like we've talked about headline risk before on tiger sisters. There's just a lot of headline risk when it comes to these industries because you don't really want to be pointed to as like the evil company that laid off 30% of hospital workers. Right. Right. Because there's a lot of downstream effects too that can ladder up to that. And then the PE firm will inevitably be blamed for that. Right. And it's not always just sensitive industries like hospitals either. It's across all different industries like for example think about vice media, which used to be a global media company. I remember they raised $1.6 billion, including from PE funds like TPG and they weren't able to make it work. And they ended up declaring bankruptcy in 2023 and laying off hundreds of employees. And going back to the Toys R.S. example, over 30,000 people lost their jobs when Toys R.S. went under. So many examples in retail. So thinking about Jay Crew, thinking about pay less, both of them went bankrupt at some point and ended up shutting hundreds of stores. But to be fair, not all PE is bad. So look at what Blackstone did with Hilton for example. They bought it, they improved it, they expanded it globally and they actually took it public again. Yeah, they ended up making 14 billion on that deal and they didn't have to do mass layoffs. Many times it comes down to incentives and style of the PE firm. It depends on the firm itself, how big it is, what industry it's in and the strategy that they employ to turn around the companies. A lot of firms are able to do it and then sometimes they're not able to. Okay, Shari, on to our last part, part five, which is how PE affects you as an employee or a customer. So what can you expect if your company gets acquired by a PE firm? Yeah, I would say there are three main things. The first one is efficiency moves, aka typically cost-cutting and tighter budgets. The second one is new leadership. A lot of times these PE firms actually bring in people from outside the company. A lot of times they're actually operators that exist in the PE firm to come lead the new company. Yeah, because PE firms, if they're turning around a company, they want to bring in people that they trust and know can do the job and that they know will execute their strategy. True. The third one is restructuring aka layoffs, which is to boost profitability. And as a customer, if a PE firm has acquired one of your favorite brands, you might see higher prices, wear service and leaner offerings. Yeah, this reminds me of when my girlfriends and I heard that Zimmerman, you know the Australian like dress brand for women, designer brand, when they announced that they were PE acquired, we were like, oh shit, better buy up all that Zimmerman now because next season it's probably going to be worse quality and it's going to be more expensive because the PE fund is going to try to squeeze their profit margins and improve them. So that was just like a small way where we were like, uh oh. We know what's coming. Yeah, like time to buy up the kind of like vintage Zimmerman. But as Devils advocate, sometimes you do get better service, PE firms are known to cut the blow and make things more efficient, so that also trickles down to customer experience as well. Yeah, I would say a lot of times PE firms like what they say they're good at is improving operations. Yeah. So if that's a big part of the business, that can be something that as a customer, you might experience improved operations. Wow. That was a really meaty episode on private equity. My favorite part is talking about LBOs because that honestly comes up so often in conversations and you just read about it in the news all the time. Damn, watching that all back, my main reaction is I can't believe we do all this for free. It's all free for now, but Patreon coming soon. Oh, oh really? Hmm. Now that you guys understand both venture capital and private equity, you can hold your own in pretty much any room. And if this conversation sparked anything in you or you learned something, please send it to a friend who might find it helpful, especially if that friend is going to a fancy party next week. And if you guys are interested in more money, power, and love decoded, make sure you hit subscribe. Like seriously, seriously, seriously, seriously, seriously, seriously, seriously, subscribe. On YouTube, Spotify, Apple podcasts, wherever you're listening to this episode. Thank you guys so much for tuning in. We'll see you next time. Bye. Bye.