A Smart Perspective on Risk Mitigation

Megan - 00:00:18: Today, my guest is Isaac Strulowitz. Isaac is CFO and partner at both CoVenture Management and Crossbeam Venture Partners, affiliated entities focused on providing solutions across the entire capital stack. Isaac first joined CoVenture in its nascent stages and has since helped it grow into the larger institutionalized firm it is today. Transitioning from reconciling credit card statements during the firm's scrappy startup stages to now managing relationships with investors, shareholders, and exceptional third-party service providers. Having played a role in the evolution of the firm and touching every side of the business in the process, Isaac has a unique perspective on the evolving role of the CFO as a crucial partner in creating value at an organization. Isaac, thank you very much for being my guest on today's episode of CFO Weekly.

Isaac - 00:01:40: Thanks so much for having me. Happy to be here.

Megan - 00:01:41: Today we're going to be talking about taking calculated risks and managing risk in general, particularly in fast-growing environments. And we've got a lot to learn from you, so let's get started. First, can you just kind of walk us through your career journey to date and how it is that you ended up at CoVenture?

Isaac - 00:02:01: So I graduated from Yeshiva University, a place that I absolutely loved and a place that still holds a special place in my heart, where I majored in accounting. I think many of my friends would tell you at the time that I was probably a better writer and history student who had more of a creative streak and that accounting wasn't necessarily an obvious choice. But I was drawn to it for two primary reasons. The first was that everything needs a tie, right? There was a beauty to me in the objectivity and precision of it. And number two, I envisioned doing something in business one day, thought learning the fundamentals, understanding how not just to prepare financial statements, but how to interpret them was something I should learn while I was young. That knowledge would hopefully compound and seek to really build an interdisciplinary and complementary skill set during those years. So after graduating, I started out at one of the big four accounting firms doing tax work, not because of some passion for compliance and tax code, but because I was honestly still a kid. And that was where it appeared the jobs were and wanted to keep an open mind. While I met a lot of great people there, including some that I've since recruited to work with me at CoVenture, and certainly appreciated the early training and have so much gratitude for the firm, I knew pretty early on that working exclusively in tax was not something I wanted to pursue long term. So from there, I was fortunate enough to work at one of the largest asset management firms in the world, where I deepened my understanding of finance and investing and how to operate. And that's where I started to find the best in class way. Discovered there that I was naturally drawn towards projects that involved problem-solving, creating and building out new processes, and workflows, and started to develop a bit of an entrepreneurial itch while aspiring to hopefully lead my own finance team one day and ideally at a fund, which uniquely allows for one to operate at the intersection of investing, legal, asset management, investor relations, accounting, and tax. So thankfully, the co-venture opportunity came up while I was still pretty early in my career. I happened to be friendly with an individual on our board here, still, good friends, which allowed for a really natural and easy transition and felt like a place I could be at for the rest of my career and grow because of the team and now my partners, who have also become close friends. And because of the momentum that I was able to sense was building here. I knew that we were on the precipice of building something truly unique in how private companies get funded that I wanted to be a part of and hopefully contribute to. So I joined as a VP of finance, and there was a bit of a gap between the two of us. A bit of a culture shock when you transition from two large institutions to effectively what was a startup manager at the time. Not fully grasp how much you're responsible for literally on day one, but I felt like I had the blank canvas I was looking for in creating a robust finance platform here and was thankful to become the firm CFO about two years in, and then made partner again a couple years later.

Megan - 00:04:49: So what do you credit with the transition from those big established companies to a startup? What do you credit for your success in making that transition?

Isaac - 00:05:00: I think there was a lot of humility that I had, right? So I didn't come in as the CFO. There were several individuals sort of ahead of me. I really took my own growth and learning really seriously. I used to have a really terrible commute into the office from here in New Jersey, where I would literally bring textbooks with me out to the bus. I called it my boss's MBA. And on top of that, I would really annoy a lot of mentors that I had relied on. And Savneet Singh, who worked closely with us, and many of our LPs that have since become friends. Because I understood that there was a lot I needed to learn. And I think there was a humility to it. And it genuinely was coming from a place of wanting to succeed and wanting to see the firm succeed. So I really just credit that. I still often tell people, that this is what I've seen works, but I'm always open to changing my approach in light of new information. So I think having that humility. I know it sounds counterintuitive, I guess, to hear somebody brag about their humility, but I think that was really it. And there's obviously just an obsession and work ethic that I had where it got to the point where I was brought into board meetings, eventually started leading a lot of them, and then just naturally became the CFO.

Megan - 00:06:09: And risk is essentially what fuels a business like CoVenture. Taking risks on startups that could open new economies and innovation is obviously what brings the reward. And it's your job to mitigate that risk. So how do you balance those responsibilities?

Isaac - 00:06:25: It probably makes sense to discuss what CoVenture is because there are risks throughout all the different layers of the organization. So I guess today, CoVenture, for those who don't know, is an alternative asset manager that has a suite of private capital solutions, housed primarily within three business lines. Our first is our credit fund. So that largely provides non-exclusive capital to tech-enabled companies through different private credit strategies with a particular focus on financing novel, double, mispriced asset classes that are traditionally overlooked by banks and traditional lenders, usually through asset-backed structures and growth financing. A couple of examples include YouTube content financing backed by the ad revenue generated from the channels, as well as tailored financing for growers and the produce and perishable goods industry through proprietary inventory tracking tech, to just name a couple there. Our venture capital arm is called Crossbeam. Crossbeam primarily focuses on leading seed and series A investments into emerging trends, such as the market, and the market itself. So we have a lot of different types of innovation, platform economies. And then our third strategy, our newest, is our hybrid capital solutions fund. And that's sort of a natural outgrowth of the firm's evolution and sits at the intersection of equity and credit. Our hybrid fund uses flexible structures such as convertible debt, preferred equity, and other hybrid-type instruments that look to combine debt-like protection with equity-like upside. So I'd say that risk is obviously core to what we do and obviously taking risk engenders upside, right? I love the quote from the football coach, Bruce Arians, which is one I try to live by personally, which is no risk, no biscuit, right? So you need to balance smart risk with smart mitigation is sort of the way we approach it. And because if you do what everyone else is doing, by definition, you won't outperform. So risk is sort of inherent to... And I think, again, looking at CoVenture, there's a risk across asset level, fund level, and then the organization. At the asset level, again, we're often dealing with very early-stage companies, of course, that often are accompanied by complex assets themselves. And so after we develop a thesis, for example, new modernization models within the creator economy, I think there's a pride that we've taken our ability to sort of ground our investment process in what we believe is sort of these real unique data-driven insights rather than looking for hype. And we try to look for what my colleague Ali will call the aha moment. So there's typically a rigorous and pretty thorough diligence process performed by our teams where the underwrite is intended to optimally structure the investment, be it credit or venture. And of course, there's obviously a different approach between the two, but a lot of the same principles I would think apply. So with credit, I think you're primarily looking to protect the downside, obviously, right? There's always the trade-off between yield and advance rate. So in other words, how much current income do we want to generate versus how much loss protection that we want to structure in? Our loans are often structured in a way where they're secured by specialized assets that are ring-fenced and collateral that's originated by our portfolio companies. So we feel that this mitigates a lot of the corporate risk that we'd otherwise take and that many venture debt providers are comfortable taking. On the hybrid side, we strive to provide downside protection through seniority, as well as negative covenants. I'd add that we're also pretty selective, particularly in the current environment we're in. And I think we'd much rather miss out on an opportunity if it doesn't make sense if we don't find that aha moment, rather than just swinging the bat aggressively with excessive risk-taking in the pursuit of hype. That valuation doesn't really make sense to us. And then after the investment's funded, we have a very proactive asset management group that does a terrific job monitoring. Maddie and Matt do a wonderful job on our team. And then at the fund level, I'd say we look to mitigate concentration risk to specific names or sectors. On top of that, we have robust compliance. Compliance protocols in place, the internal controls that are implemented in particular with wire transfers and those types of things. We were pretty early, I'd say, compared to most firms of our size to bring on both an internal chief compliance officer, as well as a general counsel, something that we take pride in. So at the organizational level, there are obviously all sorts of risks, regulatory, team stability, reputational, and counterparty risks. But at the end of the day, having a robust compliance protocol, I'd say really goes a long way. And our team does a great job of keeping risk mitigation at the forefront.

Megan - 00:10:40: I'm guessing these two things are somewhat equal in importance, but how do you weigh reading and research to stay on top of advancements versus surrounding yourself with a team of experts?

Isaac - 00:10:53: So I'd say in general, reading, obtaining knowledge, continuous learning, all that, in my view, and I think the firm's view, is a prerequisite. And I personally try to set aside time for it and make it routine. If it's a late night or whatever the case is, definitely try to at least read one page just to keep the muscle moving. And I listen in on countless earnings calls with relevant companies just to kind of hear their point of view and what other management teams that I look to emulate are seeing. As a co-venture, I think we certainly emphasize both personal research while also leveraging domain experts internally and externally. I think you'll see that folks here routinely go on deep dives related to potential areas of interest that we think we may be able to develop a thesis around. And then those learnings are shared from Riot. Richard on our team actually just did a really well-done deep dive on music royalties. That was great. So we've taken pride in seeing when our investment professionals sort of build up this concentrated knowledge and become domain experts themselves, both from the research, but also from their hands-on experience in investing. And working closely with founders in a particular space. So I think the key is to, as a firm, kind of maintain this intellectual curiosity that I think hopefully by now is embedded into our culture while kind of knowing when to leverage the external domain experts.

Megan - 00:12:07: I'm just curious, when you're hiring for your own team, what kind of traits are you looking for that in your mind equal success?

Isaac - 00:12:15: It's a great question. I think for my team personally, I'm always looking for people who have extremely high standards for themselves, first and foremost. And if you have that, a lot of everything else can sort of follow in my view, right? People who really despise mediocrity, who hate losing more than they like winning, and who understand that the road to mediocrity is slow and gradual. So in the event that mistakes are made, they could be harder on themselves than I ever could be. So I think with that, if you have really high standards, you'll naturally be intellectually curious. You'll take pride in your work and have really high standards for yourselves. So that's usually kind of the first trade I'm looking for. And then obviously, of course, there are technical skills relevant to each role that we're looking for. But I think for me, at least the high standards, sort of the first thing that before and oftentimes, you know, we always do a case study and you can sort of sense, you know, who takes pride in their work just from the case study and, you know, who and who doesn't have it, so to speak.

Megan - 00:13:12: Thank you for sharing that. I like that. So when you're calculating risks, how much do you rely on yourself and your team's know-how versus leaning on data?

Isaac - 00:13:24: I think there's always going to be a blend between judgment and experience and sort of data-driven analysis, right? I guess to my earlier point on the difference between risks between different layers of the firm, at the organizational level, for example, I think we've done a really good job of thinking of risk the same way that we would in an investment, right? We start by asking ourselves, well, how big is the potential downside here? And we start thinking of worst-case scenarios. And then after that, we think of the cost, both monetary as well as the opportunity cost of mitigation strategies. And I think we kind of set our risk tolerance often based on whether that balance sort of makes sense. And as professional investors, we try to view it from an ROI perspective.

Megan - 00:14:04: And talk to me about how you might use data when looking at startups that are breaking new ground. And there's not an exact comparison out there.

Isaac - 00:14:13: I think, of course, you want to obtain as much data as you can get. There's the data approach, which obviously brings important rigor and benchmarks and more thorough analysis. But the challenge, especially here, is that there sometimes isn't a lot of data to go off of. And especially when you're dealing with very early-stage companies that are operating in an esoteric asset and pretty novel. So there's a bit of an art and science to it, particularly on the venture side, when you need to go over really all the different bullet points and things that you need to believe in order for this company to succeed. And that's kind of really where the test is. On the credit side, it's a little bit different, but without data, there's really not much of an underwriting that can be performed, which makes the debt pricing really hard to do.

Megan - 00:14:56: And shouldering responsibility is a big part of your role. So if you want yourself and your team to be successful, is it important that people feel that they can make mistakes? And if so, does that put more pressure on you? And how do you foster that kind of environment?

Isaac - 00:15:14: Totally. To my earlier point, the type of people that we look to hire, right? Hopefully, when mistakes are made that, you know, again, they're harder on themselves than I ever could be. So of course, mistakes happen. You know, everyone makes them, I make them. But, you know, I think in Walter Isaacson's biography of Steve Jobs, you know, he had this described him as having this very binary way of looking at the world where everything was either a four-letter word beginning with S, I probably can't say in a podcast, or it was greatest, right? You know, of course, while I believe there's room for nuance, I do love the simplicity of that and appreciate the high standards that jobs had. Right. And I think the folks hopefully in our team kind of feel the same way that when mistakes are made, I can come from it of an approach of, you know, hey, it's cool. You're learning. And because, again, they already kind of feel that pressure internally and have those high standards for themselves.

Megan - 00:16:02: And you have a lot of experience growing businesses and growing wealth. So what are some of the most common mistakes that you see businesses make when looking for speedy growth?

Isaac - 00:16:13: How much time do you have? I'm just kidding. I think a big one is not truly understanding ROI, right? So yes, there are some things that are just purely qualitative and some things that are purely quantitative. But I think, certainly here, anything that's added into the OPEX budget, there's, in my view, an hourglass where the ROI clock is ticking, right? And every expense needs to add value. If not now, then certainly there needs to be a roadmap for when it will. And I guess the amount of times that I've heard people sort of defend questionable things as ROI positive that were pretty subjective it happens pretty often. And then the next one I'd say is hiring, which I've learned certainly is an art form, right? It's hard to get the, call it the Goldilocks of the right amount of people at the right inflection point of the firm. I think underhiring is dangerous and some tend to overhire, but we'll do so in sort of a rushed way. And there's this trade-off that's hard to balance between bringing people in quickly and being patient to bring in someone who's truly a 10. And when that's happening if you rush to bring on too many people, that leads to bringing on mediocre talent, which isn't properly managed, and can eventually lead to mediocrity. And then compounding that is sometimes just not knowing when to move off a bad hire. Even here at CoVenture, LLC, I've interviewed countless candidates at this point who all tell me a variation of the same thing, right? I want to build something. I want to grow. I don't want to be siloed. I want to get my hands dirty, right? They all kind of say some variation of that. And all that sounds great. And we love hearing it, but then when they get here, turns out they don't have the stomach for it or just can't really handle the difficulty of the ups and downs and the increase in responsibility. So bad hires do a lot more damage than people realize. Sometimes chuckle when I see it as a KPI, a key performance indicator, just like the number headcount that increased. Well, it tells me nothing if these people are productive or not productive. It's important to move off quickly. I know it's really hard to do that. And obviously to do so in a humane way, in a helpful way. But I think sometimes companies can just get kind of stuck with a lot of mediocre talent that they're resistant to move from.

Megan - 00:18:16: And do you think it's inevitable that every startup will eventually hit a growth ceiling or are there always opportunities to continue to grow if the business remains in a good place?

Isaac - 00:18:27: Yeah, sure. I think it's company-specific. I'd say culturally, as a firm at CoVenture, our goal is to always help with our portfolio companies and ideally help them achieve their maximum growth potential, regardless of where they are in the lifestyle. I mean, we take a really long-term partnership approach, which is kind of unique for lenders. There are still some borrowers or portfolio companies of ours that we've been lending to for several years now. Obviously, our cost of capital has evolved and kind of scaled with them. And as they've graduated to a lower cost, we've been really proud to help provide that. I think we often say here that we get paid not for the risk we take, but for the work that our team does. We really kind of view ourselves as active partners with our portfolio companies and helping them achieve their growth and certainly are not adversarial. And I could name countless examples of our capital-helping portfolio companies. Unfortunately, I don't know that I can name names, but definitely, times when we've seen them kind of break through plateaus and something that we take a lot of credit for. And I think that's a really important part of our portfolio. A lot of pride in long-term partners and investors with a focus on hopefully being their capital providers as long as they'll have us. And you touched on this previously when you

Megan - 00:19:34: mentioned swinging for the fences, but do you regret the investments you did make or the ones you didn't make more at the end of the day?

Isaac - 00:19:44: Well, hopefully, it's the ones that we didn't make it. It's hard to look at life that way, but certainly in this field. I think regret, we try to view it as more of a learning opportunity. To my earlier point, we're in the alpha business, right? So we need to take big swings. And I think we're very happy to choose process over result oftentimes and take pride in our investment approach. And again, rather than invest in something just for the sake of growth or growing AUM, we do try to be purposeful about it. So I think if you have that approach, it's really hard to have regrets because we did everything we could, we feel like. And I think anything where things didn't necessarily go our way, I think we're so proud of the process, but certainly always look at it as a learning opportunity and hopefully can help us inform decisions into the future.

Megan - 00:20:30: And you've obviously had an amazing career to date. So what advice would you give to someone who's starting their career with a mind to one day be a CFO?

Isaac - 00:20:40: I'd say certainly read. I don't know anybody that's successful that doesn't read a ton. I think Buffett, I forget the exact number of pages, but I think he reads like 400 pages a day, whatever the amount is. So there's what I tell all the younger folks on our team is, you know, there's obviously the work and then there's what you do after hours and what you're doing to improve at your craft. For me, it's kind of finding those quiet pockets of time where I can sit down and learn and read and see what others are doing and try to build my left hand. I'd say also start as young as you can. I know that's a hard lesson to learn and you really only appreciate that as you kind of grow into your career. But if younger folks can just get their hands on whatever they can, I'd say knowledge compounds. And with that lesson of compounding, you know, Warren Buffett's success wasn't necessarily that he had one phenomenal year. It was that he was just doing this since like the 50s, and 60s. So it's just the longevity of it just compounded over time, right? And I think that's a really powerful lesson. And then the other one is just to have, you know, humility. It's good to have strong opinions but to keep them loosely held, as they say. Don't always assume that you're the smartest one in the room and try to just learn from everyone. And just, again, absorb as much information as you can. If you're starting out in your career, just become an information sponge and constantly question and do so in a way from having an intellectual curiosity rather than thinking that you know better than everyone else.

Megan - 00:22:02: That's great advice. Last question. What is keeping you up at night?

Isaac - 00:22:07: Well, I guess the literal answer to that is my kids. But aside from that, certainly a lot, obviously the geopolitical environment, the sort of things beyond our control, I would say keep me up at night. The regulatory environment, obviously the direction where rates are going what that means for our funds, and how attractive our cost of capital will become. I think from a kind of micro and firm perspective, while you always enjoy the part of the roller coaster where you go up and that's like the fastest and most exciting part. And now I feel like the firm, while we still have a very long runway for growth, now managing a 40-person operation that manages a lot more capital than we did when I first joined and seeing the firm transform overnight, or not overnight, but what felt like overnight. It's just a totally different job than it was. And trying to make sure that I am staying on top and staying paranoid and trying to just make sure I'm doing right by our LPs, our employees, and all the stakeholders at CoVenture. That's what's given me the four hours of sleep or whatever. My sleep-tracking devices tell me I'm good.

Megan - 00:23:09: Isaac, thank you so much for being my guest today.

Isaac - 00:23:12: Thank you. This was great. Really enjoyed it.

Megan - 00:23:14: Yeah, I've really enjoyed speaking with you. And thanks for finding the time to be here with us today to share your experience and knowledge. I wish you and CoVenture all the best.

Isaac - 00:23:22: Thank you. Really appreciate it.

Megan - 00:23:24: And to all of our listeners, please tune in next week. And until then, take care.