| 00:01 |
This is the Money Seed Podcast where we discuss all things investing, plain and simple, the way it should be. Please remember, this show is for educational and entertainment purposes only and is not intended to be investment advice. Welcome back to the Money Seed Podcast. My guest today is Kristian Marquez. Kristian is the CEO and founder of FinStrat Management. He’s a finance professional for over 20 years. |
| 00:29 |
He has led companies from small stage to big stage to multi-billion dollar exits. Kristian, welcome to the show. Gabe, thank you for having me. When I looked at your background, I saw that you are a CFA title holder that’s chartered financial analyst. Tell me, for people who are considering, say, accounting or some people are getting an MBA, there’s a lot of other ways to get that kind of a business slash finance experience. What was it about the CFA that made you pursue it? And I asked because it is a notoriously difficult certification to get. |
| 01:00 |
There’s three very difficult exams over many years. Why did you do it and how has it helped you? A combination of reasons. One is just what the charter holder represents. As you pointed out, pass rates for each of the exams have historically been below 50%. And so you know it’s difficult to argue with anyone who has a charter holder to say you’re dedicated to your profession. |
| 01:28 |
Because at least when I was taking the exam, they were only offering each exam once a year. And couple that with very low pass rates in order to pass all three exams, you know it’s just a great way to demonstrate by virtue of action that you care about this craft intimately. The other component of it is I tell you a little bit of supply and demand. So today you’ll find charter holders in a whole host of roles. |
| 01:58 |
One of the big ones is perhaps a portfolio manager, whether it’s a mutual fund, a hedge fund, private equity, venture capital. And so there’s definitely a significant portion of the framework that’s focused on investments. But you’ll also find them in CFO roles, controller roles, and Fortune 1000 companies, a whole host of places. That said, given how the challenges of passing it, there’s an element of simple supply and demand. |
| 02:28 |
And so if you look at the count of charter holders relative to MBAs, it’s a fraction. And if we just think about demand for investment professionals, it just puts you in a great position for earning power, perhaps opening a couple more doors that would have otherwise stayed closed. And frankly, also a fraction of the cost. And so if you think of typical MBA education, what? |
| 02:59 |
Six figures, you know all in on the CFA is going to be less than $10,000 notwithstanding the time investment, which was material. Made a lot of sacrifices, nights and weekends. However, when you’re on a budget and you prefer not to accumulate debt, it’s a great option. That’s a very good point. Yeah. You’re right. MBAs are extremely expensive to get in most cases. And you’re right. The CFA certification would cost a lot less. I hadn’t considered that before, but now that you mentioned it, it makes a lot of sense. |
| 03:30 |
Kristian, you have seen a lot of success in the startup world. What attracted you about startups? It’s hard. It’s creativity. The opportunity to express yourself by building something. Very similar to an artist. I think it’s just a different application. In this case, you’re building a business, maybe then a piece of artwork. But I mean, the similarities are numerous. I think it’s an evolution. |
| 04:02 |
Someone who starts the first business is going to come at it than if they start a subsequent business. Tremendous amount of learning, not only about just your market but yourself because your feedback loops are generally relatively quick, presuming you’re not making wine. |
| 04:21 |
But you know there’s just a whole host of elements of building something that has value, confirming whether or not the market’s willing to exchange money for what you have, and then just knowing that you’re making a difference in somebody’s life. Because obviously, it’s not an absolute by any means, but effectively, you think about you’re convincing someone to give you money in exchange for what you have. |
| 04:50 |
And they’re doing that because they believe what you have is going to benefit them. And so you know for those entrepreneurs in the game who genuinely care about delivering value, I mean, it’s very fulfilling. Startups notoriously are difficult to pick at the beginning, right? I think even like Y combinators and the sequoias of this world have a very high failure rate when they’re picking startups. What are your sort of rules of thumb? What do you look at when you look at a startup? Yeah, it’s a great question. |
| 05:19 |
And I think that question is more pertinent than ever given the current interest rate environment. And I’ll share what I’m thinking. So you know before I answer your question, if we take a quick step back, the Federal Reserve started raising interest rates in March of last year. And the consequences, whereas previously, money was very inexpensive. Now that’s no longer the case. |
| 05:49 |
And so prime rate last I looked was 8.5%. As compared to what, 3.5% before they started raising rates, investors now have a choice. Whereas previously, you could look at an early stage software-based business and make an investment, either directly or via VC, and know that you didn’t have as many options just given where interest rates were. |
| 06:19 |
Now that that’s changed, and you’re seeing companies and VCs in an environment where potential investors are being a bit more discerning with their dollars. The consequence is that now early-stage companies have to start thinking about profitability. Whereas previously, the mindset was, “I’m just going to grow at all costs.” And I’ll just go raise either a bridge run via a convertible or safe note. |
| 06:52 |
But presuming I have something that resembles a winner in my hand, I can do a price equity round, no problem. Well, that’s changed. And so now companies are thinking about, “Well, I have to be a little bit more thoughtful of what my spending plans are going to look like, how much I invest in my pipeline, how I’m going to nurture and grow the top of my funnel to get more closed W’s. And if you think about that, the question in my mind becomes, if I’m going to start a business that historically is or start a business, what’s its profitability profile? |
| 07:30 |
Most software companies are not profitable. And so to me, I think we should take pause. And I reference software because we work with predominantly software companies, but I’ll expand my explanation in a moment. |
| 07:42 |
But if you think about a company and its need to support its own operations with its own cash flow, you should put a lot more energy into due diligence and planning and answering the question, “Will the market buy when I’m going to sell?” And so the consequence of that thinking I’ve decided is I’m beginning to come to the opinion that entrepreneurs are better off starting a business that has a higher probability of being cash flow positive, like professional services. |
| 08:20 |
And take your pick. I mean, it could be trade services, construction. It could be what we do, accounting and finance. But something that perhaps is an existing business that doesn’t necessarily have to convince anyone that, “Hey, you need to adopt this new service or software that I’m going to sell.” And the benefit of that is that it starts to lay a foundation that you can then go launch a software business because you now have a infrastructure in place. |
| 08:52 |
You have cash flow that enables you to take a little bit more risk, but more importantly, time. Because today, there’s no shortage of articles on businesses that have pivoted when they first started. Because especially, again, when you’re creating new products, whether they’re widgets or software, there’s a lot of discovery that needs to take place. Discovery equals time, time equals money. |
| 09:18 |
And so by not necessarily putting the dream on hold, but just saying, “Hey, I’m going to create a machine that gives me the ability to pay myself, my core staff, a marketing arm first, then you’re better positioned to pursue that other vision that somebody has. Kristian, do you work a lot with startups yourself? |
| 09:48 |
I do. So a little bit about the company. You mentioned FinStrat management. So I am the founder and CEO. I started the company back in Q1 of 2017. Originally thought that I would assist founders raise capital. Having been through the process myself, it had been demystified. And I realized having spoken to a lot of entrepreneurs that there’s a bit of an enigma to it. |
| 10:16 |
And it just so happens that our first client, who’s still a client today, said, “Kristian, that’s great. What I actually need are dashboards. And oh, by the way, I’m about to lose my accountant, and frankly, I need to go from cash to accrual accounting. Is that something you can help me with?” And I said, “Yes, it is.” Because I had served in a variety of accounting and finance roles leading up to this point. |
| 10:40 |
And therein, FinStrat Management was born today, so we offer a host of services, but our original and core service is founder-directed accounting and finance services. And a lot of providers in the space where we separate ourselves is that we’ve designed our offering for businesses, in simplest terms, have their site set on the brass ring. |
| 11:09 |
So they want to monetize either debt facilities, price equity rounds, or eventually a sale. Investors are going to want to see certain information. So in the case of our inaugural client, it was dashboards. Show me your SaaS metrics. Show me your monthly reoccurring revenue and the individual components, new sales, expansion sales, gross churn. And that information is used in a variety of ways. |
| 11:39 |
Effectively, it’s business intelligence. Members of the C-suite can use it to make decisions. Do we commit more to sales and marketing? Are we committing too much? But it also helps communicate to investors, the board, how the business is performing to assist make a decision whether or not they want to cut a check. Understanding that management team and a whole host of other variables go into decision, but financials are a big part of that. |
| 12:09 |
Most early-stage businesses aren’t in a position to hire a full-time chief financial officer. But even if they could, my counsel would be it’s not the best use of your dollars. There are a whole host of service providers. Case in point, I employ a fraction of chief marketing officer. Marketing is not in my wheelhouse. But to me, it makes more sense to find that expertise and employ a fraction of their time because that’s what I need. |
| 12:38 |
Same logic goes on the accounting and finance side. Our offering, we mimic an in-house team. So we do everything. Gap compliant, financials, emphasis on accrual accounting, white-labeled back office, but most importantly, dashboards, budgets, forecasts. Answering all of those questions I mentioned a moment ago of how is the business doing and are we on the right trajectory? For a young company or a young startup, if they’re not profitable, how much time do you think people should give it before it becomes profitable? |
| 13:11 |
How much patience do you think these companies do? It’s a great question. There’s a couple of answers to that. So I’ll start with the really objective one. I’ll say 18 months. And I say that objectively just because I know that a lot of institutional investors will look at runway as an objective measure of whether or not they want to put more money into the company. And so I’ll exaggerate to make my point. So just to interrupt, when you say runway, you mean how long they have before they run out of cash. Correct. |
| 13:41 |
Yeah Yep. And so if you look at monthly burn relative to how much cash is on the balance sheet, you’ll know how many months of runway the company has, presuming all things being. Obviously, it’s a variable question because the next day you can sign a really big deal. And if you can structure it such that you can prepay your fees for a year, let’s say, that’s going to change the profile of your runway. |
| 14:11 |
And so it’s a great example, though, of how having a foundation within accounting and finance that you can readily get that answer is very valuable. Now, the subjective answer to your question is it depends. You know I alluded to pivoting. Other writers have made reference to eating ramen noodles. |
| 14:35 |
And the spirit of it was, you know if your heart’s really in this and you’re convinced that it’s just iterations and time, well, then you just figure out what you need to do to bring this to life. You know I’ve seen examples where founders have kept at it for years as they continue to discover new elements on the market. Now, I’m not suggesting that founders should necessarily do that. |
| 15:03 |
And I say that because one of the things I learned back in that dot com boom was some of the tactics that very successful hedge funds were employing to consistently generate returns for their investors. And in simplest terms, it wasn’t what they were investing in. It was how they were investing. Specifically, they were cutting their losses very, very, very short. And so logically, they’d say to themselves something the effect of, “I don’t control the market. |
| 15:35 |
I can decide where I deploy my capital, but the market doesn’t care what I think.” That same parallel exists with a founder who’s selling a new product. You can believe with all your being that what you have is fantastic. It doesn’t matter unless someone’s willing to exchange dollars for what you have. And so with these hedge funds, I watched trade. Same concept. Position goes against them. They’re out. |
| 16:02 |
And if you really start to think about it, I’m going to do a little mental math for everybody here. Imagine you had 10 positions and you put the same dollar amount on for all positions. And let’s say seven of those positions you were wrong through you were right. I mean, they went in the direction you were anticipating. If you were able to limit your loss to, say, $1,000 on those seven, so $7,000, as long as collectively you can get greater than a $7,000 law again on the three that went in your direction, your portfolio is generating a positive return. |
| 16:38 |
And so I just distilled how very successful traders and hedge funds make money. But I mean, that’s it. I mean, there’s a whole host of challenges of doing what I’ve just described. But I mean, that’s really the spirit is at some point, do you say, “Okay, I’m just wrong, and I’m going to stop, and I’m going to move on.” It’s not an easy decision, especially when you’ve invested a lot in blood, sweat, and tears. |
| 17:03 |
But my counsel is that at some point, you should say, you know I’m just wrong, and I need to stop this endeavor, and I need to move on. I’m glad you brought that up about letting your winners run and cutting your losses short. I think that’s one of the most difficult things for young traders to learn. When somebody in their early 20s or mid-20s starts trading on the stock market, it somehow plays with human psychology, right? As humans, like as soon as we’re up a little bit ahead, it’s like, “Ooh, I want to take the money. I want to take the money off the table. |
| 17:33 |
I want to bank my winnings.” And then as soon as something goes against me, I’m like, “Ooh, you know I don’t want to sell it. I want to recover my losses.” And so for some reason, human psychology tends toward the opposite of what we should be doing. And so there’s quite a bit of discipline there. Yeah. Let’s talk a little bit more about investing and finances. You have a really strong background there as well. If I can ask a bit of a personal question, how are you invested for your retirement? Not in terms of numbers, but in terms of asset classes and yeah. |
| 18:03 |
So personally, my preference, just given my balance sheet profile, is real estate. And it’s not to say that I don’t have a laundry list of things that I would like to invest in. I would. I have nanotechnology on my list. I have fusion on my list. I have AI on my list. And perhaps one day when my balance sheet’s bigger, I’ll make investments in those spaces. |
| 18:32 |
But my opinion is that real estate is well, if you’re going to deploy passive capital, my position is real estate is the best starting point. And it is important. Let me just start by saying for a moment, I am distinguishing that from starting a business. As I describe it, I encourage people to think of money creation in two ways. There’s how you make your money and how you invest your money. They’re not the same. |
| 19:05 |
My experience and what I’ve seen working with and knowing high-net-worth individuals is that the majority of them have made their money via equity or ownership in something that is a business. And that business was either sold or it became profitable, and they paid themselves dividends. They then subsequently invested their money. The majority of them that I know started in real estate like myself. |
| 19:34 |
But again, depending on their net worth and let’s say someone who’s eight figures plus, then effectively, you’re in a position where you can take more risk. And so I think it is important to note, though, that I am intentionally not including traditional call it public stocks and bonds. |
| 20:01 |
Not that they don’t have a place in a portfolio, but in the beginning as compared to real estate, my position as real estate is the winner. The reason I feel that way is leverage. So you can go on margin in stocks and bonds, but given that there’s a lack of volatility with real estate, it’s less risk. And frankly, you can also get more leverage. Depending on the investment property, banks are going to oversimplify. |
| 20:30 |
Banks have two criteria which they’re going to make a decision if they’re going to loan against. It’s going to be your debt service coverage ratio, i.e., so what are the rents relative to the price of the property? And then two, let’s say most of them will top out at 30% equity. So 70% or book to property value. And so you know if you think about it, you’re effectively owning a piece of property for a fraction of the cost. |
| 21:00 |
And now you have renters, whether it’s residential or commercial, who can pay off that mortgage. And presuming you can get in at the right basis, which is a bit hard to do in this environment because there’s a significant mismatch throughout this country, and there’s a supply shortage. It’s possible to generate positive cash flow on day one. No secret. I mean, there’s no shortage of people who have webinars and conferences where you can go and learn how to do this. |
| 21:33 |
But my personal experiences and it’s an absolute genuine way to create wealth. Really, just in my opinion, becomes a question is at what point does your portfolio get big enough where you start to diversify? You know I mentioned some of the sectors on bullish on. You know I could unpack that further if you’d like and give you some other specific examples. But I think the really important part is this concept and it’s core to being a CFA charter holder. |
| 22:02 |
It’s not just return. You have to look at risk. And understanding how loose or conservative you like to play things are going to go a long way to dictating your decisions. That’s also influenced by age. Someone who’s 21 can take a lot more risk than someone who’s 90. They just have different on horizons and different needs. Again, I’m oversimplifying this, but I mean, those are the big factors that go into my answer. You know For everybody’s benefit, I’ll be 48 later this year. |
| 22:34 |
But all my kids are out of the house. They’re almost completely self-sufficient. And so, I mean, a whole host of criteria that should go into the process. But without fail, most of all the high-net-worth individuals I know all include real estate as part of their portfolio. I find your answer quite fascinating. So I’m a real estate guy myself, so I’m big on real estate, and I am very excited to hear that you are big on real estate as well. |
| 23:04 |
I mean, I remember there was a book in the 1990s called The Millionaire Next Door, and there were similar studies. I think Tom Corley was another one of my guests on the show who repeated that study about 10, 15 years ago. And both pretty much wrote the same thing is that real estate seems to be the quickest, most predictable, most reliable way to accumulate wealth. And by that, I mean like real estate investment apart from your primary residence, which is also another vehicle, but you got to live somewhere. And then real estate, especially in America, where the tax code really does favor real estate investors. |
| 23:35 |
Given everything you said, with leverage, with the lack of volatility, etc., real estate just seems to be a great vehicle for many American investors. I also found it quite fascinating that you mentioned industries as opposed to companies, right? So for example, you said Fusion. You didn’t say all these different kind of like Renaissance Fusion or all these other companies, or you mentioned, I think, AI and a few other ones as well. And so I would have thought that given your expertise as a CFA, you are more qualified than 99% of the people in this country to analyze public companies, right? |
| 24:08 |
You can look at their cash flow statements, balance sheet, and figure out, “Okay, this company is underpriced, overvalued,” etc. And yet, you are still sticking to the fundamentals, which is, is this industry exciting? Is this industry poised for growth? Is the technology revolutionary? And so you’re really going down to the fundamentals as opposed to the detailed analysis, if I’m understanding you correctly. Yeah. So a couple of different thoughts. |
| 24:38 |
I’ll use Fusion as an example. I mean, it’s a fun subject, but I’ll use Fusion as an example. Or maybe Fusion is an example because I don’t know how many public companies there are who are intimately involved with the fusion. So let’s use fertilizer, which I’m also very bullish on. There’s a couple of different ways you can play this. |
| 25:01 |
You can say, “I’m going to go find an S&P 500 fund or a mutual fund that will spread my risk because they will invest in a number of different fertilizer-based companies.” And frankly, even if you had the time to individually analyze an individual company, your simple amount of money that you have to invest would dictate that that’s the best route as compared to cutting a check in a private company. |
| 25:34 |
And so that then takes us to the Warren Buffetts of the world. So if you think of Warren as compared to a hedge fund, different time horizon, different outlook, he’s not necessarily, though he does, trade in or out of positions. Because he has so much size, billions and billions of dollars, and he can move the market, you know he has specific criteria that he looks at not only in terms of profitability and free cash flow, but also just how big is this company? |
| 26:05 |
Am I going to own it outright or am I going to take a portion? But the spirit of what he’s doing, value investing, is to do homework and really dissect an individual company to see whether or not it meets its criteria. Maybe if we have this podcast in five years from now, I’ll do something similar because that type of investing requires not only time, but it also is dictated because you’re cutting checks that have a certain size. |
| 26:36 |
So it just so happens that today my portfolio and my time dictate that I’ll stick to real estate. But I don’t know. I 100% and I love dissecting individual companies. I’ll also throw out there that it’s hard. And it’s the exception that people who can consistently beat the market, but it’s not to say it can’t be done. |
| 27:01 |
It really just boils down to a combination of hard work, know-how around analysis, a plan, sticking to the plan, and a little bit of luck. So here’s the thing. Earlier this year, I read a great book called Market Wizards. And I think it was written back in the 1980s. It’s a little bit old now, but it was one of those books that really drove it home for me that, yes, there are investors. There are traders out there who can beat the market consistently year after year. |
| 27:31 |
Because before that, you know a lot of people are like, “Oh, it’s an efficient market. You know There’s not much you can do. You have no hope,” etc. And yet at the same time, I read that book and I say, “Okay, so there are investors and traders who can beat the market consistently.” On the other hand, we have professional mutual fund managers, and many of them struggle to beat the market. How difficult is it to consistently beat the market? Difficult. So a couple of different things. |
| 28:02 |
One, you have to look at what’s the framework that you’re going to invest. A mutual fund is typically going to be long only, whereas a hedge fund has a lot more options available to it. Long, arbitrary. They can write options if they wanted to. And so that’s important because right away, we have an apples or orange arsenal of investment vehicles depending on whose performance you’re looking at. |
| 28:28 |
Now, it’s not to say there aren’t mutual fund managers who aren’t consistently beating the market. There are. Bill Miller, Leg Mason, he’s consistently beat the market. Bill Gross, who used to be founded, used to be with Pimco. Bond King consistently beat the market, regularly beat the market. But they would tell us that they’re the exception. |
| 29:00 |
You know Yes, individually in any one year, you may have a portfolio manager who does really, really well. The question is, how consistent are they? As compared to the hedge fund side, you see a lot more hedge funds that are consistent. Obviously, there are some that are consistent, then blow up. From where I sit, it’s a combination of it’s a combination of portfolio management, first and foremost. How well do you what I alluded to earlier, how well do you manage your losses and do you let your winners ride? |
| 29:30 |
The second part of that is where are you actually putting the dollars to work? Some of the hedge funds that I saw were absolutely employing quants to answer those questions. They would short stocks and write them to zero because they had figured out the key as to what was the most what was the profile of a company that looked like it was going to go to zero. |
| 29:54 |
Now, if anyone’s listening and they’re curious, you know I’d say it’s probably you’re losing money and your debt profile suggests that you’re not going to be able to get any more outside capital. And if your revenue is shrinking, you have what looks like a failing company because businesses only go out of business for one reason, and that’s because they run out of cash. And so it really then becomes of how disciplined are you? You mentioned psychology earlier. |
| 30:26 |
My experience has been is that we’re not only hardwired to be right because of our egos. We’re raised in an environment where we’re expected to do 90 or better on an exam when really we should have the mindset of a major league hitter. Getting into the Hall of Fame, you just have to have a lifetime average of greater than 300%. So effectively, you’re getting three hits out of every 10 at bat. Same concept with stock investing. |
| 30:56 |
You don’t need to be right the majority of the time. You really need to just make sure you cut those losers short and make sure that your winners make up for your losses. And therein lies the rub. Because as you pointed out too, admitting you’re wrong and saying, “Oh, this is not going in my direction I anticipated is hard.” And then there’s a tendency to sell your winner quickly because it validates that you were right. “Oh, it’s going in my direction.” That’s the exact opposite you should be doing. |
| 31:25 |
No, let it go because you have to make up for those losses and then earn a return. That’s exactly it. Kristian, as we begin to move to wrap up this interview, where can people reach out to you? Where can people follow you and find you? So they can find us on our website. It’s Finn, Short for Financial, FIN, STRAT, short for strategy, ST-R-A-T, and then MGMT abbreviation for management.com. And you can see there’s a Contact Us page on there. |
| 31:57 |
Again, we regularly work with founders providing accounting and finance services. Big emphasis on software, more broadly, venture-backed companies. If any of your listeners would like a free consultation, it’s my pleasure. They can just reach out to us the website. Happy to listen to their business, what they’re doing, and answer any questions for them if they’d like. Fantastic. I’ll put those into the show notes. Kristian Marquez, CEO and founder of Finstrat Management. |
| 32:27 |
Thank you very much for joining us. Gabe, my pleasure. Thank you for having me. Hey, thanks for joining us for another episode of the Money Seed Podcast. Please remember to click like and subscribe. It really helps spread the message to other investors, and it helps attract new viewers to the show. We appreciate your support. Thanks very much. |
