#AIS: Bestie AMA with Valor's Antonio Gracias

The recording opens with a short garbled fragment of banter, with snatches such as "let your winners ride" and a mention of open-sourcing something to the fans. It has no clear meaning.

A host then turns to Antonio and says Elon recently reflected on 2008, when, as the host puts it, SpaceX and Tesla were both near collapse around December 25th. Elon said, according to the host, that only a handful of people put their careers on the line for him, and the host says Steve Jervison, as the transcript spells it, was mentioned specifically. The host adds that Elon was a little choked up. The names in this question are partly garbled. The host asks Antonio to take the audience back to that potentially career-ending bet on an electric car company.

Before answering, Antonio jokes that he left his wallet backstage because the last time he was with the four hosts he lost a lot of money, and that they also made him cry. A voice jokes that they are playing poker and that he "pulled a Palmer Lucky" (the transcript's spelling). Antonio says that if he cries again it will be from gratitude for the moments they shared.

Antonio says his firm's strategy is very operational. In that period he was working on supply chain, the factory and sales, together with his partner Tim Watkins and three or four supply chain people, and they faced a major supply chain cost problem. He says it was brutal, and that it was also the middle of the financial crisis.

He describes a capital and people allocation decision at small funds, which he gives as roughly 120 and 300 (the figures are garbled). They had to decide where their capital and above all their people would go, and chose to focus on Tesla, first because they believed in Elon when most people did not. These details come from his recollection and are not checked here.

Antonio says Elon is not only a brilliant engineer, one in a hundred years in his words, but a man of deep conviction, deep passion and deep compassion. In his view Elon is trying to bend the arc of humanity for everyone because he really cares, and the firm wanted to be on that mission with him. This is Antonio's own assessment of Elon.

He says it was really hard at the time. One client asked him how he could know this was not DeLorean, and he answered that the firm was not selling cocaine out of the back of the factory in the cars. A host explains that DeLorean was the car from Back to the Future whose owner was trafficking cocaine to underwrite it, and Antonio jokes that despite living in Miami they were not selling cocaine. He calls it a career-betting event that turned out right.

A host notes that Antonio did not only back Tesla but also appeared at critical moments at SpaceX. Antonio says they doubled down on Tesla, put more money in, helped lead a tough convertible round after the crisis, and then also invested in SpaceX, which was running out of money as well. In terms of the capital stack, he adds, others were around.

He says that operationally they stayed involved with SpaceX over the years, but never to the existential degree of Tesla. Because he and his team were operators, and he had been a factory manager who ran industrial facilities, they could add unique value at Tesla; in a rocket factory they were less valuable. He recalls that both companies were going down at the same time under extraordinary stress, yet calls it one of the greatest moments of his career.

Antonio describes the best part of the venture business as backing amazing people trying to change the world and going to war for them in the deepest, darkest moments. He calls these moments of fellowship, where you care deeply about someone and the mission and can make a huge difference, and says they are the highlights of his career. He says his partners would say the same.

He says that he and others on stage had fought together for something they believed in, and he calls it a privilege to have done so with Elon and with the hosts at different points in his career. He ends with gratitude.

A host asks how he stays grounded and motivated after huge successes, when part of him must feel the next one will never be as good. Antonio answers that the firm keeps going because it believes in making things a little better, and invests in companies that make a difference, with people it respects and is aligned with. He calls that the ethos of the firm.

He says they may never find something as important as SpaceX again, but they will find more great people and help them. He points to two of the companies represented at the event: Anduril, where the firm invested alongside Palmer, and Flexport, where he says it made a small investment.

He calls not putting more money into Flexport one of the biggest mistakes of the last 10 years of his career. His account is that there was a soft handshake on a term sheet at a price he calls X, and the price later doubled to 2X, so he held to his price memory and agreed to co-lead. The details are his recollection.

Antonio says the two founders on the stage are entrepreneurs trying to make the world better, in his view making the world safer in a time of war, with a remark about COVID that the transcript garbles. He says there are more people like that, who may not be Elon, who he thinks is probably one per generation, but that there are lots of great people.

He is very optimistic about what is happening in the economy, saying his firm sees incredible innovation from tremendous entrepreneurs in its pipeline, and adds that maybe there is another Elon, though he does not know.

A host notes that hardware and other deep tech investments can have very long capital deployment cycles, and asks how much customer and revenue evidence Antonio needs before backing a big build such as a rocket to the moon, and how he values such a business.

Antonio says the answer depends on the sector and that the firm thinks probabilistically, using a probability tree of outcomes such as 3X, 5X, 10X or 100X, and then asking what return on capital the money actually earns. He refers to a talk the hosts had earlier about public markets. Part of his description of the kind of company the firm seeks is garbled in the transcript.

His framing is that a business is a machine: capital goes in one side and return comes out the other, so return on invested capital really matters. He says that at a company like SpaceX a lot of capital goes in, but if it works, which the firm believes it will, the result is a company with tremendous margins even in the industrial sector because it lives in an oligopoly inside and outside the US. This is his investment thesis, offered as opinion.

Asked whether he backs a lot of deep tech startups where a founder arrives with a PowerPoint and asks for 50 million dollars for a prototype, Antonio says it depends on the business. He says the firm has passed on things it expects to be competed down to low margins, and he declines to name examples, although he mentions electric aircraft and VTOLs as an area with many entrants.

He contrasts SpaceX as a one-of-a-kind business (the transcript renders it "NNF1") with electric aircraft, which he expects to be a market with many players ("NNF many"). In a market with many players, he says, margin competition pushes return on capital down to basic industrial margins, little better than established aerospace names such as Bell or Airbus. The exact comparison is garbled.

Another voice says Antonio has raised one of the most important and poorly understood principles of investing: return on invested capital. In this voice's view most people do not know what it means, how to calculate it, or how it compares with the weighted average cost of capital, though these are fundamentals for running a business, especially in a moment like this.

The voice adds that when you need a lot of money and meet someone as sophisticated as Antonio, who has worked from first principles, you must know these things. He calls ROIC, alongside DCF models, a core foundation of valuation, especially when making real things and spending capital expenditure.

The voice says that in the last 10 years money was effectively free and few thought about this, while his own firm always has. In today's world, he says, an entrepreneur who can show a 50, 60 or 70% return on capital on each dollar is making a compelling case, even while losing money along the way.

The voice ties this to a question from the previous day: how a young company presents itself and cuts through noise on future value creation. He argues that even when people debate whether an answer is right, they give credit for the intellectual honesty of working through it.

He says companies often slip away from first principles. In a high-margin enterprise software business, he explains, ARR can be defined and a multiple of ARR used as the valuation comp. Then a company with different margins, growth and revenue retention, or a services business, uses a similar comp, and everyone thinks about valuation as a function of an industry-standard comp instead of asking how that comp arose and what business it came from.

He also claims people are calling revenue ARR when it is not even subscription revenue, and that the investing cycle becomes assuming the next round will be at a certain multiple, which drives incrementally higher valuations while everyone misses the core proposition. These are his observations of market behavior, not measured findings.

Asked for his read on the economy from his portfolio companies, Antonio says he thinks the economy is in a recession, and jokes that he is pretty old and has seen many cycles. He cites a tweet about racing to something, which the transcript garbles, and agrees with the thrust: companies need enough capital to get through the problem.

He says there is good news in this recession. Looking at the macro picture, including debt, the state of the consumer and what is happening with inflation, he says it looks a little like the period after World War II. This is his own analogy, and no data are given to back it.

In Antonio's account, World War II was the last massive mobilization and demobilization of the economy, and COVID was a mini version: the system was stuffed with money as a buffer and the economy restarted. We now have inflation, he says, but also lots of business formation and new ways of working, as after the war. He says that makes him very optimistic.

He says that to bring inflation down it will be necessary to reduce consumer demand or change prices, and that the next year or two will be rough. But he argues the consumer is in pretty good shape and not overleveraged, and that there is a lot of innovation under the numbers, so the economy should come out okay.