#AIS: Bestie AMA with Valor's Antonio Gracias

Let your winners ride, rain man.

David Sack.

And I said, we open source it to the fans, and they've just gone crazy with it.

Love you, queen of Kinwa. Antonio Elon had a moment of reflection, and he was talking about 2008. He's talking about the imminent collapse, as he felt it, of SpaceX and Tesla at the same time in December 25. And he said there were just a handful of people who came out there and put their careers on the line for him. Yourself and Steve Jervidson specifically mentioned and Ira. And it was a particularly poignant moment for him. He was getting a little choked up about it. Tell us about that bet you made in 2008 and the potentially career ending bet for you to bet in an electric car company at that moment. Take us back to that decision.

Yeah, well, before I do that, I just want to say that I left my wallet backstage, because the last time I was with the four of you, I lost a lot of money. And I realized that I better leave all the cash somewhere where you can't get it. And you also made me cry. So I think I might cry again now. Of joy, I mean. No, it was more like humiliation.

We were playing poker.

Yeah, we're playing poker.

You pulled a palmer.

Lucky.

If I cry again this time, it will be from a sense of just gratitude for those moments that we got to share, for us in particular, because our strategy is so operational. I was there working on supply chain in the factory and on sales in that period, along with my partner, Tim Watkins, and three or four of our supply chain people. And we had a major problem. Supply chain. The costs were way out of control, and Elon was doing the engineering on the very expensive parts. We were doing the. I call it the b parts, the a and the b parts s. And, man, it was brutal. But it was very clear to us that. And remember, it was also the middle of financial crisis, right? So we had a treasury portfolio. We had to decide we didn't have a lot of capital at the time. These are tiny funds, $123,000,000 funds, where our capital go, where our people would go, more importantly, where our operating people go and where I would go. And we decided to focus on Tesla, because first, we really did believe in Elon when most people didn't. And we saw in him something very special, which I think you probably saw here yesterday, that not only is he a brilliant, brilliant engineer, one in 100 year kind of engineer, he's a man of deep conviction and deep passion and deep compassion. What he is doing is really trying to bend the arc of humanity for all of us because he really cares. And that came through to us, and we wanted to be on that mission with him. And so we were privileged enough to be there in a moment in time that it mattered. And it was really hard, man. I mean, we had clients. I actually had a client said to me, how do I know this isn't DeLorean? And I said, look, I can tell you for a fact we are not selling cocaine out of the back of the factory in the Cars.

DeLorean being the famous Back to the Future Car.

Exactly.

Where the owner was trafficking cocaine to underwrite the Car.

Exactly. I may live in Miami VinEYard. Tony, gracias. But we're not selling cocaine for sure. Yeah, but no, it was a Career betting event for us. And it turned out right. It was right thing to do. But, yeah, for me, I'm just deeply grateful for these experiences.

You really doubled down because you didn't just do Tesla, you also were there in some really critical moments at SpaceX as well.

We were. Although I tell you, we doubled down at the time in TEsla. We put more money in Tesla than the middle of the financial crisis and then helped lead a convert round there that was really tough for us to do. And then put more money in SpaceX. But I tell you, operationally, like, in terms of capital Stack, I think there were other people around. And SpaceX was also running out of money. And so we put money to SpaceX operationally, worked at SpaceX over the years, but it was never as existential in terms of the operations as it was at Tesla. I mean, Tesla was, I think, truly existential. And because we were operating guys and I myself had been a factory manager. I worked in auto parts and auto parts factory. I'd run industrial facilities myself. We could kind of uniquely add value there in the rocket factory, we were just less valuable. But, yeah, both these companies were going down at the same time. And the amount of stress we were all under was extraordinary. But looking back on it, it's one of the greatest moments of my career. I mean, this sense of fellowship. I think the great thing about being in our business, the business we are all in, is that we get to back amazing people that are trying to change the world. And in these dark, dark, dark, deep moments, we get to go to war for them. And in those moments, I call them these moments of fellowship, where you just care deeply about someone and passionate about the mission, and you get to make a huge difference. These are the highlights of my career. And if you ask my partners, they tell you the same thing. These are the best moments. We've had some together. Three of us have had some together. Actually, we've all had some together here on the stage. We had to fight for something we believed in. And it's a privilege, man, to do it. It's a privilege to be in that situation. It's a privilege to be with Elon. It's been a privilege to be there with all of you at different moments in my career, and I'm very grateful for it.

Do you feel like you come off of a high after having huge successes?

Like.

Like, how do you stay grounded and motivated to try to find the next one? If in the back of your mind there must be a little piece that says, it's never going to be as good as this guy or those two know?

It's an interesting question, javas. I think that there's a couple things in play for us. One is we keep going because we believe in making the world better. We invest in companies that we believe make a difference with people we respect and we're values aligned with. And that's the ethos of our firm. Right. So whether it's large or small, we may never find something that's as important as Teslas, SpaceX again. But we will find more great people and we will help them. Two of our companies here, I mean, we invest in Anderol with Palmer. We have a small investment, Flexport, which should have been one of the biggest mistakes the last ten years of my career, is not putting more money in Flexport. Yeah, no, it's kind of a funny story about. We had, I'd say, kind of the soft handshake on a term sheet at, say, a price of x. And Softbank came in like two days later and made it two x. And I had too much price memory to keep going and co lead it. So there's an error. But you have two people on the stage here. They're extraordinary entrepreneurs that are trying to make the world better. Both these companies are really great and making the world much more, particularly now post Covid and in times of war, making it much safer for all of us. There are people like that out there. There's more of them. They may not be Elon. It was probably one elon in our generation, but there's lots of great people. And I'm very optimistic about what's happening now in the economy. We're seeing incredible, incredible innovation with tremendous entrepreneurs in our pipeline. So maybe there's another one. I don't know.

Antonio, how do you think about the. In the businesses you guys invest in, there can sometimes be a very long capital deployment cycle before you see any real return in terms of business value, whether it's pharma. I know you've done pharma. Some of these hardware companies where there's a big build cycle, how much do you need to kind of think about and see a customer and revenue show up before you're willing to say, hey, let's build the big rocket ship to go to the friggin moon? And how do you judge and value that business and back a team?

It's a really good question. I think it depends on the sector we're in, and it depends on how we look at the world. Trip probabilistically, and we're looking for companies that we call Pro and trip over. They get bad and the world gets worse. So in the case of pharma or something like SpaceX, we'll think about, like, what is our probability tree here? What's your probability loss? Probably a three x, a five x, a ten x 100 x. And then we'll think about when the capital goes in. What is the actual return on capital? I was watching the talk you guys had with Ryan about what happens to the public markets. The reality is that a business is a machine. You put capital in one side, and out the other side comes return. The ROIC, the return invested capital really matters. And if you're a classically trained investor the way I am, we think about that a lot. So even though we may be putting a lot of capital in, the question is, what's the margin going to be in the back end? A company like SpaceX, a lot of capital is going in, but we know that if it works, and we believe it will work, we're ultimately going to have a company that has tremendous margins, even in the industrial sector, because of the industry structure it's in. It lives in an oligopoly inside the US and outside the US. So it's like building Starlink. Same thing, capital going in. But we know that the margins and the profitability of that business on the back end will be very, very high, and so the ROIC will be very good.

Are you backing a lot of deep tech startups, like companies? A founder shows up with a PowerPoint, they're like, I need $50 million to make our prototype. What happens there?

It depends on the business. So, as an example, we have passed on things that are, our view, going to have margins that are ultimately competed to a low level.

Right.

And I don't want to give examples here, but there are lots of examples of people that are doing things in, I'll call it electric aircraft, Vtols, et cetera. We look at this and say this is going to be a highly competitive market. These are not nn of one. SpaceX is an end of one. If you compare that to someone making an electric vehicle, that's say, electric airplane or electric vetol that will not be an end of one, it will be an end of many. And in end of many business, you're ultimately going to have margin competition that's going to make it. That return on capital goes down to basic industrial. Like, it won't be that much better than Boeing's ROIC or Airbus's ROIC, because those will be ultimate competitors.

You said it a little too, I think superficially. So let me just double click. And I think Antonio brings up, I think, one of the most important principles of investing that is so utterly poorly understood, which is ROIC, Roik return on invested capital. Most people don't even know what it means, how to calculate it. No pat over your weighted average cost of capital. These are enormously fundamental principles when you're running a business, especially in a moment like this, because when the rubber meets the road and you need a lot of money and you run into somebody as sophisticated as him, he's already worked from first principles to understand it. It's