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FEG INSIGHT BRIDGE PODCAST

We are thrilled to interview some of the world’s leading investment, economic, and philanthropic minds to provide insight on how institutional investors can survive and thrive in the world of markets and finance.

Win an autographed copy of #1 New York Times Bestseller Hillbilly Elegy

The random drawing will be held in early February. We will contact you via the email provided once complete.

Hillbilly Investor: J.D. Vance

We are thrilled to have investor, philanthropist, and bestselling author, J.D. Vance!

J.D.’s #1 New York Times Bestselling book, Hillbilly Elegy, explores social and economic challenges in small-town America from his personal viewpoint. On November 24, Hillbilly Elegy the movie will be available on Netflix, which was directed by Ron Howard and features an incredible lineup of A-list actors. View the trailer below.

J.D. is also a founding partner of Narya Capital, which is a venture capital firm focused on backing great ideas and entrepreneurs outside of Silicon Valley. Listen in as J.D. shares his experiences turning a law school essay into a #1 NYT Bestselling book, consulting on a star-studded movie, and investing in Middle America.  Topics include:

  • Cultural & economic impacts of the loss of the American industrial base
  • Opioid addiction and how it is still plaguing the working class
  • Value of empathy in politics
  • Re-investing in America
  • How Middle America entrepreneurs can differ from those on the “Coasts”
  • How cities can be successful in playing to their strengths and by creating the right infrastructure to support VC
  • And, if politics are in his future

 

Don’t miss this engaging conversation — or the movie!

KEYNOTE SPEAKERS

J.D. Vance
Author of the #1 NYT Bestselling Hillbilly Elegy

J.D. Vance is an investor, commentator, and author of the #1 NYT Bestselling Hillbilly Elegy, described by the National Review as a “brilliant book” and by the Economist as “one of the most important” reads of 2016. Raised by his working-class grandparents in Middletown, Ohio, J.D. graduated from Middletown High School in 2003 and then immediately enlisted in the United States Marine Corps. After graduating from college, he studied at Yale Law School. During his time at law school, J.D. worked at Yale’s Veterans Legal Services Clinic, providing free legal counsel to veterans of our nation’s wars in Vietnam and Iraq. After a stint at a large corporate law firm, J.D. moved to San Francisco to work at the leading Silicon Valley venture capital firm Mithril Capital, cofounded by Peter Thiel and Ajay Royan. Following that role, J.D. became the managing partner of the first Rise of the Rest Seed Fund, Revolution’s seed stage venture capital fund. Today, J.D. serves as special advisor to the Rise of the Rest Seed Funds. J.D. continues to lecture and write on topics of public interest. He regularly discusses politics and public policy on national networks, and has appeared on ABC, CBS, CNN, and Fox News.

Host
Greg Dowling
Chief Investment Officer, Head of Research, FEG

Greg Dowling is Chief Investment Officer and Head of Research at FEG. Greg joined FEG in 2004 and focuses on managing the day-to-day activities of the Research department. Greg chairs the Firm’s Investment Policy Committee, which approves all manager recommendations and provides oversight on strategic asset allocations and capital market assumptions. He also is a member of the firm’s Leadership Team and Risk Committee.

Transcript

Greg Dowling (00:06):

Welcome to The FEG Insight Bridge. This is Greg Dowling, head of research and CIO at FEG. This show spans global markets and institutional investments through conversations with some of the world's leading investment, economic, and philanthropic minds to provide insight on how institutional investors can survive and even thrive in the world of markets and finance.

Greg Dowling (00:30):

Today on The Insight Bridge, we are thrilled to have investor and best-selling author J.D. Vance. His New York Times best-selling book, Hillbilly Elegy explores social and economical challenges in small-town America from his family's very own viewpoint. And if that wasn't enough, this fall, Hillbilly Elegy becomes a movie on Netflix. It was directed by Ron Howard and features and incredible lineup of A-list actors. Outside of inspiring a movie, J.D. is spending his time on his other passion: investing. He is a founding partner of a venture capital firm focused on backing great ideas and great entrepreneurs in less obvious locales, like flyover country.

Greg Dowling (01:14):

Before we start, a quick geography lesson for our listeners. FEG is in Cincinnati, Ohio. It is in the very southwestern corner of the state. Part of the broader metropolitan area includes Kentucky, where J.D.'s extended family is from, and Middletown, Ohio, where J.D. grew up.

Greg Dowling (01:35):

All right, big FEG welcome to J.D. Vance. Thanks for joining us. I know you're gotta be extremely busy right now.

J.D. Vance (01:41):

Yeah. Thanks for having me. It's fun to talk. And yeah, I was at the FEG conference a few years ago, so it's always weird how things adjust in times of the coronavirus, but glad to be able to talk to folks again.

Greg Dowling (01:53):

One of my favorite parts of your book, it's in the introduction. It says, "At the time, I am 31 years old. I've accomplished nothing. But I'm writing a book". So what made you think about writing a book? And then maybe more importantly, how the heck did you get it published?

J.D. Vance (02:10):

The answer to both of those questions is related. So it was really a law school professor of mine who encouraged me to think about taking what was at the time a law school essay about upward mobility and economic opportunity and sort of fuse it with my own personal experiences and turn it into a book. And the name of that professor is Amy Chua, who some of you folks may know is Battle Hymn of the Tiger Mother author. And she's had a couple of other books that have been successful too. And so, when a person like that who has had some success in the publishing industry tells you that you should write a book, then you start to ask yourself if maybe she knows what she's talking about. And so that was really the first kick that got me on the path of thinking about writing a book. And really what happened is, over time the book just got more and more personal. As I said, it started as this law school essay about upward mobility, and every draft that I turned in--whether it was to my wife or to Amy or to the person at the publisher who was reading the book---just said, "You know, this is really interesting, but what would make it a little bit more alive for the readers is for you to add a little bit more personal color. Because you've got some good family stories and these stories are related to the source material."

J.D. Vance (03:20):

And so it just became more and more personal over time. The only reason I think I could have gotten it published was because Amy believed in the project and made the right introductions in the publishing industry. As I said in the book, one of the lessons I learned in law school is that the professional world is very often oriented around who you know, and if you know the right people, things tend to fall in place, or at least you get the opportunity for things to fall in place. And she made an introduction to this woman named Tina Bennett, who has become a good friend and agreed to become my book agent. And then once Tina was on board, it was actually pretty easy to get a book deal. We had a number of interested publishers and one thing led to another. We had a book deal and then I had to write the book and here we are.

Greg Dowling (04:00):

Was it hard to be that personal and talk about some of these family issues?

J.D. Vance (04:05):

Oh sure. Yeah, it was definitely uncomfortable and I resisted it a lot. I think even when the book was coming out, I tried to have this sort of mental and psychological separation from the fact that there were all these personal stories that people were going to be reading and discussing and understanding. There were these weird coping mechanisms I realized that I developed. One, I just persuaded myself that no one would actually read it. So it didn't matter that it was so personal because no one was actually listening. If you tell a story, if you shout it into the ether and nobody listens, then have you actually said anything? And of course the publisher and anybody who was involved in the book didn't like to hear that because of course they wanted a lot of people to read the book.

J.D. Vance (04:42):

And I also just had this ability to separate myself from the book project. One of the early things you have to do is get people to endorse your book, especially if you're a new author. You have these blurbs on the back, they're about a paragraph long, and they at least give some credibility. They lend some credence to the idea that you've written this book and that other people who are interesting find it interesting. And the first person I asked for a blurb is this guy Peter Theil, who I was working for at the time. He was an investor in Silicon Valley and remains sort of involved in a lot of the projects that I'm working on. I remember sending it to him and actually having this weird "stop" moment where I couldn't quite hit "send" because I thought to myself, "Oh my God, Peter's going to read all these stories. I can't possibly send it to him."

J.D. Vance (05:27):

And my wife, who was with me at the time said, "You know, he's not the only person who's going to be reading it, so you better get used to the fact that this is going to happen." And so I hit send and tried not to think about it again and he gave me a nice blurb. I think that's sort of how a lot of it has happened is that you try to sort of forget for a while that a lot of the people you meet know these intimate family stories. Of course it comes up in conversation and when it does, that's fine, but it's definitely a weird sort of out-of-body experience that you have, I think, when you publish a book like this.

Greg Dowling (05:55):

We just finished election season, and it felt like your book really took off last election season as people were trying to understand the Trump voter. Do you think that was a fair characterization of your book? How is that right, how is that wrong?

J.D. Vance (06:11):

Yeah, I think it's fair and unfair. In important ways, the book isn't especially political. I don't think I mention Donald Trump or Hillary Clinton in the book at all. I didn't mean it to be an especially political book--obviously touches on political topics because real life touches on political topics, but that wasn't anywhere close to the focus. I think I understand why a lot of people grafted onto it when they were asking questions about the election and the electorate and who were these people who were voting for Donald Trump, and this was at least a personal insight into a family and a community and a group of people who did go disproportionately for Donald Trump in 2016. I understood why people were doing that, but I always try to remind people that a lot of the problems that I wrote about in the book, they predate the 2016 election.

J.D. Vance (06:57):

They certainly will be with us well after the 2016 or the 2020 election. And my hope is that you sort of read the book and understand and have a little bit of empathy for the characters and the very real people who make up my own family story and my own family background. I hope that empathy doesn't just last a single election cycle or that interest lasts a single election cycle because these are real people and we all share a country together and it would be nice if the interest wasn't just about, "Oh my God, why did these people vote for Donald Trump?" but was more understanding and more, I think, appreciative of the very long-term challenges that a lot of people in the community that I come from face.

Greg Dowling (07:36):

What do you think... You've been involved with a lot of different charities, I know one of them is Ohio Renewal Project. What do you think are potential solutions? How do we help these people that may not get as much attention as other groups but certainly feel left out?

J.D. Vance (07:52):

Yeah, it's very tough. And I don't think that there is any sort of single solution. I tend to think about it as a toggle between things getting worse and things getting better, and as much as we can toggle in the direction of things getting better, that's important. I do think that one of the things we've appreciated from a sort of socioeconomic perspective is that what happened in the American economy and the way that that filtered down to American culture from the early 1990s through the financial crisis was a pretty jarring shock to a lot of people in a lot of communities. We sort of have this conceit that we could sort of have our industrial base, have our manufacturing base primarily located overseas, that American consumers would benefit from the cheap products, and then American workers would sort of adjust and go into new jobs of the 21st century instead of focusing on the old jobs of the 20th century.

J.D. Vance (08:45):

And I think that story isn't totally wrong, but a lot matters in how quickly that process evolves. In other words, it's one thing to have a community adjust to a new economic reality over two or three generations, it's another thing to have that community adjust to a new economic reality over like 20 years. This economist David Autor has this really interesting paper about the China shock were basically, his argument is that from 1999 to 2007--so we're talking about a span of not even a decade--America lost about 7 million manufacturing jobs, primarily due to some of our relationships with China. Now that's obviously a sort of complicated argument and there are a lot of things that go into whether that was good or bad. I tend to think that it was on net bad, but I can understand why people would disagree, but even if you think that was ultimately a worthwhile exchange, it's really hard to find 7 million new jobs for people in the course of a decade.

J.D. Vance (09:42):

And you occasionally hear people, mainly sarcastically say, "Well folks just have to learn how to code." Well even if that's true--and I think that's a little simplistic for obvious reasons, but even if that's true, you can't just take 7 million people and have them become computer programmers overnight. These sort of shifts take time. And I guess my biggest takeaway for solutions is that we have to figure out how to preserve enough of an industrial base so that communities can thrive and people can actually work in meaningful high-wage jobs. I think without that, then you're just necessarily going to have a lot of economic disruption and you're gonna have a lot of social disruption that comes along with that.

J.D. Vance (10:21):

Another solution--and something I've been talking about for four years and unfortunately I just don't think... It sort of got worse from 2000. If you look at the data, it probably got worse from 2010 all the way through the present time, and maybe it's leveled off a little bit, but it's certainly not getting better--is we've really got to figure out this opioid problem. Again, I say that in a slightly depressing tone because in four years I don't think we've made a ton of progress--in 10 years we haven't made a ton of progress. But if you have higher rates of addiction... Which you do have in my community. Sort of defining Appalachian Americans, people who live, or are at least connected culturally to that broad region of the country that we call the Appalachian Mountains. You actually have seen in that community for 50 or 60 years, elevated rates of addiction. The problem is in the 1950s when my grandfather was having problems with substance abuse, that was alcohol, right?

J.D. Vance (11:13):

And you could be a pretty functioning person if your drug of choice was alcohol. You could go to work. Some people obviously struggled with it in much more extreme ways, but there were a lot of functioning people who had substance abuse problems in the 1950s, because the underlying substance wasn't as debilitating as heroin and fentanyl. And when you replace--you take that same prevalence of addiction and you replace the drug with fentanyl, then you've got what you have now, which is 70,000-80,000 people dying a year and a lot of communities struggling. A lot of children who are homeless, a lot of grandparents who are picking up the slack. I think figuring out that issue, preventing the flow of fentanyl into communities, and getting people better treatment is a critical piece of the equation. But, again, we can talk about that for three hours, but I think just making little marginal improvements in people's lives is probably the best that we can hope for. I'd take it.

Greg Dowling (12:05):

As I mentioned pre-call, I didn't grow up in Cincinnati, but I've been here a long time. I moved around a little bit, but probably most of my time was in Cleveland, Ohio, also a very industrial town. I remember as a young kid driving with my grandpa, he was a steel worker, a tool and dye maker, and he'd always point to the building that he worked and he was retired and he'd always with pride, say, "Greg, that's the building I worked at." Every day he would say the same thing if we were in the car. And then one time he said, "My building's not there anymore. They shipped it to China." And so it was a real loss. The other thing that struck me in your book as being both a pro and con to the Scotch Irish ancestry of Appalachia is how fiercely loyal they are and the family structure. That's important to them but that probably also prevents them from moving to San Francisco to get that coding job, even if they could do it.

J.D. Vance (12:57):

Yeah. I tell people this all the time, that one of the big solutions for how you give people opportunity who live in a geography where a lot of jobs and a lot of opportunity have disappeared for whatever reason is... Why don't they just move? Why don't they move to the places of the country that have more jobs that have more opportunity? The two responses I have to that are always: one, part of the issue with just moving to San Francisco if you don't already have a job there is San Francisco's a really expensive place to live. The same is true of a lot of big cities across the country. Even places like Columbus, which by the standards of big cities is low cost of living, but by the standards of Middletown, Ohio is a very expensive place to raise a family. We've created this weird dynamic where a lot of the places, a lot of the geographies where you have the most opportunity are also the places where it's really expensive to build a life.

J.D. Vance (13:48):

So you want to tell a person, a middle-class father of two or working class father of two, that he needs to move away from everything that he has, all of his family, all of his social support, and move to a place where a 2-bedroom apartment costs $4,000 a month. And by the way, not even totally clear what job you're going to do when you get there. That's just a really tough equation. It's not surprising that a lot of people are going to say, "Well, given a choice between that very high-risk outcome and maybe lower opportunity, but certainly stability here at home, I'm going to stay here at home." And then the second thing is you're actually right. There is a cultural component to this--a cultural component that I agree has some downsides but I tend to think has a lot of upsides too--where people don't want to build a life thousands of miles away from the people that made them who they are.

J.D. Vance (14:34):

I think one of the more interesting statistics that I saw from the 2016 election was if you live within 20 miles of your mother, who are you likely to vote for? And the people who live within 20 miles of their family were much more likely to vote for Trump, and people who are much more mobile were much likelier vote for Hillary Clinton. And my assumption is that basic pattern held during the 2020 election as well. I think that it's understandable that people don't want to leave everything behind. My own story is I left home when I was 18 years old, I went into the Marine Corps, I went to Ohio State, I went to Yale from there. I pretty much for 10 years was constantly away from home, and that was a necessary part of me ultimately having the opportunities that I have today.

J.D. Vance (15:15):

But the pull of home is pretty strong and I eventually found my way back to Cincinnati, where I'm about 25 miles from my family sitting here right now. I don't think that life decision is something that we can just frown upon and judge and say, "Well, if you don't have opportunities, you're going to have to move." I think a lot of people want to build a life in the home that they came from and we should make that easier too. If people want to move, fine, they can move. But for people who don't want to move, we can't just write them off.

Greg Dowling (15:41):

Tell us about the movie. What's been your involvement? I hear they filmed some of this in Middletown.

J.D. Vance (15:45):

Yeah, that's right. They filmed most of it in Georgia, which I understand is sort of a tax policy thing. It's just much cheaper to film a movie in Georgia than it is in most other places. They did--and I appreciated this--they filmed for about a week in Middletown. I think for a lot of environmental scenes so that it was just as close to the real thing as they could possibly get. And it was kind of crazy actually, because with the help of the Middletown government, the Middletown police force, they sort of shut down this four-block section of Middletown where they filmed most of the scenes that took place in Middletown. And it was on Harrison Street in Middletown, if people know where that is. It was literally a block over from McKinley Street, which is where I actually grew up in town.

J.D. Vance (16:25):

And so it was one of these things where I was parking my car three blocks in one direction from where I grew up and walking one block the other direction and there was this movie set. It was just a pretty crazy, pretty surreal experience. My involvement is... I tried to be... I didn't want to make a movie about the book at first, and then I talked to Ron Howard and I just really liked him and really liked the thoughtfulness that he brought to the project, so I eventually relented and agreed to let him make a movie out of the book. I sort of saw my involvement as to try to be as much of an advisor as possible about the characters, about the lines that they would use. You know, if there was a line of dialogue where I thought, "That kind of sounds awkward. I've never heard that phrase before." Or they were really interested in "What would Mamaw say in this particular moment?" That's my grandmother. What would Papaw, my grandfather, say in this particular moment?

J.D. Vance (17:15):

And so try to just give as much of a help and a boost to them as possible as they tried to make the movie. But I also tried not to interfere too much. I sort of took the attitude of, "These guys know how to make movies, Ron Howard knows how to make movies, and I don't." So I tried to let him do as much as possible. The weirdest part about it is when they just--as they have to do to turn a book into a two-hour movie--they take some dramatic license. They fuse different stories together into the same moment so that they can accomplish some movement of the plot. It's very weird to see something that happened when you were 16 and something that happened when you were 29 actually happen in the same scene, it just causes this weird cognitive dissonance. But it was definitely really fun to watch it all come together and I hope folks will watch it, which it'll be out here in a week and a half or so.

Greg Dowling (18:02):

Absolutely! Outside of books and movies, you're spending a lot of time on investing, especially in private equity. How did you get interested or involved in private equity?

J.D. Vance (18:12):

Sort of just pure chance. I mentioned Peter Thiel earlier. I first met him in 2011, I think. I was a law school student, he gave a talk at the law school. And I remember this was right before the movie, The Social Network came out and Peter figures very prominently in that movie because he's one of the earliest--I guess the earliest investor in Facebook. And he came and gave this talk and it was a relatively small seminar room, he wasn't an especially well-known guy. He was just really obsessed in this talk with why had the real economy stagnated. We'd seen all this progress and social media and information technology, but it took longer to fly from New York to Paris in 2011 than it did in 1985, our energy system wasn't that much more efficient, our agriculture system in terms of yields per acre was pretty stagnant.

J.D. Vance (19:03):

There were just all of these ways in which the real economy had sort of stagnated. He saw that fundamentally as sort of a capital allocation problem. He thought venture capitalists just weren't willing to invest in harder technologies and things that were a little bit more challenging. They were too interested in the low-hanging fruit of software and IT. I was just really impressed by that message. It's something that I'd never heard before and it really influenced a lot about how I think about the world today. I just went up and told him, "Hey, I think that's really interesting. Is there any way that I could help do the things that you're doing?" And he eventually said, "Yeah, you should come out and work for me." We sort of had a conversation that led to a job offer. That's pretty much how I got here. There's been no looking back. It's funny when I think about that conversation, pretty much my entire career--since I had a brief stint in a corporate law firm--has been in venture capital, and I think but for Peter's mentorship, it probably would've never happened. I probably would have been doing something else. So it really is just amazing sometimes how those chance occurrences influence how you think about your own life and eventually your own career.

Greg Dowling (20:04):

So in the movie--you mentioned Ron Howard, you also have Glenn Close, you have Amy Adams, and those are super impressive. But being an investment guy, I might be more impressed with Peter Thiel and Steve Case. So you go from Peter Thiel and then you work with Steve Case as well and he influences your thoughts about investing in venture capital.

J.D. Vance (20:23):

The first time I met Steve was actually a very, very clear memory. I was in DC staying at this fancy hotel because I had been on Face the Nation, I think, that morning. And I met Steve for a drink at this hotel. Steve sort of fused my interest in--call it tech innovation and hard tech sectors--with his interest in geographic innovation. And one of the things Steve persuaded me of was that part of the reason you weren't seeing as much, call it "hard tech innovation" for lack of a better word, is that all the venture capital dollars were going to software capitals in the country. If all of the money was going to San Francisco--and I think when we first sat down, probably over 90% of venture capital dollars were going to San Francisco--then it's not surprising that the types of companies that exist in Silicon Valley are the types of companies that are really taking off.

J.D. Vance (21:14):

And so his argument to me was, "If you're really interested in investing in these non-traditional sectors as a venture capitalist, you've got to get out of Silicon Valley and you've got to focus on some of the things that we're focused on." I think that conversation led me eventually to, one, work with Steve and then eventually launch my own fund here in Cincinnati, which is what I spend most of my time working on today. But I think Steve's real innovation in venture capital has been in this geographic focus, which, when he started four years ago, not really many people were talking about it. And now you've got multiple big Silicon Valley funds. My friend Joe Lonsdale, who runs this firm 8VC--a big, big Silicon Valley investment fund--just announced a couple of days ago that he was moving the fund to Austin, Texas.

J.D. Vance (21:59):

Peter Thiel himself has a fund, Mithril Capital, in Austin, Texas. You've started to see people moving outside of the Valley, and I really think that's a trend where maybe not all credit but certainly a lot of the credit belongs to Steve.

Greg Dowling (22:11):

So are entrepreneurs different on the coast versus in middle America?

J.D. Vance (22:16):

Oh they certainly are, in ways, frankly, both good and bad, or at least--there are things about Silicon Valley that I don't like. I think entrepreneurs, very often because they live in a world that's so flush with venture capital, they think a lot more about how to raise the next round, sometimes, then how to actually build a viable business with customers and a consistent revenue base. The flip side of it is that they can also become a little arrogant because of that. They know that if this thing doesn't work out, there's going to be another job or another entrepreneurial venture for them to take advantage of six months down the road. So I think that creates a certain sense of almost entitlement where the entrepreneurial ecosystem just seems so vibrant that people take it for granted.

J.D. Vance (22:55):

The flip side of Silicon Valley, thinking about sort of a prototype of an entrepreneur in the Midwest or in the Southeast, is they don't take venture capital for granted, so I think they are a lot more dedicated and focused from a very early age on how to build the real business, not just how to keep raising money. And that's, I think, a very good thing. But they're not quite--or I should say they're more risk-averse than a lot of the entrepreneurs that I talk to in Silicon Valley. And I think, again, some of that comes from working in ecosystems where... If you start a startup in San Francisco and it goes bust, there are like a hundred other things that you can do after that. There are companies you can go work for, there are other companies you can go and start.

J.D. Vance (23:36):

If you've got a startup in Cincinnati, Ohio, and it goes bust, there may be five or six other things you can do, but there aren't dozens. And I think that makes people a little bit less willing to take on risk and a little bit more willing to sell early. One of the things we've tried to train the folks that we've worked with on is, "If you've got a really big idea, don't take the $90 million acquisition offer. Wait it out. Actually try to build something truly world-changing." Which, again, sometimes that blows up in your face and you pass on an acquisition offer that was very valuable. But I think the flip side of it is that the types of companies that we invest in will more often than not tend to have much, much bigger outcomes than the $90 million actually that you might expect in a classic Midwestern city.

J.D. Vance (24:19):

So we try as much as we can to convince entrepreneurs to think big and to be willing to take on a little bit more risk. I have to tell a story on this topic. One of my favorite people in the world, both as a human being and also just as professional, is this guy, Scott Dorsey, who runs High Alpha Ventures in Indianapolis. Scott told me that--I want to say in the sort of mid-2000s--he was approached by Salesforce to buy ExactTarget for something on the order of $70 million. Scott wanted to take the deal. The deal fell through because something came up in Salesforce's diligence so it didn't eventually happen. Scott sold ExactTarget to Salesforce 6 or 7 years later for $2.6 billion. And so that deal falling through, which he was pretty unhappy about at the time, eventually resulted in him building one of the biggest companies in the Midwest. That, to me, is the big difference. I think if Scott had grown up in San Francisco and spent his career in San Francisco, there's no way he would have taken 70 for that company when it was offered.

Greg Dowling (25:19):

We have an office in Indianapolis, and I remember seeing the signage change on that building and it went up as Salesforce, so he's certainly a great example. In Cincinnati,. I can only think of one company in recent history that's attracted any major venture capital. And then I also think about your story about Peter Thiel. If I remember the movie correctly, I think it was Peter--speaking of Social Network--who talks to Mark and says, "Mark, this Facebook thing, you need to move to San Francisco because of the ecosystem." So not only do you have more money out there, but there's this whole ecosystem around there. How do you build an ecosystem in Grand Rapids or Wichita or Cleveland, Ohio?

J.D. Vance (26:03):

I think that's the sort of thing that really has to start in the nonprofit and the public sector. It's hard to be the first private sector venture capitalist in a place. We're doing what we're doing in Cincinnati because we love it and because it's our home, but if a lot of work hadn't gone into Cincinnati from the Brandery, from similar institutions, I think it would have been very hard for us to do what we're doing. I can't imagine starting Narya in Cincinnati in 2010, but in 2020 it was actually--it seemed really possible. There was a lot happening culturally downtown. There was an existing entrepreneurial ecosystem. There were already good companies that were being started at seed and series A stages.

J.D. Vance (26:44):

I think that what we've seen that's sort of been most effective is when community leaders recognize that there's some real benefit to creating entrepreneurial ecosystems and they try to create the infrastructure to make that happen. It's co-working spaces, it's places where people are actually meeting with investors and community leaders. Where the private sector can be most helpful is not even investing in venture capital funds. Obviously as a venture capital investor, that's good and we want people to continue to do that, but what Cincinnati, for example, has done really well is make it easier for the companies who are trying to buy and sell in the startup space to access those legacy companies--both as customers, as mentors, as potential suppliers--because that business relationship is just incredibly valuable.

J.D. Vance (27:32):

I will say that the ecosystems that I don't... I shouldn't say I don't love them as much, but just one dynamic that I've seen that I don't appreciate is when people try to recreate Silicon Valley in their own cities. I always think that's a little bit of a fool's errand. Silicon Valley has a lot of disadvantages, but it has a lot of innate advantages. I don't think anybody's going to recreate it. For example, Columbus right now is spending a lot of time trying to create a life sciences and gene therapy ecosystem for startups and I think that's going to be very successful. They've got Nationwide Children's Hospital, they've got a lot of institutions that are making it easier to do that. Cincinnati has its own unique advantages. I think what each ecosystem or what each city should do when it's building an ecosystem is identify the things that the legacy business infrastructure there is already good at and try to build a startup ecosystem on top of that, as opposed to just copying the consumer IT focus of Silicon Valley.

Greg Dowling (28:29):

That makes a lot of sense. Playing to your strengths. You have this firm in Cincinnati, Ohio, how does sourcing work? If you're in Sand Hill Road, they probably knock on your door. Do you have to do a lot more of knocking on their door? How do you source great ideas?

J.D. Vance (28:42):

I think if you ask 10 different venture capitalists, you get 10 different answers. And obviously this is complicated a lot in a COVID world, where people aren't traveling as much and a lot of people are working remotely at least part of the time. What we try to do is: one, we try to use the existing network of investors that we've worked with for 5 years at this point, and really try to rely on the people that we trust. I mentioned Scott Dorsey earlier, but there are a lot of good investors that we've talked to that we've invested with over the years. And if they have a good company, a lot of times we're going to be one of the first people that they knock on our door because they've worked with us in the past and we haven't been overbearing and we've been a good partner to work with.

J.D. Vance (29:19):

But of course, part of being a good partner is not saying yes all the time, but just being honest and forthright when you do say no. It's amazing how much people appreciate honest feedback as opposed to, "Well, we're not gonna do this. It's too early." That's not really helpful. But I think if you're actually helpful, then people come to you with more and more companies, even if you've said no in the past. The other thing that we try to do at Narya that I think is pretty specific to our model is that we really try to identify macro trends in different industry verticals that we're excited about either because new technologies are coming online or because we think an industry is just pretty ripe for innovation or just because we've talked to an interesting person who is working on something that suggests the industry is sort of overdue for some change.

J.D. Vance (30:01):

And we really try to mine those contacts and those sources of information for interesting companies that might come out of it. Sometimes you find that there's something interesting going on in an industry technologically, but it's not yet ready for commercialization. So you keep tabs on them and a few years later it is ready for commercialization. And sometimes you find there's a company that should exist or you think that it should exist and it doesn't. So you have to put that one back on the drawing board and hope somebody comes up with something similar. And then sometimes you find that you think an industry opportunity--there's a perfect meeting between that and a company that should exist--and you just do everything you can to put as much money into that company as you can.

J.D. Vance (30:42):

We're pretty macro-driven investors. We really try to identify where a given economic trend matches up with a new technology and invest in that company. AppHarvest, which is a company in the Narya portfolio, is a pretty perfect elucidation of that thesis. There's a company that we invested in back when I worked more directly with Steve Case called Anduril, which is a defense technology company, that's doing very well right now. A lot of it is just... I think you have to have a pretty discreet view of what the future should look like and which companies are actually trying to make that future happen. And that's what we try to do.

Greg Dowling (31:14):

We are recording this during COVID-19. How has COVID either impacted some of those themes, the timing of investment, or--getting back to the start of our conversation--middle-America? What's the broader impact of COVID?

J.D. Vance (31:29):

I do think that the social impact is pretty powerful, and obviously it's fallen on different groups of people differently. When I think about COVID, obviously the pandemic is--the physical pandemic that's hurting and killing a lot of people is sort of top of mind. Below that, the next thing I worry about is sort of the social impact for a lot of middle-class and working-class families. We're not worrying--we only have two young kids and neither of them are really school-age. One of them is in preschool with his grandfather a couple of days a week. But I worry a lot about the 11-year-old kid who is sitting at home in front of a computer all day and can't actually get to school.

J.D. Vance (32:07):

And obviously that's only true for a segment of the population. There are a lot of families of means who are finding ways to get their kids socialization, to get them in front of other kids, to get them at a school that's safe and is actually teaching them things but also giving them that important socialization. I worry a lot that we're failing middle-class and working-class kids on this front. That you have a lot of those kids who have no real social outlet, who aren't getting a real education because it's impossible to really teach an 11-year-old kid in front of a computer screen. And so I worry a ton about that.

J.D. Vance (32:40):

Obviously COVID, if you look at the economic indices, it's affected the non-tech sector more than it's affected the technology sector. There's a reason that the NASDAQ was going gangbusters until a few weeks ago, and then as soon as vaccine news started to tick up, the NASDAQ started to lag behind the Dow and the S&P. And that's of course because the tech sector has just done really well. If you're in the business of delivering packages or you're in the business of connecting people via computers, your business has been doing really well during COVID. If you're in the business of selling food, it hasn't been as good, to state the obvious.

J.D. Vance (33:13):

What's true in a lot of these small- and medium-sized towns all across middle-America... It's true even in a bigger city like Cincinnati, where you have a neighborhood like Over the Rhine, which I think is a real attraction of Cincinnati, but it's struggling right now, obviously, because a lot of it's built on service sector jobs and service sector businesses where the revenues just aren't there at a time of a global pandemic. I guess those are the two things I worry about besides the pandemic itself. Are we failing our kids and not affording them proper educational opportunities in the midst of the pandemic? And are we taking four or five steps backwards in a lot of these medium-size towns where they've really built up a service sector-based economy, and that's sort of going backwards right now?

Greg Dowling (33:57):

And then, taken to the next step, how does that impact investing, especially on the venture side?

J.D. Vance (34:02):

The only real way that COVID has affected us beyond the fact that we're spending more time on Zoom calls and we're not traveling as much, is that we're just being cautious in how we deploy capital. If you'd asked me, I would have said year one of our fund, we want to deploy 20% of our capital committed, and we're probably going to be more like 15%. And so we're probably just saying no to things that we might've said yes to 2 or 3 years ago because we're not sure how this is ultimately going to shake out. We've never shied away from life sciences, we have a life science investment portfolio right now. We continue to look probably more deeply at life sciences than we would have 2 or 3 years ago, just because I think, for obvious reasons, the regulatory regime has loosened up a little bit in the midst of COVID and there's a lot of capital--government capital, nonprofit capital, and a lot of private capital that's going in to a lot of new diseases.

J.D. Vance (34:52):

Now the interesting flip side on the life sciences piece is that because of COVID, it's actually been harder to get a clinical trial through in a non-COVID application. So I do think there's going to be this interesting dynamic where a lot of companies that are clinical trial ready have sort of been just sitting on the shelf languishing a little bit, and you're going to see a sort of buying spree for those assets when COVID starts to recede to the back of people's memory. But certainly the final thing that we ponder is, we want to invest, obviously not just in people and companies that are interesting, but also in vibrant communities. If a company is trying to build itself in a place that's falling apart, it's just less likely to be successful. And so we certainly ask ourselves when looking at businesses, "Is this business going to fare well if the pandemic lasts for another 6 or 12 or 18 months?" but that tends to be pretty case by case. And again, I think, so far, at least other than just generally being cautious, I don't think that we said no to anything or said yes to anything purely because of COVID.

Greg Dowling (35:51):

Has COVID made it even more important for companies, even if they're making widgets, to have a digital transformation plan? How important is that? Or is it like, "You know what, this is the here and now. We're all doing Zoom calls or doing Microsoft Teams." Do you really have to be like, "Hey, I know you're in a service business or you're in a manufacturing business. Do you have to have the digital presence?"

J.D. Vance (36:15):

I think you do. I wouldn't necessarily say COVID has changed that as much as just accelerated that. We've already seen--Marc Andreessen has this famous quote: "Software is eating the world." And I think what he really means by that is that there's going to be some part of your business process, even if you're making widgets, that is going to be improved by having a more digital supply chain, a more effective way to switch out one supplier from another, a better way of actually delivering to customers, even in the midst of a pandemic. So I tend to think that one of the things that COVID has revealed is that if you don't have at least some sort of digital footprint, if you're not using technology--not necessarily as the core part of your business, but to enable some more efficient business processes--then you're probably just not going to survive in this world.

J.D. Vance (37:05):

And I unfortunately think that... Even in restaurants. Think about a business that's not digital at all, except for maybe reservations and payments is at restaurant. But as I understand it, the businesses that have fared the best in the COVID world are those that have gotten ahead of the convenience delivery options. If you were more thoughtful about orienting your business in a way where Grubhub or DoorDash could make deliveries where customers could do curbside pickup without having any sort of contact, you fared a lot better than the businesses that I think have effectively tied themselves to the old model of doing business.

J.D. Vance (37:45):

I hope... The worry would be that even the service businesses that have gone a little bit more digital and adjusted are still not doing well with this. The barriers are just too substantial in a COVID world. But I hope and suspect that's not the case. I think that while you're going to see a lot of folks going out of business, and I think that's really unfortunate, I do think that you're going to see a lot of companies figuring out how to thrive even in this new world. And of course the question is, "Does it ever really go back?" If we do have a Pfizer or Moderna vaccine that has 96% efficacy, do companies regret making those investments or not? I suspect the answer is no, but it's of course a big question a lot of folks have asked. If this goes on for 12 months versus 24 months, it changes the capital expenditure calculus.

Greg Dowling (38:30):

Lastly, I hear your name thrown around occasionally in political circles. Can we ever expect to hear of a Senator or Governor Vance?

J.D. Vance (38:38):

I don't think so, at least not anytime soon. I really like what I'm doing and I think we're doing a lot of good. And I like just sort of being a member of the community here in Cincinnati. I like focusing on helping these companies grow. And all that stuff is just impossible if you go into the political world. Not that there aren't good people or honest reasons to do politics, but for now I think that what we're doing is hopefully making a difference. And in my most ambitious vision of Narya, what we would do is show that if you invest in different types of technologies than Silicon Valley investors are focused on, you can actually do very well for your investors, but also create a lot of value. And I'm not ready to give up on that mission anytime soon.

Greg Dowling (39:18):

Well, J.D., thank you so much. I know you've been extremely busy. Your movie comes out on the 24th, please make sure everybody goes and watches it. I know I won't miss it, I will be tuned in. so thank you very much, J.D.

J.D. Vance (39:30):

Awesome. Thank you. Great to talk with you.

Greg Dowling (39:33):

If you are interested in more information on the topic, please go to our website where we will have a list of relevant FEG publications. And don't forget to subscribe to our communications at www.feg.com/subscribe so you don't miss the next episode. Please keep in mind that this information is intended to be general education that needs to be framed within the unique risk and return objectives of each client; therefore, nobody should consider these FEG recommendations. This podcast was prepared by FEG. Neither the information nor any opinion expressed in this podcast constitutes an offer or an invitation to make an offer to buy or sell any securities. The views or opinions expressed by guest speakers are solely their own and do not necessarily represent the views or opinions of FEG.

 

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