Podcast Summary: How I Invest with David Weisburd
Episode E120: Why Bigger Isn’t Always Better in Private Equity and Venture Capital
Guest: Teddy Gold
Release Date: December 13, 2024

1. Introduction to 3i and Its Mission

Teddy Gold, the guest in Episode E120, provides an in-depth look into 3i, an investment network he co-founded. Unlike traditional funds or banks, 3i operates as a community where exited founders, family offices, and fund managers collaborate to source and co-invest in private equity and private credit deals.

"3i is an investment network. We're not a fund or a bank, but a community in its truest sense."
— Teddy Gold (00:08: A)

2. Growth and Deployment Achievements

Since its inception in October 2021, 3i has experienced significant growth, expanding its membership to 550 members and deploying over $500 million in investments. This rapid expansion occurred during a unique period marked by the tail-end of the pandemic, a surge in tech and crypto enthusiasm, and a booming family office sector.

"Since launching In October of 21, we've grown to 550 members and deployed a little over $500 million."
— Teddy Gold (02:33: A)

3. Shifting Trust from Institutions to Peer Networks

Gold discusses a notable shift in the investment landscape where trust is moving away from large institutions like traditional banks toward personal and peer networks. This change is supported by Edelman's annual trust survey, which highlights a rising trust in peers over institutions for the past five years.

"We're moving away from traditional banks and brokers and starting to rely more on personal networks."
— Teddy Gold (02:47: A)

4. Filtration Mechanism to Mitigate Adverse Selection

To ensure high-quality deal flow and minimize adverse selection, 3i employs a robust filtration mechanism. Members can submit deals, which are then quickly evaluated by other experts within the network to determine their viability.

"We can get a quick look from another member expert within the network and a quick yes, no of is this an interesting deal to be looking at."
— Teddy Gold (03:54: A)

5. Value Addition Through Structured Investment Processes

3i enhances the investment process by centralizing data, streamlining diligence, and coordinating investments, making it seamless for both limited partners (LPs) and general partners (GPs). This structured approach allows 3i to raise substantial amounts quickly, typically between $35 and $50 million per deal within two to three weeks.

"From the LP for the GP side or the fund manager side, it feels like they're dealing with one institution."
— Teddy Gold (04:34: A)

6. Supporting Emerging Managers and First-Time Fundraise Solutions

A significant value proposition of 3i is supporting emerging managers by providing first checks and seed capital. This support often comes with more favorable economics, enabling early-stage funds to gain traction and attract additional investments.

"We can be the first $30 million in and then that fund will go on to raise, you know, additional $200 million on top of that and to go on to success."
— Teddy Gold (06:14: A)

7. De-risking Investments through Collective Asset Management

3i mitigates investment risks by leveraging the collective expertise and pressure of its members. Regular updates and asset management processes ensure that investments are closely monitored and supported to maximize success.

"By clubbing up the community as a group and by acting as a single funding source... we can apply leverage and we can apply the collective pressure of a 30 or 40 or $50 million check onto the GP or CEO of the company we're investing into."
— Teddy Gold (07:01: A)

8. Trust Erosion in Large Institutions

Gold highlights that traditional fund managers often prioritize asset accumulation over investor returns due to lucrative fee structures like the "2 and 20" model. This results in diluted returns for investors as funds grow larger, leading sophisticated investors to seek alternatives.

"Funds one through four do much better than funds five through ten."
— Teddy Gold (10:03: A)

9. Specialty Finance and Private Credit Insights

The episode delves into the specialty finance and private credit sectors, noting the challenges of scaling niche strategies. While early investments in these areas can yield high returns, scaling beyond certain thresholds often leads to diluted performance due to difficulties in maintaining team quality and deal flow.

"Scaling that strategy to a hundred, two hundred, three hundred million dollars is harder... the returns are going to be diluted on some of these private credit strategies."
— Teddy Gold (00:00: A)

10. Case Study: Aircraft Engine Investment

Gold shares a specific example of 3i's investment strategy through an aircraft engine teardown deal. A member with extensive aviation finance experience sourced the deal, leading to successful investments that returned 1.5 times the invested capital within 18 months. This illustrates the effectiveness of 3i's collaborative and expertise-driven approach.

"We funded our first deal alongside that member in the space and members made their money back in less than 12 months and 1 1/2 times their money in 18 months."
— Teddy Gold (00:00: A)

11. Navigating Market Cyclicality and Deal Flow

3i remains vigilant about market trends and cyclicality, recognizing that attractive investment opportunities often attract larger capital inflows over time, which can drive down returns. The network continuously surveys its members to stay ahead of emerging trends and adjust their investment focus accordingly.

"As people pile on, they drive down the returns."
— Teddy Gold (17:44: A)

12. Future Vision for 3i

Looking ahead, Gold envisions 3i expanding its presence in major financial hubs like New York, Miami, San Francisco, Los Angeles, Chicago, London, and Toronto. The goal is to build a dense, high-quality membership network supported by vibrant local ecosystems and regular event programming.

"One of my goals is to build density in our main hubs... create a vibrant enough ecosystem where we have regular event programming."
— Teddy Gold (19:55: A)

13. Early CEO Lessons and Emphasis on Relationships

Reflecting on his tenure as CEO, Gold admits that initial overemphasis on scalability led to neglecting personal relationships with early members. He emphasizes that the true value of 3i lies in its non-scalable, relationship-driven approach, valuing personal interactions such as handwritten notes and individual meetings.

"What I sacrificed in the earliest days was the relationships with our earliest members... Every relationship is important to us."
— Teddy Gold (20:49: A)

14. Closing Remarks and Contact Information

In his closing remarks, Gold invites listeners interested in 3i to reach out directly, highlighting the network's ongoing growth and the value it provides to high-caliber investors seeking meaningful private market opportunities.

"You can reach out to me personally to learn more. It's teddy@threeimembers.com."
— Teddy Gold (22:02: A)

Notable Quotes with Timestamps:

• On 3i's Community Nature:
  "3i is an investment network. We're not a fund or a bank, but a community in its truest sense." (00:08: A)

• On Growth Metrics:
  "Since launching In October of 21, we've grown to 550 members and deployed a little over $500 million." (02:33: A)

• On Shifting Trust Dynamics:
  "We're moving away from traditional banks and brokers and starting to rely more on personal networks." (02:47: A)

• On Filtration Mechanism:
  "We can get a quick look from another member expert within the network and a quick yes, no of is this an interesting deal to be looking at." (03:54: A)

• On Supporting Emerging Managers:
  "We can be the first $30 million in and then that fund will go on to raise, you know, additional $200 million on top of that and to go on to success." (06:14: A)

• On De-risking Investments:
  "By clubbing up the community as a group and by acting as a single funding source... we can apply leverage and we can apply the collective pressure of a 30 or 40 or $50 million check onto the GP or CEO of the company we're investing into." (07:01: A)

• On Trust Erosion in Institutions:
  "Funds one through four do much better than funds five through ten." (10:03: A)

• On Scaling Challenges in Private Credit:
  "Scaling that strategy to a hundred, two hundred, three hundred million dollars is harder... the returns are going to be diluted on some of these private credit strategies." (00:00: A)

• On Aircraft Engine Investment Success:
  "We funded our first deal alongside that member in the space and members made their money back in less than 12 months and 1 1/2 times their money in 18 months." (00:00: A)

• On Navigating Market Cyclicality:
  "As people pile on, they drive down the returns." (17:44: A)

• On Future Expansion Goals:
  "One of my goals is to build density in our main hubs... create a vibrant enough ecosystem where we have regular event programming." (19:55: A)

• On Importance of Relationships:
  "What I sacrificed in the earliest days was the relationships with our earliest members... Every relationship is important to us." (20:49: A)

• On Contacting 3i:
  "You can reach out to me personally to learn more. It's teddy@threeimembers.com." (22:02: A)

This episode offers valuable insights into how smaller, specialized investment networks like 3i can effectively compete with larger institutions by leveraging community expertise, maintaining agility, and fostering deep, personal relationships among members. Teddy Gold's experiences highlight the importance of scalability challenges, trust dynamics, and strategic support for emerging managers in the evolving private equity and venture capital landscape.