#029 Beyond the Shark Tank: A Primer on Real-Life Angel Investing with John Foster

 Welcome to the show, John Foster.

Thank you, James. It's great to be here.

And John is the founder and like the proprietor of the middle school mba. So he gives m masters of business administrations to middle schoolers middle school mba.com.

Now, is that true? Is the, you actually give MBAs to middle schoolers?

We don't. We don't confer. Like an accredited degree on them. But the content that we deliver, yes, it's the whole thing is structured like an mba. We cover business, economics, entrepreneurship, and it's all in an integrated fashion.

The way an B is, if you think about. A master's in, in economics. There's not so much business there if or a master's in business. And these things have been siloed way too much in everything else in, in academia. And they're actually all closely related. And so teaching them together is the right way to go.

And so that's what we do. And we call it middle school mba because that is the approach. Business, economics and entrepreneurship are all intertwined and should be learned at the same time. Do you

like market to eighth graders or just, is it, do you just market it to anybody?

We market to anybody who's teaching?

Fifth, sixth, seventh. Oh, ninth grade kids. Oh, okay. So we go across all of middle school. We actually when we built it we thought it was gonna be a high school course because everybody assumes that kids are too dumb to, to get this until college or grad school, we're gonna do it in high school.

And what we kept finding out is that we could do it younger and younger by just, by having it extremely clear and intuitive and the fact that you. When it's part of an integrated hole and you can zoom in and out of that integrated hole, then it's quite easy to grasp.

It's when you compartmentalize it and you ask people to memorize various concepts in isolation, just trust me, this is how this works. Then that's difficult. But when you have this one big piece and we use we have a visual model that we developed that's really helpful.

And so we don't ask anybody to take, we call it tour guide teaching. It's like you were walking down the street with somebody and saying, okay, so on the corner over there, there's a church. And they go, yes, of course. And the church has a steep Oh, And the steeple is being held up by the structure of the church, blah, blah.

These are all things that they can just see for themselves, but maybe they never noticed. And so we're like the tour guide and we're just pointing out obvious things that they see for themselves. And then we note the connections between them. And fifth grade is the lowest we typically go, but we have had fourth graders doing this course.

And so we have little kids that can tell you about the business cycle and where inflation comes from and price structure and all this kind of stuff. It wasn't that

long ago that 10 year olds were, they were genuinely. And they and kids can actually learn and retain things arguably better than adults.

Back in the day, the British Navy had 14 year olds leading boarding parties onto another ship. Wow. In, in combat. So Yeah. Yeah. We've really infantile infantalized. So much of our society,

infantalized, is that an actual word or did you just make that

up? I'm not sure. Is that a word that you

teach at the

No, we don't do grammar.

We don't do grammar. Business and economics. We advise that you get your grammar right for your pitches. I'm

sure y and we're gonna probably get, get into that in just a bit, but I've already. The audio from a wonderful video that John produced, and it's available on the YouTube. And I'm gonna have the link at the show notes, which are james d newcomb.com/angel investing.

So if you go there, you'll find the YouTube, but I've already played it here. I've played the audio here on the podcast. And so hopefully people that didn't press fast forward, and if you did, Do so at your own risk. But it's very important to understand the concept of angel investing to, to understand the basics of what a sound business cycle looks like.

Labels it, the Austrian business cycle, but it just, bas basically means sound. People doing sound things with money and exchange between other people. So I just want to start with a very broad. We've all heard the term angel investing. We know maybe a bit about it, but could you just expound on what exactly is Angel investing?

So angel investing is when private individuals fund another private company, and that doesn't sound like anything that would need its own name, but they're. The Securities and Exchange Commission, has rules about what you can do with your own money and you have to be a qualified investor in order to participate in these sorts of ventures.

They, and in a way we have crowdfunding today where you can put money into a, some sort of startup com company or venture and really angel investing. You could think of crowdfunding with a very small crowd, maybe in, in instead of thousands of people you've got a dozen people or a couple of dozen people.

And so the. And the net effect is that the owner of the venture, the entrepreneur, is able to sell pieces of their company to others, sell stock in order to raise capital and fund their operations. Un until, these are almost always fairly early stage companies, and so they. In the life of a company you put in resources in the beginning and keep putting in, and you hope that at some point it catches fire or lifts off and it starts generating excess cash on its own.

But in the beginning it's consuming cash. And since your typical, since you don't necessarily have a huge amount of money sitting in the bank and. As the entrepreneur, you're spending 80 hours a week building your business. You don't really have time to, to work a another job on the side.

You, you need some startup capital. And that's what angel investors provide to the company. So it's

basically money, seed money.

It's seed money in exchange for a piece of the company. You, you mentioned shark Tank and I think that's a good touchstone for a good comparison.

Those are early stage companies and those guys are angel investors. Some of it is Dr. Dramatis dramatized a bit for tv. Typically, you on Shark Tank, you can hear people say low, okay, I, I want 40% of this company and I'll give you this much money for that. Usually angels want a much smaller piece of the company.

More than 20% would be almost unheard of because we want the entrepreneur to have the overwhelming incentive to make the thing work. So we want most of the stock in the hands of the entrepreneur and there are many other things that have to happen. With the stock that, that he does hold they're future rounds that have to be raised and they're key employees who have to be compensated with stock.

And so a lot of things has have to happen with that stock. And if it were, say, reversed where we bought 80% of the company and the owner had 20%, then the incentives would just all be wrong. That, that's one. Key difference is that angels want a very minority position in the company.

And the other piece that happens is that while the entrepreneur is pitching to the angels, putting his best foot forward and trying to do a. Making a, trying to make a sale once the sale happens it's all the other way again, the it on Shark Tank, the angels have all the power.

But in reality, once you make the deal, the entrepreneur has all the power because the shark or the angel has a very small position in the company and Very limited legal rights to anything and is largely riding on the the ethics and the integrity of the entrepreneur to the entrepreneur can do anything with the money at that point is his money.

He can spend it. Spend it badly. He can even build a company that's thriving and successful and decide not to sell it. Just say, ah, I like it now, I'm just gonna keep it. And if he doesn't ever sell that company, then the angel never gets paid. You own 10% of a great company, but that's it.

You don't get a dividend. You don't, you've, that's not what the angels in the game for. The idea is that the entrepreneur is gonna sell the company. Before, in, in five to eight years. And at that point, the the angels gonna get bought out and that's when they make their money.

But it's, it is, the angels have remarkably little control of anything once the investment is made.

When it comes to, and we're just using, shark Tank as a frame of reference, like you have. Really well known. They're almost household names in some cases. And they have these huge networks like Lori Griner has.

She's done QVC from what I understand, and she's just knows just about everybody. And so if you deal, do a deal with her, then she can get your product sold. And but from what I'm hearing is that if you work with an act, A non shark tank angel investor, for lack of a better term, these people are just gonna basically stay out of your business.

That's not completely true. That what I, it's not that they're gonna stay out of your business, but they can't push their way in. They can't, they have no leverage. Actually, if you're an entrepreneur and you're trying to raise money, you want to be very careful who you raise from.

You would like to have, cuz typically, all of these angels have some background in, in business and, they're not not Shark Tank type connections but they know people in the industry and you'd like to have angels. You wanna. You're as interested in their Rolodex as you are in their money.

So you want people with the right connections in the right places. And that's extremely valuable in terms of being able to open doors for you and make introductions and of course the they're totally on your team. They're, they've put their money into your business and unless you succeed, they're not gonna.

So it's the incentives are beautiful. They're exactly right. And the you frequently have really good relations between the angels and the investors. The angels and the entrepreneurs all the way through the a deal.

That's why a, a music student who's 18 years old and deciding where to go to college, they wanna go to Julliard.

Not just because they're gonna get a great education, but also because the, their private teacher knows just about everybody in their industry and they can open all kinds of doors. And if you have, if you've graduated from Julliard, it's pick your job basically. It's not, that's not the case, but there's just that added benefit of having not just that name, but also the connect.

Of the people that you know. So that's a comparison that might be relatable to people. Now we were talking a little bit about things offline and I was just trying to prepare myself for this interview the best I could. And you mentioned something about a private company ecosystem, and I was wondering if you could briefly describe that and, Explain how that correlates to angel investing.

People are social creatures and birds of a feather tend to flog you. You get entrepreneurs who are in the same sort of a game and they're their business associations and there's the just various groups of people who get together and know each other. And as you start tying them together with, there's little threads between them, you start building this ecosystem and it's composed of the entrepreneurs and the angels and all of their various connections to other people.

And then you also have accelerators and incubators that are run by some by state actors, some by private organizations. And then business schools. Often will have a entrepreneurship program. And then so you put all these connections together and you start to have an entire ecosystem.

I, I'm sorry to interrupt, but could you briefly define what is an accelerator and an incubator? Just so we have a frame of reference?

An incubator is the purpose of an incubator is to try to help us a business get started, like from. You have an idea. There's quite a leap between an idea and something that can look like a business.

So a business plan and an actual product and the legal structures around it, those sorts of things. And so incubators or organizations that, that try to make that path a little bit smoother, try to show you how you get from a to. As a as an idea where an accelerator is one step further down the road which is trying to help somebody with a small business grow that business provide might provide office space or coaching or that sort of thing.

So it's trying to move that business along to the next level. And again, some of those are sponsored by your State Department of Economic Development and others are run by private organizations. Some in business schools down in New Orleans. We have the Idea Village, which sort.

Does both functions. It's really helpful to bring together a lot of different people who have a passion in this space and knowledge and connection. So if you are looking to start a business it's really helpful to, to be connected in this whole network.

Thank you.

And I, I rudely interrupted you while you were describing the private company ecosystem and how angel investing fits in. So if you can recall so

If you think of it as a big web, with, and with different nodes on the web and you've got the entrepreneurs and the investors, And the universities and the accelerators and incubators and business groups.

So with within that obviously the entrepreneur's job is to come up with a, with an idea and turning it into a company that, that makes money. And the angels job is to fund the early part of that journey. And so then you, the whole thing is like couched within the larger business community, and it can be remarkably well hidden.

If you're not, once you look for it and you start digging around you'll find it. But if you don't know it's there, it can just be completely out of. In fact, for me, I, the way I got into angel investing was totally by accident. I was traveling back home from someplace and I was at the Newark Airport.

In the riding the air train to a terminal and just happened to strike up a conversation with this guy there in the train, and we're on the same flight, it turns out. And he asks what I do and I tell him, and he says we're actually starting a, an angel group in New Orleans, and maybe you wanna be part of it.

And really my first thought was, this is some kind of scam. I had never heard of it. I didn't know it existed. He says, oh yeah, there's a lot of entrepreneurial activity in New Orleans and Baton Rouge. I'm like, really? I haven't seen any of that. But yes it's true. It's there. And this guy has turned out to be a terrific friend and a great mentor and just a complete accident.

But once you know it's there, it's like everywhere. You can't miss it. Nuts

and bolts here. I want to see if we can get maybe a bit of a picture in our mind of the actual process of angel investing. And you can take as much time as you. But I want to know if you could give us a picture of what the entrepreneur is interested in when he or she is vetting potential investors and what the investors are looking for when it comes to an ideal business that they can invest in.

And by all means, take as much time as you want. We got all day, as far as I'm concerned.

You've got the entrepreneur, and. And the investors in this dance. Maybe the thing to start with is that what this thing is all organized around is some dream that the entrepreneur has. This is the entrepreneur has it's more than an idea, right?

This is their life. It's their dream. It's their, all of their passion is in. They are like a hundred percent, a thousand percent in on whatever scheme they're trying to pull off and they've gotta pull it off. It's, the success or failure is judged by whether or not they earn money.

Money is how you keep score. And that's something really we should probably talk about a little in a little more depth because. Money can have a lot of different meanings to people and conjure up different sort of emotional responses. But I'm gonna make a note here. We'll try to come back to that.

But, so anyway, the the earning a profit, creating a company that's making money or at least making revenues, and then. And having that be successful enough that some bigger investor somewhere else wants to buy it, wants to buy the company. So the entrepreneur's ideas or plan goal is to take this idea and turn it into a company that, that they sell to another person.

And. So they're bringing their idea to life and then and then it's gonna have value in the eyes of somebody else who's gonna purchase from them. And that's going to they're earning their living that way. There are serial entrepreneurs who do that over and over again.

They're. They're those who, whatever it is they want to do, they might wanna, they might be trying to shoot for a big enough return that then they get into the investing game. A lot of people do that who've been successful. Now they turn around and they use the skills that they learned in building a business to, to help other people build their business and in, and invest in those business.

But it's very much, there are constraints around the whole thing in terms of, maybe your dream is to make i, I don't know, edible pillows. And you just would really love to see that happen and you're ready to devote, all this time to it, but if the rest of the world doesn't see that as a good idea and isn't willing to either buy your pillows or fund you to keep trying to sell these pillows, you're gonna eventually be forced to stop.

So the profit and loss system provides the service of stopping Uses of resources that society doesn't find beneficial. Thomas Soul has made the point that we have a profit and loss system, and it may actually be the losses that are the more important of the two because it stops it tells people, stop doing that you're wasting our.

Stop doing that and go do something else, or at least release the resources you're using for somebody else to go use it. And so that's the, within, we're working within that those constraints of profit and loss. And there's also a time constraint there that's enormous because it's not just.

You can't say I'm sure this is gonna be profitable in a hundred years. Nobody cares. It has to be profitable sooner than your investors lose patience with it. So you're operating within constraints of money and time. So that makes it very high pressure. And so for the entrepreneur the goal is, Raise the amount of of seed capital that they need to get to the point where their company is self-sustaining or maybe it's sold before, it's, before it's actually broken even and earning a profit.

But that would mean that their revenues are growing enough that profitability is foreseeable in the future. The entrepreneur is after that the investor is bringing that seed capital and is basically gonna go along for the ride. They're going to invest some money.

They're gonna bring whatever expertise and connections that they can bring. But really everything is on the entrepreneur's shoulders to, to deliver and to make it all happen. And so the investor is largely. Like I said, along for the ride, but they've bought into this dream that the entrepreneur has, that the thing that really unites 'em is there's this dream out there that the entrepreneur has come up with and the investor has said, okay I'm in for that.

I'm gonna come with you on this journey. And so they really become partners and. And confidants. The I think I mentioned earlier that, that the investor has very limited control over what the entrepreneur does and in, and even if the entrepreneur ever exits, exiting, is selling the business and cashing everybody out.

So whether or not they exit. there are legal agreements between the parties. The investor, owns a certain number of shares of stock, but investor doesn't control whether those shares get diluted down the way. They don't control whether the enterprise is encumbered by debt.

By bank loans or whatever that the entrepreneur may raise. So mi there are many ways that the entrepreneur can screw the investor. It's once the investment is made. And that's why you hear investors say over and over again, there's there's a long due diligence process.

People don't make decisions as quickly as on shark. You know the when the investor pitches the company that's maybe a 10 or 15 minute pitch. And if that goes well and the investors are interested, that begins a due diligence process which may go on for a number of weeks. And the investors dig through the financial statements, the business plans, the.

They have a million questions. They're, They're trying to understand all the nuts and bolts of, is this market really gonna support these assumptions in terms of how many you can sell and the price you can sell 'em at? And what, how are you gonna get to market? How do you find, how do you identify your customers?

How much does it cost to acquire each customer? What's the vi, blah, blah, blah. Great detail, every little aspect of the business, but at the end of the day, What they're really investing in is the entrepreneur. It's do I believe in this person? Do I think they're gonna give me a fair shake?

Do I think they're, you? You, the information that you have is very incomplete and it's all guesses upon guesses, and it's the only thing you really know about it is that, that it's raw and. That, that weird things are gonna happen and pop up. And this entrepreneur is gonna have to be able to jump over hurdles and pivot and think on their feet.

And so really that's. In the whole due diligence process. You are looking for red flags that might indicate this is, this Jains isn't gonna fly. But more than that, you're trying to figure out is this human being that I'm talking to here, are they up to this task or are they, do they have the grit?

Do they have the determination? Are they smart enough? All of. They get together. They talk about these things and then the investor says, yeah, I want in. And I'm gonna, I'm gonna invest in your dream and come for the ride.

You

recommended a book when we were talking and I was just asking for some resources to do an interview, and you recommended a book called What a What Every Angel Investor Wants You to Know by Brian Cohen, which is wonderful, and I didn't read it entirely through, but I've read a pretty good chunk of it.

But, As I understand it as Mr. Cohen described it, like angel investing comes from I think it's a term that has to do with Broadway theater, and if a theater was in if they needed money to save the show, like the show was outta money and they would call on. Somebody who's really wealthy has got money to burn.

And I said, okay, I'll come in and you can put on your production of cats or whatever it is. And so they were considered angels. They saved the day. And that's, from what I understand, that's how angel investing came to be. It's rooted in that type of that type of idea, unless I don't understand it correctly.

But if that's true, then if you're gonna be an angel investor, You have to have a certain amount of pessimism. You, I guess you just have to have an attitude of, I might be pissing my money away and you're just willing to take a risk so that you can buy into someone's

dream. I would say that things have veered a veered away from that origin a bit.

Since then, it's not that. That's, it's a, that's an interesting question cuz it points to another constraint on, on, on all the parties involved here and that's that. The, just as the entrepreneur can't carry on spending money forever without making a profit the market will force them to stop doing that.

Similarly the angel can't invest money and lose it forever because they'll eventually be outta money. Ins have to meet there. The, either an angel investor ultimately. Makes money and recos their capital or there's no angel investing happening, right? It's and in order for that to happen the, it's not that the angels are willing to throw away their money.

It's that they're willing. To gamble on high risk deals with the potential of high reward. And it has to be that way. It's not that these are exceptionally greedy people that are trying to earn 20 times their money on an investment. It's the point is that at least half of the investments they.

Completely go broke. They go to zero, they lose everything. And that's a good day. If only half of your investments fail then that's what you expect. That's a portfolio that's performing. Okay. And then another portion, another quarter or 40% or so.

Maybe they do. Okay. They might break even. They might, you might make, twice your money on 'em. And so if you average those two together you're still way, way behind. You've lost at least half your money already. So the remaining investments these last few are go, are gonna make your portfolio work or not.

And so those last few. Some of those need to earn 30 acts or 40 acts and the problem is nobody can tell the difference between these in the beginning and so every investment has to look like it could be a 20 x return. Or at least a 15 x return. And so anything that looks like it just couldn't return 15 x, you just it's not investible.

You, you just can't put money into that. People get the notion that, oh, these guys, they're just pigs. They. They won't consider it unless it makes 'em 15 x it's not that it's gonna make 'em 15 x, it's that it might, it has to look like it'll make it right. It has to look like it could because Okay.

You know that most of 'em are just gonna go broke. So these guys aren't in the game just to, to lose all their money because, obviously they couldn't, and there would be no more money left to invest. And so that's another constraint on the overall system that, that it has to look like it could have a very big return in a relatively short amount of time.

And that in turn says the company has to have certain characteristics, so now you can start, you can tell if a company, it, it needs to be able to grow quickly, either quickly in revenues or quickly to profit. It needs to be able to get pretty big because nobody can afford to, Just in doing a deal, there's a lot of time and effort that people put in.

There's a certain amount of legal fees. There's, there are a lot of fixed costs to the thing. And so unless it's of a certain size, it's not worth doing. You wouldn't go through all this to raise 500 bucks and so unless you're raising, a $200,000 or $300,000, it's not worth all of the.

To that it's required to make it all happen. So that sort of sets the size that, the minimum size of a deal. And because of that, because and like we said, that has to be a small minority interest. So if you, sorry to. To go into too much math here, but I'm, I'll try to keep it as simple as possible.

If 200,000 is the minimum in investment that's worth doing, and if you're only selling 10% of the company, that implies that the whole company is worth $2 million. And so you, in order to get into the game, you need a company that. And claimed it'd be worth 2 million today. And so that company, which has no revenues and no profits, probably today needs to say, okay so look today I've gotten enough traction in one way or another that it's for, so it's, this thing is worth 2 million today and in five years, I'm gonna sell it for 20 million and there's your 10 x return between 2 million and 20 million.

And so I've got this company that has no revenues today, but five years from now is gonna be worth 20 million because I'm gonna have $5 million of revenue. And and here's how I'm gonna get from zero revenue today to 5 million in revenue in the.

When you say revenue, are you referring to profit?

No, that's the top line revenue the amount of money that, that you're earning.

So there's revenue, which is your sales dollars, everything you bring in for sales, and then they're always the cost that you had to spend to get those sales. And then you have profit after that. So

you're saying the, so like a business can be earning revenue, but they're not making a.

Amazon did that for decades. Yes. And so yeah if you can sell a company to somebody on the basis of strong revenue growth, even if it doesn't have profit, but it, but you can't sell somebody, a company that has stagnant revenue growth and no profit. Because you have no, no hope of profit in the future.

So yeah, you. In, in, in selling your company to somebody. This is not pitching it for, this is in the future. When you're exiting in doing that exit, you can sell it on the basis of, look how fast my revenues are growing, or you can sell it on the basis of look how much profit I have.

I'm obviously creating a lot of value. In the market and so the valuation of the company, the sales price of the company as a whole can be based on either one, either on revenues or on profit. And maybe this is a good time to to go back to that to that note on money because these are simple concepts.

Sales minus cost equals profit. That's a very simple concept, but it's got very profound underpinnings when you look at so profit. Let's start with sales. If so, for sales. If I come to you and say, James I'd like you to buy this little gad. For $20.

And you look at it and you go, wow, what a cool gadget. But I have a lot of other things I can spend my $20 on. I could buy lunch, I could, there's a lot of things I could do with my $20. And unless this gadget isn't the best thing you have to do with those $20, you're not gonna.

So for me to sell this thing to you, you have to value it more than anything else you were gonna do with those $20 which means I've brought you something valuable that you wouldn't have had otherwise. I created value for you on the cost side of. It took me a certain amount.

I I had to spend a certain amount of money to make that little widget and if I had to spend a hundred dollars to, to make it, I sold it for you for 20, I've got a loss of $80 and what that basically means is that, okay, I created value for you with the $20 sale, but I destroyed value for other people.

In and the amount of resources that I consumed in making that. So when we talk about profit, when you earn a profit, it means that you've benefited your customer someplace greater to a greater degree than anybody else could. And you've consumed less resources than anybody else could than the next person in the market that was bidding for those resources.

And so when the profit that somebody earns is a reflection of value they've created in society for other people according to the other people, not according to the person who earned the profit. So it's it's a profound. When people earn honest profits I say honest profits, which means nobody's been forced to either buy the good or to sell, the resources to do it.

And, there nobody's thumbs on the scale here anywhere, which is typically the course in, in any sort of market transaction. So profit is profoundly good. And money is I guess I, I say this because I grew up in a I think a relatively typical atmosphere where business and money.

Were reviewed with suspicion, it's like this isn't maybe quite on the up and up. It's, it might be a little shady that you're in business whatever. And it, it took me decades to of actually living it in that world to realize that's not the case at all. And then, I learned the theoretical underpinnings of that which we just discussed.

And and really that's some of the stuff that we teach in middle school. MBA is Come, comes back to to these points. I don't want kids to grow up the way I did with no idea of how business worked and the function of money, money itself is just just a scorekeeping tool.

And it's a way to To improve to make transactions easier, but money in itself is just a neutral creation of the market. And it shouldn't be assigned good or bad. It's just, in any more than a ham or a screwdriver, it should be assigned good or bad money is, Just plays an essential role.

Profit and loss needs to be assigned good and bad, right? Profits is good and loss is bad. And that's not just good for the person who earns the profit, but for society as a whole. So that's that's the. Really, the beauty of this whole thing is that you have an entrepreneur over the dream.

You have investors that, that say, okay, we want to go along for this ride and then. It's all constrained. This is back to Adam Smith's invisible Hand. It's all constrained by profit and loss, and it's directing everybody to serve customers and society and to economize on the use of resources.

So it, it's all really a beautiful system and it's discouraging the degree to which it's maligned in so many areas.

There are so many tangents and rabbit trails that we

could go off. I know. I'm trying to control myself

for the sake of staying on topic for our conversation here. Doesn't mean that we can't have more conversations in the future to talk about certain things that you've already brought up.

I'm totally game for that if you are. But to stay on topic with angel investing, I want to talk a little bit about Hub. Hub, some of the. Unnatural disruptions to the market, such as a sudden infusion of paper money or click of a button dollars, fiat dollars that some person in a dark room, smoke-filled room in Washington, DC presses, and poof, there's $6 trillion that have been added.

We had the recession in. 2008, we've had this prices are going way up in since all these covid pandemic, bailouts, whatever you wanna call 'em. How do these affect the market and how do they affect the specifically the angel investing scene

in the venture capital markets today? There's there's been an enormous reduction in activity.

And in the prices of of companies that are sold that's directly related to the interest rates set by the Fed for many years, they were zero, essentially. And now you can. Since you can get, four and a half percent on t-bills, then it's the decision on whether to put your money in the T-bills or invested in a startup venture is shifted.

So mechanically, that's the first thing that happens is as. Rates are higher, interest rates are higher, then that shifts money from investing into savings. People would rather save it than in, than invest it. And it's not that either one of those is good or bad. It's not that saving is in inherently good or that or bad.

Kanes said that savings was bad. The paradox of thrift. It's not that it's good or bad, it's that there's an optimal amount that, that people should save and invest. And the way they figure out what that optimal amount is through interest rates. And so when a party like the Fed comes in and artificially changes interest should be a market rate.

It should be determined by savers. People who wanna save and people who wanna borrow going in the market and finding out. What's, what the interest rate should be for every term, for a year, for five years, for six months, whatever, that should all be market related transactions. And when you do that, then the market balances.

The people who want to, who have money to save and people who have projects to do with that money that's been saved. So again, when the fed artificially lowers rates, then much more money floods into the investing side. And we've seen that over the past few years and now they're, that they're being forced to raise rates supposedly to fight inflation.

Then that money is starting to dry up more. And so the trend is obvious that you. The market, the lending market was more flush with money and now it's tighter. That's quite obvious, whether it's in a better or worse place. Only the market can say that, the, if you need to let the market set the rate and then let everybody else work with that market rate.

So we do see definitely that deals are or the fewer deals for smaller amounts in investors are, have a much lower appetite for risk in the last six months. It's amazing that the, you bring. An almost identical company to a group of people. And whereas before they were like, oh, this sounds good.

I like the way you're doing that. Now. They're like, ah, they've been nitpicking little things. Gee, are you really sure that customers are gonna this in that shade of green? Really?

And it's remarkable that they don't go you know what? The interest rate is a little bit higher on tbi, so I don't need to, they don't explicitly say that. I don't think they're thinking that, but their mindset changes and they view the world differently. It's remarkable.

It's just like an audition committee on an orchestra. If they have a hundred candidates to win one job, they can be as picky as they. They can get just, I didn't like the way you used your tongue on that third triplet, so you're outta here. Whereas if they if they have five positions and there's four candidates, they're gonna gonna.

gonna. Take whatever they can get and be thankful for it. I'm just trying to bring comparisons that people can relate to now a and I don't want to end our interview. We're running a bit on time. I have another appointment in 10 minutes. And I don't want to end on a sour note and leave everybody pessimistic about the future and, just do all kinds of negative things.

I, I was wondering if you could just close us out with, Both a vision of what like an optimal market would look like, and maybe just a couple of things that we as individuals could do to contribute to that.

O okay. We're a long way from optimal markets and I'll try to make this very high level. And I'll just make some assertions without backing them up for the sake of time, but, so every operation that happens be between two people just voluntarily is a market transaction and everybody does better.

Anything that interferes with that is, is problematic. From the Fed interfering with with interest rates to every regulatory agency that puts constraints on how people do business every one of them ideally you'd like to get rid of. And so that as a result Price formation would be as accurate as possible, and then everybody would react to those prices, whether they're prices of money as interest, or whether it's the price of a hotdog, whatever it is with society organizes itself that way by, by gauging prices.

And so in, in that situation, we would have. The optimal amount of investment in the optimal projects, and we would create the most wealth for society. I heard somebody the other day the estimate of what things would be like today had we never installed all the the New Deal and Great Society programs is that everybody would be on the order of seven.

To 10 times richer than they are today. So if you're making $20,000 today, you'd be making $200,000 under that scenario. So that's where ideally we'd like to be. That's what would be best for society as far as individuals. The thing to do is recognize every constraint on people.

Peacefully conducting their own affairs is a problem and it should be removed if at all

possible.

All right. Our guest has been John Foster. He is the founder of Middle School mba, which we can find on the web at middle school m b.com. If you've got a middle schooler who could benefit from what John has shared, obviously knows his stuff probably the best sales pitch for your business is a great interview like this. Congratulations on your success in your middle school mba and definitely appreciate you sharing your insights. I personally learned a lot and I hope people listening in, learned a couple of things about angel investing too.

I really enjoyed it. James, thanks for having.