Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Master's in
Speaker 1: Business with Barry rid Hoolts on Bloomberg Radio.
Speaker 2: This week on the podcast What a Fascinating Conversation, Iva
Speaker 2: Shang co founded legal List while she was in Harvard
Speaker 2: and then subsequently dropped out with her co founder to
Speaker 2: launch what essentially became an alternative credit fund that specialized
Speaker 2: in litigation financing along with two other types of credit
Speaker 2: related to litigation outcomes. Really a fascinating combination of legal
Speaker 2: insight and technology. Initially, this began just by scraping the
Speaker 2: State of Massachusetts judicial websites, all the different cases that
Speaker 2: were there, the different motions, who the lawyers were on
Speaker 2: each side, and they had no idea what they were
Speaker 2: going to do with this data until eventually they go
Speaker 2: to Y combinator and general counsel there says no, you
Speaker 2: have a gold mine here, and it's you have to
Speaker 2: focus on financing the litigation cases with a high probability
Speaker 2: of a successful outcome, but where the planiff doesn't have
Speaker 2: the capital to see it through and are up against
Speaker 2: the deep pocketed defendant who could just wait them out.
Speaker 2: I found even to be just very interesting and I'm
Speaker 2: intrigued by the business model. They created really a white
Speaker 2: space that a handful of multistrat funds might have been
Speaker 2: doing something with, but there really wasn't a dedicated old
Speaker 2: credit fund, especially one with nearly a billion dollars in
Speaker 2: client assets, focusing on I found this to be really
Speaker 2: fascinating and I think you will also, with no further
Speaker 2: ado my discussion with Legalists.
Speaker 1: Eva Shang, thank you so much for having me.
Speaker 2: So let's just go to Cambridge and talk about you
Speaker 2: drop out of Harvard at the age of twenty to
Speaker 2: start an alternative investment funds. What were you thinking?
Speaker 1: That's a great question. So back in the day, my
Speaker 1: co founder, Christian was actually the one who came up
Speaker 1: with the first seedlings of the idea to start Legalist.
Speaker 1: And what happened was he was very interested in data scraping,
Speaker 1: and he had taken some classes with a CS professor
Speaker 1: who did data scraping, and one day he decided to
Speaker 1: scrape the Massachusetts State Court record website. Now, this is
Speaker 1: a website that had cost the state seventy million dollars
Speaker 1: to make, and it was extremely janky, and his intent
Speaker 1: was just to download all the information and then see
Speaker 1: what he could do with it. But keep in mind
Speaker 1: he didn't have access to any of the standard web
Speaker 1: scraping equipment. He didn't have access to Amazon Web Services
Speaker 1: or cloud hosting. So he just bought these two mini's,
Speaker 1: which are like Mac computers that don't have a little rouse,
Speaker 1: yes exactly, and he just set them up and started
Speaker 1: trying to download and scrape all the information. Now, as
Speaker 1: it turns out, he was downloading at too high of
Speaker 1: a pace, and so Harvard caught on to the fact
Speaker 1: that there were just massive gigabytes of information passing through
Speaker 1: to this one dorm room in Dunster, and so he
Speaker 1: came to me and said, Uh, would you mind if
Speaker 1: I just put these computers in your dorm room and
Speaker 1: then they can sit in your corner and then scrape
Speaker 1: using your Internet. And I was like, what's going on here?
Speaker 1: And so that's kind of how I got roped into
Speaker 1: this business where we decided to form a corporation and
Speaker 1: our intent was just to download the data and then
Speaker 1: question mark question mark.
Speaker 2: So so you had no idea where this was going
Speaker 2: to go.
Speaker 1: Initially, we had no idea.
Speaker 2: Let's see what happens. And that's just with the with Massachusetts, right,
Speaker 2: will you also involved in y Combinator while you were
Speaker 2: at Harvard as well?
Speaker 1: Yes, So we got into y Combinator the summer of
Speaker 1: twenty sixteen just off of this legal analytics idea. And
Speaker 1: after we got into y Combinator, basically the very first day,
Speaker 1: the general counsel, who kind of keeps a watch over
Speaker 1: all the legal tech companies, pulls us aside and is like,
Speaker 1: I don't think your business idea is very good. I
Speaker 1: don't think this legal analytics thing is going to work
Speaker 1: out for you. Lawyers hate to pay for things. They
Speaker 1: like to get paid for things. I don't think you
Speaker 1: should be doing this. And we were like, well, we
Speaker 1: just got here, so we're going to do our old idea,
Speaker 1: thank you very much. But throughout the course of the summer,
Speaker 1: he kept on saying to us, you should really consider
Speaker 1: getting into this area called litigation finance. And eventually we
Speaker 1: realize the same thing that he did, which is that
Speaker 1: lawyers don't like to pay for things. And we were like, okay,
Speaker 1: so what should we do. And basically what he said was,
Speaker 1: if you're able to have this real time coverage of
Speaker 1: all these hard to access court dockets, than what you
Speaker 1: could do theoretically is pick out the cases that are
Speaker 1: going really really well and invest in those so you
Speaker 1: can take your own portfolio.
Speaker 2: That raises the question, if they're going really really well,
Speaker 2: why would anybody want to take outside funding when they
Speaker 2: want to see it through and maximize their returns. Or
Speaker 2: are these so expensive that even the cases that are
Speaker 2: going well need a little outside financial help.
Speaker 1: So I think when people think about litigation, they imagine
Speaker 1: how it is in the movies, where you file a
Speaker 1: case and then you go to trial the next day
Speaker 1: and then judge here's your case. So in reality, what
Speaker 1: happens is, you know, let's just take a prototypical scenario
Speaker 1: where you have a business that gets acquired and I'm
Speaker 1: the founder. I've been working on this business for a
Speaker 1: long time, and after the acquisition, the company that acquired
Speaker 1: us strips away all our resources, so then I don't
Speaker 1: hit my earnout and that's part of the acquisition price.
Speaker 1: And now I file a lawsuit thinking that tomorrow I'm
Speaker 1: going to get my ten million dollar earn out. But
Speaker 1: in the meantime, not only have I not been paid
Speaker 1: my earnout, but I also don't have money to pay
Speaker 1: my lawyer, and so I might screep together some change,
Speaker 1: get the complaint filed, the case is going well, you
Speaker 1: survive some initial motions, but trial is still two years away.
Speaker 1: And so that's really where a litigation funder could come
Speaker 1: in and say, okay, leave the legal fees to us.
Speaker 1: Not only will we pay for it, we'll keep your
Speaker 1: lawyer on a budget, we'll make sure the case stays
Speaker 1: on track, we'll offer our analysis of it compared to
Speaker 1: the thousands of other cases we've evaluated, and we'll make
Speaker 1: sure that we're your partner until the end.
Speaker 2: What does the founder have to give up in exchange
Speaker 2: for all that financial support? What is legalists share of
Speaker 2: the outcome.
Speaker 1: So the way that litigation finance works is that it
Speaker 1: is non recourse, which means that if we invest into
Speaker 1: litigation and it loses, then we don't get repaid.
Speaker 2: All the risk is on you, exactly.
Speaker 1: But if the litigation wins, then we share in the upside.
Speaker 1: So we normally aim to take around thirty or forty
Speaker 1: percent of the case, depending on how long it goes for.
Speaker 2: So it's almost as if it's a lawyer charging a
Speaker 2: contingency fee. Exactly, Hey, you don't have to pay me
Speaker 2: any legal fees for this car accident, but if we win,
Speaker 2: I take a third of the outcome.
Speaker 1: Exactly exactly, And there are types of cases that lawyers
Speaker 1: take on contingency. Frequently contingency lawyers are the original litigation funders,
Speaker 1: but in order to put together a diversified portfolio, they
Speaker 1: only have so much time, and so they usually do
Speaker 1: things like personal injury, employment, class action, things that are
Speaker 1: predictable in which where they have a lot of control
Speaker 1: and cases settle quickly an earnout case or a commercial
Speaker 1: case or a breach of contract case. Those costs hundreds
Speaker 1: of thousands, if not millions of dollars, and lawyers don't
Speaker 1: really want to put in all that time for free.
Speaker 2: So you're y combinator over the summer, when do you decide, Hey,
Speaker 2: this is a real business and I think I should
Speaker 2: drop out of Harvard to do this.
Speaker 1: Yeah. So, after we decided to switch to doing litigation funding,
Speaker 1: we went to John Levey, who's the general counsel at YC,
Speaker 1: and we were like, Okay, what do you know about
Speaker 1: litigation funding? And he said, the only reason I know
Speaker 1: about it is because I have friends who work in
Speaker 1: insurance and insurance is the mirror image of litigation funding,
Speaker 1: except for the defense side. They keep the lawyers on track,
Speaker 1: they pay the defense costs, and they really don't like
Speaker 1: that litigation funding now exists for the plaintiffs.
Speaker 2: Right because they have a giant financial advantage being part
Speaker 2: of a exactly big perpetual insurance company versus lawyers come and.
Speaker 1: Go exactly So that was pretty much all we needed
Speaker 1: to hear to actually make the switch. But then once
Speaker 1: we made the switch, it was a lot more challenging
Speaker 1: than we initially expected to actually raise a fund. There's
Speaker 1: that John F. Kennedy quote where he says, you know,
Speaker 1: we go to the moon. We choose to go to
Speaker 1: the moon not because it is easy, but because it
Speaker 1: is hard. I think a lot of startup founders are
Speaker 1: actually the opposite, where it's like, we choose to go
Speaker 1: to the moon not because it's easy, but because we
Speaker 1: think it's going to be easy. I think if we
Speaker 1: had known how difficult they would be for two twenty
Speaker 1: year olds to raise a fund to invest in litigation,
Speaker 1: it was just such a crazy idea at the time
Speaker 1: that we would have been like, yeah, no, thank you,
Speaker 1: we'll do something else.
Speaker 2: So when you launched, there aren't a whole lot of
Speaker 2: dedicated litigation finance funds. But you've become successful, are you
Speaker 2: attracting competition or other people saying, Hey, we didn't realize
Speaker 2: this was so doable. What's it look like out there?
Speaker 1: So at the time that we launched, there were already
Speaker 1: public companies that were doing litigation finance. One of our
Speaker 1: LPs likes to say he likes to say that he
Speaker 1: invests in managers where it's so time consuming and difficult
Speaker 1: to do what they've done that no one in their
Speaker 1: right mind would do it, And if they could go
Speaker 1: back in time and redo it, even the founders wouldn't
Speaker 1: do it over again. And I kind of think that
Speaker 1: our business is a lot like that. If you were
Speaker 1: to go into litigation finance at the outset, you would
Speaker 1: not want to raise a really small litigation finance fund,
Speaker 1: hire an engineering team, build an algorithm, scrape millions of
Speaker 1: court records, do hundreds of investments in a given fund.
Speaker 1: You would do what all the other litigation funders do,
Speaker 1: which is invest in ten big cases with law firms
Speaker 1: that you're familiar with.
Speaker 2: Huh, really interesting, So you drop out of Harvard is
Speaker 2: that twenty seventeen.
Speaker 1: We drop out of Harvard in twenty sixteen, and it
Speaker 1: takes us a full year to raise our first ten
Speaker 1: million dollar fund in twenty seventeen.
Speaker 2: Wow, So stay with dropping out of college. First of all,
Speaker 2: what did your parents say? They must have been bereft.
Speaker 1: My parents are immigrants, and so they feel like playing
Speaker 1: it safe is always the way to go. But while
Speaker 1: I was at Harvard, it quickly became apparent to me
Speaker 1: that nothing you do plays it safe. Like you can
Speaker 1: either be in lockstep with everyone else and do the
Speaker 1: whole recruiting for a consulting firm and then working at
Speaker 1: a consulting firm and then going to business school and
Speaker 1: then you know, ascending the ladder and not take any chances,
Speaker 1: or you can choose to do something else. And for
Speaker 1: a long time I didn't know what that something else
Speaker 1: would be. And when it presented itself to me, it
Speaker 1: became very obvious that this is the direction the universe
Speaker 1: was calling for me to go in.
Speaker 2: Huh. So you raised ten million in your first year?
Speaker 2: Ten million? Is that right?
Speaker 1: That's right?
Speaker 2: The first year? And then you are involved with the
Speaker 2: Field Fellowship. Peter Thield's award to young people who he's
Speaker 2: looking to, Hey, get out in the real world. You
Speaker 2: don't need to go to school. Was how helpful was
Speaker 2: Peter Teel's capital?
Speaker 1: So the Teal Fellowship is a one hundred thousand dollars
Speaker 1: grant that's given to people who drop out of school.
Speaker 1: It's given to the individual rather than to the company.
Speaker 1: But it did create a little bit of a problematic
Speaker 1: situation for us early on because he was known for
Speaker 1: his own litigation funding situation.
Speaker 2: Well, the whole thing with what took place with Crocker
Speaker 2: and Paul Cogan. There even was a book, right and
Speaker 2: if that was actually quite fascinating.
Speaker 1: But it's not actually litigation funding, that's right. That case
Speaker 1: is not that a grudge, yes.
Speaker 2: As a personal grudge, and it just goes to show
Speaker 2: you even when only two people know a secret, it
Speaker 2: still eventually comes out, which which is was my big
Speaker 2: takeaway from that book. But back to the fellowship, did
Speaker 2: it help you raise other assets that people say, oh,
Speaker 2: Peter Teel is successful if he's putting money into EVA,
Speaker 2: well he must see something there.
Speaker 1: Not really, but we did get a lot of questions
Speaker 1: about whether we were going to be suing media companies,
Speaker 1: and the answer was always no, media companies are.
Speaker 2: Not usually very That wasn't especially profitable, It just that
Speaker 2: was that was you know, when you sue a small
Speaker 2: website into oblivion, there's not a lot of cash to
Speaker 2: pay back. That was just I'm going to spend what
Speaker 2: it takes because I'm not happy with these people. You
Speaker 2: guys are in business looking for an economic outcome, that's right,
Speaker 2: not a personal outcome. So sounds like the first year
Speaker 2: of raising capital for Legalist was very challenging. At any point,
Speaker 2: were you thinking, hey, maybe I should go back to college,
Speaker 2: maybe I should go to law school, and were you
Speaker 2: Were you ever thinking about taking the bar or going
Speaker 2: to law school.
Speaker 1: So I was thinking of going to law school. But
Speaker 1: what ended up happening was that in California there is
Speaker 1: a Law Office study program where you can apprentice under
Speaker 1: a lawyer and you have to study for a certain
Speaker 1: number of hours per week. And Christian and I ended
Speaker 1: up doing the Law Office apprenticeship program starting in twenty
Speaker 1: eighteen with our general counsel at the time, Curtis.
Speaker 2: And YC or Legalist GC.
Speaker 1: LEGALISTGC, and that took us almost five years and then
Speaker 1: We ended up taking the bar exam last year and
Speaker 1: we both passed. Oh that's so now we actually are lawyers.
Speaker 2: That's amazing that you went that route instead of going
Speaker 2: to finishing college and going to law school. Tell us
Speaker 2: a little bit about your partner, Christian hay Am I
Speaker 2: pronouncing that.
Speaker 1: Right now, Christian hag Haigu.
Speaker 2: So he's your co founder. He's the person who was
Speaker 2: initially scraping all the data off of the Massachusetts court
Speaker 2: system websites. He sounds more like a computer science che
Speaker 2: then a legal geek. What was his background and tell
Speaker 2: us a little bit about how you guys met.
Speaker 1: So Christian was studying economics and computer science and I
Speaker 1: actually think he's incredibly operationally minded and just one of
Speaker 1: the smartest people I've ever met. And the crazy thing
Speaker 1: is that we've known each other for over ten years
Speaker 1: at this point, and it's definitely one of the most
Speaker 1: important relationships in my life. And when there's a fire
Speaker 1: at the company, when the two of us leap into
Speaker 1: action to solve it, there's really nothing like it. It's
Speaker 1: like when you have someone that you've worked with for
Speaker 1: so long and you basically know what they're going to say.
Speaker 1: Or think before they actually say it. And over the years,
Speaker 1: a lot of people that I've talked to disparage these
Speaker 1: fifty to fifty partnerships because I think they think it's
Speaker 1: riskier if you can't come to an agreement. And what
Speaker 1: I actually think is that anything that's so worth doing
Speaker 1: has a lot of inherent risk, and so if you
Speaker 1: make a partnership work, it can actually work much better
Speaker 1: than just having one person be in charge. So I'll
Speaker 1: tell a story about why I think it's so difficult
Speaker 1: to do what we do, or to even just start
Speaker 1: a business so young alone. So I mean, for the record,
Speaker 1: today we have over four hundred investments and seventy five
Speaker 1: percent success rate, hundreds of realizations. But back in the
Speaker 1: day when we had our very first case lose, it
Speaker 1: was only one hundred and fifty thousand dollars investment, but
Speaker 1: it was our very first loss, and it meant a
Speaker 1: lot to us because it threw into question our entire
Speaker 1: business model.
Speaker 2: Was that your first investment, or was that your first
Speaker 2: loss then you had subsequent you had previous winners to that.
Speaker 1: It was one of the early cases and it was
Speaker 1: our first loss. So I just remember feeling like the
Speaker 1: entire world was falling, and we were also so young
Speaker 1: that we hadn't been through a lot of bad things
Speaker 1: happen in our life. And so Christian and I we
Speaker 1: snuck into the back of a Costco because we didn't
Speaker 1: have a Costco membership, and then we bought those one
Speaker 1: dollar fifty hot dogs that they sell at Costco, and
Speaker 1: then we ate it for dinner more roastly, and we
Speaker 1: were like, this is the dinner we deserve. And I
Speaker 1: can't imagine what I would have done if I had
Speaker 1: been doing this alone. So that's why I think a
Speaker 1: lot of people warn't against partnerships because of the two
Speaker 1: sigma problem where you can't get along with your partner,
Speaker 1: then the whole firm collapses. But to us, I think
Speaker 1: it's one of our major superpowers.
Speaker 2: Huh. Really interesting. So the initial strategy of litigation finance
Speaker 2: comes from the general council at Y Combinator. Why did
Speaker 2: do you think it took so long to convince you
Speaker 2: that that was the way to monetize the tech that
Speaker 2: you guys had developed scraping state judicial records.
Speaker 1: Litigation finance is a very obscure asset class. It's really
Speaker 1: not the first thing that a college kid would think
Speaker 1: of as a business to run. And I also think
Speaker 1: that one of the features of being young is that
Speaker 1: you can't recognize or understand good advice, even when it
Speaker 1: comes your way. I remember there was one other hedge
Speaker 1: fund that did credit on these p top lending platforms
Speaker 1: that was a few years ahead of us, and back
Speaker 1: when we were trying to raise our first fund, they
Speaker 1: had already raised a few hundred million. So I went
Speaker 1: to their office and I was like, give me your advice.
Speaker 1: How did you do it? And the two tidbits that
Speaker 1: I remember from that conversation where he was like, I've
Speaker 1: got this really nice, expensive pair of shoes, they're like
Speaker 1: seven hundred dollars, and I also have these business cards
Speaker 1: that are very professional and they have just a lot
Speaker 1: of heft and texture. And it took a really long
Speaker 1: time for the moral of that story to actually become
Speaker 1: apparent to me, because I was perplexed by this information
Speaker 1: for just such a long time, and it was only
Speaker 1: years later that I was like, Oh, what he's really
Speaker 1: saying is when you're young, you should try to look
Speaker 1: professional and institutional and reassure investors, especially LP investors, that
Speaker 1: you're not going to lose their money. And he was
Speaker 1: using those details to make a point, but I was
Speaker 1: just too naive to understand what he was actually saying.
Speaker 1: So I think a lot of advice is like that.
Speaker 1: If it comes to you at the wrong time, it's
Speaker 1: as good as if you didn't hear it at all.
Speaker 2: It's very hard to take advice when you're young, because
Speaker 2: you don't have a frame of reference, right, You don't
Speaker 2: have the breath of hear the range of possibilities right.
Speaker 2: And that's why this advice is really useful for someone
Speaker 2: who's been through that. Really very very interesting. Now you're
Speaker 2: almost the firm is almost ten years old. What sort
Speaker 2: of advice are you getting now that you might be
Speaker 2: paying more attention to that in twenty sixteen, twenty seventeen
Speaker 2: just went right by without a whole lot of notice.
Speaker 1: I remember one of our advisors in LPs, who's a billionaire,
Speaker 1: came by our office and I was like, what's the
Speaker 1: secret to your success? And this is when I think
Speaker 1: I must have been like twenty two or so, and
Speaker 1: he was like, hire good people and retain them. And
Speaker 1: I was like, well, obviously, what else? And then the
Speaker 1: farther I get into the business, the more I'm like, oh, yeah,
Speaker 1: that is the main thing. It's just that when you're
Speaker 1: at that stage, it's not apparent to you exactly how
Speaker 1: to apply it.
Speaker 2: And that's really interesting. One of the things you don't
Speaker 2: realize when you are making your first I don't know
Speaker 2: ten hires, first dozen HighRes that five or ten years
Speaker 2: down the road, that group of people you're hiring are
Speaker 2: going to be the ones doing the subsequent hiring yeah road,
Speaker 2: And you just can't anticipate that until you've lived through it,
Speaker 2: and then it's like, wow, those were really important hires
Speaker 2: that first you know five or ten people. It makes
Speaker 2: such it sets the time for everything going forward, and
Speaker 2: there's no way to understand that until you've lived it.
Speaker 2: Maybe that's where the advice aspect comes in.
Speaker 1: I also think that the cohesion of an organization is
Speaker 1: so much more important than how talented the individual parts are.
Speaker 1: So there's this children's book called Enders Game, which I've
Speaker 1: always loved. You reread it.
Speaker 2: I don't know if I would call that a children's book.
Speaker 2: I mean it's a sci fi book scott orson Cards.
Speaker 1: Or scott Card. Yeah, but in Enders Game you'll notice
Speaker 1: that at the very end, they don't bring in the
Speaker 1: top kids from every class they alert. Yeah, and when
Speaker 1: they're actually battling the aliens for the final battle on
Speaker 1: behalf of all of humanity. I'm outing myself as a
Speaker 1: huge nerd here, but they bring in Ender's closest friends.
Speaker 1: And these are.
Speaker 2: People that he respects, not just one person, because all
Speaker 2: these any challenge against high are high odds. It's never
Speaker 2: just Michael Jordan. It's got to be everybody around him,
Speaker 2: right right, And if you look at I don't want
Speaker 2: to go into sports metaphors because occasionally Michael Jordan can
Speaker 2: carry a team, but even the Bulls didn't start winning
Speaker 2: until he had good players around him, and it made
Speaker 2: a big difference.
Speaker 1: Yeah, And I always wondered why huge bureaucracies could sometimes
Speaker 1: lose to startups, and it's because there's so much internal
Speaker 1: energy that's spent fighting each other, and the lack of
Speaker 1: cohesion means that you can't all row the boat in
Speaker 1: the same directions. There's actually energy working against each other.
Speaker 1: And that's one of the reasons why many of our
Speaker 1: employees have been with the firm for five plus years
Speaker 1: and why that kind of trust and loyalty and culture
Speaker 1: is I think the root of what enables everything we
Speaker 1: do today.
Speaker 2: Let's talk a little bit about the process of litigation
Speaker 2: financing and some of your other strategies. The flagship strategy
Speaker 2: obviously litigation financing. You mentioned you've done about four hundred
Speaker 2: financing so far.
Speaker 1: Is that about right? That's right. We've done over four
Speaker 1: hundred deals.
Speaker 2: And how many of these have reached their.
Speaker 1: Conclusion over one hundred and thirty.
Speaker 2: So you're about a third of the way through the
Speaker 2: initial the first let's call it five years or so,
Speaker 2: seven years of financing.
Speaker 1: It's been a long time, I mean, so we raised
Speaker 1: our first fund in twenty seventeen, second fund in twenty nineteen,
Speaker 1: third fund in twenty twenty one. I think the pace
Speaker 1: of the number of deals we do is definitely accelerating,
Speaker 1: considering the fact that we only had ten million for
Speaker 1: the first two years. But we've learned a lot along
Speaker 1: the way.
Speaker 2: And in twenty twenty two you raised four hundred million dollars.
Speaker 2: That's a pretty hefty number for what was then, I
Speaker 2: guess a five year old fun putting together a good
Speaker 2: track record. Let's talk a little bit about the sort
Speaker 2: of returns you target and how long the should take.
Speaker 2: So you have four hundred investments done since twenty seventeen,
Speaker 2: about a third of them have reached fruition. What's the
Speaker 2: win loss rate? You mentioned seventy five percent before.
Speaker 1: That's right, So we went about seventy five percent of
Speaker 1: the deals that we do when being calculated as it
Speaker 1: makes above the amount that we put in and lost
Speaker 1: being anything below principle.
Speaker 2: So you could actually win the case but not be
Speaker 2: financially successful because there returns are less than the initial investment.
Speaker 1: That was the big thing that we learned in the
Speaker 1: early years. So in the early years, we only had
Speaker 1: ten million of assets, but we had billions of dollars
Speaker 1: of deal flow. And so what we would do is
Speaker 1: we would work with other litigation funders multi strat hedge
Speaker 1: funds that did litigation funding, and we would refer cases
Speaker 1: to them and watch how they did their work. And
Speaker 1: what we noticed was that litigation is essentially like an
Speaker 1: envelope with a check in it. You do not know
Speaker 1: how much is written on that check.
Speaker 2: Oh it's a sealed envelope.
Speaker 1: It can seal develope, right, And everyone has their best
Speaker 1: estimate of how much is in that check. But theoretically,
Speaker 1: if you were to buy the envelope for ten dollars
Speaker 1: or even ten thousand dollars, you would always make money.
Speaker 1: A defendant is always willing to settle for at least
Speaker 1: ten thousand dollars just to avoid paying their lawyers.
Speaker 2: Make it go away, absolutely exactly.
Speaker 1: That's called a nuisance value settlement. And so theoretically, the
Speaker 1: less money you can invest in each claim, the higher
Speaker 1: the likelihood of success. And if you were to invest
Speaker 1: one dollar, you would win every single lidiation.
Speaker 2: Because you would always take the ten thousand dollars check
Speaker 2: to go away. That's a great ROI. In reality, you
Speaker 2: have a plaintiff that doesn't want to settle for right
Speaker 2: brand they feel they're wrong. Once it gets you know,
Speaker 2: people forget. Ninety something percent of cases settle before trial.
Speaker 2: So one question I have to ask you is, when
Speaker 2: you're doing litigation financing, of the cases that are resolved,
Speaker 2: how many of them actually go to trial and how
Speaker 2: many of them are resolved way before trial?
Speaker 1: The majority of them are settled, and litigation finance, I
Speaker 1: have to admit, does introduce a hurdle beyond which the
Speaker 1: plaintiff has to hit in order to settle for a
Speaker 1: reasonable amount and make a reasonable amount of money. So
Speaker 1: that's the reason why in litigation finance you don't see
Speaker 1: settlement rates that are as high as you would normally see.
Speaker 1: The plus side of this is that normally a lot
Speaker 1: of plaintiffs run out of money and then they settle
Speaker 1: the case for pennies on the dollar, and so litigation
Speaker 1: finance allows them to hold out for what they're owed.
Speaker 2: I would think that it's a self selecting group in
Speaker 2: two ways. One is people who know in advance I'm
Speaker 2: giving up some of my upside, but I want to
Speaker 2: go the distance. And two, because they're funded, they don't
Speaker 2: have to take a low bull settlement. I would imagine
Speaker 2: the defense side, Oh, they have a deep pot supporting them,
Speaker 2: We're going to have to be prepared to go to court.
Speaker 2: It changes the dynamics of the subsequent settlement discussions. I
Speaker 2: would imagine it makes the defendant a whole lot more
Speaker 2: serious about the case. Then we could just wait this
Speaker 2: guy out and eventually they'll run out of.
Speaker 1: Cash exactly exactly. Now. The secret about the defense side
Speaker 1: is that it's often in their best interest to draw
Speaker 1: out the litigation process, One because the plaintiff might run
Speaker 1: out of money, and two just because if I'm owed
Speaker 1: ten million dollars in an earnout, it benefits the defendant
Speaker 1: to pay that to me in five years rather than today,
Speaker 1: even if they settle for the full amount. So that's
Speaker 1: why a lot of defendants, especially big companies, will weaponize
Speaker 1: the fact that they have deep pockets, can pay for lawyers,
Speaker 1: can drag things out, and you know what's the plaintiff
Speaker 1: going to do? Sue them in court and take five
Speaker 1: years to do so. And so that's why you might
Speaker 1: see cases where both sides recognize the plaintiff is at
Speaker 1: least entitled to something, but where the defendant just hasn't
Speaker 1: settled because it's in their economic best interest to drag
Speaker 1: it out.
Speaker 2: Huh interesting. So, given three quarters seventy five percent success rate,
Speaker 2: what sort of returns are you targeting? I know we
Speaker 2: can't talk about actual performance, but when you're looking at
Speaker 2: an individual case, one would have to think the average
Speaker 2: of the cases are looking for x percent a year?
Speaker 2: Is it fifteen percent? Is it twenty percent? The winners
Speaker 2: have to offset the losers, So I got to think
Speaker 2: you're looking for way more than ten percent.
Speaker 1: Right, that's right. So we usually charge a significant multiple
Speaker 1: on our dollars put out and across the fund we
Speaker 1: target a twenty to twenty five percent net, So we're
Speaker 1: trying to be comparable to private equity, but in half
Speaker 1: the duration and uncorrelated of course.
Speaker 2: So litigation finances the flagship strategy. What other strategies do
Speaker 2: you employ?
Speaker 1: So litigation finance is by far our largest strategy, But
Speaker 1: we also have a couple hundred million in a type
Speaker 1: of distress lending in bankruptcy called dip lending. And we
Speaker 1: also have a couple hundred million in a type of
Speaker 1: alternative credit called government receivables. So government receivables is where
Speaker 1: you have a ninety to one hundred and twenty day
Speaker 1: receivable from a federal or state government entity, either because
Speaker 1: of a grant or a contract that you performed on
Speaker 1: or a credit of some sort, and we advance against
Speaker 1: that and then get paid directly by the government.
Speaker 2: I just had a conversation with a friend who does
Speaker 2: that sort of work for state and county governments, and
Speaker 2: the problem they run into is when they're too successful,
Speaker 2: when they have all these accounts receivable to them, it's like, Hey,
Speaker 2: we have too much business. How do we fund this?
Speaker 2: And it seems like it's pretty guaranteed. I didn't realize
Speaker 2: that sort of old credit was something you do. How
Speaker 2: large of a receivable are you looking at? I'm assuming
Speaker 2: you're not doing this for five and ten thousand dollars
Speaker 2: at a pop. Right, it's probably millions of dollars, if
Speaker 2: not more.
Speaker 1: Right, So, the individual receivables can be as low as
Speaker 1: ten twenty thousand, but we usually set them up as
Speaker 1: credit facilities with people who generate lots of these receivables,
Speaker 1: and the facilities might be a couple million. And the
Speaker 1: reason why we're able to find these businesses is because,
Speaker 1: and you'll notice, everything we do is related to either
Speaker 1: the legal system, the judicial system, or the government in
Speaker 1: some way. Because what our technology does best, and we
Speaker 1: call our technology the truffle sniffer, as in like a
Speaker 1: pig that goes into the forest and then finds valuable truffles,
Speaker 1: is we crawl through these comprehensive government databases and pull
Speaker 1: out the information that is relevant for investment purposes and
Speaker 1: go after those deals specifically. So in litigation, we're looking
Speaker 1: for cases that win in government receivables. We're looking for
Speaker 1: businesses that are owed receivables and are likely to be
Speaker 1: in financial need of receivable financing. So Boeing, for instance,
Speaker 1: would be excluded even though they generate huge amount of receivables.
Speaker 1: And I would love to fund Boeing, but Boeing would
Speaker 1: never want funding from us. So it is what it is.
Speaker 2: That's really interesting. And you mentioned dip or debtor in
Speaker 2: possession financing. So in a bankruptcy, the debtor takes control
Speaker 2: of the entity and suddenly they're operating on behalf of
Speaker 2: all the other creditors and that requires a line of
Speaker 2: capital as well.
Speaker 1: So most large bankruptcies are called pre packaged bankruptcy, so
Speaker 1: there's already a dip lender in place. What we specialize
Speaker 1: in is looking for these sub scale dip opportunities where
Speaker 1: there is no prepetition lender that's willing to put up
Speaker 1: the dip financing and so you can come in and
Speaker 1: be a priming lean on all the assets of the bankruptcy.
Speaker 2: And we briefly discussed competitors, but but it sounds like
Speaker 2: it's deep pocketed high net worth individuals and some multi
Speaker 2: strat funds that sort of do this on the side.
Speaker 2: Is anybody else focusing on this sort of strategy directly
Speaker 2: or for now? Do you pretty much own the space?
Speaker 1: So we did not invent any of the asset classes
Speaker 1: that we are in. However, we approach what we do
Speaker 1: in a very unusual way, and a lot of our
Speaker 1: LPs see that. So the reason that we even came
Speaker 1: up with a government receivable strategy, which is a liquid
Speaker 1: hedge fund. It's got a much shorter duration than we're
Speaker 1: used to, it's a different type of database, is because
Speaker 1: one of our LPs, a university endowment, approached us and said, hey, look,
Speaker 1: I've got this other manager. They do government receivables financing.
Speaker 1: I freaking love this asset class and I want more
Speaker 1: of it. But they're not able to source more because
Speaker 1: they're using their relationships to source.
Speaker 2: You're scraping it right off the sites. That gives you
Speaker 2: a ugee.
Speaker 1: Yeah, we don't need to go to people we know
Speaker 1: and say hey, is there any chance you want financing?
Speaker 1: We can actually go into the government contract websites and say, okay,
Speaker 1: who here looks like they would need government receivables financing.
Speaker 2: So everything you've described so far is both technologically driven
Speaker 2: and outside of what we think of as traditional finance
Speaker 2: or even old finance. I don't want to use the
Speaker 2: phrase niche, but I got to ask how far can
Speaker 2: this scale up? Like this is not going to be
Speaker 2: a trillion dollar business ever, Right, even if you attract
Speaker 2: thousands of competitors, you're coming up on a billion dollars.
Speaker 2: Is there room in the space for ten billion or
Speaker 2: twenty billion or is there just not enough juice to
Speaker 2: make it worth a squeeze there?
Speaker 1: So each one of our strategies individually is capacity constrained.
Speaker 1: And you can see this by the fact that the
Speaker 1: industries that they are in are not that large. So
Speaker 1: the largest government receivables funder has two billion of assets
Speaker 1: under management, the largest litigation funder has a couple billion
Speaker 1: of assets under management. They are kind of what they are.
Speaker 1: But we see our firm as a tech driven alternative
Speaker 1: credit firm, and the types of alternative credit there are
Speaker 1: out there is huge.
Speaker 2: Right, that's a trillion dollar industry, clearly, But you've found
Speaker 2: an area that is the fishinghole you you're operating in
Speaker 2: as relatively small as compared to let's call it middle
Speaker 2: market funding of existing companies. So the other thing I
Speaker 2: find so fascinating. So you've diversified across three different lines,
Speaker 2: so it's debtorin possession of financing accounts receivable, and then
Speaker 2: litigation finance. But all of this sounds completely uncorrelated to
Speaker 2: the economy, to the stock market, to interest rates. What's
Speaker 2: the relationship of the fund success rate versus all the
Speaker 2: other things we look at as either correlated or uncorrelated.
Speaker 1: So that is the niche that we occupy for our LPs.
Speaker 1: They have a lot of things that are market correlated,
Speaker 1: and depending on their liquidity and return profile that they're
Speaker 1: looking for, they might invest in lidiation finance, which is
Speaker 1: longer duration, it's a kind of a five to seven
Speaker 1: year draw down fund. Or if they're really looking for
Speaker 1: liquidity but are willing to do a lower return profile,
Speaker 1: they might look for something like government receivables, which has
Speaker 1: quarterly redemptions but is more of a ten to twelve
Speaker 1: percent net And then DIP is somewhere in the middle.
Speaker 1: So across all of our strategies, I think the non
Speaker 1: correlated component is a super important part of both how
Speaker 1: we market and the value that we provide for our investors.
Speaker 2: Huh. So some people want liquidity, they're going to do
Speaker 2: accounts receivable. If a big endowment or foundation is less
Speaker 2: concerned about regular demands on capital or future liabilities. If
Speaker 2: you're doing the flagship litigation finance, expect to be locked
Speaker 2: up seven years, fair statement.
Speaker 1: Five to seven years, five to seven years.
Speaker 2: Really interesting. I got to ask about the name. Where
Speaker 2: did the name legalists come from?
Speaker 1: I think that it was related to our very very
Speaker 1: original business idea, which was a list of attorneys and
Speaker 1: a list of cases.
Speaker 2: Legal list. That's right, So back and White combinator, when
Speaker 2: you're just scraping this and saying, we don't know what
Speaker 2: the hell we're going to do with this, but here's
Speaker 2: a list.
Speaker 1: Of attorneys in cases exactly.
Speaker 2: Huh. But you just kept it for for nostalgia sake.
Speaker 1: I do. I do identify as a legalist. I'm very
Speaker 1: big on rule of law.
Speaker 2: Yeah, some people less so right to say that. So
Speaker 2: let's talk a little bit about the asset growth, which
Speaker 2: has been pretty amazing. You start with ten million and
Speaker 2: twenty seventeen. By twenty twenty one, that's under half a
Speaker 2: billion in now you're knocking at a billion. That's pretty
Speaker 2: rapid growth for a startup. Most startup al credit funds
Speaker 2: or alt edge funds don't scale up to a billion
Speaker 2: dollars that quickly.
Speaker 1: I think that's right. I think we happen to be
Speaker 1: at a very good moment in time where a lot
Speaker 1: of our investors are people who were already familiar with
Speaker 1: litigation finance but happened to not like how it was
Speaker 1: being done before. So the big problem with litigation finance
Speaker 1: traditionally as an industry is that each litigation itself carries
Speaker 1: a ton of idiosyncratic risk. You could have the best
Speaker 1: case in the world and get in front of a
Speaker 1: judge and the judge is feeling kind of crotchety that day,
Speaker 1: and so then he dismisses it, and then you're done.
Speaker 1: And what our strategy does is our strategy takes the
Speaker 1: idiosyncratic risk out of each individual investment out by pulling
Speaker 1: it with hundreds of other investments. And there were no
Speaker 1: other litigation funders. There are no other litigation funders that
Speaker 1: do it the way that we do.
Speaker 2: Huh really interesting, Well, you're out if the judge dismisses it,
Speaker 2: unless there's an appeal. Do you guys fund appeals?
Speaker 1: We don't fund appeals for cases that have lost.
Speaker 2: We have well would you fund? Would you fund an
Speaker 2: appeal for cases that one? Not because you're challenging the outcome,
Speaker 2: but you're challenging the dollar amount the award, not the verdict.
Speaker 1: So the qualifier for the Truffle Sniffer is based on
Speaker 1: a set of variables that include static variables, so these
Speaker 1: are things that would eliminate a case categorically or qualify
Speaker 1: a case categorically. And then there are also time series variables.
Speaker 1: So the time series variables are related to things that
Speaker 1: happen in the case. And this is not at all
Speaker 1: obvious to detect, and this is what our machine learning
Speaker 1: is trained on. But we're looking for signs that a
Speaker 1: case is going really well. For certain types of cases,
Speaker 1: getting a pro may injunction might be a really big deal.
Speaker 1: For other types of cases, like patent cases. For instance,
Speaker 1: fifty percent of patent judgments are overturned on appeal even
Speaker 1: if they win. Wow. So for that reason, we don't
Speaker 1: do any patent cases because there is really no stage
Speaker 1: at which we could fund it where it has been
Speaker 1: de risked, and we're really looking for preliminary motion hurdles
Speaker 1: that de risk a case. Huh.
Speaker 2: So the future is inherently unpredictable, but by controlling a
Speaker 2: handful of variables, you can narrow the range of potential
Speaker 2: outcomes to something manageable exactly.
Speaker 1: And what then our underwriters do. And there is still
Speaker 1: a big human lawyer underwriting component for the simple reason
Speaker 1: that you know, if you look at a case, there
Speaker 1: are three elements to underwriting it. There's will it win?
Speaker 1: How much will it win? And if they do win,
Speaker 1: can the defendant even pay it? And the latter two
Speaker 1: are really what we still need a lawyer to check for.
Speaker 1: So a lot of what the lawyers check for is
Speaker 1: does it actually make sense for this guy to get
Speaker 1: this amount of money? And we call this the no policy.
Speaker 2: Good policy in just about every endeavor.
Speaker 1: Yeah, but what we found is that people put out
Speaker 1: energy into the world and then it is reflected back
Speaker 1: to them. And so when we've had situations where we've
Speaker 1: just we're just like, did you really hate that guy?
Speaker 1: I really hated that guy and he's got such a
Speaker 1: technically good case on paper, And we've had a handful
Speaker 1: of losses that have had this BAC pattern, But once
Speaker 1: they get to trial, the judge is like, oh, I
Speaker 1: can see why you terminated that contract, right, I can
Speaker 1: see why you didn't want to work with him, right,
Speaker 1: And then they inevitably lose, and the jury will drape
Speaker 1: the law over whichever party they feel like is more deserving,
Speaker 1: because we all have a sense of inherent right and
Speaker 1: wrong in our hearts and we want to act according
Speaker 1: to that.
Speaker 2: It's always funny when you when you come to the realization, hey,
Speaker 2: this ape million people in the world. Even if one
Speaker 2: percent of them are let's use the word jerks instead
Speaker 2: of the a word. That's still you know, a ton
Speaker 2: of people. That's still if there's eight billion people, well,
Speaker 2: guess what, it's eighty million jerks out there. I don't
Speaker 2: need to deal with them. So anyway, I totally get
Speaker 2: that rule of thumb and it works well. But since
Speaker 2: we're talking about this sort of squishy individual personal things
Speaker 2: you mentioned many of the multistread funds that do these
Speaker 2: sort of deals, they have a network of people. It's
Speaker 2: sort of who knows who and how they come across
Speaker 2: these cases, and one person refers it to another person,
Speaker 2: and that lawyer refers it to a third person. Your
Speaker 2: approach to originating these things are completely different. You're pulling
Speaker 2: the data off of I'm now going to assume it's
Speaker 2: just about every state in the country that's right off
Speaker 2: of the judicial websites of the states, and then you're
Speaker 2: running your analytics on it to say, hey, let's see
Speaker 2: if we can find a case that's worthy, and at
Speaker 2: that point take us through the process of reaching out
Speaker 2: to that planiff. How does that conversation go, Hey, we
Speaker 2: saw your case. We're wondering if you need assistance on
Speaker 2: financing it.
Speaker 1: So, even though we fund the plaintiffs, the attorneys are
Speaker 1: usually our primary points of contact because attorneys are repeat players,
Speaker 1: and so at this point, you know, our team has
Speaker 1: five thousand calls with attorneys every single year, and at
Speaker 1: this point we've spoken to tens of thousands of attorneys
Speaker 1: pretty much everyone that does the type of case that
Speaker 1: we'd like to do. When we first started out, it
Speaker 1: was all cold outreach, but these days it's a lot more. Hey,
Speaker 1: I saw that your X case just survived motion for
Speaker 1: summary judgment? Congratulations, Do you want to reconnect in a
Speaker 1: couple weeks, even though I know we just talked, you know,
Speaker 1: six months ago. So it's a lot more of these
Speaker 1: warm connections. And it's not that we are not bullish
Speaker 1: on relationships. It's that I think that when you have
Speaker 1: a solely relationship driven origination approach, you're really limiting the
Speaker 1: number of deals that you can.
Speaker 2: You're relying too much on serendipity as opposed to something
Speaker 2: that is not only quantitative, but structured and rules driven.
Speaker 2: It gives you a more consistent thing. So you mentioned
Speaker 2: no patent cases. What are the sort of commercial cases
Speaker 2: that you very much like, what catches your eye?
Speaker 1: So two thirds of our cases are breach of contract
Speaker 1: and business towards. Do you know what business to Of course.
Speaker 2: I didn't do your out. I went to law school,
Speaker 2: so I kinda yeah, I know what business torts are.
Speaker 2: That's why, which is part of the reason why I'm
Speaker 2: in finance, because I found that stuff kind of not
Speaker 2: nearly as interesting as finances.
Speaker 1: It does make me a lot more aware of all
Speaker 1: the things that could go wrong when you do business
Speaker 1: with people. It's like, no matter what industry it is.
Speaker 1: We've had several cases with indoor trampoline companies, right. I
Speaker 1: was really shocked when the second indoor trampoline company dispute
Speaker 1: came my way. I was like, how many indoor trampoline
Speaker 1: companies are there anyway, meaning like.
Speaker 2: Where kids go to play or companies at manufacture them
Speaker 2: and sell them, because the ones where kids go to play,
Speaker 2: even if you're like padding everything, it still looks like
Speaker 2: a litigation nightmare.
Speaker 1: These are contract disputes between franchisees, franchise ors, distributors, things
Speaker 1: like that. But no matter what type of company it is,
Speaker 1: whether it's a trucking company, a software company, an entertainment company,
Speaker 1: there are only so many types of disputes. It's like
Speaker 1: you don't honor your contract right. You steal someone's money,
Speaker 1: you steal their employees, you steal their trade secrets, you
Speaker 1: take the business opportunity you were meant to do together
Speaker 1: and then do it yourself. And it makes you realize
Speaker 1: that humans act extremely consistently no matter what industry they're in.
Speaker 1: That's right.
Speaker 2: The interesting thing you raised about franchises, I've noticed, and
Speaker 2: it kind of waxes and wings over time, but there
Speaker 2: is a regular series of litigation between franchisees and Burger
Speaker 2: King or McDonald's or whoever the franchiser is. Have you
Speaker 2: looked at those sorts of cases that seems to be
Speaker 2: something that pops up pretty regularly.
Speaker 1: It's not common for us to fund franchise e franchise
Speaker 1: or cases. This is not really detailed because the franchise
Speaker 1: franchise or agreements are written in a pretty air tight way. Yeah.
Speaker 2: No, that McDonald's is as slick and tight as you
Speaker 2: can possibly get. And how much upside is there? What
Speaker 2: made me think of this is I just saw a
Speaker 2: bunch of franchisees or up in arms over the possible
Speaker 2: reintroduction of the five dollars value meal, which McDonald's wants
Speaker 2: to do, and somebody claimed it's violation of their franchise agreement.
Speaker 2: I'm I gotta think McDonald's is savvier than that, Like,
Speaker 2: if they want to introduce the fi dollar value meal,
Speaker 2: you're gonna you're gonna have to eat it. You know,
Speaker 2: it's it's even if it's a if it's a break
Speaker 2: even or a loss. They're doing it to bring bodies
Speaker 2: into the store, and I have to imagine it's covered
Speaker 2: in the franchise agreement.
Speaker 1: Another commonly misunderstood litigation is the McDonald's coffee litigation. Did
Speaker 1: you hear about that? Oh?
Speaker 2: God, that's an infamous one which anti anti lawyer people
Speaker 2: talk about all the time, but when you read the
Speaker 2: facts of the case, this woman was badly scolded. The
Speaker 2: coffee was thirty degrees hotter than the typical takeout coffee.
Speaker 2: They screwed up. They have the top on. I mean,
Speaker 2: there's talk about the wronghill to die on. If you're
Speaker 2: against litigation as a way to solve some societal problem,
Speaker 2: that's not the case you want to use.
Speaker 1: Right, right. I think that litigation is frequently misunderstood in
Speaker 1: that way. Most people do not want to be in litigation.
Speaker 1: It's not a fun place to be in, which is
Speaker 1: where you see, which is why you see so few
Speaker 1: lawyers act as plaintiffs themselves in litigation because it's just
Speaker 1: not very fun. It kind of eats you from the inside, emotional.
Speaker 2: Straining, it's emotionally difficult. And you know, I always see
Speaker 2: people threatening litigation, and it's like, hey, if you want
Speaker 2: to sue, sue, don't wave a gun around, use it.
Speaker 2: Don't threaten to use it, right, And that's what litigation
Speaker 2: seems to be. Anyone who threatens litigation usually isn't serious,
Speaker 2: right me. Know, when you fired an attorney and you
Speaker 2: filed the summary, you know emotion and complaint, and then
Speaker 2: we can have a conversation about how serious you are.
Speaker 1: Right, The reason that litigation happens is because of a
Speaker 1: gap in expectations between the plaintiff and the defendant. So
Speaker 1: the closer the gap is, the more likely it is
Speaker 1: to settle quickly. And then the wider the gap is,
Speaker 1: whether one side is unreasonable or the other, the more
Speaker 1: likely it is to drag on and actually go to trial.
Speaker 1: And we see this even with going back to the
Speaker 1: earnout example, even with a pretty clear cut eurnout example,
Speaker 1: because it might have stages to it, so you might
Speaker 1: get one million if you hit this milestone, two million
Speaker 1: if you hit this milestone, And even if everyone agrees
Speaker 1: that somewhere between five and ten million, they'll still litigate
Speaker 1: over whether it's five or whether it's meant to be ten.
Speaker 2: The assumption is everybody is operating in good faith, and
Speaker 2: once that good faith disappears, then whatever the opposing party
Speaker 2: is doing is read in a negative light and it
Speaker 2: just gets further and further apart. Yea not a big surprise. So,
Speaker 2: given how tech oriented you are, how much time and
Speaker 2: effort do you spend building out the tech continuing to
Speaker 2: expand it, making it just beefier than it was. How
Speaker 2: much innovation can there be in terms of scraping state
Speaker 2: judicial or federal judicial websites.
Speaker 1: So there are two ways in which we can improve
Speaker 1: the technology. One is adding more data sources for instance,
Speaker 1: you know, adding our government receivable strategy. It was so
Speaker 1: many new government websites that had to be scraped. And
Speaker 1: then the second way is improving our existing process. And
Speaker 1: I don't know if you've heard about the advent of
Speaker 1: generative AI, but it has been kind of a game
Speaker 1: changer for us and for a lot of legal tech
Speaker 1: companies because now we're not just able to analyze the
Speaker 1: the docket, but we're actually able to analyze the rulings
Speaker 1: themselves and figure out what we like about them before
Speaker 1: we reach out too.
Speaker 2: So you're looking at rulings, are you looking at motion
Speaker 2: papers also to see the strength of either either side's argument?
Speaker 2: Is that something else you're looking at?
Speaker 1: We usually analyze the orders themselves, so when an order
Speaker 1: comes down, we can see exactly how many counts were
Speaker 1: denied and how many counts were accepted, and that will
Speaker 1: influence whether we reach out and when we reach out
Speaker 1: and what we say when we.
Speaker 2: Do reach out really interesting. So we're talking about scraping
Speaker 2: data off of websites. In the world of economics, I
Speaker 2: could go to FRED, or I could go to BLS
Speaker 2: or BEEA, and I could just download an Excel spreadsheet
Speaker 2: of all the historical data. Do the states not make
Speaker 2: that sort of data available for anybody who wants it?
Speaker 2: Does it require this complex scraping process.
Speaker 1: So everything that the government does has to be publicly accessible,
Speaker 1: but it doesn't mean that it has to be easy
Speaker 1: to access, which is a completely different standard. And so
Speaker 1: many of these state court websites are extremely difficult to access.
Speaker 1: They are updated every day with new filings, But it
Speaker 1: doesn't mean that you can just go in and download
Speaker 1: a CSV. I mean, if we could, that would make
Speaker 1: our lives so much.
Speaker 2: Easier, although it make it easier for people to come
Speaker 2: in and compete with you.
Speaker 1: That's also true.
Speaker 2: Do you ever get pushed back from states? Hey, why
Speaker 2: are you spending so much time on our servers? We've
Speaker 2: noticed that eighty percent of our traffic was you last week.
Speaker 2: What sort of pushback do you get from individual state websites?
Speaker 1: So that was the problem that Christian ran into at
Speaker 1: Harvard back in the day, and it was because we
Speaker 1: were newbies at it. And when you actually do it
Speaker 1: for a long time, you learn to moderate your traffic
Speaker 1: and only go to the pages that you need to
Speaker 1: go to.
Speaker 2: Right, I'm assuming you could do that at night. You
Speaker 2: could do it when it's less less trafficked. You could
Speaker 2: show up in a way that isn't taxing to them.
Speaker 1: We're trying to build a sustainable business here, not take
Speaker 1: down a state server.
Speaker 2: Right, easy enough. So out of all of these cases
Speaker 2: that you've done over the years, and now you're on
Speaker 2: your fourth fund, is that right?
Speaker 1: Fourth? Fie? Right? We're launching our fourth fund later this year.
Speaker 2: So what's the biggest takeaway from the process that you've learned? Like,
Speaker 2: having done this for nearly a decade, how are you
Speaker 2: looking at this practice of alt credit? What's the big
Speaker 2: lesson you've learned in building the fund since twenty seventeen.
Speaker 1: So I think that people over complicate finance. I've learned
Speaker 1: that if I can't understand someone after having it explained
Speaker 1: to me once or twice, then it probably doesn't make
Speaker 1: sense and they're just pretending to understand it. I think
Speaker 1: the underlying fact of credit or finance or any kind
Speaker 1: of investing is I give you a certain amount of money,
Speaker 1: and you give it back to me if X, y Z,
Speaker 1: and you have to understand under what circumstances you get
Speaker 1: it back and how you get it back, And you
Speaker 1: have to understand under what circumstances you disperse and how
Speaker 1: you disperse, and then you try to minim the gap
Speaker 1: in time and maximize the difference between what you put
Speaker 1: out and what you get back. It's really not that complicated,
Speaker 1: but I think that modern finance has had so many
Speaker 1: smart people try and overcomplicate it that they've obscured that
Speaker 1: very simple fact.
Speaker 2: So I'm going to give you a little pushback on that.
Speaker 2: I think complexity is a feature, not a bug, and
Speaker 2: it's done by people within a particular industry. That's what
Speaker 2: jargon is because they're trying to prevent people from understanding.
Speaker 2: And you're not going to pay for a consultant or
Speaker 2: an expert if it's simple. But look how complex it is.
Speaker 2: Write me a big check and I'll explain it to
Speaker 2: or I'll explain it to whoever you want me to
Speaker 2: explain it to. It seems I completely agree with you,
Speaker 2: but a lot of what I see that's complex.
Speaker 1: It's intentional.
Speaker 2: You have to look at the insensive the incentive to
Speaker 2: make things simple and understandable versus the incentive for them
Speaker 2: to be complex, and the amount of fees that can
Speaker 2: be charged on that.
Speaker 1: My other pet theory about finance is that there are
Speaker 1: many ways to make money, but most of them have
Speaker 1: markets associated. And so anytime there's a market, the purpose
Speaker 1: of a market is to compete out all the alpha
Speaker 1: and so what people are saying is usually I'm smarter
Speaker 1: than everyone else in the market, and that goes against
Speaker 1: the fundamental efficient market hypothesis, right, And so where you
Speaker 1: should try to be instead is the area where there
Speaker 1: hasn't been a market formed yet. You should try to
Speaker 1: be at the place where there isn't a sale and
Speaker 1: then try to force them into a sale. Rather than
Speaker 1: going to the auction house and assuming that you're buying
Speaker 1: the art for the right price.
Speaker 2: Right, when you're buying in a deep broad market, you
Speaker 2: would assume that you're going to get something close to
Speaker 2: fair value. It's not going to be If it's too
Speaker 2: much over fair value, well people aren't going to buy it, right.
Speaker 2: And if it's too much under fair value, it'll attract
Speaker 2: enough competition that will eventually inefficiencies get arbitraged out of
Speaker 2: the market. So let me throw you one curveball before
Speaker 2: we get to our favorite questions. And I'm kind of
Speaker 2: fascinated by this. So you publish essays kind of regularly
Speaker 2: at Silicone Valet, and one of the questions I found.
Speaker 2: One of the essays I found that was so interesting
Speaker 2: is I woke up and I found that the Harvard
Speaker 2: Registrars has finally shut down my at Harvard dot edu
Speaker 2: email address. And even though you dropped out in twenty sixteen,
Speaker 2: you kept promising yourself, Hey, I'd be back on campus
Speaker 2: in the fall. Was that a little bittersweet losing your
Speaker 2: undergraduate email address? Because I know people at other schools
Speaker 2: like Wharton and Yale, they graduate, they keep that email
Speaker 2: address for their whole lives.
Speaker 1: So the interesting thing about my life has been that
Speaker 1: I kind of grew up with the company. So when
Speaker 1: I started the company, I was twenty and I was
Speaker 1: basically just out of my parents' house. And these days
Speaker 1: I have my own house and I have a one
Speaker 1: year old baby. And last fall I made Thanksgiving dinner
Speaker 1: for the first time and A lot of what I
Speaker 1: think about when I think about leaving Harvard is that
Speaker 1: it's really like gazing back at your own youth, and
Speaker 1: so you feel a lot of nostalgia for the person
Speaker 1: that you used to be and how different you are
Speaker 1: from them. And along the way, you know, I poured
Speaker 1: those years into the company and grew it to where
Speaker 1: it is today. So I think that's really what that
Speaker 1: essay is reflecting.
Speaker 2: All right, let's jump to our speed round, our favorite questions.
Speaker 2: We ask all our guests, starting with tell us what
Speaker 2: you're streaming these days? What are you watching or listening
Speaker 2: to that's keeping you entertained.
Speaker 1: So I'm a big fan of Morgan Housel's podcast, where
Speaker 1: talks about the psychology of money. It's very rare to
Speaker 1: find someone who's deeply philosophical but also interested in finance,
Speaker 1: and his podcast is the perfect intersection of that.
Speaker 2: Let's talk about your mentors who helped to shape your career.
Speaker 1: I'm going to have to say our old general counsel Curtis,
Speaker 1: who shaped everything that Christian and I know about litigation
Speaker 1: and also made us lawyers like it.
Speaker 2: Let's talk about books. What are some of your favorites
Speaker 2: and what are you reading right now?
Speaker 1: Oh? Okay, So there are two people who have worked
Speaker 1: in finance who have written actual literary works. One is
Speaker 1: Gary Sernowitz, who wrote The Counting House and I've got
Speaker 1: a copy for you today. And then the second is
Speaker 1: this guy name Amore Towels, who worked at an investment
Speaker 1: bank for twenty years and then switched completely to writing fiction.
Speaker 1: And so what I like about his stuff is that
Speaker 1: most literary authors have only ever been authors. And you're
Speaker 1: an author, you are coming from a place of passivity
Speaker 1: where you're not actually an actor in the world. You
Speaker 1: have no ability to change the world. You're just observing it.
Speaker 1: But because Amortowels has been in business for so long,
Speaker 1: he writes characters that are extremely proactive and optimistic and
Speaker 1: have such a good attitude that they're able to shape
Speaker 1: the world around them. So his most famous one is
Speaker 1: called a Gentleman in Moscow.
Speaker 2: Oh of course.
Speaker 1: Yeah. The main character is literally trapped in a hotel
Speaker 1: in revolutionary Russia, but he manages to create a life there,
Speaker 1: which shows that you can you can change your environment
Speaker 1: no matter what your environment is.
Speaker 2: You know, I used to think all of the Michael
Speaker 2: Lewis books that were so interesting were because he spent
Speaker 2: years in finances at Salomon Brothers. So Liar's Poker and
Speaker 2: The Big Short. Yeah, but then you start to see
Speaker 2: his other books like Moneyball or The blind Side or
Speaker 2: the Pandemic book Premonition, and he has no experience in
Speaker 2: those spaces. He's just like an incredibly talented writer. Yeah,
Speaker 2: but that's really an interesting set of observations. The guy
Speaker 2: who wrote Gentlemen in Moscow. What are some of the
Speaker 2: other books he's written.
Speaker 1: That you like. He has one that he just published
Speaker 1: called Table for Two. And then my favorite of his
Speaker 1: is a short story called You Have Arrived at Your Destination.
Speaker 1: And the short story is about this idea that if
Speaker 1: you were to be able to project the lives of
Speaker 1: your children, it would be in three acts like a play.
Speaker 1: So in the first act you have youthful optimism, where
Speaker 1: you have all these hopes and dreams and the world
Speaker 1: is opening itself up to you. But then you have
Speaker 1: the second act where you experience a setback. And he
Speaker 1: calls this second act setback coming to terms with their
Speaker 1: own limitations. And at this point a lot of people
Speaker 1: just retreat or they give up. But then if you're
Speaker 1: able to kind of accept who you are, you can
Speaker 1: move into the third phase, which is a place where
Speaker 1: you can be a better person and live a deeper
Speaker 1: and richer life.
Speaker 2: I can't argue with that. That sounds pretty accurate. Our
Speaker 2: final two questions, some of which I'm really curious to
Speaker 2: see your answers. So what sort of advice would you
Speaker 2: give I shouldn't even say, reaching recent college grad somebody
Speaker 2: in college who was interested in a career in all
Speaker 2: credit or hedge funds or finance, how would you advise them?
Speaker 1: So my own trajectory has been a little bit unusual,
Speaker 1: and I think that most people assume that finance is
Speaker 1: an apprenticeship business where you can only learn by studying
Speaker 1: with someone who has already done it. But I think
Speaker 1: that coming from that perspective means that you're always going
Speaker 1: to do it the way that people did it before,
Speaker 1: and we've always had this advantage from being able to
Speaker 1: examine everything from first principles. So I guess my advice
Speaker 1: would be that people should not be afraid to deviate
Speaker 1: from that traditional lockstep path.
Speaker 2: And our final question, what do you know about the
Speaker 2: world of litigation, finance, data scraping, investing, Waltz credit today
Speaker 2: you wish you knew back in twenty sixteen when you
Speaker 2: were first thinking about launching the business.
Speaker 1: Back then, I really didn't know anything. So being young
Speaker 1: is like having a flashlight that only shines on and
Speaker 1: step ahead of you and no further.
Speaker 2: That's very interesting.
Speaker 1: I don't think that there's anything that I've could have
Speaker 1: told myself that I would have had the context to understand.
Speaker 2: So it's really the journey, the process that you learn
Speaker 2: along the way. Even had you started with what you
Speaker 2: know today, it doesn't sound like you think it would
Speaker 2: have been in any use.
Speaker 1: Yeah, So land Samantha Chang has this quote where she says,
Speaker 1: if I could change anything about my life, I would
Speaker 1: not have been so unhappy when I was young.
Speaker 2: You're so focused on the future sometimes forget to enjoy
Speaker 2: the moment exactly, and that is very true for a
Speaker 2: lot of young people, especially in hyper competitive fields, no
Speaker 2: doubt about it. Well, Eva, this has been absolutely fascinating.
Speaker 2: We have been speaking with Eva Shang. She is the
Speaker 2: co founder, CEO, and general partner at Legalist. If you
Speaker 2: enjoy this conversation, well check out any of the past
Speaker 2: five hundred discussions we've had over the previous July will
Speaker 2: be ten years. You can find those at iTunes, Spotify, YouTube,
Speaker 2: wherever you find your favorite podcast. Be sure and check
Speaker 2: out my new podcast At the Money, short ten minute
Speaker 2: conversations with experts about topics that affect your cash, earning it,
Speaker 2: spending it, and most importantly, investing it. You can find
Speaker 2: those in the Masters and Business feed, or wherever you
Speaker 2: find your favorite podcasts. I would be remiss if I
Speaker 2: did not thank the Cracked team that helps us put
Speaker 2: these conversations together each week. Sage Bauman is my head
Speaker 2: of Podcasts at Bloomberg. Sarah Livesey is my audio engineer
Speaker 2: at Tiko of Albroun. My project manager, Anna Luke is
Speaker 2: my producer. Sean Russo my researcher. I'm Barry Brittoltz. You've
Speaker 2: been listening to Masters in Business on Bloomberg Radio.