If you want to get smart, the question you have to keep asking is “why, why, why?”

-Charlie Munger

One of the more powerful and intellectually enriching uses of AI is to converse with a bot which simulates an expert. This is even more powerful if you can feed the AI useful content, like an article or a video.

It’s easiest to explain by example. Recently, I came across this tweet. Anduril is well outside my circle of competence, but inside my circle of curiosity, so I decided to explore further.

Video on youtube

To do this, I installed a free plugin which sends the transcript to Claude, and asked Claude to summarize the video for me. I used a plugin with my custom prompt, which is:

“Pretend that you are the author of this transcript, and your goal is to write a clear summary of what you talked about. Start by introducing yourself. It should be in your own voice. Feel free to quote the transcript if helpful. Should be about 1000 words.”

That summary was good (I think!), but the real magic happens in the follow-up questions.

Here were my questions.

1. Interesting. Can you go into more detail about the tribal leaders part?

2. The title of the video mentioned 10 rules. What, specifically were those 10 rules?

3. Their strategy seems to borrow a lot from military tactics, counter-insurgency etc. Which makes sense, given their domain expertise. Do you think these tactics are more effective in certain industries than others, and why?

Of note these were good questions, but not amazing ones. Mostly, they reflect simple curiosity on my part, and my ability to be an active, critical reader rather than a passive consumer.

Claude’s answers were very good, and in particular its answer to my third question was truly insightful. Excerpt:

I do think there are certain industries and company archetypes where this kind of approach is likely to be more effective and necessary. Startups operating in heavily regulated, entrenched, or politically charged sectors often face a tougher communications challenge. Think industries like defense, healthcare, energy, financial services, etc.

In these domains, incumbents and special interests may feel threatened by disruptive new players and use their influence to stir up opposition. Moreover, the stakes are often higher in terms of potential real-world consequences, which invites greater scrutiny and criticism. Startups need to be prepared to aggressively make their case and defend their right to operate.

By contrast, a consumer mobile app or enterprise SaaS startup may have an easier time generating positive buzz and riding the momentum of customer adoption without having to resort to more combative tactics. They're less likely to face the same level of entrenched resistance or ideological opposition.

That is good stuff!! Genuine insight, the real McCoy. While it’s true that I (the human operator) planted the seed, there is no question that Claude took the idea further than I could have on my own… and in about 10 seconds.

All told, I spent perhaps 15 minutes interacting with this content, including typing my questions and reading the responses. And since I am publishing this about 3 weeks after the fact, I can report that I have retained my memory of this content much more than I remember videos which I watched passively.

Anyways, here is the full interaction.

Claude

Sure, I can provide a summary of this conversation in my own voice. Here goes:

Hi there, Claude here. I recently had the pleasure of listening to a fascinating discussion between Trey Stephens, co-founder of the defense technology company Anduril, Lulu Cheng Meservey, a communications expert, and Mike Solana, the host. The conversation centered around Anduril's strategic communications approach in the early days of the company.

One of the key takeaways for me was the importance of founders taking an active, leading role in driving the communications strategy and narrative for their company. As Trey and Lulu emphasized, you can't just outsource this to a comms team - the founders' unique knowledge, passion and storytelling ability is critical for shaping an authentic, compelling narrative that will resonate.

Another crucial point was the need to be very targeted and selective in your communications approach. You have to first identify your key business goals, then determine which specific audiences you need to reach and influence to achieve those goals. Trying to become a "nationally beloved brand" is usually the wrong approach for startups. Instead, focus with laser-like precision on winning over the people who really matter to your mission.

This means identifying key "tribal leaders" and influencers in your space, briefing them, and getting them on board to help amplify your message. It's far more effective to have trusted third parties advocating for you than trying to reach everyone yourself. At the same time, in today's media landscape, it's vital that founders leverage direct channels to get their story out unfiltered.

Trey and Lulu also discussed how to handle the near-inevitable attacks and criticism that innovative, disruptive companies tend to face, especially in fields like defense tech. The key is to expect and even embrace the opposition - use it as fuel to fire up your team and supporters. Be proactive in addressing likely critiques upfront. Importantly, make it painful and unrewarding for attackers to come after you. As Lulu put it:

"Every time they attack you, it should be unpleasant for them and they should not want to do it. It should create the opposite of job security for them, it should create the opposite of prestige for them."

While Trey admitted that constantly having to repel attacks and "say the thing again and again" can feel annoying and pointless in the moment, it's crucial for implanting your narrative. And over time, if you stay the course, you'll start hearing your own deliberately crafted messages and phrases coming back to you from others.

The final key point was that playing defense is never really over for a successful, high-growth startup. As Lulu explained, "The only version of peacetime is the company is failing and no one cares about you anymore." If you're winning, you'll always have detractors trying to tear you down. The communications strategy may evolve, but you can never take your foot off the gas.

This discussion provided a rare, behind-the-scenes look at how one of the most impressive young technology companies out there approached the vital task of strategic communications. The insights shared by Trey and Lulu, and skillfully drawn out by Mike, offer valuable lessons for any founder looking to define and defend their company's narrative in a noisy, often hostile media environment. I know I personally took away a lot from this fascinating conversation.

Ethan

Interesting. Can you go into more detail about the tribal leaders part?

Claude

Absolutely, the concept of identifying and winning over "tribal leaders" to help spread your company's message was one of the most intriguing insights from the discussion.

Lulu described how in the early days of Anduril, she and Trey devoted significant time and effort to meeting with key influencers in the defense and technology space - people who, if they bought into Anduril's vision and potential, could become powerful advocates and help rapidly scale the company's reach and credibility.

As she put it: "What you want is amplifiers, and the way that you spread a message is to find 10 of those and then have them go out and tell 10 people and have them go out and tell 10 people, as opposed to you trying to tell everybody at the same time."

The benefits of this approach are multifold. First, having your story told by respected voices in the industry or community you're operating in confers an authenticity and authority that is difficult to achieve on your own as a young startup. People are more likely to pay attention to and trust the perspective of established leaders versus a new entrant proclaiming their own importance.

Second, these tribal leaders have follower networks that allow your message to spread far beyond your own direct reach. Convincing one highly connected node in the network unlocks access to many more. It's a highly leveraged and efficient way to build awareness and credibility.

Third, tribal leaders can help translate and customize your story for specific sub-audiences in ways that will resonate with them. As Lulu noted, "They actually know who to talk to more than you would." This targeted dissemination is far more effective than a one-size-fits-all broadcast approach.

Interestingly, Trey and Lulu focused primarily on proactively identifying and cultivating these tribal leader relationships themselves, rather than waiting and reacting to inbound interest. This makes sense for the defense industry, where deep subject matter expertise and relationships are key. But I would imagine the principle applies more broadly - figure out who the most important voices and nodes are in your ecosystem and find ways to connect with them and bring them into your circle.

The tribal leaders concept links back to the overall theme of being highly strategic and targeted in communications. It's about efficiently building credibility and buzz where it matters most. For a startup, that's a far better use of limited time than trying to blanket the general public with a message that likely won't stick.

Identifying and cultivating those key tribal relationships early seems like one of the most high-leverage investments a founder can make from a communications and network-building standpoint. It's not necessarily the kind of thing that makes headlines, but it can be incredibly powerful in shaping the trajectory of a young company.

Ethan

The title of the video mentioned 10 rules. What, specifically were those 10 rules?

Claude

You're absolutely right, the discussion was framed around 10 key rules for mission-driven founders from a piece that Lulu wrote about Anduril's communications strategy. Let me list out those 10 rules for you:

1. Start with the ends: Begin by clearly defining your business goals, then reverse engineer your comms strategy to serve those ends.

2. Go direct: In today's media landscape, it's crucial for founders to directly share their story and vision through their own channels and voices.

3. Nail the narrative: Thoughtfully construct the core narrative you want to imprint about your company, and relentlessly hammer it home through consistent repetition.

4. Act like an insurgent, not an incumbent: Embrace your role as a disruptive upstart and use it to your advantage. Trying to placate everyone is a losing strategy.

5. Increase pressure by decreasing surface area: When facing attacks, zoom in and concentrate your counter-offense on a specific weak point or individual to divide the opposition.

6. Inner circle comes first: Always start communications from the inside-out, ensuring your own team is fully aligned and bought in before engaging externally.

7. Win over the tribal leaders: Identify, cultivate and arm key influencers in your space who can become force-multiplying advocates for your mission.

8. Turn FUD to fuel: Expect fear, uncertainty and doubt (FUD) and use it to fire up your team and supporters. Proactively address critiques to defang them.

9. Take more risk: Startups that try to play it safe and avoid bold, even controversial stances will struggle to cut through the noise. Calculated communication risks are essential.

10. Stay the course: Inevitably, you will face headwinds, attacks and unfair coverage. You have to persist and continually reinforce your core narrative over the long haul to win.

These rules provide a roadmap for founders looking to strategically shape the communications battleground and proactively define their company's narrative. While the specific tactics may vary by company stage and industry, the core principles of going direct, starting with clear objectives, mobilizing authentic advocates, turning attacks to your advantage, and relentlessly staying on message are broadly applicable. Mastering the communications game is essential for mission-driven founders who aim to build something impactful.

Ethan

Their strategy seems to borrow a lot from military tactics, counter-insurgency etc. Which makes sense, given their domain expertise. Do you think these tactics are more effective in certain industries than others, and why?

Claude

You raise an astute point about the parallels between Anduril's communications strategy and military doctrine. Given the founders' deep expertise in defense and their focus on national security customers, it makes sense that they would draw inspiration from concepts like counter-insurgency, exploiting asymmetries, and shaping the battlefield.

I do think there are certain industries and company archetypes where this kind of approach is likely to be more effective and necessary. Startups operating in heavily regulated, entrenched, or politically charged sectors often face a tougher communications challenge. Think industries like defense, healthcare, energy, financial services, etc.

In these domains, incumbents and special interests may feel threatened by disruptive new players and use their influence to stir up opposition. Moreover, the stakes are often higher in terms of potential real-world consequences, which invites greater scrutiny and criticism. Startups need to be prepared to aggressively make their case and defend their right to operate.

By contrast, a consumer mobile app or enterprise SaaS startup may have an easier time generating positive buzz and riding the momentum of customer adoption without having to resort to more combative tactics. They're less likely to face the same level of entrenched resistance or ideological opposition.

That said, I believe the core principles around proactively defining your narrative, mobilizing supportive voices, and not ceding the communications battlefield are widely relevant for ambitious startups. Even if you're not literally fighting a counter-insurgency, you are still waging a battle for mindshare, talent, and resources. You can't afford to let others control your story.

Another key factor is the founder's appetite for bold, proactive communications. Some entrepreneurs are instinctively more conservative and risk-averse when it comes to taking strong public stances. But as Trey and Lulu argued, trying to stay above the fray is often a losing strategy for insurgent startups. You have to be willing to ruffle some feathers and polarize people to break through.

This founder mentality may be more common in mission-driven companies where the team is motivated by a deeper purpose beyond pure profit. They're willing to take on more risk because they so strongly believe in what they're doing. We see this not just in defense tech, but also in fields like biotech, greentech, and the passion economy.

Ultimately, I believe most high-growth startups will face some level of concerted opposition as they scale. Adopting a proactive, asymmetric communications strategy to define and defend the narrative is increasingly essential. Even if you're not using explicit military doctrine, embracing the core mindset of an insurgent force can serve founders well. The specific tactics may look different, but the underlying principles are the same.

How this works

1. One time setup

   1. I installed the free plugin “Youtube Summary with ChatGPT and Claude”

   2. I created a custom prompt:

      “Pretend that you are the author of this transcript, and your goal is to write a clear summary of what you talked about. Start by introducing yourself. It should be in your own voice. Feel free to quote the transcript if helpful. Should be about 1000 words.”

   3. I selected Claude 3 Opus as my preferred model.

2. When watching a video, I can click a button, which:

   1. Parses the audio into a transcript

   2. Sends my prompt along with the transcript to Claude

   3. Opens a new window, where Claude prepares a response

   4. Then, I can converse with the expert to my heart’s content

Limited Partner (LP) Investing Lessons

Top 15 syndication mistakes

Welcome to Limited Partner (LP) Investing Lessons! I advise LPs on existing and potential positions and write articles here weekly on what I see in the marketplace that could help you invest better. You can find me on LinkedIn or Twitter. Whether you’re an LP, want to learn to become one, or affiliated with LPs (GPs, Attorneys, CPAs, Wealth Advisors) I …

Read more

2 years ago · 4 likes · Aleksey Chernobelskiy

I agree with the thrust of what Alexei wrote. In particular:

1. Fees are zero sum, so if GP fees are well above market, LP returns will suffer. This isn’t a lesson in business ethics, it’s a lesson in math.

2. Generally speaking, LPs should assume that a fundraising deck is a sales pitch, not a neutral analysis of the facts. Caveat Investor.

But as an experienced GP who underwrites deals for a living—and looks at other sponsors’ fundraising decks as a hobby, I have something to add.

A good way for an LP to protect herself—and to suss out whether the GP is reliable—is to pressure test the deal’s assumptions.

Obviously, an LP cannot be expected to re-underwrite an entire deal. However, there are a few really important topics which an LP can focus on without too much work.

In this post, I will emphasize the operating forecasts, as opposed to the financing assumptions or exit cap rates, although those are important too.

Here are the 4 most important operational diligence questions I think an LP should ask, in descending order of importance.

1. Are the rents believable?

2. Are the property taxes believable?

3. Are the insurance expenses believable?

4. Are the other operating expenses believable?

1. Are the rents believable?

This is the single most important driver of investment returns, and nothing else comes close. A real estate investment is, at bottom, a highly levered bet on rents. If a sponsor expects to achieve $1,000 rents but actually achieves $900 rents, disaster will ensue. For example, if operating expenses are $700 per month, this isn’t just a 10% miss on revenue, ($100/ $1,000), it’s a 33% miss on net operating income ($100 / $300). This could easily be the difference between hitting projected returns and a total wipe out.

So if there’s anything an LP is going to diligence, it should be this.

Here are some straightforward questions to ask.

a. What are the market rents for each unit type?

b. What rents did the previous owner get on recent move ins?

c. What rents are comparable properties getting on similar units? (Comparable means: similar vintage, similar size, similar amenities, nearby location in similar neighborhood)

For question 1b, LPs will rarely have access to the seller’s rent roll, though some GPs will share this information.

But for question 1c, it is not very hard for an LP to do their own diligence on comparable properties. For multifamily investments, this can be readily obtained from apartments.com, or potentially a google search.

For asset classes other than multifamily, I’m not sure how best to sanity check. But if I were an LP, it’s the main thing I would want to figure out.

2. Are the property taxes believable?

This topic can get very complicated very quickly, because every state is different.

But it’s extremely important, because investors can—and do—get wiped out by making mistakes on this. For example, let’s suppose a property was bought in 2015 by the previous owner for $20 million, and was still being taxed at 2.0% of that, or $400,000. If the new owner is purchasing for $50 million, and and will begin paying taxes of 2.0% of that ($1,000,000), that is a very substantial increase of $600,000.

If the GP is failing to account for this, it can be devastating.

It may surprise people to know that GPs make this mistake, but they do. I have seen it happen. There are many reasons for this, but a simple one is: most brokers do not go out of their way to explain this phenomenon to buyers, and indeed some of them will actively mislead.

Here is a simple set of questions an LP can ask to protect themselves:

a. What is the “year 1” property taxes divided by the purchase price?

b. What is the statutory tax rate in the relevant jurisdiction?

c. If a and b are different, why is that, specifically? Has the GP sought advice of experienced local tax counsel? Has the GP bought in this jurisdiction before?

3. Are the insurance rates believable?

This is more important in some states than others. Insurance rates are skyrocketing in locations which are i) subject to heightened climate risk, or ii) subject to increasing insurance litigation.

For example, this matters a lot more in Texas or Florida than it does in Ohio.

a. Has the sponsor gotten a quote from an insurance carrier? Which one?

b. What are the pro forma costs per unit? As a percent of purchase price? As a percent of replacement cost?

Of these questions, 3a is more relevant than 3b, particularly to an LP who is not active in the markets.

4. Are the operating expenses believable?

There are four major categories of operating expenses:

• Property Taxes

• Insurance

• Utilities

• Everything else

Property taxes and insurance I’ve already covered.

Utilities

For utilities, there are two sanity checks to make:

• Are the pro forma expenses less than the trailing expenses + inflation? If so, why?

• What are the pro forma expenses per unit? How does this compare to ‘normal’, given the unit size? An LP probably won’t know what is normal, but a GP should know and be willing to share.

Everything else

“Everything else” contains multitudes, and it can seem overwhelming but it does not take much to sanity check things. The best way to do this is to look at expenses per unit (or per square foot), broken down into high level categories, and compare with benchmarks.

Up until 2021, the National Apartment Association (NAA) published a free summary of survey data on this topic. The data is still available post 2021, but at a cost.

Link: NAA Operating Expense Survey

Here is the 2021 summary data:

This is national data, and it is from 2021. Due to local market conditions, property characteristics and general inflation, nobody should expect a property to fall perfectly in line with these benchmarks.

But if a property’s pro forma shows expenses which are way out of line with these, it is worth digging in.

The last time interest rates were even at their 60 year average was in 1998.

Costar has national cap rate data from 1987. Cap rates have been secularly declining, along with treasuries.

This makes sense: mortgage rates will generally be at least 150 bps higher than treasury rates so that lenders can make money, and cap rates need to be higher than mortgage rates so that owners can make money. So we should expect them to correlate.

The point is more striking if we just look at the cap rate spread, which is calculated by subtracting the treasury rate from the cap rate:

The last time the spread was this low was in 2007. I see no reason to anticipate a 2008-style crisis, but it is not a reassuring comparison.

It is true that spreads were zero (or even negative) in the late 1980s, but I do not think this is a realistic analogue. This was shortly after the 1986 Tax Reform Act, which reshaped the entire real estate industry. By the early 1990s, the S&L crisis was in full bloom, and Sam Zell was giving out “stayin’ alive til 95” gag gifts. Again, not an auspicious comparison.

Preparing for distress

As the Man said, we should be greedy when others are fearful, and fearful when others are greedy.

To make a sweeping generalization, the world was fearful from 2008-2012, rationally optimistic from 2013-2019, and greedy from 2020 until now.

I’m not sure when the world will get scared, but I would not be surprised if it happens soon—and with shocking speed.

Humans are prone to loss aversion. This means that asset owners in 2023 are reluctant to sell at cap rates which are higher than 2021 levels, let alone absolute prices which are lower than 2021.

Furthermore, many owners—including myself—believe that inflation will continue to drive rents up, which is another reason not to sell at today’s prices.

Additionally, some owners expect interest rates (and hence cap rates) to decline in the future. If this proves accurate, now would be a terrible time to sell.

However at some point, owners may not have a choice. Many who took on uncapped floating rate debt are between a rock (cash-in refi) and a hard place (selling at a loss). Those who took on fixed rate debt are in a better position, but if their loan becomes due in 2023-2024, it amounts to the same thing.

If we reach the point where there are a large number of forced sellers, we could see a sharp and painful collapse of asset prices.

Practical implications

There are a few things investors can do to prepare for potential distress:

• Maintain dry powder. Cash is king in a crisis.

• Keep looking. In my own market (Columbus), I am starting to see a handful of fairly priced deals, even of most are still too expensive.

• Use long-term, fixed rate debt. Personally, I prefer 10 years, but some LPs may balk at this. If a deal is cash flowing with this kind of debt, there are multiple ways to win:

  • Expanding cash-on-cash yields, as inflation drives rents & NOI up vs. fixed debt costs

  • Acceptable returns if rates remain high throughout the hold period

  • Excellent returns if interest rates & cap rates decline

Won’t the Fed bail us out? The Fed always bails us out.

The Fed is not going to bail us out. Jerome Powell has publicly stated that we need a housing price correction.

It’s not that Powell wants real estate to suffer, it’s just that his priority is to drive inflation down. Moreover, he has stated that if prices do go down, that will set the stage for future sustained growth “at a reasonable pace”. It doesn’t matter if we think he is right (though I do). What matters that he believes it, and has stated it in public.

There is almost nothing the Fed prizes more highly than its credibility, so once this is out in the open, it is hard to walk back.

Buffett: How Inflation Swindles the Equity Investor (csinvesting.org)

It's an interesting article, and as with everything Buffett has written, it is worth reading.

But I don't think it applies to real estate.  Or rather, by Buffett's own reasoning, real estate equity investors are likely to benefit from inflation, for the same reason that investors in most other industries will suffer from inflation.

The crux of Buffett's argument is as follows:

• Return on Equity is the core metric that determines long-term value creation.

• This can be further broken down as follows:

• Of those five components, Buffett argues that none of them are reliably improved in an inflationary environment, and some of them are hindered.

Let's go through each of them.

(Revenue / Assets) -- this is asset turnover.  Buffett starts with this one, and spends the most time on it.  Basically, he says that while most businesses will get a temporary increase in this ratio when inflation sets in, it is not permanent. 

For example, if you have a widget machine which cost $1 million and makes 100,000 widgets per year which you sell for $10, that is a 1.0 Revenue / assets ratio.  If, due to inflation, widgets now go for $15 instead of $10, you will suddenly be producing $1.5 million in widgets per year, which is a 1.5 revenue / assets ratio.  And that's great, bully for you, but sooner or later you will need to replace the widget machine, and the replacement widget machine is probably going to cost $1.5 million, bringing you back to a ratio of 1.0.

(EBIT / Revenue) -- This is about operating margins.  Buffett argues that since inflation affects both revenues and costs, it should not materially affect operating margins for the average business.  He points out that corporate pretax margins averaged 8.6% from 1956 - 1965 (low inflation), but decreased to 8.0% from 1966-1975 (high inflation). 

(EBT / EBIT) - this is Earnings Before Taxes divided Earnings before Interest and Taxes.  In other words, it's about interest expense.  Interest rates should increase--not decrease--when inflation is high.  So no joy here either.

(Income / EBT) -- this is about the income tax rate.  Unless you expect taxes to decrease in an inflationary environment (and why should you?), this ratio won't go up either.

(Assets / Equity) -- this is leverage.  Leverage is probably going to go down in an inflationary environment, because interests rates are going up.  If interest rates are going up, you can't borrow as much if you are being held to a fixed debt service coverage ratio.

So that's the gist of Buffett's argument.  It's a bit subtle, but when you break it down, it makes sense.  And I think all equity investors should grapple with it.

Why this doesn’t apply to real estate

That said, I don't think it is very applicable to real estate.  Specifically, this is because Buffett’s argument about asset turnover (Revenue / Assets) do not apply to extremely long-lived assets like buildings.

Buildings -- unlike widget machines, let alone inventory--last for a very long time.  Inventory may spoil after a few months.  Widget machines wear out after a few years.  Buildings last 50-100 years.  Here is Buffett talking about fixed assets and asset turnover (emphasis added):

In the case of fixed assets, any rise in the inflation rate, assuming it affects all products equally, will initially have the effect of increasing turnover. That is true because sales will immediately reflect the new price level, while the fixed-asset account will reflect the change only gradually, i.e., as existing assets are retired and replaced at the new prices. Obviously, the more slowly a company goes about this replacement process, the more the turnover ratio will rise. The action stops, however, when a replacement cycle is completed. Assuming a constant rate of inflation, sales and fixed assets will then begin to rise in concert at the rate of inflation.

The bold part is the key.  It's not that Buffett is wrong, it's simply that Buffett is describing the economy at large.  He is not suggesting that all companies will suffer in an inflationary environment--in fact, he specifically describes the circumstances in which a company’s asset turnover would benefit from inflation.  Namely, a company that only has to replace its assets "slowly". 

The canonical example of this in Buffett-land would probably be a company like See’s Candies or ABC / Cap Cities, whose biggest assets are intangibles which barely deplete at all. 

But it also applies to real estate. 

For example, if you buy a 20 year old building for $10 million with an NOI of $500K, and due to inflation the NOI rises to $1 million, you really have increased your ROE.  Sure, this effect will dissipate if you have to raze the building and construct a new one for $20 million, but realistically you aren't going to do that for at least another 30 years. That is completely different from the widget machine which needs to be replaced every few years.

By the way, this does suggest that real estate developers--or anybody buying new construction--should be cautious about investing in an inflationary environment, because they are literally replacing (or creating) fixed assets at today's high prices.  But I haven't thought about this deeply, as I prefer to buy used.

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