076: Managing Personal Investments with David Banks - A Tech Professional's Journey

00:00 - 01:09 | Christopher Nelson: See, I got this vision. I always thought, like, you see, not all the guys, some guys in Silicon Valley, and we were talking, I know, earlier about some leaders that we admire and they, you know, have careers that last into their 60s and 70s and, you know, God bless them, like, they love that. But I also saw people that transitioned out and became full-time investors. I thought to myself, I could do that and enjoy it. Welcome to Tech Equity and Money Talk. I'm back with David Banks. As you know, David Banks has been through three IPOs, Interwoven, VMware, and Splunk. And he's here to talk today, not about his tech sales career, but about how he transitioned from being a money maker to a money manager. So David, I'm so excited about this conversation because this is where you and I jam, you know, very, very frequently. Yes. And so when did you get this idea that the portfolio that you were building, that you're moving all this tech equity into could be a business that you retire into or that you transition into, let's say?
01:09 - 02:59 | David Banks: About the time I joined Splunk, which would have been 2012, right before the IPO, I was looking further out and realizing that software sales, quite frankly, is a younger man's game. And so, knowing that the clock was ticking, that I needed to start thinking about 10 years out about what I was passionate about doing next. And I wanted to, I'd already pretty much established by the time I went to work for Splunk, financial freedom, based on the previous two opportunities that I'd worked for. And I've always been interested in finances. I was trading some of my own stocks. I still do that today, managing a lot of my own investments. And I wanted to be able to expand that, but I didn't have the time to do that, working in tech, because I was working 60, 70 hours a week, 60 days a week. So I began thinking about that. To get started, one thing that we did is, again, through our network, the value of the network, I began to meet people who were in the rental housing. So keep in mind, this is the post-Great Financial Crisis. collapse, right? Post-2008, probably around. Yeah, so this is about 2012 when we're still kind of coming out of the recovery and going through it. I met people through my network that needed money to buy rental houses. They were building a rental house portfolio, and these were people that I'd sold software to, had worked with, and things like that. Also met people who were fixing flippers, essentially fixing up a house, flip it, because that was a big business after the… Right.

02:59 - 03:03 | Christopher Nelson: There was so much inventory. I know people were going in and buying blocks. Exactly.

03:04 - 04:30 | David Banks: So, for those people, if people go to the bank and get a loan, you know what kind of work it takes. It's a 20-page application. It's a review committee with no promises that you're going to end up with a loan six weeks later. People that I knew that I had trust in, that I knew were capable of executing on what they said they were going to do, I started loaning money. Actually, we started loaning money. And we'd loan money to these people. And the advantage of dealing with me, even though it was a much higher interest rate than at a bank, was we had a three-page loan note that didn't require an attorney to read. We could turn the money around to them in 48 hours or less. And so for some of these fixing flippers, that's important. Executing, getting the money, and buying the house. And we didn't have a loan application. So we were the second choice. And I always told them, I'm not going to negotiate the rate because we know we're kind of the bridge loan. And a lot of what these people do is get a loan, the bridge loan from us, so they could get the project started and then maybe refinance. We just had one recently refinanced to a lower interest rate. That's fine. That's our case.

04:30 - 04:59 | Christopher Nelson: That's your model. You started hard money lending, right? That's, I think, the category that falls under, you know, creating notes. And this was because, I mean, because what I'm trying to understand is what was the focus that you wanted to generate income, you wanted to get the money working harder for you, and you also wanted to preserve your capital, or was it the fact that you just wanted to actually have a sort of a business aspect of it?

05:00 - 05:55 | David Banks: It was really both. It was more about cash flow. Generally, we are cash flow investors, and we are my wife and I. So we formed an LLC, Addison Financial, and it encompasses our investments. It encompasses what we got remaining of the loan portfolio. We decided not to go out and build that as a business. Sure. Because it was going to require some scaling up. It was going to require a lot more risk. It was gonna require technology, yada, yada, yada. A lot of things. And so we decided that, hey, we're not gonna go out and expand that business. We'll still do loans for existing clients, but we're gonna scale that down, and instead, we're gonna invest money in other hard money lenders. So loan money to the people who loan money. A passive investment, really. And so that's worked out better for us in terms of what we do.

05:56 - 06:15 | Christopher Nelson: So, taking a step back, you get the tech equity, you've been building a stock position for years, because I know you've been 30 years building that up. Now you realize, I want to start generating income, and so you decided to look towards private equity and these types of things.

06:15 - 06:15 | David Banks: Sure.

06:17 - 06:26 | Christopher Nelson: What I think is interesting is you decided to run it and manage it as a business. Where did the concept come from for you?

06:26 - 07:33 | David Banks: I wanted to because, number one, I felt like I was the person with the skin in the game. It was our money that we had invested and maybe I'm a little bit of a control freak, I think. salespeople, technology salespeople, successful ones tend to be a little bit of control freak. And I'll admit to that, right? And so I wanted to manage this like a business for a number of reasons. Number one, there are advantages, as you pointed out in some of your other podcasts, of establishing an LLC or an S-corp or C-corp and being able to write things off associated with your business, like your laptop, your cell phone, healthcare, some of those things. And knowing that I was preparing to exit Splunk at some point in time, although I was having a great run, enjoying it, having a great time, I knew that all good things come to an end. And so this one was going to come to an end. And I wanted to be ready to be able to step in and be able to have a business that we could build upon with investments.

07:33 - 08:04 | Christopher Nelson: And so what When you think about the conversation that we'd had previously about doing due diligence at tech companies, and then you're obviously a stock investor, how did you bring that into, let's say, this portfolio as a business, you know, the way that you were thinking and managing it? What are some of the, I'm trying to, I guess the question I'm trying to ask is what skills came over from tech and And then also, what other investing skills are important to have?

08:04 - 09:54 | David Banks: Yeah. Actually, there's some similarities there. Number one, networking is very important. We talked in the last session about the importance of networking and how I leveraged that to learn about some of the pre-IPO companies. Well, in a lot of these private placement deals, they're just not readily available out on the web, at least a lot of the good ones are. Right? So networking becomes important. Continual learning is important in investing, and it is also in technology too, whether you're an engineer, a software sales engineer, or a salesperson. So constantly learning is critical. Being able to analyze deals was important. So in the technology sales that we did selling larger deals, we were building financial models for the CFO and for the accounting people to justify why they should give us one, two, three, a couple of cases on a couple of larger telecom deals we did, seven, $8 million, right? Nobody just hands you $7 million for a bundle of software. There has to be some kind of financial modeling going into that. So that ability to do analysis and work with numbers is important. I also think about developing mentors, especially in a career. I didn't do enough of that in my career. That's one regret I have. I could have done a better job of finding mentors who could help me. I've done a much better job at that in managing my money. I've got people that help me understand certain asset classes and whether or not an investment is good or not.

09:55 - 10:10 | Christopher Nelson: What does it mean when you said earlier that you're a cash flow investor? You know, and I think of, you know, the names people may say cash flow, passive income, portfolio income. What do you think about that? Describe that.

10:10 - 11:44 | David Banks: So I I look at it this way. I've actually built a chart for it. But the There's people who are really focused on growth, where they want to invest in, say, a piece of land common with new development and have a 3, 4, 5x return. Or maybe they're investing in a multifamily property and they're focused on the 2x return that might come from it. Other people, like ourselves, are invested in cash flow, the recurring, consistent, every month, every quarter cash flow that's produced from the profits associated with that investment. Right. And so we tend to be more cash flow investors. One is not right, and the other one's not wrong. It's really understanding your risk profile, first of all, and what it is, your goals, and having a plan. So you asked earlier, what's similar about being in sales as investing? Well, building a plan, having goals. We've done all that. Right. We actually, my wife and I sit down and review the goals. We've got that actually coming up here in a couple of weeks. We're going to review where we're at this year, our successes, our failures in our investments, and then start setting goals for next year. So planning is very important because you need a roadmap to figure out how you're going to get to where you want to be. Really, long-winded answer to your question, we're more focused on that repetitive cash flow that comes from the profits, generally, of an investment.

11:44 - 13:01 | Christopher Nelson: Right. And the way that I like to describe that is, it's different than, I think a lot of people get, they understand this traditional model that's a lot of financial advisors advocate for, which is you have a gross stock portfolio, you get it to a certain number, and then you take distributions or you sell assets, and that is your quote-unquote cash flow, and you want it to grow faster than you're taking money out. That's one strategy. An income-focused strategy is where you are preserving the principle and you want that investment to give you exhaust from operations. So it's giving you profit. You're taking that your original capital is preserved or growing. Those are the two key things. And I agree with you. And so now as you started getting into, and it sounds like, I mean, what I like about this is, You know, this is where you and I geek out all the time, is it's not just about, when you say running your portfolio as a business, it's not just putting it in an LLC. It is that we're going to have plans, we're going to have goals, and then we're going to measure, okay, where were we? Do you do that quarterly?

13:03 - 13:32 | David Banks: I look at it pretty much monthly, quite truthfully. Right. So I've got a spreadsheet. I've actually got a couple spreadsheets. My wife handles a lot of the accounting, so she's tracking the distributions you talked about coming in. Right. Have we been paid? Have we been paid on time? We still have loans out there where they're making monthly interest payments. Right. So we have all that that we track. She focuses on that part. I track overall performance. How is our investment doing? doing.

13:32 - 14:45 | Christopher Nelson: Right. Oh, the health of the investment. So she's going in tracking almost like accounts receivable, you know, any type of accounts payable. Yeah. I mean, I, truly I moved my business over to I'm sure you have yours on QuickBooks. Right. So, I mean, I do. I have your balance sheet. You know, you manage your AR, your AP. Right. Because I think, you know, for me, I'd be interested in what it's like for you. But when You're treating it like a business. For some reason, if it's personal finance, like, oh, I got some money, like, hey, we're going to go to the ice cream shop. And I know for us, like post Splunk, the reason that we started shoving ours in an LLC and getting it outside of our personal finances is we started having kids. And then we realized if you have money in your bank account, it'll just bleed into your lifestyle. Yes. And I think part of that is because it's right in front of you and you're going to have more emotional decisions. You're not going to be intentional versus when you're running a business and you have, you know, you treat it like official business meetings and you're managing that way. I don't know. I'm more intentional with that.

14:46 - 15:40 | David Banks: Yeah, we are too. And I like having it in a separate entity because now we've segwayed off our personal finances and we have an LLC, which also takes away some of the risk, right? Right. In a litigious society. So if somebody, I can't imagine why they would, but if one of our clients wanted to come and sue us over a loan or something, right, they're going to sue the LLC, they're not going to sue David Banks. Right, that's right. So I like having it segued off for a number of different reasons. It just keeps it really clean. We pay ourselves out of the company. And for our accountant, who helps us, my wife works with the accountant on preparing our business returns, also helps her to be able to kind of segue the two.

15:40 - 16:19 | Christopher Nelson: Right, see the both, and I think it's important because when you manage it, I think when you treat it like a, and again, I think coming from tech, I think of my portfolio as a scaling business, like I want it to grow. I don't, where I think when it's not, my observation is that when it's not treated as such, it's always like an afterthought. Oh, I gotta do my personal finances and not, At what point, I guess it was sometime in Splunk when all of a sudden this business started becoming like, okay, I wanna really invest in this business. And what was it like trying to stand up your portfolio as a business while you were still working?

16:19 - 17:02 | David Banks: I didn't do that much of it during Splunk. I was doing the loan business. That was fairly simple because again, it was to people that I had a previous relationship with. After Splunk is when I really dug in to investing in multifamily properties and mobile home parks. And that was really a bigger task because I spent probably between networking and all that. I enjoy it so I don't look at it as work, it's the other thing I do now. I spend about 25 to 30 hours a week on that. And so, again, it's enjoyable. It's still free form because I'm in control of my schedule and my time.

17:02 - 18:33 | Christopher Nelson: Yeah, and I think people don't understand, like, this is where I'll… I don't know, see I got this vision, I always thought, like you see, not all the guys, some guys in Silicon Valley, and we were talking I know earlier about some leaders that we admire and they have careers that last into their 60s and 70s and God bless them, they love that. But I also saw people that transitioned out and became full-time investors. And I thought to myself, I could do that. Yes. And enjoy it because investing conversations are not dissimilar to the conversation we're having right now. Correct. And when you're talking with and I think there's a real opportunity to invest with people that you know, like and respect. to have great follow-up conversations with them, to also part of, I know our routine is you network with other investors, meaning your idea sharing and what's going on with you. You're strategizing if you have an investment that gets in trouble and you're trying to figure out, okay, how can we help these people navigate or how can we get out of here? Yeah, exactly. The exit can be important. The exit's always important. But how so in your transition from, you know, full time tech to now full time investor, you know, thinking about like that shift in mindset, I'm curious, how has your how's your risk appetite changed?

18:33 - 19:59 | David Banks: Well, it's changed from evaluating pre IPO companies where you're with illiquid equity compensation, where the risk is, quite honestly, quite high. So as much as we talk about working for equity compensation, the hard reality is a lot of those companies fail, or the equity compensation never realized. And that's where you talk about working for public companies that you've got liquid. So you've got to look at those two. I was focused on probably the most riskiest, which was the pre-IPO companies. I mean, I didn't have a crystal ball. I didn't know if these things were going to work out. One of them didn't, as we talked about in the last session. It was a total miss. My equity compensation was worth zero because the company was really worth zero. So anyway, so now it's different. I'm probably actually in a more conservative place because we're focused on cash flow. We're focused on analyzing companies and investments that have a track record, are producing, they're generally public, there's a lot of information, you get their financials. It's a whole different game. So I would say I'm much more conservative now than when I was in the role of evaluating pre-IPO companies to work for.

19:59 - 20:18 | Christopher Nelson: Yeah, definitely. In this transition, there had to be some education. Where and how do you think you really learned the most, and what are some tips and tricks you would give to people for getting up, especially thinking about private equity?

20:18 - 21:22 | David Banks: Yeah. What I would tell you, this is not for the faint of heart. Private equity. You need to somewhat dedicate yourself to learning, which I did through taking in-person and online classes, particularly in the asset classes that we're invested in, mobile home parks and multifamily apartments. I also joined forums, there's forums out there, which is a network of investors who do the private placement, private equity type of investing. I'm on those forums, sharing ideas, learning, so that's another way. And then networking, just constantly networking. Networking with operators, networking, we just had lunch with one of our general partners, right? networking with them to find out what's going on, get their opinions about the market. We were talking to our partner about the multifamily market in Texas for him. So I was picking his brain, trying to figure out when's the best time to maybe get back in.

21:22 - 21:59 | Christopher Nelson: You're right, and this to me goes back to, because I do want people to know and understand that this lifestyle is, it's a lifestyle, number one, but it's also incredibly enjoyable. We were having a nice lunch, it was a free-flowing conversation, but we walked away with some really on-the-ground knowledge that you're not reading that came from some data, you know, follow-up, we're gonna be able to get more data that's going to help us become more versed in the market, but it's all happening with, you know, friends having conversation.

21:59 - 23:07 | David Banks: It's exactly right. You've got to dedicate yourself. You've got to do these things. And you've got to stay. You've got to stay educated because these investments can go sideways in a really bad way if you really don't know what you're doing. And also, yeah, getting talking to people and getting the information on the ground, you're generally probably not going to accurately read, you've talked about this before, the Wall Street Journal or Bloomberg and really get the true skinny on what's happening in, say, the multifamily market or the office market for that. Right, right, or the mobile home family market. Yeah, definitely on the mobile home park market. You know, right now there's a lot of negative articles about the office market. I'm not here to say things are okay, they're not, but there are, they make it sound like every office is going to be a hole in the ground. Well, the truth of the matter, there's some offices that are leasing up quite well in certain cities. But you wouldn't, you don't normally hear that. But I hear that from talking to other people in my network.

23:08 - 23:37 | Christopher Nelson: Right. So it sounds like I mean, between the training, between the forums, reading the forums and then networking, those are some of your key strategies to get going. Let me ask you this. If you could go back to, you know, David exiting Splunk and say, hey, here's some things that you should do as you're as you're starting this four way to managing your money as a business. What would you tell yourself?

23:38 - 25:41 | David Banks: I start out by understanding what your risk profile is. And you should be doing this even if you go back to the career discussion and you think you're going to pursue equity compensation and go to work for pre-IPO companies or even public companies. You've got to understand the risks that you're taking on in doing that. And not everybody has the same risk tolerance. I mean, it runs across the continuum. And so, first of all, you've got to understand your risk profile and be comfortable with that because you don't want to get into something where you have a lot of sleepless nights. I accept what we are doing and understand our risk profile. Then you need to develop a plan with goals. You've got to know where you're going and what you're trying to achieve, especially if you're trying to produce cash flow that's going to fund My wife and I do not have an income. We're not W-2 employees anymore. So now you've got to think about things like how am I going to, those benefits that we take for granted, working for money as an employee, that 30% generally of our paycheck, those benefits, those are gone. That's right. You've got to fill that gap. How are you going to cover health care? So, how are you going to produce income? Because you may not, in the world we live in today, there's no such thing as pensions. There's 401Ks. Hopefully you've invested and built up your 401K. But at the same time, you've got to think about how you're going to produce, how these investments are going to produce cash flow that can fund the lifestyle. And then you've got to look at yourself, too, and figure out as part of that plan, are my expenses, is my lifestyle reined in? And quite frankly, 12 months before I left Splunk, I went through, did a Quicken report of everything we spend money on, and we chopped back a few things. Because we weren't going to have that weekly paycheck coming anymore. That's right.

25:41 - 25:44 | Christopher Nelson: So you had to downsize or do a financial audit, whatever you want to call it.

25:44 - 26:20 | David Banks: Yeah, it was simple for us, cutting back on how many times a week we go out to eat, right? Oh, yeah. Yeah, that's expensive. And really just looking at some things, looking at your subscriptions and saying, hey, why are we still doing this? Paying for that. And just really doing a financial audit, like you said, and preparing. So you've got to look at all those things. And I think, unfortunately, people In our society, we are not doing enough of that and that's why we hear about so many people unprepared for retirement, as they would say.

26:20 - 26:59 | Christopher Nelson: They would, yeah, and I think, you know… I have not found anything as rewarding. I really find this lifestyle of managing your portfolio as a business to be incredibly rewarding. I've met, I've created a whole new network of people in and around this. We've obviously become friends even though we knew each other working. We really enjoy this stuff together. What do you think? What's your takeaway right now and what do you think is your vision of your business in the future?

26:59 - 30:39 | David Banks: Right now, we continue to do what we do. We're in really a pretty good place in terms of the cash flow we produce. We've got some investments that aren't performing where they should. Because we've gone through a period of rapidly rising interest rates. That's put a crush on a number of businesses across the entire economy. Hopefully that's starting to turn the corner. So yeah, we have some investments that aren't doing quite as well, others that are doing quite well. Going forward, I think we'll continue to look for opportunities. I think coming out of this high interest rate environment, there are going to be opportunities again in multi-family, in investing in multi-family properties. Housing, we got a severe, at least a four million unit housing shortage in this country, at least. And housing's one of those basic needs, next to air, food, and water. So, I think they're coming out of the wreckage. What feels like has been difficult times, I think there's opportunity. And I would say, going back to the career segment to people too, is that it feels like a difficult time in tech. And I've heard you talk about this before. But the one thing that I've observed over my 40-year career is that tech and tech jobs go through business cycles. And I've been through many of those business cycles. So I remember when I started selling computer hardware, we had a big uptake in the early 80s, and then we had a little bit of a lull in the mid-80s. As we moved to distributing computing environments and moved to SAS, every one of those was in the internet bubble. We talked about that. Every one of those was kind of followed by the natural business side. That's right. And so I think a lot of people today, we read, you've talked about it, we read about in the newspaper about all the layoffs in tech and that type of thing. But the truth of the matter is that, yeah, that may be occurring, but that does not mean it's the end of tech. Tech delivers something, and it has over my entire 40-year career, and it will for the next 40 years, too. It's the path to productivity for companies. It's how they improve their earnings. It's how they drive their stock up. And what we're seeing right now is just the natural business cycle. And for those people who are out there right now, you know, sharpening their expertise, getting their experience. Like I said, I've lived through about four or five of these. When I went through, when I was looking for my next thing to do between Interwoven and VMware, 2001, 2002 was a terrible time. It was brutal. In fact, I would say it was even more brutal than what we're going through right now. Yes. Nobody wanted anything to do with tech. And I even had my moment of doubt where I thought, well, Maybe I ought to go do something else. But I didn't, thank God. And then 2008, 2010 was another rough time. So we're going through a rough period, but usually, it's preceded by what we're seeing with AI and AI adoption. And so I'm here to tell people that businesses, which they're currently doing, figure out the business cases and how to extract productivity from AI. We're going to have another boom, and you want to be there for that. I frankly wish I was 20 years younger. I would love to jump into some of this. That's going to be good, I think, in about 12 to 24 more months.

30:42 - 31:08 | Christopher Nelson: Well, great. Well, thanks so much for taking the time today and walking us through, you know, this transition. I think you put a nice bow on bringing us back to, you know, what I think we've learned from David in the first episode is you can trade your time and talent for tech equity to build wealth and that there is a way that David just walked us through for him that works that I know for many others that you can take that money, manage it like a business and get to financial independence.

31:09 - 31:10 | David Banks: Thank you, Christopher.

31:10 - 31:11 | Christopher Nelson: Thank you so much. Appreciate it. My pleasure.