
A Yale Graduate Leaves a Trail of Ventures and Debts - CapitalistCartr
http://www.nytimes.com/2015/04/17/business/dealbook/a-yale-graduate-leaves-a-trail-of-ventures-and-debts.html
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daegloe
Received March 16, 2015 \---

D-

Thought this was worth shooting your way:

CrossFit NYC, which I started as a side project ten years back, has since
grown into the largest CrossFit gym in the world (by a factor of three).

It's a big enough opportunity that I'm making CrossFit my main focus for the
next 18-24 months, taking a leave from Outlier to essentially build up the
Equinox of CrossFit.

We're raising a $5m growth round, and are pursuing both an equity roll-up
strategy (we just acquired our smartest two competitors in NYC), and
aggressively opening new spaces (we've locked deals for awesome 18,000sqft
foot locations at 42nd & Lex, Broadway & Fulton, and Spring & 6th Ave, to open
throughout 2015).

Given our traction / track record / unique position, this is coming together
fast; we already have the first $2.5m locked down, and we should close out the
rest within a couple weeks. Deck attached. Would love to have you in,

j

\-- joshua bryce newman northstar crossfit www.northstar.nyc

~~~
mbesto
IANAL, but if someone sends you that, you decided to invest and it's untrue,
it could be considered fraud, right?

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chatmasta
The question here is, did this guy do anything wrong or is he just a shitty
businessman who failed to capitalize on the opportunities for which the loans
were given to him?

Moreover, why are investors expecting loans to be paid back when given to such
high risk endeavors? They were investing in startups, not real estate.
Structuring those investments as a loan is an asinine decision on both sides.
The borrower is personally liable in the event of default, and the lender gets
no equity to capitalize on success. It's stupid.

There is probably much more to this story, specifically if you note the
reference to "bridge loans." Josh Adler, the plaintiff, is head of a fund
called b2rfinance, funded by bridgewater. B2r invests in "hard money lending,"
also called "landlord loans" or "bridge loans." I just learned about this
investment yesterday, but I encourage everyone to read about it. Basically
it's a high interest loan tied to the "after repair value" of any hard asset
(houses, atm machines, vending machines, etc.), where the borrower puts the
asset itself as collateral. The terms are generally extremely predatory and
often result in ownership transferring mid loan to the lender, or high
"prepayment" penalties. These are basically payday loans backed by assets
instead of paychecks.

Some real estate guys I talked to described these loans as "subprime 2.0." The
same mid level investors from subprime 1.0 are taking the loans, investing in
flipping houses or renting them. Frequently the equity of one house bought via
a hard money loan is leveraged into another loan for another house. You can
see how this creates a house of cards. Now bridgewater and other PE firms are
putting billions into this vehicle, presumably prepping to securitize into
bonds and sell to IB's. Distance between borrower and source of funds is
increasing rapidly and risk assessment quality is decreasing just as with
subprime 1.0.

Again, I just learned about this type of loan yesterday and researched it for
a couple of hours. I could be grossly misinformed but I think I get the gist.
It sounds like an extremely dangerous investment vehicle that could spiral out
of control the same way mortgage securities did in 2007. If I had the money
and knowledge I would be investigating how to bet against this a la _The Big
Short_.

Anyway, all the references to these bridge loans in the article makes me
fairly suspicious of the whole thing. Reader beware.

~~~
fennecfoxen
Hmm. First, I thought that most real-estate-backed bridge loans were supposed
to _reduce_ the risk, by the very nature of backing it up with property (or
home equity). This is in stark contrast with a zero-documentation no-money-
down subprime loan -- only people who have spent a lot of time building equity
will get this sort of a deal.

My understanding suggests that the main time you, an individual, would do a
bridge loan, is if you wanted to buy a house and use the home equity in the
house you haven't sold yet as your down payment. If that's the case, you put
the cash in the down payment, and aren't expected to pay it back if the house
you've vacated is seized. Nothing about this process seems intrinsically
unfair to anyone (yet) though the process is probably an expensive way to get
that money.

I'm not sure why you'd put them into bonds. Besides being freakishly irregular
loans, they're generally designed to be very short-term, which it seems would
be an impediment to securitization -- doubly so when you're talking about a
business bridge-loan instead of a real-estate one. Are you sure your
presumption is accurate?

And, just for what it's worth, even payday loans can be very attractive if the
alternative is worse (e.g. please give me a $500 payday loan so I can go pay
my fine and retrieve my car from the impound lot so the city of SF stops
charging me $65.75/day in fees. thanks.)

~~~
chatmasta
Again, I am uninformed and this entire system is very complicated, and not
documented in any authoritative legislation that I can find. In fact the
Wikipedia page on "hard money loan" has one citation, a 404'ed Fannie Mae
page. It's possible the entire idea of "hard money lending" is a bullshit
concept executed differently by every investor. This may contribute to its
apparently shady reputation. Because of its undocumented nature, it's
difficult to discuss these loans and I am having trouble understanding the
system. Despite that, let me try to respond to you:

Your examples make sense when the loans are targeted at individuals who live
in the home the loan is paying for. In that case the incentives can frequently
align to decrease overall risk.

However what I am hearing from mid level investors on the "ground level" is
that most of these loans are _not_ going to people living in the houses. They
go to people renting or flipping the houses. This is creating misaligned
incentives.

Because flippers/landlords work at scale (more than one house) they naturally
treat the loan as an investment vehicle and therefore need to create positive
ROI. A single homeowner doesn't care about high interest rates because
presumably they were the best, or the only, option to buy a house. However
flippers/landlords need to "cash out" of the loan for the high interest rates
to be viable. They can also use the equity in one house financed with a loan
as the collateral for a second loan.

A single default can have cascading consequences on multiple parties as it can
lead to the foreclosure of multiple properties and a liquidity crunch for the
lender who needs to then dump the properties. If suddenly twenty 3br houses
within the same area foreclose and go up for sale, then the surplus of housing
supply drives down the price.

The increased risk of lending to landlords creates an incentive to consolidate
funds to cover a larger risk pool. That is why blackstone and other PE firms
are investing in large funds. The problem is that by investing in many
landlords, black stone cannot properly assess the risk of every loan. If this
sounds familiar it's because the exact same thing happened in subprime
mortgage.

Ultimately the problem is large funds are consolidating risk while decreasing
the accuracy of risk measurement. This combines with the sudden influx of
funding to create incentives for reckless lending.

Put another way, multiple parties are making money without providing any
service other than consolidating funds and passing risk tolerance onto the
next lender. The system of banks > PE funds > brokers > landlords has too much
exposure. Too many people lend the money without knowing the risk.

As for why black stone would securitize into bonds, it is the economically
rational thing to do. Unfortunately in this system the loser is the one left
holding the check when real estate plummets and interest rates rise.

There are many parallels to subprime 1.0, most notably the middle class
lenders authorizing the loans with "someone else's money." Landlords are not
funding the investment but they are assessing the risk.

(Sorry for long reply. I have been thinking about this a lot.Also p.s. My
original comment was wrong about Josh Adler head of b2r. I mixed up two people
with names josh and Adler.)

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dsjoerg
The hook to this piece is "Yale". To see why, try reading it without the word
Yale. Then it's just "Some Guy Has Business Trouble, Gets Sued, Some People
Don't Like Him". No story.

I met him once at a party, we talked for a while, seemed like a pretty typical
entrepreneur/hustler dude. Did not pick my pocket.

~~~
smacktoward
I disagree. There _is_ a story there, namely that the Yale credential is one
of the magic signifiers that let this guy waltz his investors past doing any
due diligence before trusting him with their money. It didn't occur to them
that such a thing was necessary, because he had all the right boxes checked
off on his CV -- young, white, male, Silicon Valley, Yale. He was The Right
Sort, and that was all the investors needed to know.

The story is the way that connections and credentials count for more in the
world of American capital than a track record of success, or even honesty.

~~~
mathattack
In Manhattan it's Yale. In Palo Alto the cred comes from Stanford, Cal Tech
and MIT.

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DevX101
Sounds like this guy pissed off someone who knew a NYTimes reporter.

~~~
pcurve
Yep, there goes his chance of raising any more money for foreseeable future.

~~~
ezl
This.

I'm wondering how this warranted a writeup like this. Someone starts a few
ventures, a few people lost some money, its ambiguous as to whether or not
there are valid claims to the lost money. Total amount "a few million
dollars".

What makes this different?

And the examples given are of ventures that Josh worked for 8+ years in.
Hardly the mark of a conman.

Many HN participants have left behind more failed ventures or lost more money
than this Josh.

~~~
rlucas
Yeah, this is a hit piece against a low level schlub. By west coast standards,
in fact, by _New York standards_ this is light-years away from damning levels
of failure. I mean, it's in total less than a healthy series a round, and
probably less than a hedge fund trader can lose in a bad month without risking
his job.

Goldstein (author) writes investigative pieces on the Clintona' hedge fund
dealing among other big issues. What on earth possessed him to try and tar
this guy?

That's the real story I'd love to read: how to buy or beg the favor of turning
a nyt reporter into one's own hatchet man for nickel and dime vendettas.
Sheesh.

Full disclosure: I probably have lots of 2nd degree connections to the subject
of the article since we were in related schools at the same time, but I don't
know him and have no dog in his fight(s).

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anigbrowl
_The company, which Mr. Newman started a year after graduating from Yale, bet
much of its success on “Keeper of the Pinstripes,” a low-budget baseball movie
based on a novel about the Yankees. [...] It is not clear if Mr. Newman ever
raised the $9 million that he had said would be needed to begin making the
film._

Anyone who thinks $9m is 'low budget' is a sucker who didn't do their due
diligence. Real film productions use an escrow account that releases when the
film is fully funded or returns the investors' stake within a set period. Also
raising $9m for a first film just smells to high heaven. 5% of that amount
would be a _lot_ of money for a first-time producer.

The guy must be a really smooth talker if the company still holds the rights
for the original store. Usually options on literary properties run for only
3-5 years.

------
SG-
I've run into someone that basically did the same thing and has been going
around to different cities and countries and pulling the same stuff.

He almost uses the exact same words and tries to twist things around like
"well I could have gone bankrupt but I decided to do the right thing and pay
back people". Meanwhile all he's doing is paying back fractions away using new
investor money while living his comfortable lifestyle.

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wpietri
I have to wonder how many of these people are running around the industry
right now. I'm sure it's more than one.

~~~
mathattack
In good markets, it's harder to see the fraud because the rising tide helps
the criminals too. As Warren Buffett says, it's only when the tide rolls out
that you see who is not wearing pants.

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kobybecker
What does Yale have anything to do with this guy's actions?

~~~
bandrami
Because being a Yale alum is how he had the rolodex to get these loans.

~~~
nullrouted
bingo

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talsraviv
Does anyone know how common it is to finance high-risk startup companies with
the kinds of debt described above?

Risky ventures and investors losing money aren't news, but I'm trying to
understand if this story is unique because of the type of financing.

EDIT: ...other than, of course, the dishonesty.

~~~
chatmasta
The only reason I can see is predatory. They know if he signs his name he is
personally liable so even if the venture blows up they can sue for his own
money. And if the venture fails to pay the loan, but still builds value, the
lender can take all his equity.

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MediaSquirrel
Wow. I know this guy!

~~~
sciguy77
So... as someone who knows him what's your take on this?

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davidhariri
...Newman.

