Ep766: Nathaniel Harding – One Risk at a Time

Andrew Stotz 00:02
Hello fellow risk takers, and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win in investing, you must take risks, but to win big, you've got to reduce it, ladies and gentlemen arm on a mission to help 1 million people reduce risk in their lives. And I want to thank our listeners in Oklahoma today for joining. And also, I just want to highlight that at the end of 2023. I sat down and went through my more than 150 episodes that I did last year. And I picked out it was this was a hard task, but I picked out the 27 top podcasts based upon download numbers and you know what I thought were interesting conversation and diverse views. And that's all available. I've got that curated list available for free for anybody that wants to go to the website, my worst investment ever.com Just click on the link. I've set it up as like a videos so you can watch the videos you could go through them quickly go through them slowly skip one go to the next whatever. But I think it's a great way to learn as much as we can. So fellow risk takers, this is your worst podcast hosts Andrew Stotz, from a Stotz Academy, and I'm here with featured guest, Nathaniel Harding. Nathaniel, are you ready to join the mission?

Nathaniel Harding 01:26
I'm ready, Andrew, thanks for having me on.

Andrew Stotz 01:28
Yeah. I'm excited to get you on and learn about what you're doing. And also, you know, what you've learned and get you to share that with us. So let me introduce you to the audience. A born and bred Oklahoman. Nathaniel is an innovator, and market maker who has founded scale and sold companies. He is a successful investor in energy, biotech and ag tech. Nathaniel was named a young global leader by the World Economic Forum, and most admired CEO in Oklahoma by the journal record. McDaniel, take a minute and tell us about the unique value you are bringing to this wonderful world.

Nathaniel Harding 02:10
Yeah, happy to discuss it. So my partners, I started cortado ventures, about three and a half years ago, we are early stage technology investors focused on the mid continent of the US. That's an area that we think has been overlooked by coastal venture capital. We invest in an overlooked or underrated entrepreneurs that are building amazing technologies and companies in really important sectors like energy and logistics, and may not look sexy, but they're doing things these documentaries are building really powerful solutions for impacting our modern life. And that's where we invest at the earliest stages. Yeah,

Andrew Stotz 02:52
and for those people who haven't, like I grew up in Ohio, so it's a little bit kind of Midwest. And, and then, you know, obviously, Oklahoma's little bit further west, and I've driven through Oklahoma and driven through many of the western states, but when you think about kind of middle America, you know, it's, I guess, someone on the coastal go, why? Why does it matter? I mean, I can do anything from New York or LA, that, you know, can take advantage of these guys that are coming up with new ideas in the Midwest or across the US? What is it that you think you're bringing to them that maybe they're not getting from the coastal investors?

Nathaniel Harding 03:34
Yeah, we believe and I think it's supported by a lot of really interesting studies, that at the earliest stages of a company's formation, proximity matters. And so, think of this, you know, a lot of times we're investing in a company that's not on PitchBook. Yeah, it's not, it's not in the databases, you're not gonna find information about this company might not even be a company yet. So how do you find these companies, a lot of times, it's just your actual personal network, and just kind of good old fashioned, like going to things and meeting people in real life. That's actually really important in early stage investing. But also, the early stages of a company's formation is a high touch proposition. You know, they're, they're just trying to figure out what is the go to market strategy, they're iterating on a product or an idea, and, and truly being to where you're physically, you know, close, where you can be available. As an advisor, as somebody who's helping the companies grow. That's important. And then lastly, when somebody's building a new product, I always say that the CEO needs to focus on those first 10 customers and making them wildly happy and solving the problems. Well, that's also a high touch situation. And so you want to be available that customer you want to be responsive, you want to be showing up at the office. And and so we as investors a lot of times help connect the startups with the To cut the customer base. And that's another whole nother layer, why the proximity matters because we can actually make connections. And we've done so many, many times, where we'll help introduce these startups to kind of their first, first 10 customers, it's up to them in the land the customer, it's up to them to make them happy. But we can make that connection. So it's all sort of very personal kind of value proposition that we

Andrew Stotz 05:23
can bring our network. And what are some of the different ideas that have either been pitched to you or that you've invested in? Or you've seen that you think, Wow, that was pretty, that's pretty interesting.

Nathaniel Harding 05:33
Yeah, our business is pretty fun. Because, you know, we hear ideas that are amazing and awesome, but also crazy. And there's actually like a Venn diagram of there's a lot of overlap of crazy and awesome. You know, so I'll brag on a couple of our of our companies. One is company called New View. And they use LIDAR on satellites. Lidar is the technology that self driving cars used to figure out where they are, and what's in front of them. Well, our company new view is using LIDAR on satellites to create a high fidelity 3d Image of any surface on Earth. There's application and energy infrastructures, they give like monitoring pipelines and power lines, and has application agriculture. So think of monitoring crops. And so it's amazing company founded by somebody from Oklahoma, originally, and then they actually landed an investment from the actor, Leonardo DiCaprio. Yeah, but we were an early investor, this company. And it's a good example of what I talked about digital tech meets real world, you're seeing LIDAR digital technology, being married and being used in the ultimate real world, like the entire world, the entire surface of the earth. And then one more example of a company that we're actually looking at, but I think it also helps them body. The kinds of things that we look at, is a common byproduct in manufacturing in refinery and gas plants, is h2 is hydrogen sulfide, which is a deadly gas. But it's the right now it's just a it's a nuisance, it's very dangerous, it's expensive. This company has a novel technology, that together with other waste byproducts like carbon dioxide, can actually turn that into hydrogen, which is valuable, solid sulfur, which is valuable in different petrochemical production processes, and water. And so you know, they're using this technique, novel technology to the first to do it. So again, things that are really hard to do, you don't just kind of come up with these on your couch, you come up with these ideas, because you've been in the industry, you come from industry, and you're selling to these really big customers, large enterprise markets, and solving really important problems in the world.

Andrew Stotz 07:55
One, one other question I have is like, what's going down? What's going on on the ground around there? I know, we see in America that oil and gas output has been, you know, very strong, which I think people didn't necessarily expect was going to be happening during the Biden administration. And so now we see it cranking up. Are you seeing that on the ground? Or is that just in the numbers, and it's not as clearly coming across?

Nathaniel Harding 08:24
Yeah, the many years ago, I should say, 2010 timeframe, there was something called the shale revolution, which may be familiar to some certainly familiar to people in this part of the country. That's referring to a type of rock shale, which is very, lacks porosity. But using technologies like hydraulic fracturing, figured out how to produce it at scale. And that really launched the US into being a top producer. But we also kind of overdid it, you know, there's a bit of a correction even before COVID, there's a correction and the oil and gas market domestically, where we kind of realized that the inventory, or at least the amount of production for a well, wasn't as economic or at least there was a limit to the kind of grow at all costs, which maybe sounds like a familiar story and startup plant, you know, there's a grow at all costs when things are good, but then some sanity returns. So there has been a correction in the US market and production. But yeah, you're, you're right, you're actually seeing us resume new records of production, and resuming our place in the global market. But it's driven by onshore, you know, Continental US production. Actually, a lot of these areas. In fact, we call ourselves at portato ventures, mid continent focus, but come in investors. That term mid continent, is actually a term that we borrow from the oil and gas industry. The Mid Atlantic region, has historically been one of the most prolific regions in the US and it's actually the home of that the beginning of that shale revolution.

Andrew Stotz 09:52
And with the shale revolution, is it gas that's being extracted or oil and gas.

Nathaniel Harding 09:58
Both it starts With gas gas is easier to move because it's smaller molecules. But it's expanded. So now the Permian Basin is probably the king of basins in the lower 48. And that's in West Texas. And that's actually mostly oil, even though it's, you know, shale and other types of stones as well. Well,

Andrew Stotz 10:21
that's a great briefing on what you're doing, and a little update from Middle America. So I appreciate that, given that I haven't been back there in a long, long time. And I certainly haven't been back to Oklahoma besides a couple times driving through. So hopefully,

Nathaniel Harding 10:35
y'all will come on by what we'll hook you up next time you're around,

Andrew Stotz 10:39
that sounds like fun i In fact, I'd love to go see what's going on on the ground, you know, in the, in the oil and gas space, because it's just, it's fascinating, but Well, now it's time to share your worst investment ever. And since no one goes into their worst investment thinking it will be. Tell us a bit about the circumstances leading up to an intelligence your story.

Nathaniel Harding 11:01
Sure, so this was back in my oil and gas days, which really defined my career from graduating college until 2019 2020. And where we developed a good capability, as a company was finding new areas evaluating new areas of potential. And I'm talking about like new oil and gas fields, areas that we believe were underdeveloped or not developed at all. And that we could find new layers of potential, you got to remember, like oil and gas was multiple strata of Earth, and you can evaluate those strata to see, which might be the most productive. So as a company, we developed a Competence in Using analytical methods using high science to evaluate potential areas, and then to deploy the infrastructure and equipment personnel to prove it and develop it. And we would do that, you know, increase production throughout an area through the viability of a new area, and then sell that to kind of a bigger established oil and gas company. So that was the formula. And so, you know, going back now, this would have been, this would have been 10 years ago now. You know, we had kind of come off of a recent success, where we did a similar model, where we grew in area, we grew up production by tenfold, we were able to have a great exit a great sale, does a good outcome for us and our investors. So didn't you know, 10 years ago, we're like, okay, we're going to do this again, you know, we're We're hot stuff, we can do this anywhere, we have the Midas touch. And we were working with some very well established, accomplished geologists geoscientists and decided to kind of take that model outside of our home state of Oklahoma. In fact, when about as far north as you can, and in the US up to Michigan to find a new area. And you spent several months and use some of the same techniques to kind of evaluate where you look at data from nearby wells, or you look at different like geological reports, field reports, you know, observations from the surface or from mining operations, to kind of infer what you think the potential is. So we saw an opportunity to do something that nobody had done, which is to produce oil out of a shale formation that had to date only produced natural gas and but in a different part of the state. And so that was really kind of setting the stage as far as you know, what we're where we've come from, and then what kind of our next mission is and so we had to find an investor, you know, because he seems expensive. That's the thing about the oil and gas business. You can literally spend a million dollars a day, developing one wealth, and duration. And you also have to acquire the acreage or lease the acreage, you have to actually get rights to the land. So there's actually a big upfront cost as well. But kind of painting a picture of have to establish a new company to operate a new area. You know, we have to have upfront capital to be able to lease the acreage and you have to go through a lot of kind of regulatory steps to have the right to operate in a new environment. unfamiliar to us Okies that's kind of the slang for an Oklahoman is an Okie, so let's clear that territory to us. But you set up shop in Michigan. And, and let me tell you, the winters there, you know, absolutely brutal. I remember when you develop a new oil and gas well, it's 24 hour operation. And so you I remember being out there and like 2am, negative 20 degrees, all the layers I had on everything I, you know, even our, our equipment was freezing. And then when that happens, you bring out like a steam truck, like basically this large truck that literally produced the steam and just blast whatever is frozen while the steam truck froze. And also like a hot oil or basically, everything in the oil field is like, as a very obvious name. So a hot old truck. Well guess what a curious curious hot oil. Well, that froze. And so you know, dealing with this and like, man, but when we develop this billion dollar fields gonna all be worth it. Hmm. He keeps telling yourself that. And we actually use a very novel technologies, some listeners may be aware of hydraulic fracturing or fracking. We're using typically water a water mix of different things to open up the rock so it can produce we were using we were early pioneers are early adopters of a basically a waterless system, a system that actually is based on hydrocarbons. And so even that was a very novel approach, you know, we're in, we're in a new area and a new state doing something no humans ever done, again, producing oil out of this formation. And using a technique that's very novel. But the price is so so large. And, you know, obviously, I wouldn't be telling the story, if I had a great outcome ended up having it was an absolute commercial zero. You know, we were out there, like the whole process of bringing it online, a new Well, man, when it works out it was like ultimate rush. You know, they always come online, like the middle of the night, and the picture you have in your head, like the movies where it's like, the gusher goes out into the sky, like, that doesn't happen. But the emotional rush happens because you're not allowed to spew oil and gas into the sky. That didn't happen anymore. But, you know, that moment, that exhilaration of that discovery is so worth it, but then the abject failure and the rejection when it doesn't work. And that's where we had, you know, we were able to produce a bit out of the rock. So I guess, good for us, we were the first humans to actually produce oil out of a rock that had never produced oil. But Andrew, who was an absolute commercial zero, that's gonna get much worse than that. And when

Andrew Stotz 17:32
was the day that you guys are yourself? Realize that, like, Can you recall the day that was like, We gotta give this up?

Nathaniel Harding 17:41
Yeah, and unfortunately, it's kind of a death by 1000 cuts? Because it's not like, well, let's give it one day and see if it works. I mean, you have just, if it's, if it comes online, and it's producing a lot, and then that's, that's great and going and but if not, they will, maybe there's something we can do to fix it. And you could also say, well, we may need to drill in different area. So then we went out and did this two more times. So we had that first, well, then gave it a kind of a month or two, did another and then did another and you know, we you change different things. But just like you do kind of the whenever you're experimenting, if you need to change one or two variables to see if that makes a difference. See how it responds. And, you know, so this is now over the course of several months, I'd say from when we first decided, we're gonna go do that until we said, we need out, it was probably 18 months. And then it took another six months to actually get out, you know, you didn't just magically disappear, you have to do something with those assets, you got to turn it over to some other operator or plug them. So when you have when you're done with an oil, well, you literally plug it with cement, according to regulatory guidelines. So yeah, from beginning to end, total was about two years.

Andrew Stotz 19:06
And how would you describe the lessons that you learned from this?

Nathaniel Harding 19:10
Yeah, I would say there's definitely two sides to it. I'm going to definitely say the things that we should have factored in. But I'm also going to give it another spin to kind of say like, well, would we do it again? What would we do different? We definitely layered on a lot of layers of uncertainty, operating in a new state, operating with a new team doing something nobody's ever done before and using a new technology. I mean, that's a lot of first you know, so I think one thing was absolutely that there's such thing as too many firsts. You know, there's when you kind of stack that house of cards up high enough, it's going to fall. And so now I How do I use that now I'm a venture capital investor. And we categorize risk everything, give everything a name, and you have team risk and execution, your market and technology risk. And we, you know, typically now, I partly informed by that will limit it to our investments to one risk, you know what? Because that's where that's where alpha is created, right? If all the risks have been answered, If there's zero risk left, well, then it's been priced in and you're too late. But as an early stage investor, you got to pick one of those. But for maybe that's a bit too far.

Andrew Stotz 20:40
Maybe that's a, I'll just share my thinking on it. I was thinking when you were just saying that was, like we say, one day at a time, like one risk at a time? Yeah, it's kind of the absolute way to put it, you know, to the idea being that, yeah, it just, it just made me think like, I'm going to the website of Exxon Mobil right now. And as an analyst all my life, I want to go and see their, you know, their documents where they list out all the risks, you know, it's just so it's always fascinating to read through them. That's, that's a legal document that's trying to say, hey, we told you everything, right. But it's also a great place to see, you know, to get a list of all those risks. So I'm going to do that. And I'm going to share that with my students in my valuation masterclass bootcamp, on Friday when I meet them and talk about this, because it is an important thing that analysts often miss and investors miss is understanding the risks. And I think in this case, it's one risk at a time or the idea is isolate your risk. In one of my businesses, we were looking at investing in Vietnam, from Thailand, and we did a lot of work on it. And at the end, we decided not to do it. Because we felt like we could deploy that capital in Thailand and get same amount of growth at a good profit margin. Without a new country without a new language without a new team without a new legal system, we were dealing, you know, it's like, those are massive risks that we were just like, ain't gonna do it. So it don't really highlights about that.

Nathaniel Harding 22:19
Absolutely. And I think we also even look at, you know, now as investors, we look at, we'll call an existential threat. So maybe there is just one risk, but maybe it's just binary and uncontrollable, and it's either it's going to work or it's going to be an absolute zero. Sometimes that could still be okay, if it's priced in, but by examples would be if, if a company has one customer and it's the federal government, well, then if there's a law change, or you know, then all sudden you go from a giant customer to zero. Biotech has that kind of risk, where it's either going to clear the FDA or it's not. But I will say this, something that I think we actually did, right, and that I can extrapolate as an enduring lesson is, you know, we had, as I mentioned, it's very capital intensive business. And what we did was very capital intensive in that earlier example. And so we had to raise capital, and we lost it all. But I'll say that that actually wasn't as bad as it sounds. And here's why. In the oil and gas business, when you drill a well, you can deduct the capital costs of drilling. And so there's something to be said, for finding the right investor with the right needs for the right application. So in this case, you have an investor who has a lot of taxable income. And it's either if you don't decide by December 31, then it's either going to be a tax liability, or you can do something with that. And instead, in this case, invest in something that's has a lot of these intangible drilling costs is the technical term IDC. So it's reduced the tax bill significantly, otherwise would have been just a loss, or the liability, I should say. And it gave the potential of great returns now that the returns ended up being zero, but it still wasn't like a total loss in terms of the after tax effect on this investor. So, you know, I can kind of speak this investor and say that in their mind is like, actually, it wasn't all that bad. You know, can I get something out of it? And for all of us, if it had worked, it would have been absolutely monster. I mean, it would have been just life changing for everybody. And so I kind of asked myself, like, would I have done like, would I do something like that again? You know, I would like to think that I would try to maybe do one risk at a time and you're talking about and maybe do it sequentially. But as far as like even embarking on something like that, you know if you can align it interest with investors, and then give yourself an opportunity for that kind of outcome, then yeah, I think it's worth it, but you need to take it one step at a time. Well, well, one more thing to that is if you spend all of your, your career doing stuff like that, there's a lot of opportunity costs there, you know, so swinging for the fences on everything, you can end up taking your eating after career and these kind of opportunity cost that didn't, didn't shake out. So I, you know, I'm not, I'm not out there saying you should always do that approach. But if you do take kind of one risk at a time, you'll get that feedback before you've gone too deep, either financially or opportunity cost, and can react to that information.

Andrew Stotz 25:44
So based upon what you learned from this story, and what you've continued to learn, let's go back in time, either for yourself or for another person, you know, in a similar type of situation doesn't have to be the exact same, but what's one action that you would recommend the that our listeners take, to avoid suffering the same fate?

Nathaniel Harding 26:07
I would say, if you're doing if embarking on something that has a lot of firsts, or a lot of kind of new experiences for you. It really helps to partner with somebody who does know, the territory, whatever that is, right. I mean, in my example, I could have pointed to a few things, but I could have actually reduced how many firsts we were doing. But also partner with somebody who does know how to, in this example, operate that area? Or hold off on that new technology until you can answer another question in your list of risks. So that's something that I think I would tell anybody who's kind of embarking on something, then a lot of risks. And you know, when you're starting a new company, you have developed a new technology, you do have a lot of those but and the example that we talked about, in startups, when we invest in tech startups, is get feedback from that first customer. And again, like make your first customer first 10 Customers wildly happy, because that's going to do a lot to answer the question of execution risk and scale risk. And so I liked your way, kind of putting it one risk at a time. So

Andrew Stotz 27:31
as we wrap up, what's a resource that you found valuable in your life or any other resource that you'd recommend for our listeners?

Nathaniel Harding 27:39
Yeah, I actually get a lot of my inspiration from travel. And, and it can be anything, right. But I find that kicking myself kind of out of the daily grind is there, of course, time off is wonderful. But for me, at least, I need to be somewhere else. And it kind of gets me out of just thinking about the daily grind, and actually much more kind of aspirational thoughts, and longer term. And I can absolutely point to several examples in my own personal life, where I've had career breakthroughs that came to me when traveling. And I think kind of shows you how big the world is. And so like, as humans, we're all prone to the comparison, you know, being bedeviled by comparing ourselves to our peers, when you travel, and take yourself out of that environment. All of a sudden, it kind of resets what you're really after, instead of comparing yourself to others, you compare yourself to the best version of what you want for yourself. And you can think more aspirationally and creatively.

Andrew Stotz 28:47
Great, great advice. And I know I love traveling, I used to travel quite a bit. And I love to travel around the world and around Asia in particular. But you just see things from a different angle. And also just you know, getting out of the daily grind. You sit down and you're thinking, you know, you're thinking bigger picture. So I think that's a great, great advice. All right, last question. What is your number one goal for the next 12 months?

Nathaniel Harding 29:13
We recently raised our fun to raise $80 million fund to our goal is to deploy that capital into the top startups in the region and to be a top decile fund. It's absolutely our mission and our goal is to be a top decile performer and, and to really define this kind of market for the midcontinent invest some specific things to it. We actually are hosting the next year midcontinent venture capital Summit, we had our first inaugural one last year it was a huge success. So I guess I can put a plug out there to say May 7 and eighth in Bentonville, Arkansas. Some of some really amazing speakers and thinkers and builders and backers that are going We talking about the trends in tech and venture capital. But it's all part of our goal, you know, the next year and beyond, to be really defining this new market of this third wave of venture capital that we're seeing in the mid continent.

Andrew Stotz 30:16
Well, I'll have links in the show notes to you and you know, the resources that you have. And so for anybody that's interested, get out there and check it out, well listeners that you haven't another story of a loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. And as we conclude, Nathaniel, I want to thank you again for joining our mission and on behalf of a Stotz Academy I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Nathaniel Harding 30:51
Never stop learning never stop growing. You know, you learn more from failure. Beautiful, and

Andrew Stotz 30:56
that's a wrap on another great story to help us create, grow and protect our wealth fellow risk takers, let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your worst podcast host Andrew Stotz saying I'll see you on the upside.