Retirees Face $1.3 Billion Loss in Wall Street Fraud

It was supposed to be a safe investment.

In small offices across the country, brokers sold a security called L Bonds. The bonds were backed by life insurance policies and were supposed to provide a steady stream of income.

Many buyers were elderly. Now they’re facing catastrophic losses of up to $1.3 billion.

From a report that broke this morning in The Wall Street Journal:

What many of these retail investors didn’t know was that [bond issuer] GWG’s founders and a board director would each use the money to fund and launch their own startup ventures, then move them out of the investors’ reach, according to people familiar with the matter. The roughly 27,000 individuals who bought GWG’s unique debt securities, known as L Bonds, are now facing huge potential losses – for many, their retirement nest eggs.


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The original business buying life insurance policies quickly ran into trouble. So, bond issuer GWG Holdings cast about for another strategy.

It settled on backing speculative startups run by the company’s founders.

That would be reckless enough a thing to do with small savers’ money. But worse yet, the miscreants running GWG quickly moved those assets out of reach of the L Bond buyers.

Once the top executives had taken the assets, they drove GWG into bankruptcy.

The judge overseeing the court proceedings in Houston said he had never before seen a company give up control of everything it owns before seeking chapter 11 protection.

GWG appears to have operated like a Ponzi scheme. Of the $1.26 billion in L Bonds the company sold, nearly two-thirds went to paying off prior bonds.

Meanwhile, the top executives siphoned off tens of millions of dollars in dividends for themselves.

The SEC began investigating GWG as early as 2020. GWG didn’t disclose the investigation to its investors for a year.

In the mean time, it sold another $200 million in toxic L Bonds.

The law generally prohibits the SEC from disclosing investigations. I think it’s high time to change those laws.

Many elderly put their life’s savings into these bonds.

They should’ve known the company was under federal investigation. The government they pay taxes to should never have kept that a secret from them.

It doesn’t help for the SEC to blow the whistle once the money is already gone.

What do you think of this case and how the SEC handled it? Leave a comment at the bottom and let me know.

See you on Monday!

More on markets:

Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

Hedge Fund Giant D1 Loses $7 Billion in 2022

Shadowy Hedge Fund Cash Bankrolls Fight Against Regulation

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The Power Law (Part One)

“Reasonable people…routinely fail in life’s important missions by not even attempting them.”

The Power Law

Every day for the last 15 months, I’ve sat down in front of my computer and tried to find the next great tech company. Being immersed in the daily details of e-mails and deal memos made me wonder about the history of this most unusual of industries, venture capital.


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So I grabbed a copy of Sebastian Mallaby’s excellent new book The Power Law: Venture Capital and the Making of the New Future. Mallaby traces the history of venture capital from its first deal to today, and explores the principles that drive its success.

The fundamental principle of venture capital is the power law — a small percentage of winners generate almost all the returns:

“Anytime you have outliers whose success multiplies success, you leave the domain of the normal distribution for the land ruled by the power law — from a world in which things vary slightly to one of extreme contrasts. And once you cross that perilous frontier, you better begin to think differently.”

Since just a few companies drive most of the returns, the entire business becomes about finding and investing in those very few companies:

“…each year brings a handful of outliers that hit the proverbial grand slam, and the only thing that matters in venture is to own a piece of them.”

So how should investors identify those rare businesses? Arthur Rock, who was arguably the first venture capitalist, liked to ask open-ended questions like “Who do you admire?” or “What mistakes have you learned from?”

Rock looked for founders who were realistic and determined. He avoided those who were prone to wishful thinking or who tried to please instead of being honest.

Rock’s inquisitive style led him to back Fairchild Semiconductor in the 1950’s in what was the first modern-style venture capital deal.

Founder traits are important, but hard numbers also matter. Google, eBay, Facebook and YouTube all had staggering growth figures early on.

Andy Rachleff, Benchmark partner and early investor in eBay, looks at an even more sophisticated growth metric:

“‘When companies grow exponentially, they don’t suddenly stop,’ Andy Rachleff observed later, adding that it is the ‘second derivative —the changes in the rate of growth of a company’s sales — that really tell a venture investor whether to back it.’”

Once an investor finds that diamond in the rough, he needs to own a piece, even if the price is high. Mallaby notes that Google’s seed round valuation was around $10M, high for its time.

Prone as I am to analysis, I often undervalued actually meeting investors and founders. This book taught me a lot about the importance of networking to the venture industry.

Don Valentine, founder of Sequoia, went to a Silicon Valley bar every Wednesday and Friday to chat with engineers about the next big thing. In the world of startups, investors are the specialists in connecting people with each other.

The more interesting people we meet, the better we’ll be at our job!

Mallaby provides so much great information that I’ll save the rest of the book for another post soon. In the mean time, if you’re interested in startups and venture capital, I urge you to grab yourself a copy!

More on tech:

What I Learned From an Investor Who Turned $100,000 into $100,000,000

Amp It Up

Managing a Crisis the Sequoia Way

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Shadowy Hedge Fund Cash Bankrolls Fight Against Regulation

Hedge funds are going all out to stop the SEC from implementing new disclosure rules. Now they have some help from an academic group whose finances are shrouded in secrecy.

From a report that broke yesterday in Institutional Investor:

…hedge funds aren’t fighting the SEC alone: A new organization, which Institutional Investor has learned has at least one hedge fund backer, has enlisted dozens of academics to argue against the proposals, creating something of a firestorm of criticism.

Wonky academic comments on proposed SEC rule changes typically fly under the radar. But [UC Berkeley law and finance professor Frank] Partnoy made them his mission. Now his work — in comment letters signed by himself, [Robert] Bishop, and other academics — is taking some heat. In part, that’s because the financing of his institute, which pays Partnoy and Bishop for their letter writing, has been shrouded in secrecy.

The International Institute of Law and Finance refuses to disclose its backers. But at least one major hedge fund manager, Bill Ackman of Pershing Square Capital Management, is bankrolling the effort per Institutional Investor.


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Even the group’s chairman is a hedge fund employee:

The chairman of the institute’s board is Stephen Fraidin, a corporate attorney and partner at Cadwalader who has also long worked for Pershing Square.

Given the institute’s lack of financial disclosures, we can only guess who else may be backing its efforts. But we do know that numerous hedge funds, including Citadel, have met with the SEC to oppose new regulations.

So what exactly are these regulations that hedge funds and their friends in academia so passionately oppose?

One requires investors who buy over 5% of a company’s stock to disclose the position sooner. Another requires similar disclosure if the 5% position is in swaps.

Swaps can be used to hide both long and short positions in a stock. They can also lead to sudden, massive losses, as was the case with Archegos Capital Management last year.

Other shareholders should know when the stock they hold is being accumulated by a major investor. Employees too need to know about ownership changes that can affect their livelihood.

Better disclosures could even prevent another financial crisis. If banks know about a fund’s huge swaps positions, they may be unwilling to extend it more credit, which could prevent a huge hedge fund or bank failure.

But just because regulations are good for society as a whole doesn’t mean hedge funds won’t fight them with everything they’ve got. And since the message isn’t that persuasive coming from them, why not pay a few academics to deliver it for them?

Hedge funds are also finding some unlikely allies in Washington, including a Congressman with ties to hedge fund Elliott Management:

Rep. Ritchie Torres, a Democrat from New York’s South Bronx — one of the poorest districts in the nation — whose top donors include Elliott, has been circulating the letter [opposing regulation], according to an individual familiar with the effort. (Torres, whom OpenSecrets says is a top recipient of hedge fund cash in the current election cycle, did not return multiple requests for comment, nor did Elliott.)

Is hedge fund regulation really a top priority of Torres’ constituents in the South Bronx?

Big money has long since poisoned politics and now is doing the same with academia. We, as citizens and investors, need to stop fooling ourselves about who these institutions really represent.

Who else do you think is behind the fight against hedge fund regulations? Leave a comment at the bottom and let me know!

More on markets:

$6B Hedge Fund Cut Off from Trading As Investigation Looms

Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

Hedge Fund Giant D1 Loses $7 Billion in 2022

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The End of Celsius — the Beginning of Crypto Regulation

Cryptocurrency lender Celsius Network has stopped all withdrawals, imperiling the savings of 100,000 users. From The Wall Street Journal:

A few months ago, Mike Washburn’s cryptocurrency investment looked like a winner.

Now he’s just hoping to get his money back.

Mr. Washburn, a 35-year-old plumber in Otsego, Minn., had $100,000 in an account at Celsius Network LLC, one of the largest lenders in the cryptocurrency world. Recently widowed, Mr. Washburn said he and his two children moved in with his parents, and he planned to buy a house with his savings. The Celsius account offered him yield higher than would a traditional bank account, and the company was well-known in the crypto community.


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Celsius promised rates of over 18%, versus around 1% in a traditional bank account. Users flocked to the platform, perhaps unaware of the risk compared to a traditional bank.

The assets Celsius holds to pay those high rates plummeted in value as crypto markets crashed this year. And some of its investments are only semiliquid, making it difficult to meet redemption requests from depositors.

Yesterday, certain investors tried to engineer a short squeeze in Celsius tokens.

It caused some run-up in the price, but the tokens remain down over 75% in the last year. I would expect this attempt to fail in the long term, given the overall instability of the Celsius platform.

Source: Coinmarketcap.com

Some savers may have looked at the 18% Celsius was offering, noted that it was 18 times as much as the bank, and piled in. But comparing a crypto lending product to a US bank account is “apples and bowling balls.”


A bank account provides FDIC insurance for up to $250,000. What’s more, any interest is paid in US dollars, a much more stable currency than most crypto tokens.

I think Celsius is finished as a platform.

Any deposit-taking institution operates on trust. Even if it weathers the current storm and manages to stay solvent, who will trust Celsius with their money in the future?

The even greater impact of the Celsius implosion will be on crypto regulation. The industry has often tried to avoid regulation, espousing a libertarian ethos.

That ends when plumbers in Minnesota are losing their life savings. Once their constituents are losing everything and barraging their representatives with phone calls, politicians become motivated to investigate and pass new laws.

What’s more, pols and regulators see opportunities to make names for themselves by sticking it to unsympathetic crypto fat cats.

It may take several years, but expect stiff regulations on cryptocurrency to come out following this crash.

I expect crypto lending and stablecoins to be the first targets for regulation. They are the most similar to the heavily regulated banking industry in that they take deposits and aim for stability.

What do you think is next for Celsius and the crypto market at large? Leave a comment at the bottom and let me know.

More on tech:

Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

Managing a Crisis the Sequoia Way

Why Tech Stocks Are Oversold

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A Wisconsin Summer With The People Who Matter Most

As I entered the baggage claim, I heard an old friend’s voice calling my name. But where was he?

My head swiveled around, confused. Then, Matt* rolled up to me in a purloined wheelchair with a big smile on his face.

That’s when I knew this would be an interesting trip.

A mural in Milwaukee celebrating the great Giannis Antetokounmpo of the Milwaukee Bucks!

One of the greatest things about the world today is how we’re getting back to the moments we used to love. In person events, concerts, and travel are finally returning to brighten our lives after a long absence.

I’m back today from the most wonderful vacation I’ve had in a long time! I got to see my mother and my old friends in Wisconsin for the first time since COVID.

I began with a visit with Matt in Milwaukee.

We’ve known each other since the 8th grade. I’m lucky to have such a longstanding friendship.

It had been nearly three years since we’d seen each other, but we didn’t miss a beat! We laughed all the way home from the airport, always on an adventure no matter what we’re doing.

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Milwaukee’s Hoan Bridge

Dinner was airy spanikopita and delicate baklava at Sts. Constantine and Helen Grecian Fest. Milwaukee is known as the City of Festivals, and in the warmer months there are celebrations of heritage and food almost every day.

The next day, I grabbed the bus north to my mother’s house. Getting to hug her after nearly three years apart felt like the end to the difficult period the world has been in for the last several years.

Or…almost the end. Ironically, we both got COVID for the first time as soon as I arrived!

Luckily, our symptoms were mild and we’ve made full recoveries. And on the bright side, COVID kept us close to home and enjoying the simple things, like reading on the glider as deer and chipmunks passed by.

Deer in the yard
The view from the glider

We played cards with the same deck we used with my great grandpa 30 years ago. We walked slowly down the streets at sunset, just happy to be together again.

Frozen custard at Culver’s a Wisconsin must!

After about a week, I came back to Milwaukee to meet Matt again, joined by our friend Brian* from Madison. When we all lived in the same neighborhood shortly after college, we were an inseparable trio.

But we hadn’t been together all at once since 2018. We ambled down the charming industrial streets like the Three Musketeers, always more excited when it’s all three of us together.

When they dropped me at the airport to go home to New York, I wanted nothing more than to stay! But they have work they need to get back to, and so do I.

There’s only so many times I can go three or four years without seeing friends and family. At that interval, I might see them a dozen more times at most before we’re all gone.

So I plan to come more often and enjoy that special feeling of being around those I love and have known the longest. As Dorothy said, there’s no place like home.

More on travel:

A Special Weekend in Stokes State Forest

Pine Barrens Glamping in Brendan Byrne State Forest

Is this NJ’s Most Beautiful Spot?

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*Names have been changed

Hedge Fund Giant D1 Loses $7 Billion in 2022

Yet another massive crossover hedge fund is facing serious losses. New York-based D1 Capital Partners has lost approximately $7 billion this year.

From a Bloomberg report that broke yesterday:

…D1 has told investors who selected a 50-50 mix of public and private assets that the strategy lost 23% through May. The firm attributed most of the damage to public investments, which fell 44%. It marked down private assets only 8% — including 0.05% last month.

This 50-50 mix was the most common choice for D1 investors.

D1 still has about $17 billion in private equities and $7 billion in public stocks, implying losses of about $5.5 billion and $1.5 billion respectively. The firm’s total loss for 2022 alone appears to be about $7 billion.


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D1’s losses, large as they are, are probably severely understated.

It has marked down its private company stocks by only 8%. However, the Refinitiv Venture Capital Index is down 47% for the year.

If D1’s portfolio mirrors the broader markets, the real losses on this $17 billion pile of private company stocks could be billions more.

To make things even more interesting, D1 borrowed billions and poured it into illiquid private company shares. From Bloomberg:

Hedge funds were tallying gains on their hottest bet in years when Dan Sundheim reached an unusual deal with JPMorgan Chase & Co. to go even further.

With the bank’s help in August 2020, Sundheim’s D1 Capital Partners used its stakes in private companies as collateral for borrowing $2 billion that the firm could put toward yet more of those stakes, among other things. Last year that focus on private companies looked brilliant, as D1 updated its valuations and posted a whopping 70% gain in that part of its portfolio.

Now, the industry is bracing for a reckoning.

I invest in startups myself, but I would never borrow money to do so.

Borrowing money to invest in tech startups is completely reckless. These companies are volatile, speculative, and illiquid.

It’s telling that the best venture capital firms in the business, like Sequoia and Benchmark, don’t play these shell games to boost returns.

Losses for crossover hedge funds like D1 are so severe that some cannot even meet redemption requests from investors:

In the starkest sign yet of the strain on hedge funds, Tiger said last week that it couldn’t continue to fill redemptions the normal way because so much of its portfolio was invested in hard-to-sell stakes in private companies. As the firm saw losses and some redemptions in the first quarter, it exited 83 stocks. Now if investors want to pull money from Tiger’s hedge and long-only funds, a portion of the liquid assets will be sold, but private investments will be placed in a separate account to be cashed out later.

I expect a similar move at D1 soon.

This isn’t the first time D1 has gotten itself into trouble.

According to a report in The Wall Street Journal, it lost 30% of its public portfolio in January 2021. As meme stocks soared, D1 was badly burned by short positions.

The overall impression I have of D1 is of a reckless firm casting about in vain for a winning strategy. It rushed into venture capital with a risky and untested scheme, then lost a fortune betting against volatile meme stocks.

Were I an investor in the firm, I’d be asking for my money back. The question is: can you get it?

What do you think of D1’s losses? And who do you think is next?
Leave a comment at the bottom and let me know!

This is the last blog for this week. There will be no blog next week — I’m heading off for a vacation!

See you on Monday, June 20th. Have a great weekend! 👋

More on markets:

Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

$6B Hedge Fund Cut Off from Trading As Investigation Looms

Citadel Adds Millions to AMC Options Bet

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Managing a Crisis the Sequoia Way

Control what you can control. Be steady but decisive. And most importantly, build a sustainable business where you are in control of your destiny.

Roelof Botha, Sequoia Capital



Lately, I’ve been seeing something I’ve never seen before in the eyes of some of the founders I meet: desperation.


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Fundraising is increasingly difficult, tech has gotten crushed and the economy is almost surely in recession. Companies that were doing great just a few months ago are staring death in the face.

With that in mind, I spent this afternoon digging into Sequoia Capital’s recent presentation on what the downturn means for startups.

It offers the best advice available for startups navigating this difficult market. Sequoia’s partners advise startups to be prepared to cut back to ensure survival, if necessary.

If your runway (time until you run out of money) is getting short, you may have to make painful cuts in spending.

Do the cut exercise (projects, R&D, marketing, other expenses). It doesn’t mean you have to pull the trigger, but that you are ready to do it in the next 30 days if needed.

Doug Leone, Sequoia Capital

Sequoia also emphasizes that this crisis offers many opportunities. Many companies are more focused once they cut back and hunker down for a bear market.

What’s more, recruiting, which has been extremely difficult for many startups, is about to get much easier. As Leone notes, all of the FANG companies have hiring freezes.

This means startups can have their pick of the best possible people.

Even better yet, some of your competitors are about to go out of business! But if you carefully manage cash, you’ll survive and have a chance to dominate your market.

Look at this as a time of incredible opportunity. You play your cards right and you will come out as a strong entity.

Roelof Botha

This downturn doesn’t mean that you have to stop growing. But it may mean paring back side projects to focus like a laser on driving efficient growth in your core business.

You can still sign up customers in a downturn if you have a strong value proposition. Since I mostly invest in SaaS, I found this passage on proving value to business customers especially helpful:

Three reasons why people buy regardless of market conditions (enterprise POV):

● Drive growth

● Save money (real, hard ROI)

● Reduce risk

● Everything else is fluffy “

Carl Eschenbach, Partner, Sequoia Capital

Finally, it’s important to remain hopeful even if things get hard!

“Whatever we are facing today, it can’t be any worse than the uncertainty we faced at the beginning of the pandemic. We will prevail.”

Alfred Lin, Partner, Sequoia Capital

You created your company for a reason. You have a mission to fulfill.

A downturn doesn’t change that. You just have to manage it correctly and seize the opportunity it presents.

The very best of luck to all you brave founders!

What challenges are you seeing in startupland today? Leave a comment at the bottom and let me know!

More on tech:

TALKING STARTUPS AND TODAY’S FUNDRAISING PULLBACK

TALKING ABOUT TODAY’S STARTUP MARKET ON THE ACCELERATOR PODCAST

THE BURN MULTIPLE: WHAT IS IT, AND WHAT CAN IT DO FOR YOU?

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SEC May End Payment for Order Flow

The SEC may soon propose an end to payment for order flow. This controversial practice lets market makers buy the right to execute trades, particularly those of retail investors.

From a report that broke in The Wall Street Journal last night:

Chairman Gary Gensler directed SEC staff last year to explore ways to make the stock market more efficient for small investors and public companies. While aspects of the effort are in varying stages of development, one idea that has gained traction is to require brokerages to send most individual investors’ orders to be routed into auctions where trading firms compete to execute them, people familiar with the matter said.

The SEC’s proposed trading changes could take effect later this year or in early 2023:

After a year of internal deliberations, the agency has homed in on a narrowing set of proposals. If the SEC votes to release them for public comment later this year, they would have a path to implementation, as Democrats hold a majority of seats on the commission.


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Market makers competing against each other to offer the best price should be much fairer than the current system. Today, large market makers like Citadel Securities can pay brokers like Robinhood Markets for the right to execute trades.

Citadel and other major firms may be dragged kicking and screaming into this fairer market:

A spokesman for Citadel Securities said the firm looks forward to reviewing the SEC’s proposals and working with the agency.

“It is important to recognize that the current market structure has resulted in tighter spreads, greater transparency and meaningfully reduced costs for retail investors,” the spokesman added.


Citadel’s spokesman conveniently fails to mention that the firm was fined $22 million by the SEC for not giving investors the best price on their trades.

But in fairness, one study found that payment for order flow has resulted in lower costs. Those payments have let many brokers reduce their commissions to zero.

Despite zero commissions, the price brokers give investors may be so bad that the investor loses in the end.

Brokers claim that payment for order flow trades are being executed at the best available price. But to this day, I’ve never seen a broker release a data set proving it.

An auction model is much more transparent. It could go a long way to restoring retail investors’ confidence in financial markets.

What do you think of payment for order flow? Leave a comment at the bottom and let me know!

More on markets:

Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%

$6B Hedge Fund Cut Off from Trading As Investigation Looms

Credit Suisse May Need Up to $1 Billion After Huge Losses

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Photo: “CMI 101: Demystifying Derivatives with CFTC Chairman Gary Gensler” by Third Way is licensed under CC BY-NC-ND 2.0.

A Special Weekend in Stokes State Forest

I walked up the cracked country road, wildflowers on either side. The birds sang and a rustle in the bushes made me turn my head.

A chipmunk! The little grey man stood still, awaiting my next move.

I tried to get a picture, but he was too fast!

This weekend I had the joy of visiting Stokes State Forest in northwestern New Jersey. Our state may be known for chemical plants and garbage dumps, but in these verdant woods, you’d never know it.


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The land undulates gently, slowly rising into broad, thickly wooded mountains. Tucked away in that woods was our campsite.

I returned to our temporary homestead after my stroll, dropping into my lawn chair with a groan. Burgers sizzled on the grill.

After a wonderful dinner and many laughs with friends, I retired to my tent on the edge of the forest. There’s something peaceful about making your bed in nature.

Stokes State Forest has excellent camping facilities that I’d recommend to anyone.

There are real bathrooms nearby, and they’re actually clean! The dispensers always have soap, a rare amenity in the woods.

A short drive away were the showers, and I felt like a new man after lathering up there on Saturday!

The campsites themselves are spacious and provide a good distance between you and other campers. But the water might be the best thing of all!

Stokes has an artesian well that provides some of the best-tasting mineral water you’ll ever drink! Locals who aren’t even camping drive into the forest to fill dozens of plastic bottles from this pristine spring.

When we’re camping, my friends and I don’t have to worry about getting home. Home is a tent just a few feet away!

There is no other time in this hectic modern world where I get to spend days at a time with some of my favorite people. That’s why camping is special.

If you’ve never camped, give it a try! Stokes is just over an hour from New York City and its natural beauty is more than worth the trip!

What are some of your favorite experiences in nature? Leave a comment at the bottom and let me know!

More on the outdoors:

How Camping Is Improving My Life

Pine Barrens Glamping in Brendan Byrne State Forest

My Camping Essentials: The Basics, The Wishlist, And The Things I Never Thought I’d Need But Can’t Live Without

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Dealgrace: Uber for Everything Else

Uber is great for rides and food. But what if you need an oil change?

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The team at Dealgrace carefully vets every business on the platform to be sure you get awesome service. And the prices are very hard to beat.

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More on tech:

Have a great weekend everybody! 👋

Why Tech Stocks Are Oversold

Talking Startups and Today’s Fundraising Pullback

The Autonomous Weapons of the Future…and Present

Get the blog before anyone else…subscribe!

If you found this post interesting, please share it on Twitter/Reddit/etc. This helps more people find the blog! 

Save Money on Stuff I Use:

Fundrise

This platform lets me diversify my real estate investments so I’m not too exposed to any one market. I’ve invested since 2018 with great returns.

More on Fundrise in this post.

If you decide to invest in Fundrise, you can use this link to get $100 in free bonus shares!

Misfits Market

I’ve used Misfits for years, and it never disappoints! Every fruit and vegetable is organic, super fresh, and packed with flavor!

I wrote a detailed review of Misfits here.

Use this link to sign up and you’ll save $15 on your first order.