Kevin O'Leary on Venture Investing, His Favorite Investor, and the Importance of Cash Flow

Do you have what it takes to be a venture capital investor? We decided to ask one of the best in the business, Shark Tank star Kevin O'Leary, about the key differences between investing in stocks and private equity. Also in this Dec. 21, 2020, Fool Live video clip, O'Leary tells Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser what investor has had the most influence on him, and why cash flow -- not capital appreciation -- is the main focus of his investment style.

Matt Frankel: What are the differences between investing in public and private companies that people would need to know. Because a lot of people would love to do what you do, but as you said, it's not for everybody. It sounds like Beanstox is one end, investing automatically, but you have venture capital which is on Shark Tank, and then investing in public companies directly is in the middle, like a Tesla (TSLA -1.92%) or something like that. What are the differences in your mind of investing in public and private companies? I know you said risk is one, but what else?

Kevin O'Leary: Liquidity. The biggest problem with taking on risk and venture capital or private equities is liquidity. You should consider that investment gone from liquidity or gone from you for five to seven years. You should have in your mind the ability to live without that capital for a very long, extended period of time. The people that make mistakes and venture vesting or in private equity forget that they need liquidity in their lives because in life, [inaudible] happens. You just don't know when it's going to happen and when that occurs you need liquidity. I would say 95 percent of what I invest or maybe 90, let's make it 90 percent, is in very liquid large cap companies or companies that are profitable, mid-cap or small tech companies, all done through ETFs. That's the core, my core holding and that's sort of the philosophy of Beanstox. The stuff I do, the very speculative stuff I do in Shark Tank, for example. I have many other companies. One of the great things about being a Shark, I'll be honest with you, is I get shown everything now, I see every deal there is, practically. I have a whole team of people analyzing and we make many investments outside of Shark Tank because we see wonderful ideas and great entrepreneurs and I want to be supportive. I consider that money gone when I invest in it because I have no idea of what the outcome is going to be. Then every morning, because I've got so many of them now, I have a complete Shakespearean drama playing out.

Jason Moser: [laughs]

O'Leary: Euphoria in one area, maybe five companies just exploding with upside, like this last week. The call that we're going to do that Zoom (ZM -0.82%) with that giant retailer. That's euphoria. Then I have companies in business travel that are just begging for another PPP loan. Maybe they're going to make it, maybe they're not. That plays out all day long. It's just a giant chorus of euphoria versus complete misery. That is the nature of venture investing. Then every once in a while I'll get a phone call saying, they want to buy Plated for $340 million. Albertson (ACI -0.54%) wants to buy my Plated company. That's good.

Moser: [laughs]

O'Leary: I like that. That's a good outcome and that pays for all my mistakes. That's the nature of that business, but that has nothing to do with the bedrock strategy that I teach my kids about investing for themselves or what Beanstox does. If you want to be a venture investor, you better be ready for rock and roll because the outcome is completely unknown, completely random. Lots of energy and I love working with the entrepreneurs, but the outcomes are crazy outcomes. You just don't know what's going to happen.

Moser: Kevin, before we wrap things up today, we always are very interested to know the investors that we speak with. We like to know the investors that have had an impact in your life. Throughout your entire investing life, what investors have had an impact on you and why?

O'Leary: There is one, Charlie Munger. Charlie Munger is my guy. I mean there's nothing wrong with Warren Buffett, but you want to know where all that philosophy comes from and who keeps Warren Buffett on a straight track? It's Charlie Munger. He has two words, cash flow.

Moser: [laughs]

O'Leary: Cash flow. That's what he believes in. My whole investment strategy is built around cash flow. I have a little Charlie Munger on my shoulder every day when I look at a deal and he's just saying two words, "Cash flow. Cash flow." He's right. He is the most astute balance sheet guy in the world. No BS guy, says it the way it is, you can't sell him crap, it's impossible. Does it keep them out of speculative situations? Yeah, there's many stocks that, probably, had fantastic returns but because he stays onto the straight and narrow on cash flow, he is an incredibly wealthy and successful man. You can't go wrong with cash flow.