Dan Abrams — Cobalt Capital

Wednesday, May 25, 2022

Dan Abrams is a partner at Cobalt Capital. Prior to Cobalt, Dan (and the entire Cobalt team) was at CAA-affiliated Evolution Media. Cobalt leads Series B rounds, but likes to get to know founders earlier in their journey.

View More Transcript

I have Dan Abrams with me today. Dan, let me see if I get this right. Dan, is a partner at Cobalt Capital, Cobalt is a new fund made up of the former Evolution Media team. The Evolution Media team spun out of TPG growth where they were affiliated with CAA as Evolution Media. The team invested in some great companies like Calm, Tonal, The Athletic, Masterclass.

They led the Series A of Scopely, so really strong investing team now at Cobalt Capital, investing in venture, mostly Series B companies. Dan, it’s great. I’m so glad you’re here. Glad we get to connect.

Thanks for having me. Super excited to chat.

Yeah, well, it’s it’s a special treat because I feel like you guys are kind of new on the scene even though you’re not really new.

So tell me if I got kind of the the. You nailed it. You did great. Perfectly done. Well, you know, I practice we practice a little bit. Right. Fair. No, that’s true.

No, that’s right. We were the fund that no one’s really heard of. And and we didn’t make that easier by re-changing our name just now. So but we were for so long investing out of TPG and originally in partnership with CAA, like you said. And then we spun out and were an independent fund underneath TPG growth and then just recently spun out again at the end of last year to create Cobalt Capital. And so we for so long never really had to market ourselves.

We every time we we needed capital, we we would be we would call TPG and, you know, we were they had enough capital for us every time they’d raise a growth fund that we would be a part of it. So, you know, we we haven’t done all these things where we’ve been making a name for ourselves until now. So I’m excited to be here and chat with you.

Well, you know, being someone who has to do fundraising, it seems like a great set up. And yeah, that sounds awesome. So. So you’re affiliated with TPG and TPG owned CAA, correct?

Yeah. TPG Capital did. Yeah, right.

OK, and TPG Capital is different in TPG growth. And you were affiliated. You said just TPG growth would raise money and then give you some portion of that.

Yeah exactly. So right. So a lot of different facets in terms of TPG. Their capital is their buyout group and one of their buyout transactions buying CAA and their growth arm. Does the growth later stage growth and then we invest in and we were the early stage part of TPG growth. So the pool capital that we were using was part of the growth program at TPG.

And were you doing were you still doing sort of entering at the same stage when you were Evolution Media like series A, series B?

Yeah, definitely. And I think what we’ve learned along the way of making almost 40 transactions in our history is that there’s a sweet spot. L.A. is a little bit earlier market than than other parts of the country. And I think that part of our DNA is investing, you know, on the earlier side then TPG, I mean, TPG sort of it was a continuum, right? They were looking at a later stage businesses. We were looking at the earlier stage part of it.

It worked really well.

And so so we we sort of learned and grew a niche for ourselves, focusing on early stage companies that are growing out of predominately L.A., but also San Francisco, New York at it.

And the other part that I find confusing is Evolution Media Capital is different than Evolution Media.

Yes. So I’ll give you the whole story. So that started as evolution media capital insights here. Originally an investment bank that was built to advise clients on transactions and trends and media and entertainment and technology. And so that deal flow was an immense amount of deal flow that we were part of. Originally, I wasn’t there, but at the time it was an investment bank. And then when TPG bought the they set up a separate fund, also called Evolution Media Evolution, Media Capital also just.

Called that Evolution Media that invested along out of TPG, just like we were talking about, you know, and having access to deal flow that originated out of CAA.

So first Evolution media Capital then came Evolution media and then came Cobalt Capital. 

And so were you leading rounds before when you were Evolution media, and will you be leading the rounds when you’re Cobalt?

Yes, for sure. I mean, we were. Let’s go. Let’s go. Serious. We mentioned that in the opener. We we’ve let Abdelal at Epic Books, which is a kid’s. It’s like Netflix for kids books. Forty thousand library titles of children’s books. We’ve led a few. We led a business called Mux that’s an API for four streaming video. 

So we’re happy to lead. In fact, we we love to lead and take a board seat and be active because we don’t make as many investments as several as many of the other venture funds. We want to make fewer concentrated and then develop deeper ties and see how we can be helpful. And we’re talking about oftentimes we’re talking to CEOs and and founders every other week, every week, you know, not just the cadence of a typical board calendar, but just as often as possible to see how we can be helpful.

And so before I get to just the basics of of Cobalt, then sort of what size checks you say you prefer leading deals.

I said my own or I think it’s mostly Series B is your sweet spot.

You know, give me a little bit more about about the shape of those. Yeah. I think our our preferred check size would be somewhere from five to 10 on the smaller end and we can go up to twenty or twenty five on the larger end. That’s sort of there’s an exception to every rule. Obviously we’re comfortable going earlier and so what we want to do is develop those relationships early and start talking to founders, develop really friendships really. And then when they come time to want to raise capital, we want to be a part of that conversation. And if we can lead, then we’re thrilled to do it.

I know that’s really good to know because that means that people who maybe have raised their series or still early in their journey, they can come to you, you’ll give them advice, you’ll tell them, hey, look, this is what we want to see in order to to lead your B.

So it’s my favorite part of of honestly of doing this is that we get to talk to people and learn about their businesses so early on in their journey, do you have sort of ownership thresholds and are you often co investing with other investors or is it like gobble it all up?

Because that’s the reputation that I have of Series B investors.

Maybe we got to do better about changing that perspective. But I think I think there’s a lot to that. And I think that at the Series B, oftentimes maybe the book’s written and it’s a success already and to the early success and and then investors want to pour as much money into that business at that stage as possible because it’s been somewhat de-risked and they want to be part of that growth curve. And that’s not a bad strategy at all. It’s a great strategy, especially for a capital deployment strategy.

How much can you put behind your winners you want to continue to follow on? And for earlier investors, the B is the follow on round. But for us it’s the entry point. You know, we sort of like if we made friends with and build connections and done well sourcing by building relationships early. We’ve heard about the journey, but we haven’t been a part of the journey yet. We haven’t been on the coffee table yet. And so for us, the entry point is, is the B, and so we’re trying to take that same approach that everyone had in the seed and A stage.

And then the B is like. They’ve already known it’s there for us. We’re trying to figure out that’s working at the B and then we’re going to pour more money at the C and the D. 

And who are the best sorts of entrepreneurs to for you to be building that friendship with?

I understand what stage they are, but, you know, are they how do you characterize them?

So I think maybe the best way to say that is kind of talk about where we like to spend our time and we like to invest. And I think our history has been at the early stages. It was in digital content and media. I mean, the name was, you know, Evolution Media, but that we didn’t only invest media, we also invested consumer and technology businesses. But a lot of them were were predominantly on the content side.

And so today sort of, pardon the pun,  the evolution of that thesis is that we know we know that we’ve seen so many digital content businesses that content businesses that that make use of and benefit from technology can be incredibly powerful at transforming the way they connect with an audience. And so I think I use The Athletic as a as an example of that, where we if the digital content publisher of sports content. Right. Long form journalism, that’s done really, really well.

We were early backers of The Athletic. We we know that using that technology, they’ve been able to unlock what would otherwise have been journalism that was stuck behind many newspaper paywalls. And so that democratization of content using technology is really transformative. And so we really like spending time there. We know so much about that. Calm is another great example Masterclass is another great example, some of these digital content investments that rely on technology to really increase access for as wide an audience as possible and make the user experience better.

And so we started with that. That’s sort of our history. And then from there, we learned a lot about a lot of different things. We learned on the front end of that about how the users engage in that content and when it’s really successful, how it can be transformative. And so we started making more front end experience investments, sort of like how it touched the consumer, some more consumer experience, focus and testing. And then we also learned sort of the back end of that, some of the infrastructure investments that enable that content.

Mux, is a great example that I already mentioned, where it’s it’s digital video and it’s the infrastructure to allow better streaming video on the Internet. So we kind of look at the world in that way. And so if we’re kind of looking at the back end, we’re looking at the picks and shovels approach. We look at the front end, we’re looking at a consumer experience approach. But in every single one, kind of like I was mentioning, in every single example where we’ve made an investment or built a relationship and learned about a business, it’s informed us and how we can be better investors along that continuum.

And so we actually do make just consumer experience investment investing that’s on companies that are not content related. We’re happy to do that. In fact, we’re looking for those. It’s just that I think what our DNA has proved us is that the content is a great way because it’s iterable and you can learn how consumers are consuming it live in real time.

How do you know if it’s a trend and how do you sort of steady those trends?

Yeah, it’s a great question. And we I think the hardest time we have around the table and investment committee is are we investing in a good piece of content that’s well written and are you taking like are taking content risk or are you taking a hit risk like is this somebody is writing a good story or really good at producing content and are you backing them? And then at the end of the day, that’s not the type of risk that we want to take.

And I think the way that Masterclass and athletic and calm have done so well is that they’re not relying on one or two or ten people to write really good content. Athletic’s are pretty simple. It’s just it’s not the content that’s winning. It’s the technology and experience consuming that content. And it’s really hard because it’s it’s a really gray area. But we spent a lot of time parsing through and we are investing in a platform that allows the distribution of a better distribution content or we invest in the content itself.

And for us, that makes the biggest difference. And we try really hard to to invest in the platform and the technology rather than the content itself. And I think Epic books, which is a business that we’re in that’s done also really well. Since the dislocation. We all worked from Zoom at home and our kids went to school and had to have remote learning and we and so epic has done really well.

It’s, it’s, it’s forty thousand kids books in a library, a digital library. So and teachers were assigning books, reading over Epic during the pandemic and that’s worked out amazingly well. 

Do you end up buying a library for your children when your young children. And do you want to do that or is it easier to have like a renting digital rental library where you can read as much as you want and that just makes much more sense.

And you’re not investing in the content itself. You’re investing in how they distribute that content, which is novel. So that’s a good example of there’s actually a technology that’s enabling the the preference shift, the consumer behavior, but there must be.

But it’s you know, consumer preferences change all the time, not only driven by technology.

Right. And so, you know, you do think about that as well. And do you have some theses around how to understand changing consumer behavior and changing norms and or is it always like a tech component as well?

It’s a great question. It’s a really good question and I think that. We’re students of culture and we’re students of technology and we’re students of these these areas, we’re really passionate about certain areas and we spend a ton of time there because we talked to a number of founders and friends and relationships to try to learn, you know, up and down whether it’s content, where where you’re consuming the content, you consuming it in home, out of home.

What are trends for consumption of content at home, like a Pelton or Tonal or out of home? And a good example. Our first investment of Cobalt is basically Feather, and they are a subscription rental furniture business. So catering towards millennials. And what the trend that we’re looking for there was a sort of millennialism is sort of defined by finding freedom, a freedom and flexibility solution for many different products.

You think about cars, there’s Uber, Lyft. You don’t need to own a car anymore. Think about homes you have Airbnb.  Music, you have Spotify.  Clothing, you rent the runway. There are all these different. The trend of millennialism is that you don’t need to own the product. You can rent it and you can decentralise where it’s coming from. And so we look at that trend. That’s not that’s not a quick trend. That’s one that’s been building over the last decade.

And we thought, what are other ways where, you know, that millennials, for example, are are changing the way that we as a society kind of have an interaction with goods. And we thought another trend that we have, which we know and we’re aware of, is that millennials are moving more and more often than any other generation previously, or they’re more they’re changing jobs more often and they’re more mobile across the country. And so when you move so often and you don’t need to own things, your relationship with furniture changes.

And so Feather is a great example of a consumer experience investment on our side that relies on technology that allows you to take advantage of that trend where millennials don’t need to own furniture, they can rent it.

Well, I’m glad it’s a good example, it was also the only example, the public example of an investment because you guys are still new enough. It’s your only public investment, right?

Yeah, we’ve we’ve just closed on another one that’s going to release announced in a day or so. So I want to keep a lid on that one. We’re really excited about it, Cobalt. But that is the we have to one that’s public. 

So I don’t know if this is a fair question because I don’t quite understand how CAA affiliated or affiliated with sort of the Hollywood world.

But I feel like Hollywood does this great job of sort of building brands of understanding consumer preferences.

And I wasn’t sure that there was stuff that we could in in the tech investing world sort of take from a Hollywood, if you will, about how they understand what’s going to resonate with a consumer, what’s going to be a big hit.

Do you think that I mean, it’s great. I mean, you did a way better job of explaining what I was trying to explain in, like five minutes about how our relationship at CAA. I mean.

There are people who really understand consumer talent and consumer behavior, and that interaction with with an audience is really powerful. And when you understand your audience, you can sell a product, you can sell content, you can sell a movie better than anyone, the next guy. And that’s what there’s a whole industry of marketers who are doing really well at that. And we’re trying to emulate the. That’s the best we can.

I sort of missed asking you about who else is at Cobalt. I’m going backwards. A whole. Should you see I’m going back, read the whole section. So who else is at Cobalt’s with. So there.

Yeah, there are eight of us on the team. We it’s the same entire same team at Evolution. My partner Rick Hess started evolution within CAA and and he and I run the firm here and we have a great group of people that that are just, you know, really excited and hungry and love the space and and have been studying it for all these years. And and now it’s the same team. So it’s really great to be able to do this together.

And what role do you play? Like, are you the pragmatist or you like the crazy one or what’s your, Gosh.

We need interview everybody else to find out because I don’t know if I’m qualified to answer that question, but

I think I really like I really like to study and understand the nitty gritty of of a space. I’m, like, fascinated by it. And so if we’re going to make an investment in the furniture subscription space I like, I dive headfirst in and I learn everything there is to know about it. And and I love that part. And I go very deep in each segment that we that we invest in because I think that’s again, that’s my favorite part.

And so how did you end up. I mean, so you did the JD MBA. I have one of those two guys.

How did you end up, you know, making the jump over to being a full time investor? I think it’s always been my passion and I think, you know, I’ve been I was doing deal work on the structuring side as a lawyer, and then I did it as a as an on investing team. And then more and more, I you know, I just got really interested in in how these businesses work, understanding their spaces, understanding the levers are they make them grow and what the levers are that don’t make them grow and try to avoid those and try to avoid pitfalls that I’ve seen. Do you think there’s any pitfalls that really stand out these you still see a lot of and just want to help people avoid those pitfalls?

So many founders don’t pay attention to the small stuff and they’ll have an investor who wants to give them money and they’ll gloss over a lot of the different nuances and they’ll give themselves a problem in setting up for future success and either limiting or structuring their deal in a way that limits their ability to attract additional capital.

And hopefully they’ve been coached otherwise. But I think, you know, and it’s not it’s clearly like founders, like, oh, I’ll just. Figure that stuff out later, we’ll have a better have a good problem solved if I’m so successful and I think I think the well run businesses are ones that I’ve thought about the big picture and the small picture enough.

So that’s like a liquidation preferences or things like that.

So actually you’re talking about. Exactly, yeah. I mean, that’s one example I can go on and on, but I think that’s one example of where I. Yeah. Like where I’ve seen, where we’ve seen problems where you know, they, they’ve given away the house, the farm on to early, early rights that are given away just because they were so happy to get capital.

Yeah, I always say you need a good lawyer. Right, exactly. Got it.

So so, you know, doing being a full time VC is still relatively new for you to be 100 percent on this side. Do you think I mean, coming from the PE world, do you think there’s things that have surprised you in the VC versus PE, do you characterize them fairly differently?

You know, at the heart of PE is buying a good business, and I think you’re buying in just a later and the maturity scale. And so, you know, it’s not that the discipline isn’t the same. I think it is the same that the discipline that is required to buy a whole business is the same is to invest in the business at the early stage. You’re doing it right. You have more information at the later stage and do like tax diligence and, you know, figure out insurance plans and you can figure out all the read all the material contracts that they have and you can get your arms around a lot more information has a buyer of a business.

And that’s sometimes comforting, but sometimes also misleading to think like just because I’ve read all the stuff in the data room that I can understand this business. And so I really think, like, you really need both skills to be able to understand what’s going to help this business grow. And also, what do I need to know about this business that might pose risk? I mean, I think the later stage buyout companies are looking at how how can how can I lose money as a business matures and overgeneralizing, obviously.

But then on the earlier side, you’re thinking, how can I help this business grow? And so to know both is actually I think, you know, really helpful.

Mhm. Yeah. I’m glad I’m not having all the ability to do all the tax diligence and I know I would want to do that either.

This is kind of an oddball question.

So let’s see.

But, you know, being in sitting in CAA and being, you know, working with influencers, some, you know, on digital media, is any of that still seem exciting?

Like is there any glamour?

Still were like occasionally you go home and, you know, you call your mom or whoever, you know, your partner and say, guess who I saw today?

You know, of course. I mean, you’d be crazy not to say that. I think that it’s such a different world than the world that you and I live in all day long that it’s just and people that you see in other contexts when they come into your world, it’s like, you know, it’s so bizarre and it’s exciting, obviously. And I think that when you have when you can. OK, let’s just use the influence or one example, because it’s a great one.

It’s an easy one. But if you have influence or they could come and lend their name to one of your businesses and all of a sudden bring millions of followers like that, that’s really powerful. And it’s not often that you we’re confronted with someone with that sort of reach. And I think that you can not could you become starstruck, but you can just be like it’s a ton of admiration and respect for people who can can bring a lot of big audience to to and be influential with so many people as influencers.

They can be they can be so influential, influential with so many different people from all different walks of life. And it’s an incredible power when they have that. And when you bring it to bear in a really meaningful way, it’s it’s great.

One of my favorite questions is good advice you’ve been given. Wow, um. Make sure that you’re you’re doing doing the right thing, doing. Well, by doing good and and I think that that has a lot of different meanings to not just charitable, but be honorable, do the right thing and a situation, do right by a founder, do right my colleague, do right by a peer investor.

And I think that that’s served us really well, served me really well. It’s worth I like to live by. And, you know, there’s that sort of it’s always in short supply. You can never have too much people trying to look out for each other.

Well, that’s a great note to end on. But I forgot to ask one question, OK, which is how L.A. focused are you guys? We’re very LA folks. I mean, I think that L.A. focus is so much of our thesis. I mean, it’s so much of our history. It would be remiss to say it wasn’t you know, we didn’t look at the world because we sit in L.A., we look at the world in a certain way because we sit in L.A., I should say.

And I think, you know, we love we love the L.A. community. We’re so personally invested in it. We’re so passionate about it. And we want it back as many L.A. businesses as we possibly can to to create a vibrant L.A. venture scene, which I know you’re passionate about, which I’m thrilled about. And I think, you know, so, so much about, at least in the content thesis, is about how you reach an audience. And that’s what L.A. does best as the, you know, so much of the industry here as an exporter of content.

And so I think that it informs what we do and how we invest every day. And we think it’s a special power that we have that we’re in L.A. and we love that and we look at the world differently.

That’s great. Well, makes you a great guest for the L.A. Venture podcast, but really, it’s it’s really great to have Cobalt here in L.A. Thank you so much that we’re excited to be here and be part of the community.