Ben Savage

Ben Savage — Clocktower Ventures

Wednesday, May 25, 2022
Ben Savage tells us about Clocktower Ventures.  They are fintech specialists who invest stage-agnostically into financial services innovation ($250k – $2.5m).
 
Clocktower never leads rounds and Ben suggests that VCs often dont make for the best board members anyhow.  
 
Clocktower Ventures:
 

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Today I’m here with Ben Savage from Clocktower Ventures. Clocktower does early-stage fintech investing with a portfolio that includes Chime, CircleUp, Tala and many more.  Based in the beautiful Clocktower building in Santa Monica and often host to lovely gatherings, but of course not today. We are on video. Ben, thanks for joining me.

Yeah, it’s a pleasure to be here and thanks me. Yeah, it was so. So where physically are you and how are things looking from where you are?

I’m in the guest bedroom and my and my house just off Mulholland Drive here in L.A.. You know, it’s it’s been an interesting couple weeks and I think everyone is still, you know, got their head spinning, trying to make sense of what’s happening in the world and what’s happening with their families and what’s happening in their professional lives.

You know, I think it’s it’s difficult to do anything other than kind of watch with sadness what’s happening not just in our country, but in other countries, and to have, you know, a pretty profound sense of loss for all of the millions of Americans, literally millions of Americans who are instantaneously unemployed and struggling through this kind of event.

Yeah.

And I think, like you said, like the venture world and tech is is reasonably well suited to a work from home sort of thing.

But I think Alpha Edison wrote a thought piece just recently about how we’re all changing our habits. And and there’s gonna be this massive upheaval of us all rethinking some of the things we took for granted What I can tell you that we have a significant presence in China at Clocktower Group and we have a China research effort. We invest in Chinese markets. We have an office in Shanghai. And one of things we’ve been staying on top of since the coronavirus crisis really started in the middle of January is what’s going on in China. What’s interesting today, if you look at the behavior of Chinese and it’s national, it’s not just in Wuhan where they really were under extraordinary quarantine.

It’s the whole country. People are buying large back to a somewhat normal set of experiences during the work. But on the weekends, nobody goes out. They all are staying home to seeing a much smaller orbit of family and friends. And you can see it in like traffic statistics and in the kinds of things that like just the activities that people do on weekends. Like they’re not going back to malls, they’re not driving around and doing things. It’s still a recent experience, like there hasn’t been that much time that it starts to feel normal.

And obviously the virus is still going even in China, where there’s no cases like they see the news of what’s happening around the world. But my my instinct from from watching what’s happening in China is that, yes, I think there will be some real behavioral shifts that will endure. And some of it is a simple yena not to tie everything to financial services. But, you know, my my favorite behavioral shift is, is anybody who I think has had a credit card that’s got the the near-field communication in it where you can just tap on a credit card machine at a convenient store.

Once you do that, you want to do that all the time. It’s better, right. But like, you might have had one of those cards and not even realize that your credit card did that. And then suddenly, like one day you just happened to discover it, however you did it or you discovered that you can tap and pay with your phone and then you just never go back. And I think there’s a lot of things that have happened just over the past couple of weeks where people have suddenly discovered just how much they can do online, not just in financial services, but in almost every domain of their life.

And telemedicine, telehealth like tell a banking, tell a trading like whatever it is, all the stuff that young people and people in the venture industry have kind of taken for granted is like of course, like you do other things on the Internet. You forget that actually there are a lot of Americans that didn’t do those things on the Internet. And all of a sudden everyone’s doing it on the Internet. And I think these these trends that have taken literally 20 years to build like an e-commerce taking out physical retail is as good an example as any.

I mean, we’re 20 years into it and e-commerce is still, what, like fifteen percent of of retail sales in lots of categories. I think in apparel, it’s actually way less than that. Still, like how fast did it suddenly evolve now? Like, does apparel just go to 30 percent online almost overnight and stay there? Right. Yeah. No. Certainly crazy times, so you alluded to. Did you see a presence in China?

And that, I believe is Clocktower Group. Is that true? That’s right. Isn’t Clocktower Ventures? So just give me again the basics of Clocktower Groups, Clocktower ventures and how those relate to each other.

Sure. So we have three businesses across our group. Clocktower Ventures is our financial innovation venture capital practice, where I spend essentially all of my time. Our two other practices are related to liquid markets. We have a hedge fund feeding platform that about once a year helps launch a new global macro focused hedge fund. And we’ve been doing that for about eight years. And then we have a more recent effort in in China where we participate in in local onshore capital markets in China by investing in and partnering with hedge funds, again, on behalf of large institutional clients.

Traditional traditional investors, just like we have in our venture fund as well. And the thing that sort of stitches these three seemingly disparate businesses together is, is really, I think, a couple of things that we would characterize ourselves as being differentially good at. One of them is taking a global macro economic point of view. All three of these businesses, we think about what we’re doing through kind of a macro perspective. The second thing is we think we’re a little bit better than the average bear at building communities and leveraging the power of relationships for insight, for access to opportunities, for ideas and ultimately for sort of mutual benefit.

Then I think the third thing that we would characterize ourselves as maybe being of a little bit more focused on is the evaluation and assessment of human capital. 

And so this dovetails very much with the relationship idea. It makes sense that if we’re very focused on building relationships that matter, we are also, we think, a little more intentional about the assessment and selection of human capital. But those two things work with this idea of being a macro thinker, an investor that kind of unites three platforms.

I get asked about all of those. It’s interesting. But just again, that that evaluation of humans. You said you’re more intentional. I mean, I would say that I also am in the business of evaluating humans. But I do have certain frameworks. 

You know, I think they range from having a philosophy and an approach to like I think you shouldn’t have to start with what are kind of your first principles about how you think the world works as an investor. And so for us, they range from having some conviction around what we think the characteristics of, you know, great seed stage entrepreneurs and founders look like. And it’s not, by the way, monotonic. It’s like it’s almost you can imagine clusters and profiles that we talk about and we talk about them both in terms of attributes, but also in terms of skill and in terms of values.

And we’ve mapped what that looks like and we’ve mapped some of those clusters. And then we have heuristics that we look for in founders where we might, you know, say like, I’ll give you an interesting. We actually really like backing as a seed stage founders, former venture capital associates. Right. And like, well, why do we like that? Couple of reasons. One, generally being a v.c associate, kind of a tough job to get.

So there’s sort of some quality that kicks in that if you treated that as a filter to the experience of being a mid-level or junior person in a venture fund, you just see a ton of companies. And so you very quickly build frameworks in your own mind about what works and what doesn’t. Especially if they’re good and and breed like you’re trained to be a skeptic, like in many ways, like if you’re a true believer, like if you want to invest in everything you see, like you kind of don’t, it doesn’t work.

Like these, these are almost by nature forced to be kind of like. It’s not going to work. That’s like the essence of venture. So if you find a V.C. associate who’s like decided they really believe in something, you know, the other it’s like kind of an OK idea. And so we like that.

So what we do, we do, I think, spend a fair bit of time thinking about these things and trying to be data driven in the way we do it.

Some VCs I mean, tell me it’s all just gut driven, you know. I mean, there’s an irreducible amount of human judgment in the judging, in judgment, like you can’t build a robot to pick to pick people. And there are also just like social limits on what you could get away with. Right. Like, I’ve often wondered, why haven’t venture firms gone down the path of, like, asking founders to take personality assessments and like, you know, there’s a lot of tech startups now that if you want to interview to be like an engineer at Company X, there’s a tremendous amount of automation that might kick in before you ever get to a human being.

There’s probably some subset of founders that would really be into it, actually, until we’ve actually thought about it. And then and then, you know, people talk me out of trying to implement things like that.

Yeah. I have the same about what I can ask my podcast guest. I’d like to ask people what their parents did when they were growing up. But I worry that sometimes it’s too personal and it will only make them right.

Yeah, well, it’ll come up in my personal questions for Ben Savage at the end of this. I’m giving them six more about Clocktower Ventures just in terms of what size check you writing, what sort of deals are you investing into? What are you looking for?

Sure. So, you know, we invest stage agonostically in financial services innovation, which we defined very, very broadly. For us, it ends up being somewhere between 17 and 20 percent of GDP that we’re addressing, which includes everything in payments, insurance, capital markets, banking, lending, credit, personal finance, enterprise, financial functions like treasury tax AP/AR are and real estate to the extent it is a financial asset rather than a physical assets. It’s a very large footprint, actually.

We have a very unusual model, I think relative to most venture firms, which is that we never want to lead a deal. We never want to take a board seat. We never want to call our founders and ask them what their KPI is, are and what’s keeping them up at night.

We rely on partnerships with other investors to do all those kinds of things and try to hold founders accountable. We actually tell our founders we want to be cheerleader’s more than shareholders and try to really get out of the way and let them run their business, let them execute. And all we’re trying to do is bring to bear this really interesting relationship network that I mentioned earlier in ways that we think can kind of help our founders. We sometimes, like, use this silly metaphor.

As you know, if you’re a founder, you’re in your kitchen, you’re like baking a cake, you’re looking for ingredients. We want to be your neighbor that like rings your doorbell, right when you need a cup of sugar, that’s kind of more like what we’re trying to be. And so what that means is we write, you know, relatively small checks relative to round sizes. At the seed stage, we invest $250 thousand dollars and then it flexes up to something like two and a half million in a series B or C, which, you know, tends to be somewhere between like 10 and 15 percent of a fund raise of any given round.

And that doesn’t always work, but that’s roughly how it works out. Since we started doing this five and a half years ago, we’ve been privileged to invest in 71 fantastic companies backing great entrepreneurs on their journeys. And, you know, so, so far, so good.

And why don’t you lead rounds? Our view is that to the extent you’re going to have venture capitalists as board members, which is itself a topic of some controversy in my mind, you should probably have a lifecycle investors as much as you can, people who are going to back your business over four rounds of capital if they can and have experience doing that kind of thing.

And that’s very much not our strategy. Like we try to write for the initial track and we have some ability to follow on. But we’re we’re explicitly not a lifecycle investor. And there are people who are the slightly longer answer without getting too deep into it, is that I would say to a first approximation, number one, it’s really hard for a board member to have that much value in the first place to startups like if you go paying a bunch of founders who’ve like exited and you say, give me the five things that mattered most to your success, I have literally never once heard a founder say it was one of my board membersSo like my almost like, humble proposal for the venture industry would be like this. You should just never sit on boards and you should just pick like like executives and people who are specialists in taking board seats to do it on your behalf.

Like if every venture firm just hired professionals to sit on sit on boards for them, I think it would probably lead to happier outcomes across the whole like the whole ecosystem. When you hear a startup say their board tended to add value, it’s usually because somebody made an introduction that mattered a lot. You can do that without being on a board.Do you still get access to deals like that? I do feel like we do.

There’s a lot of times once someone has a term sheet that it becomes very competitive to get into the deal. And yet a lot of startups are looking for the lead. 

So far we have not really had a problem accessing the opportunities we want to access. Like when we compete in transactions. Our experience has been that we we win. Some of that is a function. The fact that, you know, as I said, we’re we’re ten or fifteen percent of around. We’re not trying to be thirty or forty, which makes it easier. Somebody that we’re specialists in a particular domain. All we do is financial services.

And one of the interesting things for us, having now done whatever 70 odd fintech deals is, you know, we’ve we’ve invested with something like 450 institutional counterparties across the that those deals these are all institutions that have decided to do fintech.

And we spend a tremendous amount of time understanding all of our counterparties and trying to get to know them and building a map of like who invests in fintech at what stages. What themes are they interested? What are they like? Because we want to get that phone call from them when they have something interesting to say, hey, you know, there’s Clocktower guys. They’re doing something and go out there doing something interesting. They’re fintech specialists. They’re not competing with me.

They’re never gonna try to, like, lead a deal that I want to lead. They’re not going to try to preempt me. They just want to put a portion of capital into the transaction like that tends to work work pretty well.

And so you although you are specialized, you’re also sort of broad within your specialization, if you will.

Yeah. You were telling me, you know, it’s everything from personal banking to payments to insurance, etc.. Do you have certain it seems easy that you’re particularly excited about right now?

We want to be able to give our full attention and our full mindshare to any given entrepreneur who’s talking to us about their business and their thesis about the corner of financial services that they’re going after. And so we want to be unbiased in that way. Having said that. I mean, there are clearly some big trends and big ideas in financial services that we think are really interesting. And we’re far from the only people that think this. But one big idea we spent a lot of time talking about with our our investors is the kind of digitalization of assets, not in the sense of of cryptocurrency and digital assets, but the digitalization really of securitization, of saying there are risks that people trade.

That is the essence of capital markets is it is a risk transfer of some sort. And what technology lets us do is trade progressively smaller and smaller units of risk. At at more efficient scale. And so whether that is like might let the clearest example of this is like AirBnB because everybody knows how our BMB works. Everybody at some fundamental level says you own a house. I’m going to let you transact in a portion of that house. I’m gonna take your your guest bedroom that I’m sitting in right now and turn that into a tradable asset.

You you can take your guest bedroom, you can listed on this platform and you can rent it out in some sense. So most people don’t think of that as like like taking something and making it tradable. But that’s functionally what’s what’s happened.

This kind of idea I think is going to happen progressively more and more over the next decade because technology allows us to sort of look at the world in higher resolution from from a point of view of securitizing assets that can trade. And you see it with something like stockX, which, you know, we’re not investors in. But I think it’s like an unbelievable idea. We’re like, you know, they have IP for sneakers. Right. As a collectible that trades.

And there’s a bunch of businesses that are doing this, like we actually don’t really have any that many investments that kind of work along Mr. Mastec. I think we’re still very early in it. But this is a pretty profound change in the way markets are going to function over the next hundred years. And we’re very, very early in that. So that’s one area of financial services that we’re pretty excited about. It dovetails with what I would characterize as a second big horizontal theme that works across almost all the things we look at, which is the power of data to help us price risk better.

So if one thing technology does it, it sort of surfaces and exposes and makes legible to investors a set of transactional risks that previously were invisible, whether it’s your sneaker collection or your guest bedroom or what AngelList does. Right. It’s it’s tech startups. The other thing technology does is that it lets us price those risks in a much better and more effective way than we ever would have been able to do before. And so, you know, over the past call it 40 years, there’s been a tremendous amount of technology deployed to help people price public stocks, publicly traded stocks.

Tremendous amount of data, tremendous amount of algorithms like an enormous investment. But all of that data that has been created, all those tools are now very quickly being applied to a whole host of other risks.

Whether it’s a credit risk, whether it’s an insurance risk, whether it’s a fraud risk of a transaction. All of these kinds of opportunities and ideas are being deployed through data and through technology to help us more accurately know the value of something. you can actually group people together more finely, if you will. 

That’s that’s the essence of insurance. Right. 

And so the the more tightly you can figure that out. The better off you can be, and auto insurance is actually one of the areas where data is going to make it way easier to price like the actual risk of you getting into an accident because there are so many things that you can learn when you have good data like it turns out. If you’re commuting path takes you through certain intersections, you’re just much riskier even if you’re an identical driver to somebody else.

Like it has nothing to do with you. It has to do with like where you go. That makes you a different risk. And by the way, if you know that in theory, you could charge differentially for that. What’s even more interesting is once you get to like autonomous vehicles, you can change the rooting right to make sure that you avoid the high risk intersections or even you avoid the high risk day parts for getting into accidents. And you actually take on the ability through technology to change the actual underlying risk, which further changes the pricing of it.

And I’d argue that that seems like only good over the long run for consumers ultimately it is good for the consumer. As long as we don’t end up in sort of scary data situations.

I mean, just look at China. I mean, they have a name in China called called Social Credit, where essentially your credit rating picks up things like, you know, you have trashed two tickets for like littering on the street. Right. And and they’ve pushed it pretty far. I mean, there there are stories in China that, like people with bad social credit, aren’t allowed to buy train tickets in the first class cabin kind of stuff. And so, like you can get to some fairly freaky dystopian places if you go far enough and like we actually have.

I mean, interestingly enough, we have a portfolio company that is a lender and they have a tremendous amount of data that they’re able to get and they get it legally in the US and they get with your consent. And it’s all good. You know, on a panel, the founders said something that’s always stuck with me was like, you know, we can kind of look at you and our algorithms could effectively make a prediction of like whether your what your risk is of of getting a divorce wrangle over the next six months based on like purchase habits.

And like you can imagine how somebody held like a robot can make that prediction. He’s like, we don’t do it because we would be legally prohibited from using that information in the US. But in China, they can do it. They do do it. And they use it for making credit decisions because it’s actually an adverse credit affect. Credit impact. Right. If you’re gonna get a divorce and you sort of go right. Like you actually want a degree of limit.

But it gets really squishy with those limits are.

And it gets especially squishy in a time like this when there’s suddenly this real interest in like tracking people who are infected using their phones. And it runs it runs into these like intuitions we have about civil liberty and what’s good for our society. But the one thing I know is just that society’s views of this are going to change over the next 20 years. 30 have changed enormously over the past 20 and they’ll change again over the next 20. And very hard to predict how that will play out.

Yeah.

Anything else about Clocktower ventures that I should make sure to cover? Maybe your team? Who else is part of Clocktower Ventures?

How big are you guys? How do you operate? Yes, great question. So were were, in one sense, a very small kind of tight knit team and another, I think for a firm of our size, a platform of our size, we’re actually fairly, fairly robust team. There are kind of eight of us in our investment practice around Clocktower Ventures. Seven here in Los Angeles. And then one colleague in London. We invest in North America, in Europe and actually now also in Latin America as well.

And Europe is looked after by my colleague David, who’s based over there. We have kind of an unusual, I think unusual relative to other firms investment, investment practice in the sense that we’re actually a very flat construct and all of our deals are unanimous. Everyone on the team has to want to do the deal. We don’t have any kind of attribution of like, oh, that’s been the other David deal or NEDD deal or whoever it is. We all contribute to all of our deals.

And everybody on the team, in theory is supposed to meet, you know, every management team that we’re engaging with and we formally vote and requires unanimity to get a deal done internally, we have spent a tremendous amount of time, energy thinking through how we’re going to structure, ah ah, our judgment. The thing we’re talking about before of human capital and like the hope I have is that the experience that entrepreneurs get interacting with me or with anybody else in our organization fundamentally feels the same. It feels like you’re talking to somebody from a similar culture. Can have similar values. Think similarly, offer similar questions and points of advice and and try to give you a kind of customer service experience that would feel feel very similar.

And you know that that flows out of a collective decision that we’ve made to operate in a certain way. Got it. And I mean, I didn’t hear any. I didn’t ask I forgot to ask about your background before this, but how did you tell me about your journey to get here?

Yeah. So, you know, for me, doing venture is kind of a funny thing to find myself doing at this point my life. I started doing venture capital in 1999 when I graduated from college. I joined an investment bank called Wasserstein Perella. And ended up actually in the venture capital group and the firm’s merchant bank. And the inmates were truly running the asylum in those days. And I spent the first, you know, six years of my career doing venture investing, and then decided, hey, if I’m if I’m gonna go be a venture investor, I should go learn what at the time I thought was like the secret handshake in the industry. So I went to business school at Stanford to get ready to go build a career in venture. But when I got to business school, I started thinking more more broadly about being an investor and decided to look at liquid markets and shifted to just focusing on on that.

Joined a large systematic hedge fund on the back end of business school called Bridgewater Associates that in two thousand seven nobody had heard of and lost. People have heard of today, 13 years later, and had a tremendous, you know, a couple of years there through the teeth of the financial crisis. You know, really learned a ton about culture, for one thing, but also how to how to invest systematically and how to be more of a macro thinker.

And then started a company after Bridgewater that raised venture money from from great firms and continues to thrive. My former partner runs that thing now and then moved to L.A. for personal reasons. And I guess 2013 is maybe 2012. I lose track. My wife is in the entertainment business and that made sense for us to be here and met my my partner Steve Drobny, who had the seeds of the business that has now become Clocktower group and with our other partners started and started launching investment management businesses.

Fast forward to today.

Got it, great. And I guess because I brought it up at the beginning, I’m going to circle back and maybe close by asking you, so where did you grow up? What’s your what did your folks do to influence you?

Yeah. Yeah. I mean, of course, of course. Our parents. And so it’s us. I don’t know if professionally like there’s that much influence over maybe. I grew up in Atlanta. My dad worked for IBM and then actually his whole life really been in the computer industry.

Yeah. You know, he like from from the really beginnings of the computer industry. He actually was a coder on like the Apollo Project’s back way back in the day. My mom had started her career in the fashion industry.

I grew up in a a very solidly kind of middle class. Bringing in suburban Atlanta, which led to some sort of interesting eye opening experiences when I went went away to college and met people from very different backgrounds.

But I had an awesome, awesome upbringing in the sense that I went to a very big public high school with a real trom a real degree of socio economic and racial diversity. And so, you know, it’s actually one of things we try to look for when we’re building our team as we look for people who by who they are kind of are a somewhat heterogeneous team.

Like, we like having sort of oddballs and misfits if we can if we can help.

I love that. I love it. And I love the. You’re in L.A. now. And what what Clocktower Ventures is doing is great. And it’s great to be sort of joining as part of this ecosystem. I mean, as you started by saying feel really lucky to be in L.A. at this crazy time. So anyways, Ben, I’m going to wrap up by just saying thank you so much for coming on the show. Yeah, it’s our treasure.

I mean, we. Thanks. Thanks so much for putting this together. We are huge believers in the L.A. ecosystem. You know, we tell everybody we can there’s no better place in the country right now to start a company than Los Angeles.