Eric Manlunas — Wavemaker Partners

Wednesday, May 25, 2022

Eric Manlunas joins us to explain all the different things that Wavemaker is doing–starting with $250-500k seed checks, anchoring other funds like Wavemaker 360 and Thin Line and even building companies at Wavemaker Labs with Buck Jordan.

 

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Eric Manlunas is the founder and managing partner of Wavemaker Partners. Wavemaker is an early stage venture fund that’s dual headquartered in Los Angeles and Singapore. Eric has invested in over 300, 350 early stage companies so truly one of the pioneers of L.A. entrepreneurship. Before Wavemaker Eric was investing out of Frontera and was twice a founder himself. Eric, thank you so much for coming on the L.A. Venture podcast.

Thanks for having me. Great. Well, it’s a treat. I think you’ve got such a unique structure of all the things you’re doing at Wavemaker. So I’m hoping I get to have one interview where I ask you about like four or five different things.

Sure, sure. Happy to talk about. Yeah, we’re a little different that way, but happy to talk about the entire the entire Wavemaker story and how we’ve evolved to where we are today.

Yeah. Great. I mean, I think it’s a good place to start, which is just there are different components. You’re seeing startups, you’re seeding funds, you’re running a studio while you tell me about a high level, all the different activities.

Sure. So as you mentioned in your intro, we’re a bit multifaceted. We’re not only dual headquartered in Singapore, but we’re doing a bunch of different things in terms of the early stage ecosystem. So our main focus has been early stage for the last 17 and a half years. But we’re a bit we’re a bit horizontally integrated in that space. What that really means is we invest, we build. And most recently, we started advising and working with family offices and small corporates.

We both invest in the US and in Southeast Asia. We have dedicated funds. And on each side of the market, on the on the venture building start side, we have a company called we have a division called Wavemaker Labs, which is essentially of interest video that primarily focuses on robotics and autonomous concepts.

So we’re building about four companies right now along the lines of autonomous lawnmower, a robotic pizza maker, a a commercial kitchen helper, that kind of stuff. And then we have we also have a small constellation of specific sector venture funds that we are joint venture partners with. And these are in healthcare. I believe you had Jay Goss as a guest at some point called Wavemaker 360. And we also have something in the sustainable energy side called Thin Line, powered by Wavemaker.

We hope to expand that constellation to about four or five, possibly six sector funds. And I can explain a little bit more why we like doing those things. So we’re not a fund of funds per se, but we have a different way of joint venturing with these guys and how we help them help them stand up that practice. And last but not the least is the most recent practice that we had, which is we’re just internally calling the venture strategies a practice for now.

And what that is, is we’re we’re working with a bunch of family offices who are interested in standing up their own venture practices within their family offices and within their organizations and helping them stand that up. We co-manage it with them and which means that we get performance fees from them. And at the same time, advise them on strategic nature of early stage investments. So for now, we’re horizontal, horizontally integrated at some point. There’s some aspirations to vertically integrate that.

But happy to discuss those as well. Got it. Well, we’ll have to come back to the robotic lawnmower assembly. But OK, so within all those pieces, I could just as I send the questions about each one of those, then maybe we start with the early stage venture fund that’s here in L.A. that you are running.

Yeah. So in the upside of our early stage practice, we’re investing out of our fourth fourth US fund. Our model is we’ll invest anywhere from a quarter million dollars up to two and a half million dollars per company throughout multiple funding cycles.

But we typically calibrate that with an initial bite size of anywhere from 250 to half a million dollars, depending on the stage, the size and the pricing at around our average initial bite size have been hovering in the four hundred thousand dollar range and we’d like to buy anywhere from five to eight percent of a company. At the outset. And we will protect that position for as long as a thesis is pointing in the right direction. And as I mentioned, we’ll invest up to two and a half million dollars or a percentage of that existing fund.

We don’t want to invest more than three percent, four percent in any single name. I know you’ll also do SPV, right?

Yes. So we’ve we’ve utilized the SPV as more of a strategic tool for us. We would invest in SBB. If No. One, we’ve outstripped our own funding capability or we go off thesis and we like something that’s not necessarily early stage. We’ve done that many times as well. But so I’d say half. I’d say about a third of the SPV that we’ve done the last eight, nine years have been to continue to support existing companies within the fund.

And those are for the most part, those will be the same piece within the fund. And they’re just going to go through the SPV. All that means is we’ve we’ve outstripped our own funding capabilities or we’ve bumped into our limits, internal limits within the fund. And then the last two thirds of that have been have been off theses stuff such as relativity space, which is completely not early stage. But we’d like it a lot. So we would get involved in something like that to kind of give your audience context, the SPV, the size of the SPV is a ranged anywhere from as little as 750000, as much as nine million dollars across multiple companies.

And just to help explain how how SPV is usually work, if you’re in the seat of sort of a venture capital fund. And will you raise a new SPV for a particular investment or do you have some that sort of stay open, say, if you’ve got some LPs who who want to do any growth round that’s coming out of your fund or something?

So the answer is yes or no, which which is a very cliche answer, but it is the truth. So we do have what we consider a master SPV.

All that means it’s it’s a series L.L.C. that we’ve established a while back and we would just fire off one new series of stock for each different name. So we don’t we we don’t commingle the names, but they remain and they remain and recited one master vehicle. So whenever there’s an opportunity that comes up that requires us or we decide to do an SPV on, then we will light up a new series and then shop that across our LP base. OK.

No, I ask because I think that you have uniquely done a lot of interesting things about deploying capital in different sorts of vehicles, which I think it’s interesting, mostly necessity, because we started off very, very small and we’ve grown over time.

We’ve raised over 400 million across multiple funds. But across across those 17 and a half years, we’ve had to figure out AUM hacks here and there to be able to really get the luxury and flexibility to be able to continue to invest in the companies that we really like. 

But a lot of people wouldn’t be. Well, I guess a lot of people raise opportunity and where I was going. And this is a similar twist on that and that same concept.

It is. It is. We do have aspirations of raising growth from a growth fund and opportunity fund and perhaps even all kinds of different funds within the early stage aspect of it. That’s a bit of a distinction for Wavemaker is the fact that because we’ve we we we practice in both sides of the world.

We’ve had we’ve been around a little longer than most. We’ve been able to accumulate and develop a lot of LP relationships. We have over two hundred twenty five LP relationships across our universe of limited partners. And a lot of those guys are more comfortable writing bigger checks than smaller checks.

Interesting. And now you said this venture strategies sort of bleeding into a different part of your practice here. Is this venture strategies work where you’re helping family offices invest directly?

Is that what you’re doing? Yes. So what we’ve learned the last several years is a lot of the family offices, if they can if they can help it, they don’t really want to become LPs. They’d like to make direct investments themselves. Because there’s just the allure, the glamour.

Or whatever, whatever the reason is. So what we found is rather than not have the opportunity to work with these guys, why not try to figure out if we can be helpful to them? So that’s how it all came about. So it becomes AUM at some point because you have performance fees and you have some service fees along the way. But it’s also a great way for us to expand our our universe of potential investors. At the same time, we’re able to help them because we’re able to show them unique access that ordinarily they wouldn’t necessarily have.

Is that the main thing that they are wanting? Do you teach them things when, you know, you called venture strategies a teaching things? Or is it really a lot about the deal flow?

It’s there’s some there’s some there’s some teachings in there, such as, you know, talking about everybody has different portfolio construction philosophies. We we we preach our own whether they take it or not. It’s up to them. But we do believe in optionality given given where we invest. We’re not big believers in high concentration models. And that’s at this stage. and has has a lot changed in the past few months with kov it in terms of the family offices in particular and what they’re looking to invest or are they looking to slow down their deployment of capital?

Things have slowed down quite a bit. People have people have really tried to protect their their liquid resources in the hopes that they can get a better definition of how this thing will pan out. It’s still very uncertain. Obviously. And how do you have all this great network at family offices? I mean, some of it is you’ve been doing it a long time. Do you have.

Is it sort of that it’s that it builds on itself like family offices introduce you to their friends. Yes.

So, again, one of the other distinctions that we have is most of our capital comes from Southeast Asia. A large chunk of it, at least, I’d say on a percentage basis in terms in terms of nominal terms, probably about 75 percent of them come from Southeast Asia. So it’s a great advantage for me not to be able to compete or not having to compete with guys like yourselves in in in the same ecosystem. Right.

You do tend to meet folks that are interested in making direct investments and are not necessarily interested in becoming LPs. And you do tend to develop those types of relationship. So, you know, it’s just it’s just the value of being around a long time, I guess.

Okay. Now, again, thank you for sharing. And so maybe switching gears entirely and going from Southeast Asian family offices to can we talk about robotic lawnmowers and what you’re doing?

And we don’t have to go too deep on the lawnmowers.

But just tell me more about the venture studio. I believe it’s Buck Jordan who I’ve heard his name a lot. I don’t think I know him. Tell me more about what you guys are building there.

Yeah, Buck definitely runs that Thain’s that a great job doing it. 

So the whole premise there is to identify a pain point. Typically, you know, preferably a big one, as most investors like to get involved in and then try to validate that pain point with an actual industry practitioner, i.e. corporate, corporate or a an industry player that is experiencing that pain point in that particular example with with the autonomous lawnmower. We thought that commercial landscaping had a big gap wherein there is a shortage of labor. I mean, these are very mundane things that most people don’t really want to do unless they have to.

So there’s a shortage of labor and a good chunk of their PnL really runs in that labor. And so so those services are not that high margin. I’m talking about servicing golf courses, servicing college campuses and commercial landscape. The biggest high the highest margin products are from the specialized services, such as such as cutting trees, you know, designing the gardens and all that, but not on the mundane stuff. So the whole premise there is if this if this is really a true pain point, can we build an autonomous vehicle or autonomous product that could serve it?

Is this automatically without any labor? And will this appeal to the corporate or to the commercial lines, landscapers that are doing this? So we approached two commercial landscapers.

What we need is validation from you that not only is the problem real, but you would actually be a potential customer if we can deliver the product. So that’s what we mean by getting corporate validations. And in this particular case, it’s a company called Graze. It has preorders to the tune of about 20 million dollars from these two commercial landscaping companies.

And then, of course, the first one that Buck did was Miso robotic, which is a commercial kitchen helper that’s taking a life of its own. And it’s had its own 30 boys raise over 50 million bucks.

So we want to be able to replicate those types of successes. And and it’s fun. It’s a it’s a I really get engaged with it. And one of the things that we utilize a lot is crowd funding. And that is to that is to enhance consumer awareness. And it’s become a really, really viable source of early stage funding for us. Not to mention it gets that early marketing buzz that helps you market the product when it’s all said and done once you’ve delivered it.

And so tell me more about crowd funding I’m interested in. I don’t know it very well. There’s different regulations and crowdfunding. The first the first layer where the masses are allowed to invest.

Limits your ability to raise it up to a million dollars. And you have 90 days to do that. And for the most part, most of our companies have done that well. And so aside from the brand awareness of it, it’s a bonafide source of capital. And I’m a big fan. And anything that democratizes capital formation, I find it hard to believe that, you know, the government and all these regulators will allow people to gamble their life away and prohibit them from investing in something that actually has socially utility.

So we we’re big fans of it. We realize that not everybody is a big fan of it. But I think it’s gotten better two guys that we’ve worked with quite a bit repetitively, and it’s worked out well for us.

There’s two people you’ve worked with as an. Are they two platforms you’ve worked with? Are the agencies OK? Platforms you’ve got.

So we’ve worked with Start Engine locally here and we work we’ve also worked with Seed Invest. OK. You’re gonna open to working with other platforms as well, because a lot of these guys are really getting their processes much better than I am.

And do you usually work with, like an agency or someone who’s an expert on helping manage the campaigns on these crowdfunding platforms? Now we manage it internally.

So we. Once you get to know us, we’re a little bit over indexed with people. There’s 40 of us across all our different practices. So Wavemaker labs itself has about 13 people, plus another four or five interns. So we do have we do have a fair amount of people that we can manage all those things internally.

Wow. I didn’t know we’d make it. Labs had 13 people because I was gonna be another question, which is, does do you recruit outside CEOs or is that part of those 13 people? You’ve got sort of people who become who are who are running these projects with their CEO and title or otherwise?

No, we do recruit outside CEO. So when I when I when I when I mentioned our personnel count, that number does not include all the CEOs that lead these companies.

So if I am a I don’t know, there’s there’s probably not a scenario in which I have a great idea and I come to venture studio. I would come to your venture fund.

We’re not. We’re not an incubator. We don’t take outside ideas. And a lot of the companies that we’ve built so far are internal ideas that we validated with corporate.

Do you think there’s something that you’ve learned? Hopefully you’ve learned something, but you think there’s something you’ve learned about how to make a venture studio work? Is it kind of seems like the dream.

Like I want to work on five different projects that involve robotic lawnmowers, etc., you know, but I’ve I think that making the structure work is is sort of a challenge.

Yeah, well, you know, I would never I would never claim that we figured it out. But for the most part, I think a venture studio is really it really should be geared and should be designed to the to the founders personalities, in my opinion.

You know, their Science, which we’re also an investor in, I think they’ve done a great job trying to figure that out, mostly consumer facing stuff. 

So I’m not sure we’ve figured it out, but we don’t have a lot of shared services. We do, actually. We do and we don’t. We do have the shared services in terms of the finance team that, you know, we we we handled the financing. We we we seed every single one of them. But we’ve kept it small.

We we stabilized the capital for. Aspect of it, we’re in, we race permanent capital and we’ll see. Let’s have a conversation seven years from now. We’re actually successful at it.

So tell me. OK. So you’re an investor in Science, but then you know, I am familiar with Jay and his model reasonably well and then thin line capital.

Why is that? So tell me more about what you’re doing with these affiliate funds, if you will.

Sure. Their affiliate funds loosely called affiliate funds only because we’re their largest Alby’s. And these are both. Jay was an existing relationship when Jay was CEO of our Rx manage. I backed them and we developed a nice rapport. We were fellow parents in school. So there is there is a lot of affinity there that we develop a good friendship. And when he told me that he wanted to cross over to the venture side of things, he was asking for my advice with certain things.

And one thing led to another. And this came about. There is there is some value in what we’re doing because first time funds are hard. But even if you’re a good entrepreneur, first time funds are really hard because, number one, it’s rare that you’ll be able to go to an institution to back you unless you have a longstanding relationship with them. So you kind of have to rely on us and a network of family offices and high net worth individuals to get that done.

So we’re, Wavemaker’s a generalist fund for the most part. Leave me health care in general is something that I don’t believe you can just hack your way into. You have to have a lot of relevant domain knowledge and experience to be able to be good at that.

We’re not doing it because we want to do it ourselves down the road. We really believe there’s a value to having a constellation of affiliate funds or joint venture funds across across our network.

Sustainable energy was also similar to our interest in health care, and it’s also something that we don’t think we can hack our way into. So we needed somebody with deep domain knowledge and experience to do that. That’s how the whole arem thing came about.

The way I would say the way I would put that is it’s all about the people, right? I mean, you know, Aaron, right there is a nice mix of nice mix of, you know, nerdy ness and real world ness, if you will.

Yeah. So it’s a it’s a. I figured you’d be a good investor over a period of time. So there are certain certainly sectors that we will want to explore further. Food tech would be one of them. FinTech obviously is know it powers the entire world. So that’s something I definitely would like to learn about, although there’s some funds locally here that do focus on that.

Cannabis. Probably some really into. But we would anchor that. And as I mentioned, we would anchor them on people if if it if it’s not if there’s no fit on the people aspect of it, it’s it’s unlikely that we’ll be able to get comfortable. 

I just feel like every aspiring and thesea operator today, you know, aspiring VC, is going to reach out to you and want your help. What do you as an anchor in their in their new fund into when you’re the anchor? I assume that’s, you know. Can you tell me more about how that relationship works?

Sure. So we define anchor as at least 20 percent of the fund. That’s that’s our definition of an anchor. Anything less than that? You know, they they may probably not consider it as an anchor. We do have ownership on the GP level and we sit on the Investor Investor Committee side of things. We don’t do the Day-To-Day heavy lifting that we leave that up to the professionals to do. 

Yeah. I think it sounds like a great thing. And both both Thin Line Wavemaker health are both in Pasadena. I’m a particular fan of that. Yeah.

By by coincidence, I don’t know how that happens, but at least at least that we’ve serve Pasadena.

Well, Eric, you’re welcome to start a couple more. That’s a great place.

Tell me more about your personal investing and maybe how your coaching founders now what you’re looking for. You know, I’ve heard you talk about your looking for capital efficient businesses. Tell me, you know what? What does that mean to you? What are you looking for when you’re evaluating opportunities? Sure.

So the fundamental premise we believe in as a group is we believe that businesses of all shapes and sizes need to adopt the best technologies for them to remain competitive or to be competitive. Period. We believe those anchors ought to be in the automation side, the data side and the intelligence side. I think if you have those three elements that you’ll have a nice operating system, if you will, within your business for you to be able to become competitive.

So in other words, we’re constantly looking for those type of opportunities anchored by automation technologies that eventually lead data in intelligence gathering.

That’s really the high level of what we’re looking at. However, because we live in L.A., we do we do tend to look at a lot of digital media stuff as well. I also also the consumer facing side. But two thirds to three quarters of our investments, the last two to three years have been have been anchored by enterprise facing businesses.

Are you exclusively focused? I should know this year.

No. No, we’re not. We are located in L.A.. I’ve lived in L.A. since 1991. I’d say about two thirds, half to two thirds of our investments are within Southern California, broadly defined as Santa Barbara to San Diego. 

Do you find that you’re able to have your state fresh as a v.c? And I mean, VC is incredibly intellectually stimulating, but you’re not as fresh on the operating side?

Or do you feel like you’re able to stay fresh? A great question, I think. I have never thought of it from that perspective, but I guess when subliminal way for us to have stayed fresh was the fact that we’ve experiment in different models within the early stage side.

We consider ourselves a startup as ourselves.

We have 40 people, including the partners that we have to deal with on a regular basis.

I am a big fan of staying close. We are entrepreneurs thing. You know, staying friends with them. You kind of have to live vicariously through them to me to remain fresh. It’s, I think, the best way to remain fresh. Otherwise, operating and operating businesses and deploying capital or capital allocators are two different businesses. Right. So you kind of just have to pick your poison and make sure that you can relate to both sides.

But having having an operating background has helped me relate to the to the pains and sufferings that all our founders are going through.

I really like that. I didn’t mean it as it sounded more accusatory than I meant it. I really did.

Staying close to your founders. And I realized that I’ve been trying for a long time that I would love to hear some of that story of you building your business. I think we kind of missed the you your story as a founder.

Maybe your first business. Sure.

Sure. I was a bit of a misfit. And the reason I the reason I don’t were the reason I didn’t start with a startup was because I had bills to pay. And I thought that I could learn from big corporate. So I worked for I worked for big corporate for a little bit close to five years. I was with Arthur Andersen’s retail consulting division here in downtown L.A. for a little bit. But I’ve always known that I wanted to do my own thing.

So I left at nineteen ninety five. And I think I think I just got lucky with timing. Nineteen ninety five was around the same around the time when the first first commercialization of the web was happening.

 So I figured out what I wanted to do or what I could do.

I built an e-commerce startup special focusing on specialty foods, and I’m talking about specialty movies. I’m talking about are sort of northern European cuisines that are rare, that are rare here in the US. So that’s the way I got started. Got lucky, had plenty of false starts, but figured out the supply chain eventually and built it up to a nice, decent business where he got sold to a strategic. In the summer of nineteen ninety nine. And I wanted to continue the momentum of that.

I’ve always been entrepreneurial. I’ve always been interested in business in general ever since I was growing up. So I wanted to continue the momentum. So I got involved with another co-founder to start an ISP, the simple ISP. We. Our product was a simple narrowband connectivity. So think of your modems back then, those funky sounds. So that was a little bit more mercenary in our approach. We wanted to identify and underserved market and build it up to certain subscriber base with the thought that if we can do that, the national providers at that time, EarthLink, United Online, etc.

Would be interested. So we successfully sold it at the end of 2002.

Even when I first started my first venture fund, I never really considered myself as a traditional venture capitalist. I thought that this was this was going to be a nice pit stop. I anchored that first fund with my own personal capital.

So and then all of. All my office then or were friends. So I had a lot of flexibility to be able to go back and forth. And the reason for that big gap was because I thought there was gonna be a third idea.

And little did I know that there was not going to be a third eye.

But I guess this was the third startup that I was I was reserving myself for. This took me a while to realize it. And what do you think of.

Now, you can’t deny that you are 100 percent of v.c now. Well, you’ve got a lot of things going.

What do you think of the v.C world? You know, I like it a lot. I think there is an actual in the risk of romanticizing it. I think there is an actual social utility to it. That’s much better than our, you know, our cohorts from the P, e and the hedge fund world. I know some people. They are they’re much, much bigger, faster. Culture makes a lot creates a lot more a lot more wealth much faster.

But I don’t. I just don’t see that social utility in that aspect of it. I like about it because as you say, as you mentioned earlier, it’s intellectually stimulating. And so it’s perfect for curious folks like myself. I like the social utility of it. I’m one of my one of my gifts is I’ve been I’ve I’ve been gifted to be very comfortable being uncomfortable. And I think it’s a perfect it’s a perfect venue for early stage venture is a perfect venue for that.

What do you mean about being uncomfortable?

I’m really interested. I think I’m uncomfortable being uncomfortable and I want to learn how to be more comfortable.

I may have said that incorrectly. I meant was I’m comfortable being uncomfortable. It’s what I do.

But how did you get to be comfortable being uncomfortable or in what circumstances? Well, you know what?

I probably attribute this to my my opening experience for seven years. There’s a lot of lot of moments where, you know, you were two weeks away from running out of cash. You were, you know, a month away from going out of business, that type of thing. And you kind of just have to train yourself to to react to those things. Well, great. I it was fun to get to know you a little bit better.

And get it thinking. Yeah. And great to have you on the show and learn a lot more about what what you’re building. Wavemaker.

Great. Thanks for having me. It’s been a lot of fun. Thanks, Eric.