michael_tam

Michael Tam — Craft Ventures

Wednesday, May 25, 2022
Great chat with Michael Tam about Craft Ventures ($1-$15M), vertical labor marketplaces, Uber, his partners David Sacks, Bill Lee, Jeff Fluhr, Sky Dayton, and Michael’s path into venture.
 
David Sacks posts: https://medium.com/@davidsacks

 

 

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David, I’m here today with Michael Tam and today after summit. So we’re all a little scratchy. Michael is an L.A. investor, though. Craft is an asset fund, as I understand it. And before Craft, Michael was at cross-cut and at Uber before that, doing some mix of business and operations.

I’m curious here about all of those things, but maybe when we start what we’ve learned is starting with the basics of Craft, just to get that up front in terms of how big a fund it is and who the partners are.

It was. And thank you for being here now.

Thanks for having me. Welcome. Elway Ventures and you know, a very smart podcast. Good for the ecosystem. So, yes, Craft is an asset based fund. I happen to be the only full time L.A. based investor. I actually have a New York counterpart. So he’s somewhat distributed. The fund is relatively new, investing at a fund to fund shoes, a little over 500 million.

Oh, wow. Yeah, that’s big. Yeah. Pretty big, especially for L.A. Fun. One is 350 fun, too. We started actively investing out of it. Q2 of last year. Twenty nineteen. Both funds sector agnostic.

So if you look at the portfolio online, you know, we led the survey of Bird, which is like Scooter’s Coletta, a of Cloud Nine, which is an e-sports team, early stage investors and cloud kitchens comes out of kitchens here in L.A., late stage investors and boring company space. Read it.

So sector agnostic. Very opportunistic. But wait.

Sector agnostic. But still. Are you mostly writing the same sized checks into most of those companies?

Yes. So with varies boring company and space X or were more more based on the relationships of the j.p.’s which I can get into.

But the core stage is from a high level I think C to series B with, you know, check size can range anywhere from a million upwards of twelve to fifteen. The core round really, if you had a fight, a pick would be late C to series A, you know, leading those rounds, taking board seats. But we have invested at the seed. We’re not as ownership sensitive when we do and we’ve led a couple of series B’s as well.

And and then I think you have a very a number of very well-known partners.

Yeah. Yeah, they’ve definitely been longtime founders in tech. So the fund was founded by Bility and David Sachs. They added Jeff Flowers at their general partner. And we recently added Sky Dayton as a venture partner. I can go through their their backgrounds, but the motif through all of them is they’re all former founders. We’d love to hear more about them. Great. Yeah. David started he was a founding CEO of PayPal, started a company called Yammer, which is sort of Microsoft was one of the first to serve in the consumerization of enterprise trend. Jeff was the founder CEO of StubHub back in the day. And so that the eBay and sky was the sky, Dayton was founder of Boingo, EarthLink and Cloud Kitchen. So, you know, good outcomes across different sectors, definitely valuable perspectives for our founders and Sky.

I was gonna say he’s L.A., but now he’s kind of all over. He’s a man of mystery, isn’t he?

Yeah. He’s sort of distributed as well, but he does. The nice thing about our team is up there.

They have roots in L.A.. So David started, I guess, the first iteration of what became Yamma in L.A. back in, I think 0 6 or 0 7. And so there’s the sky and Bill. They all sort of, you know, have roots here.Why do we stick with the who’s who and go to you for a little bit and tell us, like, who are you that I’m the least interesting one, so keep it the most.

Yeah. Oh, thank you. So, yes, I mean, I like you said, I was at cross-cut prior, another early stage fund here in L.A., also very well known in the ecosystem. I call them doges of of L.A. Tech as well as David here. So they gave me an opportunity a couple of years ago. So I was there for almost two years before joining Craft, where I’ve been, you know, for about a year before cross-cut. I was at I was at Uber for a few years, but I was in the L.A. office, which was more of a regional office there. I was, like you said, a mix of business and ops running a few regions in Southern California.

And that was, you know, we’re building the plane while flying it. So there’s a variety of responsibilities.

I’m I’ve been building a company called Shift, which was also had, you know, regional g.m.’s. And we ended up thinking a lot about like how did Uber restructure their business?

I mean, I’d love to know, like, if you were running a region, what that looks like in terms of what autonomy you had and how how centralized versus decentralized a model it was.

Yeah, it was definitely autonomous. It was definitely decentralized. It followed. We had a lot of Amazon form Amazon leadership join the company. So, you know, their their whole premise of two pizza teams, everyone had this sense of accountability from top down to the rest of the company. They did a really good job of creating that kind of culture. So, you know, I had my own team on the ground and in the office, you know. The unique thing about that kind of service is it’s highly localized. You really have to understand the nature of the community. You’re servicing the relationships there. And Uber definitely built that kind of playbook. And it’s a common question I get, especially now as I spend a lot of time in marketplaces. And you can interestingly contrast that with the approach Lyft took, at least from my observation from the outside. They were not as decentralized, seemingly more centralized. But, you know, to start off, Uber definitely had HQ in San Francisco and then local city teams. And even then we had lawyers who would sort of establish the team for the first few months and then the local team would, you know, kind of run with the business.

Yeah. I remember when Uber L.A. started and Barnes was kicked out of Coopt organized base and it seemed like a lot of what he did and probably what you together did and fed back into the organization. Is that true? Into into HQ. And then, yeah, I used it throughout the.

There was definitely some sort of back and forth between HQ and the city teams, whether it came to product launches, feedback on pricing, how certain initiative from HQ was being received by, you know, Los Angeles or Orange County, given arms or domain knowledge about about the community.

Is there anything that you guys came up with in the L.A. office that went through and became policy for the whole company?

Well, you know, I was thinking back on it. I mean, L.A. Axe was definitely at the forefront of all things sort of, you know, our airport policy. You know, I think L.A. and SFO. So, you know, I can’t get in probably to specifics just for the company’s sake and also memory sake. It was it was definitely a long trudge.

But even while I was there, there were new types of teams that were forming. You know, they had this new type of regional team that was that ended up being the intermediary between the local city teams and HQ.

So how was like how when you say Lyft was more centralized, was that like marketing budgets were controlled centrally or like what things were were essentially.

Yeah. From what I could tell, you know, I’ve been at the company both from what I could tell just having people like in the respective locations.

And then that drove a lot of just what the companies were capable of doing in those cities. So I think there were certain cities that let’s just didn’t have, you know, feet on the ground kind of presence, which, you know, changed there. What they were capable of doing now exists.

That’s interesting.

And I guess staying on you then moving off Uber, how did you go from Uber to crosschecked?

Right. Yeah.

So I guess the quick context before tuberose in grad school in Chicago. And frankly, that was where I learned of what venture capital really was having classmates going into it.

Before business school, I had started an upstart online native brand that ultimately got acquired by Procter and Gamble, but that was my first ever exposure to startups. I don’t really grow up in it.

I didn’t have a community prior.

And from that experience, frankly, got addicted for lack of a better word of early stage company building and its like supporting founders.

So when I was at grad school, I, you know, kind of honed in on wanting to get into venture somebody in investment banking and tech thinking that that was maybe the initial route in. And, you know, after the summer, opt-outs declined that offer, deciding to focus primarily on venture.

And got feedback from folks and advice to join a rocket ship and get more operating experience. I also was wanting to come back to L.A. for family and my now wife was here. So Uber was one of the few companies that also sparked like sparked my interest was here. So why was there? Long story short, I just started meeting, you know, folks in venture, including your former 10/10/10 colleague, Austin big fan and as well as you, David, and got advice. And, you know, just was a student of, you know, kind of everybody in the ecosystem, whoever would take time to meet with it with me.

You know, Erica MUCKER was one of my first conversations Trog at Pritzker before I joined IFJ. So. While I was at Ruber, I was nights and weekends, just for lack of a better word, grinding and hustling, trying to get an adventure.

So when you were meeting with them and so, I mean, it makes sense to me that you’d say, like Austin, Eric, whoever. Yeah, I’d like to. I’m interested in what you’re doing. How would you then help them?

Yeah. So, I mean, to get into the specifics. There were a few projects I did through our Leonard Wood, which is a venture backed company today. It’s called Catalunya. It was a marketplace for post MBA students to to do consulting projects.

And I got lucky and I met a few a couple of now well-known investors who were looking for help. So I did that.

And, you know, luckily, they’ve you know, one of them was reference for me when I started interviewing with funds.

And then, you know, like I said, applied for a lot of opportunities, one of which was a, quote unquote, internship with a fund in San Francisco called Bolton Capital.

You guys know they had a partner here in L.A., James Conklin.

And, you know, that just kind of gave me a pseudo seat at the table where I could, you know, meet with companies, help organize anything bullpen needed around L.A.. You know, diligence during a live deal consideration.

And so that was probably the most helpful opportunity for me to start that process. What did you say, quote unquote, intern did?

I don’t think I don’t know that there wasn’t a summer internship in there. It wasn’t like I think.

I don’t know if they’ve done or had an internship program.

Afterwards, it was like a group of five of us.

I stayed on for almost a year and a half, effectively working, you know, nights and weekends. I was there. There was a summer when I was like planning my wedding. And we would Uber at the time I was I was I was at Uber at the time.

I was at the time. And, you know, I was just doing what I could.

I kind of like I said, it was very deliberate and had this belief that if I just help people in the ecosystem because they were just so receptive to it and it was a small ecosystem, I was very grateful for the amount of advice and time that people just frankly gave me.

So has it turned out to be what you expected? Yes and no. Yes and no. Things that you know, that I expected.

You know, the support of founders.

The amount of relationships that you get to sort of build and nourish the exposure you get to new kinds of companies and just the intellectual curiosity you get to satisfy all check, you know, checkbox or checkmarks like definitely what I expected and what I enjoy.

What I haven’t expected, I think.

Just the. This job can be Kennedy speaking be 24/7. You know, if you wanted it to be. And it’s also, I think, more sales and I sort of anticipated, which I’m not, you know, not really good at.

Yeah. And sell sales in all directions. In all directions. In all directions. Yeah. Exactly. And so still learning. Right. Still work in progress. I’m always gonna think that about myself. But that that aspect definitely caught me off guard. Can you just tell me a tiny bit about bullpen? Just because I think it’s interesting because their model is slightly different than either across cut or a craft, as I understand it. Yeah.

So bullpen recognized what they term to be the series A Crunch years ago and effectively coined the postseason stage today.

You can call it the late see the second seed, whatever you want to call it, the round in between raising your your series seed and your series A in my mind, you know, very smart stage.

I have an affinity for the stage now.

They were and are at least when I was working with them four years ago, very operationally minded, you know, didn’t really want to see your product demo. And they would tell you. Tell the founders straight to their face during a meeting really focused on looking at your operating model 18, 24 months, looking at your sales pod sales motion, understanding what the amount of funding would infer for your business metrics.

And they’ve really carved out and and I think created that that stage, which now, you know, a lot of folks are investing around. How much when they’re looking at an operating model, how much is that? We used to call it our financial and operating model. In fact, we call that Ellem F.A.A., which is our local market, local market, financial, an operating model.

Would you recognize that? Yes. Thanks. But how much of that is it? Is it a financial model? Is an operating model? Yeah, I think it’s mix.

Mixture, mixture of both. With with more weight on the operating side, you know, if you understand what you’ve done to date and what maybe an extra three to five million will get you and where it will take you in terms of the business.

Did you think that your investment banking experience helps at all, either a bullpen or a craft like when you’re crafting models, or is it actually a different job altogether?

That’s a good question.

But I think that question’s an offshoot of the you know, do you need to be an operator or can you be a career investor to be in venture?

I don’t think I was in investment banking long enough to really answer that question. Well, but, you know, I can’t say that looking at DCF more, I’ve not looked at one DCF model since my time in venture. So, you know, that’s that’s my answer.

So your partners are founders heavy on operating experience. Right. And you kind of alluded to bullpen was less interested in the product demo. Is that is it a very different process? Craft yeah.

Craft, I think it’s both.

The thing you get with craft with form, a partnership that we’ve all been former founders is just a very highly operational perspective and that entails product and understanding why you may have built the feature this way. So, you know, we’ve we’ve had whiteboard sessions with our companies talking through pricing, talking through, you know, your sales motion, talking through the product. So that’s you know, that’s what you get with with craft. And, you know, we’ve talked about the investment team, but we also have three operating partners as well who supported the portfolio, cross recruiting and press and general counsel. So you kind of get a comprehensive support team when with Craft.

You have this amazing perspective of having sat across different funds. Do you find the diligence quite different, either because of different funds or just because of different stages?

Yeah, I think that’s inherent you also layer on the type of business model.

You know, we have an affinity for SAS business models and GMV marketplace business models. Right. And so. And in interest in bottoms up SAS, for example, given David’s experience with Yammer. And so, you know, we might have an interest to invest, you know, earlier for a bottoms up SAS model company and type of company, just because we, you know, maybe, maybe have some sort of unique insight into that and explain. Bottoms up, SAS.

Yeah.

So, I mean, I would say definitely reference David has also written about this, but the tilde the R on it is, you know, you’re selling either through individual employees who can sign up themselves or maybe to a team rather than go in top down through the C-suite is is the is the short of it.

And the implications are, you know, less friction around sales cycle and just higher, stronger momentum, which we’d like to see.

And how do you how do you think about sea deals fitting into your portfolio? Yeah. So you see deals are for us. Like I said in the beginning, we’re not as ownership sensitive when we invest, though. It’s at for conviction. We have to get to conviction like it’s the same level conviction that we get to the first series a right.

The diligence might be different, but we’re just, as you know, bullish on the company and the vision. But we know we don’t necessarily need to get to a certain type of ownership percentages.

And why is that? Is that because you figure you’ll get the ownership later? Exactly. Yeah. And how can you make sure of that? I mean, if you beyond your pro-rata, right. It’s.

Ah, yeah. It’s our responsibility to.

I mean this comes inherently with supporting the companies we work with, you know, staying close and making sure that they come out of their experience working with us with a positive experience, positive impression and feel like they want to continue partnering with Craft for the next financing and opportunities.

But if you have the same conviction. And you have the money, obviously. Why not take the ownership early? That’s a good question. I mean, I think you sort of also extrapolate just the amount of money that the company might need.

You have other certain implications around the terms of the fund raise and the implied dilution and also the impact of downstream financing considerations. You know, if they raise too much and they raise at a valuation as a result of that, that puts pressure on the next financing terms, then, you know, it makes it it just creates more friction. And so how is he different? To the extent you can talk about it between cross-cut and which does I guess they do see it now too. But, you know, you were there was felt like much more. Was it fun and see the craft?

Yeah, I would say see that cross-cut again.

I mean, I was there, you know, about a year, a little over a year ago. Maybe things have changed as they’ve gotten, you know, deeper into fun for when I joined, there were fun three, which was a seventy five million dollar fine. And then the beginning parts of the fund for which is hundred and twenty five million.

They they typically took on I would say and I’m generalizing but the sort of investment strategy of a micro v.c funds that were sub hundred and fifty million sort of co-leading seed rounds that could range anywhere from two to four, maybe even sometimes five which would go into the post seed stage and they would co-lead it with, you know, other micro beasties. So it was. It was. I think. Maybe more structured for lack of a better word and understood. You know how to. They just have a clear idea of the kind of round they wanted to invest in. You know, I don’t know if that’s the case for them today with Craft seed is, you know, it’s all it’s all subjective and relative.

Afraid to tell your perspective as a five hundred million dollar fine seed for us can be, you know, a sub two million dollar round. It could be sub, you know, it could be a formula all around. And we’re not necessarily needing to hit ownership targets, which makes us very flexible.

So if if if you’re an early founder and you’re looking at the various options. Yeah. For get for doing your seed round. Yeah. What would be a good reason to reach out to Craft. It’s a good question.

I would say the business model going back to that, you know, with. Clear focus these days on Sassen marketplace. or sassing GMV business models. Right. So if you’re vertically focused SAS solution or you know, we have a strong interest in vertically focused labor marketplaces. We did a local company invested in a local company here in Long Beach called DRé Alliance, which is a marketplace for Drage Shuckers comes damn close, close with and of luck. Here’s a trusted health, which is a marketplace for travel nurses. So I think first it’s understanding our investment themes, which we’ve publicly or shared.

And then. you get kind of this one-two punch. And I described to the founders I’ve worked with from day one even before joining Craft when I at cross-cut. Like I’m your intern. I’m available 24/7.

I’ll I’ll work with you. Right.

And because I love it, that’s kind of what, frankly, drives me to do this job. But tactically speaking, the ones who punches you also get a partnership across the board. Who will sit down with you? You know, and like I said, go through a whiteboard session and talk about these things that are very significant to the business and at inflection points and be able to read the chessboard. So it sounds like one big reason also is if if someone aligns with your investment thesis. So maybe we could talk about some of those in particular, the ones that you’re most passionate about.

Imagine the vertical labor market places are. Yeah, they’re similar to an Uber, right.

Yeah. I mean it’s I would say today all the well known marketplaces have really been consumer facing, providing a service that’s effectively, for lack of a better word, somewhat of a commodity.

I mean, I can say it now, but even when I work to do but I use Lyft, it really just came down to pricing each year for me.

Foot that to the to now our interest in vertically focused labor marketplaces. On the demand side, you’re servicing companies, you’re helping them find labor essentially and and workers.

And so what we look for are a few things I would say first.

A very like a hyper vertical focus. Drage, which I didn’t know anything about before.

Until we met the company and Crake me drage is like, you get off the ship and then you’re going into the warehouse. Yeah.

Yeah, exactly. Ocean Port Levere Freight from ocean port to and from ocean port and distribution centers. There are aspects of that kind of marketplace that make it defensible from the other well-known freight marketplaces to move into this space, because there are characteristics of trade structures. You know, for example, they need a certain kind of equipment. They’re used to sleeping in their own beds. It’s a different kind of. They work with different types of three peoples and and shippers, so to speak, on the demand side.To go further, I mean, I would say we look for, you know, kind of like what most investors, most marketplace investors look for. Right. Fragmentation on the supply side, for lack of a better word, homogenous supply. You know, you want a marketplace. Second, facilitate trust. And how do you do that? You offer especially for labor marketplaces that are catering to businesses on the demand side. You know, you offer software solutions that keep them around and keep it sticky. You integrate into the transaction so you facilitate payment to the worker side.

Yeah, I’d really like to come back to this question of homogeneity, because, you know, a driver is a driver is a driver. Right. Whether you’re driving for Lyft. Gruber I don’t know anything about Drage drivers or I won’t make any any blanket observations, but it seems like a nurse is one more level up from that in terms of skill and differentiation between between different individuals. Where do you think it stops?

Where the supply needs to be is so heterogeneous that you probably shouldn’t make it into a marketplace.

Yeah, I would say there are examples of when it’s too heterogenous, there’s too much sort of hetero GENNADI 

You know, there’s one there’s a lot of trust, you know, and in the relationship, you there have been some posts about home joy, for example, which is a home cleaning service.

A lot of people have talked about that company, which is visible when they were around as that iteration of a company where, you know, you had people coming into your home and cleaning. And it was a one to one type of relationship.

A lot of those that kind of circumstance leads to, you know, disintermediation of the marketplace. And, you know, getting my haircut with a barber like that’s a lot of trust.

And I probably won’t want to find another barber if I really found that relationship. So I don’t necessarily need a marketplace to help me find another one. So those are those are some examples.

But like we talked with Alex Rubalcaba from our powerhouse and usually pushing this notion that labor we have huge labor shortage in our country.

And so that probably, you know, it could change if there was a huge labor oversupply.

These might be less interesting businesses.

Yeah, I mean, and that’s that.

I think that comes down to identifying the markets where this type of model would work.

Maybe other investment theses areas that you’re excited by now or that your partners are excited by your partnership.

It’s an interesting says the what we describe to be the Internet of food, you know consumers have come to expect getting food at the push of a button.

And so what does that do to the rest of the effective supply chain?

And you know, what does it do to the rest of the supply chain?

I mean, we all we’ve all are seeing what’s going on in the food delivery space. And, you know, having been early investors in cloud kitchens, which is is building these sort of commissary kitchens for anybody to really start a food delivery business significantly affects the PNL of a traditional restaurant, sit down restaurant. And so I think that how restaurants look today and what. How dining experiences have been to date. In the next 10 years could change, and it’s kitchens mostly like I have my favorite dishes that I cook and I can now be selling those essentially on the Internet via Cloud Kitchen.

Yeah, yeah. I mean, if you if you wanted to start your own restaurant, you know, Brand Minnie’s Burgers.

Yeah. You could probably go be a tenant and put them on Postmates. You read store.

We all know Mini’s can be ten minutes. Can do that. That’s funny. By the case. Yes. In like brown paper bag sold. Transaction parking lots. It’s Sinaloans geggie.

OK. Maybe we move off investment theses.

If people want to get in touch. I think, you know, if they want to get in touch or follow what you’re doing out of the. In touch with you.

Yeah. Shoot me an email, Michael at Cruft Ventures dot com. It’s. Terrific. Well, thank you so much for coming in. Great to see you. Thanks for having me. Thanks, Michael.