Sean Harper — Westlake Village BioPartners

With their recently raised $500M, Westlake Village BioPartners is catalyzing the LA biotech ecosystem.

Sean Harper, former Head of R&D at Amgen, tells us about his focus on therapeutics to improve human lives and starting Westlake with Beth Seidenberg.

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Hello and welcome to the LA venture podcast. This is Minnie Ingersoll host of the podcast and partner at TenOneTen. TenOneTen is a seed stage fund here in LA. All opinions expressed on this show by me and my guests are solely our own.    

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I’m excited for my discussion with Sean Harper today, Sean is a managing director at Westlake Village BioPartners. Westlake Bio recently raised a $500 million fund II, to continue their work funding transformative life science companies. Sean founded Westlake at the end of 2018 with Beth Seidenberg after leaving his role as head of R and D at Amgen.

Sean, thanks for coming on the show. 

Thanks for having me.

 Of course, I’d love to start with the basics. Uh, maybe you could tell me about Westlake bio and what sort of companies you’re funding and what stage those countries these are. 

Fundamentally we’re involved in company formation. So company incubations, if you will. We’re typically putting seed funds in just to get things rolling, you know, hire team, license assets out of it, universities, et cetera.

And then we often are the the lead on the series A investments  and then we try and move these companies through. Successive rounds of private funding , 

 when you’re doing that first investment, what size check are you usually writing as a first check and maybe a second check.

 Our seed funds, typically we start with a million. Sometimes we have to add a bit more before we can get to a series a on average.

It takes nine to 12 months for us to go from, , hiring in an entrepreneur or beginning to assess a technology at a university  , and getting to a series a and in that year, Typically the million dollar seeds adequate sometimes , a little bit more and then check sizes for the series.

A with respect to what Westlake puts in range from eight to 35 million, .

And just to clarify, those checks that you’re writing are always into companies who are working on new drugs. Is that right? 

Great question. So, yeah, we were very, single-mindedly focused on human therapeutics.  , we have a requirement that there’s at least product that is no more than three years from IMD from first-in-human testing.

So as opposed to some investors who will invest  , where the first product may not get into man for five or 10 years. We’re pretty focused on getting human therapeutics into the clinic, at least the lead program. And I would say that, , we focus on that because , it’s our expertise, right?

This is where we’ve all spent our time in the industry. So we don’t do devices or diagnostics or digital health. It’s all about, ,  getting medicines to patients 

so tell me a little bit more. I think what you said was three years from human testing, is that what you said?

Yeah. Yeah.  About three years. . That’s where, you know, the big value inflection occurs as well for us in, in life science, BC is when you take, , an idea that looks good in test tubes and mice, and actually managed to take it in the clinic and develop proof of concept that it actually can have.

Efficacy and safety parameters in here.

 So can you tell me more about the origins of the sorts of companies or entrepreneurs that you’re looking at? 

Yeah. So, as I said, there are really three basic models we use.  

 The first is licensing and academia. The second is licensing assets from biopharma, and that can be large or small biopharma. As you probably know many of the very successful drugs on the market are things that companies have deep prioritized strategically out-licensing to others. And then, you know, those have been successfully developed sometimes in the same indication that people had in mind, other times, different indications.

And the third model is what we call Denovo drug discovery, where we. Really invest in a team of experienced drug discovery, development professionals who want to pull together their team and, and begin to prosecute work  .  In academia. For example, we, we frequently encounter the situation where the founders believed that there. We’re just about to go on the clinic, but in fact they’re not.

And and we have to, we have to look at it and then we say, well, yeah, you’re, you’re really more like two years from the clinic, but that’s okay.  Because we in particularly Desmond Patty, our principal who’s focused in this translational space, his entire career for 30 years.

We’re pretty good at,  assessing that. And that determines the raise the size of the raise along with things like, you know, can you contract the manufacturing of whatever it is or do you have to build internal manufacturing process development manufacturing? Because it’s a, let’s say cell based therapy or a gene therapy where the contract manufacturing organizations just aren’t.

Developed enough to do it for you. And then obviously that will result in a bigger series, a raise, a bigger check from us, more likelihood that we bring in another investor to write a big check alongside us, that sort of thing.

 What mistakes are they making when they think that they’re  ready for clinical trials? And you say, no, you’re really two years out.

Well, I think, you know, that what we see often from the academic centers is tremendously strong  biology and early chemistry work like screening high throughput screening capabilities these days, and identifying if you will leads. And getting going through sort of hit to lead and identifying tool compounds that can be put into animal models.

And, and what often is missing is really a lot of the assessment of whether these molecules, . Are actually going to have the drug like properties, for example, their metabolic profiles have life in humans, all that sort of thing that would allow them to be clinical candidates that you would want to invest, you know, three, $4 million in GMP manufacturing, GLP toxicology studies, and a couple of species.

. And when you put that lens from our experience onto a lot of these programs, the biology is great. The ideas are gray. That chemistry is a starting point, , but they’re not as advanced  as is believed by, by, by the founders. And this is not surprising because most of them don’t have that deep industry experience of understanding how important things are like drug, drug, interaction, potential, , drug metabolism issues that can differ substantially, you know, mice.

Diverse from a 65 million years ago and in, in, in evolution and they’re not the model humans and, and these, you know, a lot of the people that work in academia,  they have their models and they’re very focused on them and they. Can sort of forget that there’s an awful lot of work that has to be done to go from these tool compound mouse experiments that they consider to be sort of proof of concept to showing proof of concept in humans.

 Do. Some universities do this better. Do some you know, do you wish that some of these labs were doing more of, of what you’re talking about?

Yeah. I think that, that the unit universities in general are beginning to recognize that grant funding from NIH and with a couple exceptions, there are some specialized grants that are designed to help entrepreneurs at academic centers, sort of spin out their work into small biotechs. And that can be very successful if they.

If they do it right, but I think there’s a, there’s a, a real understanding now evolving at the, , medical center type universities  that some seed funds. Within the university that can be dispersed to projects to get them a little bit further along and allow them to do things like pay us CRO to do these metabolic profiling experiments to get crystallography performed things of that sort.

There can be arcane rules. Regulations around how grant funds can be used. And we see this all the time. Like you can’t use a vendor outside the United States using NIH grant funding for some reason, for some of these grants. And so they haven’t work with the best CRO that does those Tarago free to Germany, whatever, you know 

, so these, these funds can, we’ve made available and we’ve seen a number of the universities we work with set up these funds , it’s often just a couple of hundred thousand dollars, but that’s real money at this stage that we’re talking about 

. , that makes a lot of sense. I have my siblings and my parents are all struggling to get NIH funding. So let me get into your background a little bit here. Um, I think it’s really relevant. You were running R and D at Amgen. How does Amgen think about early stage drug development and doing R and D versus acquisition?

Yeah, , I would say I’m gen , is no different than  what goes on across the industry in terms of large biopharma. In that there’s a clear acknowledgement that if you look at the, at the history of the industry and the and the trend line, More and more of the innovation  come from venture backed small company.

, and you can see this in terms of the proportion of the late stage visible pipeline at the companies that. Is derived from those sources has been steadily rising over the last 15 years.

The number of independent biotech companies that actually launch products into the marketplace themselves is steadily rising. So it less of the real earlier innovation is coming from the big biopharmas and part that’s because they’re consolidating and there’s less of them, but also they have to spend a lot of their money.

On late stage development and marketed products, support and safety surveillance, and setting up, you know, a new commercial operations with the appropriate R and D support and different drug geographies around the world to exploit the emerging marketplace that’s happening in places like China. And so all these things.

Compete for  early preclinical research dollars.  Take as an example, gene therapy or cell based therapies for cancer. I mean, these are the two. Most obvious to point to recent big breakthrough kind of technologies in our field. Right? You look at them and ask the question, how many of those, and they’re hundreds and hundreds of them.

Right? How many of them were developed in large biopharma? To my knowledge, the answer for both modalities is CRM.

Wow.

Okay. And if you think about that, what you realize is that dynamics that happen. In any boardroom in any of these companies is you go on and say, Hey, you know, gene therapies come into age. I want to build a gene therapy capability within the walls of, you know, Pfizer, Amgen, what you picked your company.

And why don’t you give me an extra like billion dollars. And over the next four years, I’ll build gene therapy capability. And everyone will slap you on the back. Say you’re a great head of R and D. I’m sure you can find a billion dollars in your budget , and you’ll get enough, right. So that, because they have to run a P and L and they have to make quarterly earnings and the reimbursement.

Agencies around the world , and the,  CVS and Optum and so on in the U S they’re all squeezing. These companies really hard and the profitability of new products. It’s just not what it was for old books. So they’re trying to manage all this and meanwhile, They’ve got these very healthy balance sheets.

And so then you come back to the board room three years later and you say, okay, look, we’re going to fall behind the rest of the industry. We have to have a gene therapy capability. I want to purchase this gene therapy company for $5 billion. , and this, this company will become, , Pfizer, , thousand Oaks and it’ll do our gene therapy.

And they have manufacturing and everything. , and everyone will say, great, where do I sign?

Hm.

But they’re generally acquiring that, that technology from venture backed companies.  , either pre or post the companies being public, you know, they can buy them before they go public or buy them after they go public. And it’s always been that way to an extent, but what you’re seeing is an enormous growth. , in that venture back component and, and less emphasis in large biopharma at most of them in, in really cutting edge innovation, because they kind of know they can buy it and it’s, it’s expensive to do. 

And that’s the dynamic that’s going on in the industry that makes it true. That some of the most exciting, innovative work is happening in venture based  companies.

And this was a large part of why I made the decision to move when I did . And I want to be really clear. I’m not putting a finger on Amgen here. When I described this, this is a universal phenomenon. 

Sure. Sure. Of course. Uh, and what have you seen for these early stage companies that might be eyeing an acquisition by Amgen? What have you seen work or, or maybe more importantly, what have you seen? Not  work? 

Yeah, great questions. 

. I think one of the other mistakes that we see sometimes is that there’s a decision made to hire a team. Now I know, of course there’s academic founders who can be valuable and they can serve on the board or on the scientific advisory board and be invaluable company.

I’m not talking about them, but what will happen sometimes is that  the university will incorporate, which is in and of itself, not a problem  but that company begins sometimes to get staffed with somebody. Who  somebody knows who has some kind of business. MBA type background or what have you. And they get plugged into this job as the CEO, as the CEO. . And they’re not the right person to run the company because it’s a science-based company and they just don’t have the background experience, whatever 

 Because again, remember. Very early companies where virtually every employee is going to be an R and D person.

Who’s trying to get something done. Right. And it’s very hard sometimes for people with like just the business development business, MBA type background. To even be able to relate , to the scientists or understand the science and to lead that effort, nor is it very easy for them to know where this is all kind of going.

So, yes, there are people who can transcend that, , but most of our CEOs have either, you know, a PhD MD or both. .

And of course, as you might imagine, those, those kind of individuals with that phenotype tend to gravitate to work with us because we all have that background ourselves.

wait and sorry. And I should just clarify who you all are. Obviously we’ve talked about you. You’re coming from  head of R and D at Amgen, and you started Westlake with Beth Seidenberg. who’s coming from Kleiner Perkins.

Yeah. So let me give a little history, cause it’s, it’s, it’s a bit different than the typical life science venture group. In this case? Yes, Beth worked in the industry at Merck BMS and Amgen. And we met at Merck more than 25 years ago. And we worked together there. We worked together at Amgen and then after she was global head of development at Amgen, and then she moved to client.

And that was about 15, 16 years ago. Now I stayed on damn Jen. And so did Desmond Patty, our principal . Beth went on and created. I think she’s now created 25 biotech companies and she was the lead investor at Kleiner Perkins.

She is a very similar background, you know, a physician scientist. 

And so we have  an unusual set of backgrounds in that we’re really operating executives from the industry who , really lean in very hard to the, to the projects, to the technology, the science, the medicine on the projects. 

Wow. And you just said that Beth has created 25 companies. And I imagine some of that is the work that Westlake bio has been doing to create companies. And some of that was when she was at Kleiner. 

Yes. And between Kleiner in here. So we, you know, in our first fund we’ve we built 11 companies and in the second fund, we’ve established three. So I that’s 14 and then I think she did, you know 10 or 11 or something in Kleiner. So it had, it’s roughly 25. I’m not sure if she even keep track anymore, but and most of those have been successful.

The vast preponderance of them have gone on to exits 

 Between the three of us, Desmond Beth and I together, most things we look at, we’ve had some prior experience working in the field.

And if we haven’t, we often want to invest because, you know, we want to work in areas where we can play to our strengths.

, can you double click on that a little bit? Which is like, I would say, Oh, another HR tech company I’ve seen so many of those are you, do you have the same thing where you’re like, Oh, prostate cancer, God, that’s so over.

Yeah, well, the whole field of, you know, immuno oncology and the particularly immuno-oncology that’s focused in hematologic malignancies has gotten a bit this way. I mean, you do get into things, situations where there’s like, There’s like 150 cell-based therapies directed at the same antigen, you know?

And it’s really like, we’re going to start up the 150 first. So there are patients where you say like, Oh, like I’m just not doing that. But , in many cases,  you say something like prostate cancer, Yes. I’ve worked on a lot of attempts , to help people with prostate cancer. But most of them haven’t really done enough and there’s still an enormous unmet medical need  you know, that’s, that’s the fundamentals along with people.

So there’s a timing issue for sure. , you know, you wouldn’t have wanted to do, be investing  , in gene therapy 10 years ago. And you’re probably not going to be wanting to do it 10 years from now. There are sort of times where the technologies, you know, ripe and then become tractable.

If there’s nothing more frustrating, practicing medicine than not having anything that you can do for patients. So you take an area like chronic pain.  You’ll very quickly exhaust your options in chronic pain and, you know, people can’t tolerate long term in and say they can’t, you can’t treat them chronically with opioids.

You know, you just run out of options really quickly. And if you, if you have an unmet need like that, that you know, is sort of. One of the main reasons people seek medical help and the doctors don’t have anything to offer. Well, you know, that may be a tough problem, but it’s more worth trying to solve. 

That makes a lot of sense. So are there companies that you’d like to be seeing a lot more of in your pipeline or more of, or less of.

.  Even in the areas where you look at you’d and say, okay, auto immune disorders, like rheumatoid arthritis and psoriasis and those kinds of things. So they’re well addressed.

Well, not really. I mean, yes, there’s, we’re a lot better off than we were when we were injecting gold into the people when I was in medical school. Right. But. You, you know, none of these drugs are just, they’re all municipal breasts and they’re all fraught with all kinds of issues because of that. And at some point it’s going to be possible to, you know, essentially reset the immune system.

So it no longer believes that self antigens are foreign. If somebody brings forward a technology like that, it’ll be transformative. . . Beth always says, you know, you have to be willing to sort of suspend disbelief and listen and think  because our job is to be thinking about.

, what’s going to be , , the therapeutic landscape, you know, five to 10 years from now because there’s a long life cycle here. And we’re open really to anything. And it can have a kind of, you know, I mean, people use these words all the time, transformative, disruptive, you know, it gets old, but that’s actually what we’re thinking about.

Right? , this is one of the things I say all the time is. This is incremental. It’s just not transformed. It’s nice. I like it, but it’s incremental and we don’t do that kind of stuff .

One of the big news stories out of biotech that hit my tech news was Google’s alpha fold and protein folding. Do you think that’s truly transformative? Is it living up to all the hype?

 And do you see a big role for tech in biology or. Or how do you see that role? 

Oh, yeah, absolutely. I mean, you know, you don’t want to, over-hype this kind of thing, because you know, it’ll, it’ll have a huge impact, you know, on. One of the things that, that that’s a barrier that holds us back that keeps us from being able to come up with, let’s say a small molecule to drug, you know, a, a protein target, because we now can understand.

The structure of that protein much more easily, or you know, there are the computational tools that allow you to see the motion that is that these molecules, you know, they’re not frozen in a crystal lattice the way we tend to think about them. They move, there’s all kinds of things. And, and I saw this working In the genetics area.

When,  we acquired decode, when I was at Amgen, I mean, the kind of work they’re able to do today, simply wasn’t possible until, you know, Illumina developed, , the kind of sequencing capabilities, sorry about the doorbell. The dog’s gonna start barking next. .

, so I think there’s absolutely no question. And the earlier you go into the drug discovery continuum, the more, this is true that these kinds of tech technologies, different ways of imaging different ways of analyzing storing vast amounts of data, robotics, all of that stuff they’d make a big difference.

And I often, when I give this kind of lecture, I give sometimes around the golden age of biotechnology. I mean, one of the things I really stress is that. A lot of the advances that are occurring that are making biology and more quantitative, more predictive science and more translatable into, , new therapies for people is the.

Introduction of these non biology technologies, whether it’s robotics or, or x-ray high throughput, x-ray crystallography, or, you know, these kinds of things have, have profound implications, but at the same time, , you can, over-hype the impact. Because we still deal with an enormous amount of uncertainty and things like choosing targets to pursue you can, work with all these tools in a very elegant manner on the wrong target.

Hmm. But you’ll invest in some of these tech platforms.

Well, no, generally not because it’s just not what we do. , I mean, I have a hard enough time doing what this, this work, where I’m supposedly, you know, like kind of a world expert. And I struggle every day to do the job because of the level of uncertainty. 

I mean Robert Rubin said that most people are, are more certain of everything than I am about anything. I, I subscribed to that camp. , but we’re, we love to see the impact. And when we see that, Hey, you know, it was possible to drug this undruggable target because we were able to simulate a cryptic pocket in a computer. And when we made a molecule and look, it actually works.

We’re like, okay, we’ll take it from here with you, 

That sounds great. Well, let me shift gears a little bit and talk about Los Angeles.

You’re here. Beth is here. Your, your team is here in Los Angeles. What are you seeing in? How, um, how are we going to catalyze things in Los Angeles from your point of view? 

Yeah. I mean, look, when Beth and I started talking about. Setting up West, like you know, she had been commuting to the Bay area for 14 years or something, but her primary home from Amgen days is still here and that’s how we’ve stayed so close. And , I told her about my experience where I had been asked by , these universities  to sit on these advisory committees about how can the university be more successful in commercializing their technology, right?

How do we create companies locally? Where are it creates job opportunities for our graduate students and our postdocs and all of that. And what I would tell them to their surprise often is . this area has tremendous academic institutions. I think it’s number three in NIH funding in terms of a region in the world in the United States 

so it’s, that’s not the problem. Lots of great people who could come in and be research scientists in the companies. We’ve got lots of industry experience people from places like our, again, you know, kite. Guillory ad now while of course, Sam, Jen, and what’s really missing. And the reason companies are not being built.

There’s no venture group. That focuses on, on cause many venture groups just invest in other people’s a and B rounds and things. That’s not going to help you. And I kept trying to say to them, you got to attract somehow, you know, Atlas ventures or the column group, or somebody to set up offices down here in like Pasadena or whatever.

And, and because it’s a local activity, they, this very hands-on to build these comments.

So when Beth and I started talking about the firm and she started telling me, well, you know how overheated. San Francisco and Boston have become how crowded they are with baby sees.

How, how the war for talent is resulting in constant turnover of people, including R and D staff, which is really bad, you know, to have high turnover in that, in that group. We just started. Talking about the fact that we thought there was a tremendous opportunity to build companies here that basically everything was here, grassroots support from the government.

I mean, you can imagine how helpful the city of thousand Oaks or LA County have been . And we didn’t know it at the time, but Alexandria Realty who are headquartered here in Pasadena. They’d been wanting for 20 years to do their magic in this area, building biotech, incubators, and that kind of thing.

But there just wasn’t enough company formation going on on the warranty. And now they’re doing that. We have five of them are companies right now in a first Alexandria facility here, . Close to the Amgen campus. And they’re going to build more and, , it’s really taking off.

, it’s the characteristics here are favorable as I think they were in places like Boston and San Francisco for a biotech hub. I mean, Beth and I both watched those ecosystems evolve. And you know, the one thing that happened in those places that was really seminal was. Big companies started buying small companies and establishing their presence.

So Gilly ad of course bought kite and Santa Monica, but what’ll happen. Next is a company. I don’t know a Tara or one of the companies that’s local here will get bought by, you know, Novartis or pick your big biotech, , and then there’ll be a Novartis sign here.  Our biggest challenge of doing the company formation work here was just ready, turn key available laboratory space. And now that’s been largely solved by Alexandria. 

That’s really exciting. So you’ve gone. Your first fund was at a 300 million, 320000001st fund. So now you’re working on this 500 mils. It’s really exciting for the ecosystem. Let me ask you maybe one or two final questions.  What’s different than you expected being a VC versus doing R and D.

Yeah. I think The first thing was just,  sort of how you actually go about doing all of the,  financial and  mechanical aspects of actually putting together a company, you know, licensing technology out of universities figuring out the cap table, all of this stuff. 

And  to figure that all out at 56 again, after I’d come from me, kind of, you know, the expert guy in what I was doing before, and now I’m completely clueless about what I, I don’t even know what, I don’t know that was uncomfortable. , but I never looked back because I knew in the long run, it would be great.

And it is, you know,  you can create one of these companies.

And two years later, you know, the company’s doing the major deal with the big biopharma. And before you know it, then they’re talking about becoming a public company it’s kind of magic. You know, it’s, it’s really quite amazing then that sort of zero to one. But, you know, you could read books about that, but to actually be involved in that value creation and employing all these great people and all that.

 I I’ve found that that’s been better than I imagined.

That’s fantastic. Well, I think your work and your mission is really inspiring. I appreciate what you guys are doing to catalyze the ecosystem here in LA. 

 Likewise you’re doing the same, of course. And it’s been a pleasure talking with you.

Gil Demeter — Pontifax AgTech

Great discussion about next gen robotics and next gen bioscience with Gil Demeter from Pontifax AgTech.  With over $465M in AUM, Pontifax is one of the largest food and agtech funds in the world.

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I’m talking today with Gil Demeter from Pontifax.  With a $300 million Fund II, Pontifax is now the largest food and agtech fund in the world. Before this, Gil was six and a half years at Qualcomm ventures and at Piper Jaffrey and Industry ventures before that.  Gil, welcome to the show. Thanks for being here.

Gil: Thank you so much for having me.

Our listeners don’t already know Pontifax. Why don’t you start by just giving us the basics.

Gil: You got it. Well, Pontifex is a growth stage,  investor in food and agriculture technology. So if you think about where we invest, it’s somewhere between late stage venture, early stage growth, private equity is probably the best way to define it. And our sweet spot is really seriously. We’ll go as early as series B in terms of investing.

Our check sizes, you know, match that same type of later stage growth. So we’re doing anywhere out of fund two from 15 to 25 million in initial capital, and typically twice that over the lifetime of the company. So, you know, for our $300 million fund II, we’ll probably end up having somewhere between 10 to 12 portfolio companies 

great. And what are the areas you’re investing into?

Gil:  

I like to bifurcate into two different area. That’s you’ve got life sciences on the one end. And you’ve got information technology on the other.

So in life sciences, you’ve got everything from biologicals to gene editing to new age ingredients on, you know, more of the. Really biology focused technologies. And on the other side of spectrum information technology that software, hardware, logistics, supply chain, things of that nature that requires, or data, or, you know, any type of mechanical operation.

And that piece rolls up under me upon effects ag tech I’ve historically led that area. Give them my back Brown, which as you had mentioned is in software hardware coming from, Qualcomm ventures down in San Diego.

Minnie: , so yeah, you’re coming from Qualcomm. So things like internet of things, sensors would make a lot of sense.

Gil: That’s right. That definitely falls within my purview. So, .  You’ve got SAS software, 

so you can be talking about an ERP platform, farmers to utilize to better manage the profit loss within their farm on an acre by acre basis. Ingredient by ingredient basis covers everything from harvest inventory too, , much more upstream. You know, we have another company in our portfolio called food logic, which is focused on traceability and transparency within the food supply chain.

And they’re catering to big CPG companies, big restaurants, but groceries.  Large guys looking for transparency and trying to mitigate any risks that they have with. Foodborne illness, health, and managing the big supplier networks that they have, 

so, you know, those are some of the areas under SAS and software. There’s also robotics. We’d invested in an RA ex exited a company in the robotic farming space. How many called blue river, which was acquired by John Deere couple of years ago. And they were basically identifying weeds in real-time on the front of our tractor and zapping them using artificial intelligence and robotic sprayers to do it millisecond by millisecond.

So the massive savings of.   Crop chemical inputs so that you didn’t have to spray across the entire field. You can just literally identify a small weed, a small encroaching plant and zap in real real-time numerous per millisecond. And you didn’t have to employ as many laborers, which, you know, in the United States, you’re not familiar with.

We have a huge labor problem. 

So, you know, that continues to be an interest area for us, robotics, then you’ve got, , sensors, as you said, right? So you can do that for, , irrigation. You can do it , within, uh, grocery stores.

Minnie: , I could ask questions at any of these. Let’s let me stick with sensors. , when you’re evaluating potential use of sensors or companies selling sensors, like,  what have you seen that works?

What have you seen with the deployment that maybe doesn’t work.

Gil: Yeah.  It’s a good question.  Over time.  In a good and bad way, sensors have become relatively commoditized and continue to do so. You know, when I was at Qualcomm ventures are a lot more expensive to put, , either a baseband or, or,  uh, 3g chip in any sort of situation or any sort of chip set where you want to deploy it.

these days you can put, you know, a much lower cost,   Peace into any area and deploy it. So again, on the one hand, you know, that’s, that’s beneficial from the standpoint of right. You can deploy these all across a farm, can deploy them in volume, across, you know, maybe indoor farming, but at the same time, it becomes less special because you know, there’s less technology on the chip.

I think for us, what we look for now, as opposed to, you know, there’s this unique chip set. Um, given that, you know, the costs are coming down and, you’re able to sell it for less effectively is what is the data network that you can build around that? So in the case of blue river, as a great example of something that we believe was successful was, you did, of course have, CPU, chips and GPU chips and.

And networking chips on these tractors, but there wasn’t in volume. Um, you know, you only needed a few to do the certain amount of processing that you need on that tractor, but it had, uh, a wide, wide applicability. So it’s not going to be necessarily a volume. You’re not selling the chips. If you sold that, you know, come out to, you know, a couple of hundred dollars in actual revenue.

Instead, what you’re selling is actually the machine learning component. So what we look for. Is that combination. What can you layer on top of those to build a platform? And what they built was the learning mechanism behind that, that they then deployed this machine learning aspect onto the tractor set, comply to all other machines that they utilize.

And basically they add.  This computer learning in the background, also powered by humans in many ways, um, to help these robotics learn what was a weed and what was a plant and identify in real time in milliseconds  , how to, you know, get rid of the approaching plant.

So it’s all about the network that you built behind it and whether that’s AI, whether it’s machine learning, 

Minnie: , what is the state of, farming and growing today and how sophisticated are these organizations in terms of having that data and having sort of the it staff to. Sort through all the data and what’s their appetite for new tech.

Gil: Yeah, that’s a great question. you’d be surprised. Farmers are actually pretty sophisticated  when it comes to new tech. I mean, you know, on average, they’re utilizing 20 plus different pieces of software already, and they run these more like organizations like a company, if you will, this is on the farm.

, growers, I would say don’t necessarily have the whole institution backed up to analyze this.

And that’s where a lot of startups come in. But what we’re finding is. Sometimes it’s just enough to be dangerous. They don’t need necessarily. And this is where, kind of a pitfall of a lot of the startups that are in this space. You know, they don’t need this big analytics piece in the background. It’s really all about ROI and what the grower thinks is good enough or not.

So if a startup could come in and provide that value from a data perspective, That’s fantastic. They really, really have to prove, you know, if you use this software, if you use this sensor paired with this software, as we describe it will equate to exactly. I don’t know, three to one return on your investment, but you’re finding that’s very blurry.

It’s hard to quantify that. And I think that’s where a lot of growers hesitate and there’s been a lot of guys who were coming in and saying, Hey, we can offer. 10% yield improvement, but it’s so hard to prove that. So that’s really the trick nowadays. they don’t necessarily have guys to process processes, but at the same time, they don’t necessarily want to buy it unless it’s immediately obvious.

Minnie: Hmm.   What percent of the market is sort of really big, uh, growers and, you know, what are their operations like?

Gil: Yeah. So, there’s, there’s a wide range of grower size, there’s over a million farms in the United States alone.  And the growers can range anywhere from, you know, a couple of hundred acres to, over a hundred thousand acres at a time.  If you’re talking about specialty crops, No vegetables, things of that nature in California, you know, Salinas Valley, et cetera, they’re smaller acreage, but higher value crops, which is also what they’re typically known as.

But if you’re talking about. Corn soy was known as what are known as row crops. Typically larger acreage, lower, more commoditized crops, but they make money on volume versus necessarily margin. So there’s a pretty wide range. And that also dictates it does dictate the sophisticated nature of the farmer.

It’s a small family operation where you’ve got a big grower operation, which can be very technologically advanced.

Minnie: is there better tech opportunity in the sort of row farms as you say?

Gil: I I’ve seen both. I’ve seen both. It’s definitely on both because you have that mix equivalent one is much higher volume that you get to work with. If you’re a startup, one is much higher value and guys are willing to pay for it because they can, they get afford it because they have the margin on a smaller amount of land.

It just depends on what you’re targeting and what the value prop of your tech is.

Minnie: And so do they, a lot of times  come out of, agriculture or are they more, you know, I’m building a satellite company and, Oh, it has applicability to farms.

Gil: You know, I’ve seen both, I would say predominantly it’s agriculture companies that are focused on that. That was the original. thought process when they created the company and other ones that try to pivot into it. I will say from my experience have much less success because agriculture is a unique area.

It’s difficult to understand, you know, growers buying habits, um, the different corporates in the space that utilize technology, et cetera. So you don’t have that expertise beforehand. You’re already coming from behind. I think, you know, there are definitely areas where guys try to move into the sector.

Like. You know, satellite and envision companies, you know, and try to make it applicable, but it is, it is once it start out with spoke to ag or an our ag tech companies from the start are typically what we have seen to be more successful.

Minnie: Hmm. Do you have any tips,  Maybe that’s hard to summarize in a short podcast. Um, but are there things that you’ve seen that people may be coming from inside? No. And people coming from the outside don’t know.

Gil: Yeah, sure. I think one thing that you’ll definitely see is the direct to grower approach is very difficult. And I think a lot of guys coming from the outside underestimate that in ag, you really need what we have seen at least over the last five years  is you really need a sophisticated channel approach from the start because it’s a lot less scalable when you’re trying to send a direct Salesforce out.

As say a SAS company, you know, it’s costly, it’s geographically expansive. If you’re approaching row crop guys, for instance, you’re sending them all across the U S and your costs, your operating costs, at least for something like a SAS company or any sales organization do, does incorporate travel. You know, it’s.

Relatively long sales cycles to break into it. You have to get to know the growers. There’s not like a central database of every grower. You can reach out to them. it’s definitely difficult to have a direct sales approach from what we have seen. You know, other things that we have seen is from an acquire standpoint, there’s not a massive amount of acquirers, but they’re, they’re definitely inquisitive.

Which is very good for our space and they’re becoming more and more acquisitive as they haven’t spent R and D dollars, you know, over the last couple of years, they’ve kind of waned on that and now they’re acquiring to make up for it. So you’re seeing a lot more acquisitions, a lot more space for innovation.

 I think that’s a very good thing, but you need to know which acquirers very specifically what they’re looking for, because. They can be very fickle. I’d say that’s another thing. So you definitely have to have knowledge of the space, the relationships for the different types of strategics around the area.

Minnie: Hmm.  What are the priorities now like, , is the labor shortage a big priority right now? And how do you see that playing out?

  Gil: Whenever you talk to a grower, the primary. Difficulties or distributor or other guys within the ecosystem of ag, , going up to, to restaurants, groceries, et cetera.  they always name labor and water as probably the two biggest issues facing them today.

, so it’s definitely bottlenecks, but I would say there have not been fantastic solutions to address this. Robotics is definitely getting there.

You’re seeing everything from robotic harvesters, drone harvesters. You’re seeing different guys for robotic pollination, all different types of areas on the farm, and then, you know, into a supply chain and then up to, you know, warehouses. .

. You just have to find the right value proposition and make sure.

The capital expenditure associated with that, which is a lot, it takes a lot to grow a robotics company, not cheap is worth it. That’s the big trade off. And so, you know, you have these jumps, it’s kind of like put a lot of money into R and D money into R and D there’s this gap in between then in commercial execution and then great.

  Is a little bit of a fine line. Do you invest before they get that? Do you invest after? And we continue to toe that line and look for the right amount of traction relative to funding to get them to what we feel is less R and D or of commercial growth.

Minnie: , so you’re coming from Qualcomm, you’ve got sensors and robotics and data. , you know, are there people who are more on  the,  life sciences, biotech side of, the shop?

Gil:  Look at our pipeline,  it’s a nice mix, 50, 50, maybe 40, 60, you know, it depends on everybody’s pipeline of life sciences to information technology right now, to give you a sense for that. You know, it was you’ll 11 portfolio companies in our fund one, which was a $100 million fund.

, we had close to, you know, half of our companies on one end and half on the other side. And, you know, I’d say the pipeline reflects that as well. So you’re definitely seeing a ton of stuff in life sciences to match the amount of stuff that you’re seeing in Infotech.

, gene editing is huge.  And trying to innovate on, natural, usually organic solutions  to spur growth in crops without having to put more inputs or war chemicals or more. expensive seed into it to yield a better result.

That’s basically the, the concept behind new innovative inputs that are happening within agriculture. And ingredients. So everything that’s supplying, you know, the beyond meets of the world possible foods, you know, they have to come up with non-meat ingredients, you know, how are they going to do that? At scale there’s companies that are building technology to build pea proteins, to build, you know, all types of stuff that are alternatives to a traditional, you know, areas that people are a little bit shying away from now on the consumer end.

Minnie: So my husband won’t let me eat apples unless they’re organic.  What’s the hype, what’s the reality 

um, what should I be thinking about.

Gil: You know, it’s a little bit of a marketing tool. I would say the closest comparable to saying something as organic is that it’s simply didn’t have chemicals sprayed on it on the field. You know, that’s not to say that there weren’t, I don’t know this or that preservative preservatives that came in later on, so on and so forth.

Um, and in a lot of cases, it’s what is. Generally an accepted amount, maybe that it didn’t reach a threshold such that they could say that is organic. So it’s a little bit of a misnomer it’s, it’s, that’s part of the issue in food and ag, right? There’s not as much transparency. I don’t think the normal consumer has any idea what really, really is the difference between this or that blueberry in terms of meaning organic or not.

Minnie: It just the sticker. You just look for the

sticker Gill,

Gil: sticker. And then you automatically pay more and that’s like

Minnie: That’s how it works.

Gil:  I definitely fall for that. Whatever. I see the two and I’m feeling I’m trying to be healthier, but I think. From from, from a genetically modified standpoint, that is maybe a little bit easier to explain, which is 

there is a difference between genetically modified, which means inserting a foreign gene and gene editing, which is removing . A gene that is dysfunctional or, you know, uh, is susceptible to disease. So, you know, an example might be genetically modified, might be something to increase the size or girth of a certain fruit, you know, and that’s to many people considered unnatural for gene editing.

It might be. You know, an example might be one of our companies called Tropic bio-science, which is focused on gene editing for tropical plants and the problem with one of their, their target areas, plants, uh, which has bananas is that the crop is actually technically going extinct. You know, this is readily available.

Not many people are cognizant of this, but the banana has is 99% of the. Strings of banana in the world. And that is a result of distribution out of genetic diversity. You know, in the early 19 hundreds, when they were trying to get rid of disease and left them with one strain of banana, basically throughout the world.

And as with anything, when there’s one strain, it’s extremely susceptible to different diseases and that’s a problem. So there’s different diseases now attacking those possess bananas that there is no natural. Protecting against example might be black sick Atoka, which is disease that affects it turns on black, you know, Tropic biocides is using gene editing and a form of CRISPR gene editing to edit out the gene that is susceptible to plaque sick Atoka and make it.

You know, perfectly normal. Otherwise there’s no way you would be able to tell different Sweden one or the other. Um, except that this one simply doesn’t have that gene, which could destroy the plant. So theoretically, there’s no difference between that. It just doesn’t happen to be, have a bad gene that exists from its genome in it.

, in many, many ways, Gene editing is improving upon life. It does have to take a careful approach. And this is something that is very, very, very highly regulated , these are types of things that are being worked on. Now

 Minnie:  What are the main complaint? Why does everyone freak out about, um, about this? 

Gil: It’s a branding standpoint. It’s very unnatural. I mean, you know, it’s the same thing as if you saw, you know, a nine foot human walking around, you know, , if somebody, inserted a genetically modified trait, all of a sudden make people giants, just like they do a, a tomato yeah.

You would do. Of course you’d be freaked out. Right. Um, it doesn’t necessarily mean it’s bad. , if you saw tomato, the size of your head, I, you know, you might be a little bit skeptical, they eat it.

, but really the only difference between genetically modified and what frankly we’ve already done through,  planting and diversifying traits over time is, is, is exactly that time.

One can be done on a very quick level and one takes,  , 30, 40 years to develop a giant tomato, but you’re ending up with the same result, . , 

Minnie: okay.  Let me just stay on Pontifex for a little bit. Can you tell me a little bit more  how you guys came together and then, , how you went from, uh, well, your first one was a hundred million to a $300 million fund.  

Gil: About six years ago. Now, a little bit more, the two partners with artifacts, ag tech came together.

One of them is named Phil Erlinger and one of them is named Ben Belldegrun to, invest in this space,  phil came from more of a traditional finance background, investment banking is that Lehman brothers, a senior executive for 25 plus years.

Ben ratchet ran a natural resource fund for Reverend Howard, the largest allocator in Europe. And they were both, you know, principal investors. And decided that this space, all the value capture was in the technology. You know, there was a ton of innovation coming out. It’s a huge market and ag, you know, have one of the top industries in the world, trillions of dollars there, and barely any of innovation puts a technology and just huge, huge gap in terms of capital.

They came together, created upon facts and I joined them to help build the franchise about five years ago. So the three of us set out to build a farm. We raised that first fund and it took some time, you know, the way that we did it was we built a portfolio of assets, portfolio of companies, five companies to start where, you know, we needed to fund it through.

At first, we had vehicles that we siloed these into to prove out the basis of, we think these can be successful. , so we had, we had five companies that we put together that we showed as a portfolio.  Here’s where we had a number of upper rounds. You know, we have very good traction, nice commercial success. And we were able to demonstrate these are early stage startups, you know, and that’s what these institutional investors were looking for, that we were fundraising from.

They want a growth capital investor in this space. So we carved out and said, look, we’re only focused on late stage. There’s a number of fantastic VC firms in this area that we collaborate with. But they’re more focused on the earlier say side sometimes. So go up upstream a little bit later, but they’re not deploying 20, 25 million per deal.

 And that’s what we became. So first we had that a hundred million, you know, first it was 50. Then we attracted more institutional capital by proving out, Hey, here’s the later stage growth portfolio.

We built the two 11 companies, boom, we had a hundred million. Then we use that on the success of our first bond.  To grow that to a fun, to and attract real solid institutional scalable capital. 300 million for fund two. And you aggregate that with fund one.

And we like to do co-investments with our fund to investors. That’s another thing a lot of these guys like to do big call investment dollars. They want you to lead it, that lean on you for the diligence and the expertise for this industry.   

Minnie: Is it  SPV before you’ve fully raised the fund

Gil: That’s exactly right. Or at least that’s how we started. we put those into five SPVs that were individually funded 

Minnie: . . And you guys are, you, you are based in,  Santa Monica 

Gil: that is correct.

Minnie: is the fund. Is everyone based in LA?

Gil: We’re all based in Los Angeles,

Minnie: Great. Let me just let me change topics entirely. Is 

qualcomm ventures?  I haven’t had anyone on the show to talk about Qualcomm , you know, what’s the right sort of company for Qualcomm.

Gil: Yeah. So, you know, when I was at Qualcomm ventures, it was, it was for, as you mentioned a little over six years. And when I came there, just to give you a sense where we were at iPhone two,   at that time apps didn’t exist.

You know, there was no ecosystem for apps. There were no apps. , but they were just, you know, on platform on device. 

. But at the time when I first came, it was very focused on hardware technologies, chip sets, things of that nature batteries that could really improve the mobile phone and then smart phones blew up, you know, and Qualcomm ventures invested in everything.

Within that space that touched the foam. And that could basically, the purview was, uh, accelerate the adoption of smartphones, accelerate the adoption of Qualcomm chip sets 

, but the purview’s still fairly wide there. So no, we invested in zoo we invested in Fitbit, we invested in. Ways, , they don’t like to think of themselves as a pure strategic we’re only going to invest in, you know, something that’s really that we can acquire later this and that part of the whole mantra behind Qualcomm ventures, why it was so unique.

And Y you know, number one investor in mobile over the last 20 years was because it took the position of we’re not going to be an invasive strategic, .

Minnie:  When I searched for your name on the internet, it said that you were teaching at general assembly. Is that true?

Gil: You know, I did a couple seminars. I wish I could say teaching. That sounds way cooler.

Minnie: did you do? I teach though? I’m always interested. Like, what were you trying to get across to your students?

Gil: Yeah. At th at that time , I was just trying to. Get people to understand , how to build a thesis in a specific area, and then execute on that. Especially if it’s not a core area that you would expect for venture capital firm.

Minnie: Yeah. I mean, I actually hadn’t thought about how much overlap there was with agriculture and tech. 

Gil: Neither had I.

Minnie: well now you’ve been doing it for the past. What five, six years.

Gil: Whoa, and that, you know what that’s, how,  my partners,  attracted me to the firm. I saw the opportunity in it. It was way larger than I ever expected.  And food tech in the last five years is absolutely blown up. Everyone’s focused on health tech. Now we overlap with, with food and diet, 

Minnie: hmm. That’s great. Well, anything else I missed today? Cause this was, I got a lot of great stuff.

Gil: No very wide reaching, but you know, if you, if you feel like, um, you know, contacting me, I actually recently set up a new Instagram account. That’s work-focused that’s, you know, for people who are entrepreneurs, people who are. You know, potential angel investors, people who want this, this advice in general, I’ve realized that it’s really hard to get exposure directly to a VC, . So I recently just started this apologies for being new and kind of weak sauce right now. But. If you want to contact me , feel free to contact me there.

The handle is at the young VC

Minnie: Awesome. I love it. Great. We’ll look for you on Instagram. I’ll share it in the show notes. Great. Well, Gil, thanks so much for answering all my questions today. It sounds like so much interesting overlap in agriculture and tech.   I look forward to staying in touch in the community.

Gil: Great. So do I

Shahin Farshchi — Lux Capital

Lux invests in emerging science and technology ventures at the outermost edges of what is possible.

Lux will write $10- 15M checks and they are not afraid to invest pre-product and sometimes pre-company.
 
Shahin has fascinating insight on automation, autonomous cars, AI and more.

View Transcript

Shahin Farshchi is a partner at Lux Capital. Lux is a top VC fund with approximately two and a half billion under management. Lux invests in emerging science and technology ventures at the outermost edges of what is possible. Shahin is an engineer with a Ph.D. in electrical engineering and believes in accelerating humanity towards a brighter future through feats of engineering. I love that. Shahin, thanks for coming on the show today. Great to be here. Thank you for inviting me.

Awesome. Well, I usually like to start with just the basics of Lux so our listeners kind of get oriented on your current fund, stage, that sort of thing.

Totally so Lux started life in the bottom com bust with the hypothesis that the next wave of great companies will be rooted in innovations in the sciences. And since then, we’ve grown to invest across health care and technology. So now we have a team of about 10 investment professionals with backgrounds ranging from stem cell biology to physical chemistry to material science, to myself having a background in electrical engineering. And a lot of what I’ve done at Lux has been on the technology side.

So everything from basic semiconductors and communications technologies all the way to robotics, automation and autonomous cars and software tools.

Is this fund six for you folks? This is fun.

Six. So we are currently investing out of two pools of capital. One is a venture fund and the other is a growth fund. The growth fund is dedicated to doubling down on the winners out of the venture fund.

And we have about 20 percent of that set aside for investing in entry point growth companies. So check sizes can be typically around 10 to 15 million dollars out of the venture fund and double that for the growth fund.

Interesting. So I thought in your venture fund, you still would call yourself entering at really early stages, right? I think you said sometimes there isn’t there aren’t even paying customers.

Is that true? Sometimes there is even a company. So on many occasions, in fact, two over the past couple of months, we’ve invested in companies or behind people who have the expectation to start companies. So we’ve committed to being the first dollars in as soon as they choose to incorporate. And those have been amazing experiences for us as a firm and obviously turned out to be very personally rewarding for us because we feel like if we have a role in the creation and hopefully the ultimate success in these companies by being part of them at their inception.

And so in those scenarios, the checks may be a little bit smaller. It may be five to 10 million dollars.

And so so you’re doing seed investing, maybe series A investing again out the venture fund. But this is really preseed and is that distinct from I mean, not to put labels on things, but is that distinct from sort of the incubation efforts that you mentioned?

You guys are also doing so in some occasions. We do ideate companies. We’ve done that several times and it’s something that we’re very excited about, but that is distinct from getting behind entrepreneurs before there is a company. So there is the incubation of a company where one of us comes up with an idea and we put some people to work and we ultimately find people who would take over these businesses where we recruit leaders to take over these businesses.

I would put that in the incubation category. And then there is building relationships with top entrepreneurs and executives who are aiming to start companies. And we basically line ourselves up or position ourselves to be first money into those companies along with those entrepreneurs.

Has that changed for you, as you’ve seen? I don’t know, deep to get more trendy or more people coming into the space. I guess that’s my first question.

So these companies have certainly become more capital intensive. So I think the the motivation of founders to partner up with investors early has increased, knowing that rather than having to raise maybe, you know, 30, 40, 50 million dollars to get to an exit, they’ll have to raise hundreds of millions of dollars. So having a deep pocketed partner committed to the company on day zero is something that is perhaps more attractive to the entrepreneurs today than it was maybe several years ago.

So because I don’t have a billion dollar fund, you know, often actually it’s attractive to me to look at companies that are fairly capital efficient.

Would you say that you almost have the opposite approach.

I think having to raise a lot of capital is necessary for a lot of these businesses. So, for example, if you’re building a autonomous car company or if you’re building a semiconductor company or if you’re building a communications company where there’s an infrastructure component, then you certainly need to raise a significant amount of money. 

And so I wouldn’t say that we we seek companies that are super capital intensive, but we’ve positioned ourselves to attract the very best people who are building these companies that are off the beaten path.

What do you think makes them most interested in in working with you?

So founders look for people who can complement them, who bring skill sets that complement theirs.

Just because the founder is doing something in semiconductors doesn’t mean they should be talking to me. It looks I have other partners at Lux that have seen these kinds of companies grow and probably would be better fit for those foundries based on their personalities.

Well, then I’m dying to know what your personality and your style is, because, yes, if I were building a semiconductor company, I would probably come to you. But maybe you can tell me more about your your style.

That’s a good question. And I think this is probably a better question for my founders.

 And I think it goes back down to the humanity or the human aspect of this business. If this business was all about just money and Rolodex and connections, then it could be it could be very much automated.

And so I am the outcome or the products of my 15 years at Lux, having invested in deep tech companies, having seen these companies succeed and fail for many different reasons.

And I think founders come to appreciate certain subsets of those experiences.

Do you think your style has changed? And do you think there’s certain investments or events that have been very seminal in sort of changing your outlook or your style?

Absolutely. So I entered the venture scene as a failed entrepreneur slash postdoctoral scholar, trying to pay his bills in Los Angeles, and I observed so many extremely talented scientists and engineers either struggled to raise money or succeed in raising money, but struggled to.

Generates an outcome that made money for their investors or for themselves, and I came to appreciate how technology in itself isn’t a value creator.

I entered venture at a time when there was a investment strategy or an arbitrage opportunity that was starting to go away back in the late 90s, early 2000s.

It feels like as if there was money to be made by simply licensing technology out of the university or out of a lab and wrapping it into a company. And there were buyers of that for something on the order of, let’s say, the low hundreds of millions of dollars.

That was a time when that technology was not as complex when taking a technology to a product didn’t cost as much and didn’t take as much time. And so there were far more willing buyers. 

Those times have changed. Right now, you have to cut a larger check to get modest ownership in a company that needs to raise a significant amount of money. And there won’t be an outcome that would be interesting for you unless it’s in the billions of dollars.

And so that has therefore changed the emphasis from technology to business and technology simply being a means to an end.

So what I spend a lot of time looking for is not just great assets, but thinking about how these assets, how these technologies can yield an unfair competitive advantage for a business that would then generate margin, that can be protected over time, that will grow and generate a great outcome for us. 

That’s a good articulation. Thank you.

Well, let me point out a couple of things in your background and maybe you can tell me more about it.

So you have a strong background in autonomous vehicles and you invested in Zook’s extremely early and they’ve been a lot in the news. And Amazon is about to launch something.

Can you tell me more about autonomy and what you know, what sort of services do you think are going to be built on top of autonomous vehicles and exciting things you think might might we might see in the next decade or so?

I view autonomy as a feature and as a component of different types of businesses and products. If you look at autonomy as a components or a feature in cars that people purchase at dealerships than it is a convenience feature, it makes the car as yet another luxury feature. And as you can see, with Tesla and GM Super Cruze, we’re already seeing some of that today. As it relates to ride sharing.

It has an impact on unit economics. So ridesharing companies live and die by dollars per passenger mile driven. And so if autonomy can reduce their cost as it relates to dollars per passenger mile driven and increased their margins, then it’s obviously very meaningful for them. So these are two very different ways of looking at autonomy. In the case of a automotive company, in the case of Ford, they’re trying to see how they can minimize what it costs to add a feature into their vehicle and maximize how much a consumer would pay for that feature in their vehicle.

That’s very different from how a Uber and Lyft would look at autonomy. And then there’s a question for the Amazons to Shopify as the door dashes the insect parts of the world who are currently using.

People, so, unfortunately, when people use the word autonomy, they they they imply it’s something monolithic. Whereas I view it as a feature. I view it as a capability that has very different implications and very different applications.

And the perspective varies widely for these different applications.

So in the case of of more the ride sharing type networks, do you think do you think that, you know, fast forward a number of years, do you think that we’ll see different services or sort of different ways of interacting with these companies? Because, you know, I’ll go to sleep in my autonomous car and wake up in Vegas or something, and they’ll just be different use cases. So I expect different use cases across different types of companies and there will be new companies.

So an Uber and Lyft today, they sell passenger miles their product to you as a passenger mile and is probably more amenable to a trip from, you know, your your apartment to the coffee shop for a one hour meeting and then a trip from that coffee shop to another coffee shop for another one hour meeting, which is primarily my use case for for ride sharing. Now that, of course, Uber and Lyft may also be able to offer the product where you go to sleep and you wake up in Las Vegas.

But that may not be as easy for an Uber and Lyft to offer than let’s say another company is a new startup to offer that specializes in that kind of experience, that kind of product, and going out for that kind of customer. So there’s going to be, to answer your question, a summary answer is that there’s going to be significant impact to existing companies that use autonomy as a as a tool.

And then there’s going to be new companies that are going to be made possible and created through these technologies that are now available.

I think a lot of what you’re investing in, you know, feats of engineering captures people’s imaginations in good ways and bad ways.

And I was a no, it does. I mean, like, I you know, I has a lot of potential, but it’s scary to a lot of people. And so, you know, how how do you address that sort of aspect when people say, look, you know, our jobs are going away because of automation and that sort of thing?

That’s a very good question. So my response to that specific question on AI and jobs is that if you look at economies that have not embraced automation, it turns out that those economies also suffer from the most unemployment. That’s just basic statistics, whereas economies and countries that have adopted have adopted automation also have the lowest unemployment. And so it’s my expectation that that trend will continue where more automation, yes, it does eliminate some jobs, but usually the jobs that are eliminated are jobs that are very difficult to build and it creates other jobs that are easier to fill and are more attractive.

And you end up with a net effect of more consumption because the unit economics of whatever you’re producing or whatever you’re offering goes down. And as you’ve seen, whenever costs goes down, refrigerators got cheaper. Guess what? People have two or three refrigerators in their house. TVs got cheaper. Well, before we used to sit in the living room and fight over the remote control. And now there is a TV in every room and pretty soon every bathroom.

So with the when the cost comes down, there’s going to be more consumption. And that goes back to the virtuous cycle conversation we’re having earlier, which leads to more jobs, more demand and then more jobs. So it’s my expectation that more automation will create more jobs. But there is a there is a catch to this. And the catch is that there needs to be education that’s broadly available so that the existing workforce will be positioned to take advantage of or to take on these new jobs.

And so I think the onus is on our educational institutions, our governments, to make sure that. These and our existing employers, by the way, so the employer who is adopting this technology, I think the buck stops with them for them to make sure that their existing workforce is going to be trained, to be able to have or take on these new jobs that are now available through automation, through technology. So a line worker, for example, who used to put life and limb at risk to put a piece of sheet metal and a 20 ton press is now operating a robot that does that well.

They should be educated to be able to operate and debug that robot in the event the robot fails.

What about a more vague fear but that, you know, artificial intelligence run wild and, you know, we’re going to be controlled by that sort of the singularity?

Is here any any pieces of that that that ring true to you are interesting to you?

Well, I hate to break it up, break it to you, but I feel like we’re already being controlled by A.I. I feel like a lot of us are already being controlled. Our happiness or our interests are very much controlled by the A.I. that serves up Facebook and Instagram feeds. I feel like a lot of our behavior, a lot of our choices are very much driven by the A.I. that results in the Google search results that we see. And so I feel like that that day has already come.

We are already controlled by AI. Now, at least today we feel like Zipora at liberty to control our own destiny and we don’t feel like we’re under the iron grip of killer robots.

Will that day come? I highly doubt it, but I am more concerned about where we’re going today with a guy with where A.I. is and the way it impacts us today. So I wouldn’t worry too much about the Armageddon, about Terminator is what is it?

What’s the word that that day, judgment day, I would be less concerned about judgment day in twenty thirty and more concerned about twenty twenty where A.I. has level of impact than it does on us.

I think a lot of it is in our control as to how we manage that and how we consume social media, how we consume the news and how we go about finding information and making choices interesting our own values.

So you’re saying a lot of that is on us, the individual consumer user, as opposed to it’s on us sort of structuring our society differently.

I think it’s still early, I think. It’s a combination of both. 

If there are systems in place where it becomes or there is a requirement that when you type in a search, there should be some way of of you being told how much of the search result is influenced by someone. For example, the fact that the search results, if I type in tires, tires for a BMW and the search in the first search results is Continental.

But I want to know, who was it that that that that had? How did that search result become and why? Why is Continental first? 

So I think a level of disclosure coupled with consumer education, I think will address a lot of these concerns.

Hmm.

The disclosure and we saw that, for example, with the markets back during the the Great Depression and with the advent of securities laws, you know, you can still to this day be duped into buying stocks, but it’s more difficult for someone to dupe you from a legal perspective. And people today are far more educated today than they were, for example, you know, versus those people that were buying railroad stocks in the late eighteen hundreds.

OK, so let me take this in the positive direction then, which is I think you talked about, you know, automation is necessary for us in a manufacturing sense to to stay competitive. What about much more on the the desk worker and how how does automation, you know, potentially improve our lives? I don’t know if you’ve heard Elon Musk talking about meat flaps and we’re all made out of meat, but like, how do we improve our own sort of intellectual?

How do you know what I’m talking about?

Yeah. So I’m just as excited about. Automation in factories and cars, as they have about automation for otherwise mundane desk or White-Collar tasks, and if you look at a lot of the great venture outcomes and the recent years, companies like snowflake companies like data breaks. These are very much automation companies. They call themselves data companies that are referred to as data companies. But they are reducing a lot of the work that someone has to sit down and and and manually do so.

And I expect them to be the first of many companies that we see that may be labeling themselves as something else, but they’re very much automating tasks. And that’s very much been the role of software from the advent of software. An algorithm is a sequence of steps that’s used to automate a process. And so.

Anywhere there’s software, there’s automation 

One of the reasons why I decided to become an entrepreneur and later go into venture as an electrical engineer was because I figured that my own job, which was sizing transistors and putting them together into a circuit to build an amplifier or to build a logic gate or to build a buffer or a filter that perform certain tasks, I thought to myself, man, this is going to get automated and I’ve seen it before, and other tasks of engineering and engineering.

There are people that walked around with slide rulers doing calculations that was completely obviated by software in the 80s and 90s. And so it’s my expectation that there going to be a more rapid pace of the automation of these types of technical jobs. And the onus, again, is on the educators and the employers to keep people educated so that they be ready for the next generation of jobs.

I think the system of universities taking you in for four years, charging you tens now hundreds of thousands of dollars and putting you out there for the rest of your life, I think is an anachronism. 

But why is it that our educational system can get away with you not getting a job or you’re not being able to pay your student debt that a few years after graduating? So it’s my expectation that’s going to be more there’s going to be more accountability on behalf of the educators and on behalf of the employers.

And that’s going to help our workforce be constantly ready for those new jobs that are being generated.

Your LinkedIn says San Francisco because Lux is actually based in Menlo. It says Bay Area. Right.

Have you always been in L.A. since you joined Lux?

The office is in Menlo Park before covid. I would be up there Monday through Thursday and some weekends and since covid, I doubt that back to every other week because obviously there aren’t as many in-person meetings going on. However, I do expect now that I’m married, I do expect to to spend more time in L.A. I have a couple of boards that I sit on down here.

The company is doing absolutely fantastic.

I think that there is no shortage of amazing talent in L.A. There’s no shortage of amazing leadership and entrepreneurial horsepower in L.A.. 

Anything else on Lux that I should make sure to take cover here? I feel like you covered it. Is there any other anything else that you’re curious about or you think your your listeners will be curious about? Yeah, I’m curious. If you were to start a company, what company would you start?

Good question. If I were to start a company. So there there’s a few areas that I’ve been tracking along the lines of. How it’s manufactured and the amount of automation and economies that are being brought to bear that would make it possible for a startup to compete in areas that until now have been dominated by large incumbents.

So there’s a couple that I’ve been thinking about in the semiconductor space and also in the in the in the manufacturing space. So it’s still early on. But again, those are the kind of motivators that would make me excited about about the next kind of Lux company.

Interesting. Is that the sort of thing that you would incubate yourself? So if I’m fortunate enough, my my preference is to find a person who would carry it, and in the case of subspace, for example, which is an L.A. company.

You can have a 50 gigabit per second connection cable at home, but still have an awful connection between, you know, Los Angeles and Austin, Texas. And I’m sure a lot of you have mean I’m sure you’ve experienced this with with video conferencing before covid. And it was it was an idea that was that was that was on my mind.

I met an amazing founder of Tofail who is in the process of selling his previous company, who had a track record of building companies in the networking and telecom space. And I was delighted to find him and to partner with him and for this to be his baby, his vision to carry forward.

So if I am fortunate enough to find a founder that is willing to take this on, that I have one hundred percent for partnering up with them. But if I’m less fortunate and can’t find someone, then it’s something that we as a firm would do in-house.

Well, thank you so much for for coming on the show today. And, you know, I wish you a lot of luck in accelerating humanity towards a brighter future. Keep doing that.

That’s the plan. Thank you. Minnie. 

I didn’t ask you about diversity in deep tech, which is something I think about. 

So I think the the the root of that is just not having about there not being as many females in a lot of these technical fields. 

I think some of it also has to do with demographics. What’s not just it’s not just gender, but it’s also demographics. So I feel like as if a lot of these deep technical fields, at least in the undergraduate realm, are or graduate are dominated by foreign students. And it just so happens that it’s more likely that a male would leave their country and come out to study abroad.

For example, when I was at Berkeley undergrad. The vast majority of my classmates were from Asia and South Asia. 

And so I think it’s not just gender, but it’s also just the demographic of the foreign students and then foreign students being predominantly male. Hmm. Yeah. And why is that? I mean, that goes back to the culture as the cultures of origin.

Tracy Gray — The 22 Fund

Tracy shares insights on manufacturing, why exports matter, industry 4.0, and the state of diversity in venture today.

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Tracy Gray is the founder and managing partner at the Twenty Two Fund, EIR at LACI, the Los Angeles Cleantech Incubator. And she first got into venture almost 20 years ago after getting an MBA from Columbia and Berkeley.

I’m not sure if that’s awesome.

The twenty two fund is growth venture capital for manufacturing companies to scale into international markets. Tracy, I’m super excited to talk about why the U.S. needs to build our export capacity and also to hear your perspective on the venture business.

Well, Minnie thanks for having me. I appreciate you wanting to hear from me. So what people a lot of people in the United States don’t understand trade and globalization and exports. Many times I’ve talked to people say, well, we focus on exports, import export. What part of exports did you not understand and really do not understand the difference? So most economies around the world, their economies are based on exports, and that means selling goods made in your country to another market outside the world.

And that is because it creates jobs and it’s a great economic development tool. And that is why most countries around the world do that. Now we are very domestic oriented. Internally, fate focused only one to three percent of our companies, small, medium and large export. We’re where Germany is like forty two percent of their economy is based on exports. And they and all the companies that made it to the last recession, Brazil. India, Russia.

Germany, France, when they made it, they made it through because they’re the foundation of their economies and exports, ours is consumerism and so we depend on each other buying from each other. And if we’re in a recession, who are we going to who’s going to have money to buy buy your products? No one. So exports is just business one to one. It diversifies your offering into different markets so that when one is down, you still have places to sell to.

And so why don’t they export? Well, I think it’s just culturally, America doesn’t think outside of our borders. Oh, yeah, that’s true. It’s a cultural thing. We don’t we just think we’re we think we just need to sell to each other. And there’s a big enough market. We’ve been the biggest, biggest market in the world for so long that we haven’t realized the rest of the world has moved ahead of us. And now, you know, the last administration was trying to close in close and close our economy even more.

And it just doesn’t work so that it’s more culturally how we are not sure that makes sense.

And like anything else, if you don’t see it happening in your neighbor, a neighboring company, you might not know it. But there must be other reasons, like if I’m if I’m making something because the twenty two fund is focused on manufacturers. Right. So if I’m making something, you know, I would think there’s regulatory environment. There’s other things that I need to navigate in order to export.

I worked with the Brookings Institute when I was an adviser to the former mayor, Antonio Villaraigosa, looking at why don’t we export, why don’t our companies export?

They started in L.A. to look at this and then they spread across the country to different market, different regions to try to get us to export more. And what happened was a lot of it was fear. Hmm. Was fear of being taken advantage, fear of not speaking the language, fear of not knowing the laws, fear, fear, fear. And then once you got past the fear, if you fixed all the fear within the value chain of exports, then there was no capital, the end of it, than you need, you need to know the regulations on this side of the pond and then regulations in the other market.

And that’s part of the fear you have to. And to do that, you have to have partners in the next market. So what we do is we try to mitigate all those risk and all those fear throughout the value chain of exporting through our strategy and through our partnerships. So fear is a big part of it. Hmm, OK. Once you export to one country, it’s easier to export to other countries because you take care of the regulations on our here in our country.

Duplicate that, you know how to do it. Then you can start going to other markets and just worry about the regulations in the initial markets.

So do you have any sort of playbook you would recommend in terms of, you know, start selling in Canada because they’re our neighbors and they’re an easy market? Or do you have anything like that?

Or just just you have to do the market analysis to see if they want your product.

Right. OK, and there’s plenty of services to do that. We just our companies don’t know it because they’re either non-profits or it’s government. So there’s no marketing to tell you how to do that. And people. So partly what we do on an advisory level with our fund is we help you connect. You connect all those dots to where you need to do go to understand what you have to do to export. And then, like I said, we have partners in every region around the world right now, I think for Australia, but we kind of do there and they help you enter.

They’ll do your market research to see if your product is right, who you should partner with, what regions within Europe is best for your product, what parts and China might be best for your product. All the things that you need can be there, services to do that. And our capital is used to pay for those services. Right.

OK, so tell me about your capital. What sort of companies are you looking at and what sort of capital needs are you talking about?

So we make sure that we meet the company where they are. So we invest equity, some debt with warrants and revenue, share whatever works for that company where they are.

There’s a lot of these companies aren’t, you know, white dudes on Silicon Beach or Silicon Valley who understand who are around the ecosystem investing and they understand what equity is. Some of these companies are like, you’re going to take my business that I’ve been growing for 20 years and you’re going to take a part of my company. They don’t want that. 

And I think that’s the way a lot of capital is going, especially capital from women and people of color, because we understand that we’re not we’re not all thinking that same way.

Can you just give me the the basics of what Industry 4.0 is.

I can give you the basics because it’s my partner who can give you the details of it. But it pretty much is using technology to make these processes more efficient and more profitable. It’s efficiency, right? So a lot of people are thinking, oh, A.I. and robotics, that’s going to make things more efficient, efficient, but it’s going to kill jobs. It just changing jobs. And that’s what 4.0 is going toward, is making us more competitive with the rest of the world who’s already on this.

And we’re we’re a huge manufacturing industry here and we don’t realize it, but we’re an old school manufacturing.

And so a lot of it part of what our capital also does is the advisory’s to help these companies. When I made up this term uptick, along with up skill, their workers, we uptick their processes data and frame this a little bit for me and sort of the macro world.

We’re living in covid. There’s a lot of a lot of jobs that are actually going away right now. What I mean is that just what people are saying are the jobs are changing? Well, I feel like it’s maybe it’s small businesses that are shutting down and that sort of stuff is what I worry about, I guess.

Yes. But we also have a two point four million open positions that can’t be filled because of lack of skills. Point four in the man just in the manufacturing sector. So this goes back to jobs are changing.

Small businesses are manufacturing and those are the ones that can grow and they’re usually in underserved communities also lack the capital because all they get is a bank or some kind of other predatory capital. So jobs are. Are changing. I want to get people to understand that it is changing jobs, not losing jobs, but have to we have to work with the workforce development organization so that they don’t do the old school kind of job training, but they need to be educated on where technology is going.

Mm hmm. Mm hmm. Interesting.

And and you and I talked briefly what I said something like, you know, do you consider yourself an impact fund at all and maybe feel free and feel free to correct me or tell me your thoughts on sort of impact nowadays?

Well, I can be people get mad at me because I think I, I grab onto words and correct people around words. But words do matter because they create a mindset. Right. So, I stopped calling myself an impact investor because a lot of the impact investors tend to silo themselves in one area.

Right. So you’ve got the climate change moment that the gender folks, you got the racial justice folks, you’ve got the economic development folks. But what people don’t understand for women and people of color, we’re hit in all of that. 

So I’ve been calling myself and our firm holistic investors, women and people of color, we’re not they always see us as the victims of some of this stuff. But we are the ones that are come up with the solutions. So we are the innovators behind this because we know what’s happening very closely in our communities.

Tell me how you sort of got to this in terms of you were working for Mayor Villaraigosa and what were you doing there? And how did how did you like working in government? Well, I was you know, I don’t want to say I was fortunate that I was very autonomous, so I was a senior adviser, advisor for international business and marketing. So I just was able to go around the world and do my job.

And my job was very externally facing. But if you have a job or you’re doing a lot of policy and it’s internally and it’s, you know, it’s like. Power corrupts, mm.

How do cities how does the government approach this international business angle?

Well, governments understand that first foreign direct investment needs to come here FDI. You’ll hear that term needs to come here where people are investing here and we need to export only now Art. And they understand that and a lot philosophical level. And it’s really important to most.

Governments from the state to local, but they don’t know. That you have to connect it to business, like you have to work with the businesses. And you can’t just tell them this is a policy we’re going to do because we think it’s right and expect business to say, yes, we’ll line up because that’s going to help us to be in partnership. So really has to be greater public private partnerships.

Mm hmm. Leverage both to get things done. And we tend to just get on our own side like businesses wants government to stay out and the government wants to tax business. We just have to look at it very differently. 

What is a good public private partnership? Like, I, I don’t that phrase doesn’t fill me with. Oh, that sounds like a functioning group.

Well, I mean, one example is the Los Angeles Clean Tech Incubator. That’s where I was going. Tell me about that. Great.

That came out of the it was birth out of a policy Antonio Villaraigosa office and grew from there. And it is paid for by so the the building itself, which is if you’ve never been to it, it is the one of the most beautiful places you’ll come to in the tech world in Los Angeles, if not in the country. Beautiful building. The Department of the DWP owns that building.

And then they have different private capital coming in to run the incubator, and then a bunch of different industries from transportation to energy. They’re all coming together, working on policies and working on policies that help the startups. And the startups can help government be more efficient. So that is what I mean. I don’t really know the programs that Laci works on. And I have not been to the building and I have been told is beautiful.

But, you know, is it is it incubation of startups? That’s what I’ve seen. But then also policies yes, it’s how you leverage policy to help the clean tech industry or whatever people are calling climate tech now and vice versa. How does innovation help cities and governments and how does it lead toward economic development?

Their goal is job creation or L.A. County. And so they’re coming. They come together and see that there’s policies you can pass to do that, that help these these innovators and vice versa the government has is picking winners and losers, whether we want to believe it or not, in the in the private sector.

They are doing that when when these venture funds get pension money, that’s all public money and the pension funds are choosing these certain look and feel to put their money into. Whereas most of the pensioners look like you and I, yeah, they’re giving their money and making rich white men richer. Right. So the government does make bets on winners and losers. They’re just not doing in a way that’s helpful for everybody. And I’ll get off my soapbox because that’s my thing.

No, I’m completely actually. Let’s stay on that soapbox for a second because, I mean, my lesson of life as I grow older is that you have to follow the money and follow the money. And then you get to what really moves me on. The big pension funds do move the needle and they are still traditionally just fighting for allocation in the top. You know, whatever names that you’ve heard of in Silicon Valley right now, 80 percent of their capital investment capital goes to white men.

Or more. I mean. Ninety five. It’s in the nine. Yeah, yeah, exactly, do you feel like I mean, so I said this in my introduction, you first started in this industry 20 years ago.

It hasn’t changed. When I started in venture capital, six percent of the venture capitalists were women. No, 10 percent. It’s now five I looked at recently. It’s five point nine percent are women. And how is that possible when we know how many more women want to come into this industry? Yeah, that possible. Yeah.

I mean, I think there’s some horrible statistic that you might know, but it’s like there’s like 50 black women who’ve raised more than a million dollars.

It’s something like like thirty seven. So black women get point zero zero six percent of venture capital. 

And that’s not statistically possible that the rates we are trying to come in without systemic sexism and racism and structural barriers, putting your most positive hat on this systemic problem? What where do you think are the big levers? What’s the sort of constructive feedback here that you think will really move the needle?

Well, the biggest problem is the due diligence process for a lot of institutional investors and LP’s. It is the bias is baked in, it’s baked in. I’ll give you an example so they’ll say, OK, you’re doing your first fund. We need a tribute, a track record to you, huh?

If there’s only one less than one percent of the venture capitalists are black and brown people power. And you can’t get into the funds to get that track record. How are you supposed to get that track record and start there? So then they say, OK, you might have the track record, but have you work together?

Well, if I can’t get in there to get the track record, how are two of us going to be able to get to work together? And then they’ll use words like, you have to be professionalized or institutionalized or investment ready. Well, that’s coded language. And what does that mean? What lens are you looking through? If I’m an outsider that never let in that ecosystem and I’ve been outside of all this time, I think I have some idea of what it looks like. But do I really? And you’re going to base your investment on the fact that I haven’t been in that industry and something that can be easily fixed, my back office and all my fund administrator and all that.

But you’re going to say, no, I’m not institutional ready? Now, if that’s what happens and I am our back off and let me clear, ours is ours is very sure.

And is Monica Monica? Is she your partner? One of my partners. Monica Doti. Yeah, because I listen to her on the Harvard Business School podcast.

Right? Yeah. You first woman. The first one that was Women Investing Women. Yeah. The Women’s Venture Capital Fund in the middle of the recession. She raised the.

Yeah. Now you guys are about as amazingly, you know what investible institutionalized. Right.

When do you feel like if something’s not working, when you put that on yourself and say, oh, you know what, this is valuable feedback, like I’m not looking institutional enough, like I should take that as feedback. And when you say, you know, fuck that, like it’s it’s something wrong with the system because I struggle sometimes, like, I want to hear the feedback.

I’m a Buddhist. I’m a Buddhist. And so I strive. I try to start with compassion and I try to put myself in their shoes. You know, they they don’t know what they don’t know and they’re so comfortable where they are. So if I have to show up in the rare suit I have now, if I have to show up in a suit and put my hair up because dreadlocks scare people, sometimes I’ll do that if I have to to raise my fun.

But I’m not. I have to be authentic. I think if you just start with just be authentic, you should be able to fit anywhere. Look, I started as an engineer on the space shuttle program, how nonblack woman with dreadlocks is that?

I know how to be in those rooms. And I did that a lot as a young woman because we all had to. But I just it’s exhausting and I just don’t want to I’ll show up who I am taking you take it or leave it.

No, like, leave it, I have to say.

OK, OK, I have a lot of people that’s funny.

Anything else, like you have a bazillion things on your background, like your trusty at Cal State Dominguez Hills. Oh yeah. Yeah. Because I really didn’t know anything about the hills until they asked me to be on their foundation board when I was a treasurer. But what I love about them is they are only there. Their mission is to serve the people in the community next to them and then 60 percent of their students are women, the majority are black and brown.

One of the things that that really got me there, Tony, how they work with the community. And they said we started with high schoolers and we bring them on to the campus and then we realize high school’s too late.

Let’s go to junior high. And then they were like junior high was too late. So they have programs all the way to kindergarten. All around them, then they then they said, well, these students have parents that are working multiple jobs they don’t have and they don’t have transportation to come to our campus, we need to go to them. And so they created these mobile fab labs with all this technology and they go to the different schools and the kids work on things.

And one of the schools is a home is the majority of kids are homeless and they are bringing technology. So they’re just doing things very different than any other campus, USC in the same neighborhood and USC walls themselves off right out of fear, right? Dominguez Hills campus is wide open.

When you go there and they’re in the same neighborhood, so it’s all your mindset. And so that’s what got me. And every time I go there and I see the work they’re doing, I literally end up crying every single time I’m in tears because and, you know, in a lot of their students are homeless themselves or living in their cars. Study of all the CSU system, it’s really criminal. But these kids are just like, I want an education.

So if I have to live in my car and I want to get food is and when I’m on campus, I’m going to do that. And so I’m like, why do they have to do that? I didn’t have to do that just to get an education. So I would help bring money and capital to them so that these students can get take that off their back and just learn so you can imagine what’s happening for them right now, you know, there in parking lots where they can get on to some kind of wi fi so they can do their homework.

Yeah. Well, anything else in your background, like there’s so much to cover. It’s great or anything else about the twenty two fund? Look, I’m so excited it exists and you’re leading the charge. Oh, you are.

You did ask about the type of companies I can tell you. Tell me about that. One of the companies that I love and I won’t say the name because we still haven’t made the investment, but it’s a hydrogen and electric trolley system, meaning they are they make trains without overhead wires. And you don’t have to dig into the ground and uproot the utilities so you can bring in these trains cheaper. It’s for those last mile destination. So example they’re doing that, the transportation for the World Cup, Qatar.

Oh, cool.

They are there about twenty, twenty five years old. It’s a lot. Next man start started it in Chatsworth. So it’s like it’s in the lower income community.

It’s a brown man, you know, it’s clean, which are really about if you ever go to the grove, you know, that little trolley that takes you around in the grove, you know, but I know of it.

That was their first version 20 years ago. Oh, awesome. Electric. Yeah. So that’s the kind of like we want sustainable, clean manufacturing companies that can grow jobs and they’re innovative and that’s what we invest in. But then, we’re industry agnostic. It’s just as long as you’re making something.

Yeah, that’s great. Well, I, I learned a lot and it’s like very convincing that we should be focused on our exports and not just consuming so much here.

Your investments, if you have any manufacturing investments and you want them to grow internationally, now you know where to go.

Fantastic. I’m so glad you’re here. I’m so glad you’re doing what you’re doing. And I appreciate getting to know you better. You too. Thanks.

I’m still humbled and honored for you wanting to speak to me. 

Scott Stanford — ACME

Scott has invested in Uber, Facebook, Slack, Square, Robinhood and others… there was probably more than 30 mins worth of stuff I could have learned.

Before starting ACME, Scott was the co-founder of Sherpa Capital and before that he was head of Internet investment banking at Goldman Sachs.  
 
And now proudly part of the LA venture community!

View Transcript

Very excited to have Scott Stanford from Acme on the show today. Before starting Acme, Scott was the co-founder of Sherpa Capital. Scott has made investments in companies that you have heard of, Uber, Facebook, LinkedIn, Square, Slack, Robinhood, Palantir. It’s a crazy amazing list. Check out his website, Acme.vc. Before starting Sherpa, Scott was head of global Internet investment banking at Goldman Sachs. Scott is another great example of all the best people moving to L.A..

Scott, thanks for coming on the show today. Thanks for having me.

Excited to be here on the show and frankly, excited to be in L.A..

Great.

Maybe you could start with just telling me a little of about Acme and kind of the basics of sort of the evolution from Sherpa to Acme.

Yeah, sure. It’s all based on a similar premise, and that is finding opportunities to part with to sorry, partner with incredible founders. Everything we look for kind of has disruption at the core. We we thrive on disruptive business models. We thrive on disruptive technology. And when the two overlap, that’s even more exciting. We’re all kind of technologists, geeks at heart. When you look at our individual backgrounds, we’ve all been doing something in tech for pretty much as long as we’ve been doing so.

We’re doing this out of passion. And when we find founders doing something really exciting and disruptive, we get excited. If you look at our website, you mentioned the Acme.vc. We put something up there recently that had really been just more of an internal thing we used with an investment committee, and that is this “dare” to challenge where we would dare each other to get up in front of investment committee and say, OK, dare to imagine X, dare to imagine turning the this segment of the health industry on its head.

Dare to imagine putting it two hundred fifty three hundred pound models on the runway in lingerie. I dare to imagine taking a critical technology and infrastructure and one hundred x the efficiency and reducing the cost in an equivalent way. And that’s when we kind of sit up and get excited. If someone’s coming to me and saying, you know, dare to imagine a cloud optimization software that will shave off three basis points and sure. Lots of money for enterprise servers. It’s a big yawn.

And that’s not because those aren’t great businesses. It’s just we don’t have that DNA. We don’t have that experience. We don’t we we we don’t even know how to listen to that pitch.

So with that dare to imagine, do you think that you sort of take more risks or how do you think about the risk that you will take or won’t take when looking at an investment? That’s a great question, and we are early stage investors and by definition, we are taking more risk than than a growth investor. However, we’ve been through this, our 10th fund, if you look at it collectively between Hany and my experience, we found this kind of place, this calibration point where we’re not we’re not investing in science projects.

You can never derisk a series of investment. By definition, half of our investments are going to fail if if fewer than half fail or fewer than 40 percent fail.

We’re not doing our job right because we’re not taking enough risk, because the way early stage venture works is you have one or two successes in the portfolio and that makes the success of the fund and your and you’re generally coming in series A.

So think of it this way. A three to eight million dollar check gets us ideally approaching kind of double digit percent ownership depending on the stage. But we underwrite a little bit less on ownership and a little bit less on stage and more on return profile.

So we’re really trying to see a pretty believable path to a 10x return. Plus, and being an independent company, we don’t play the M&A game frankly, that takes us out of a lot of interesting opportunities there. Here in L.A., I see all kinds of really cool early stage startups.

But not surprisingly, given the DNA, the the the LA is to do with branding like kind of a corner brand, the next fill in the blank–drink, nutrition supplement, whatever, and you can make a lot of money investing in those things. Hard to see the next GNC being built, hard to see the next Coca-Cola being built. Of course there are the breakouts, but oftentimes the exits for those companies, if there is an exit, will be an M&A a couple hundred million dollars a minute.

And that’s not going to do that’s not going to do what we need to do for the economics of our fund.

So do you think like, um, do you think that lends you to investing in people who are a little I want to say crazier. That sounds unfair to your founders but like. Frankly, we’re crazy. So it’s the pot calling the kettle black. Like if you look at what we do on our weekends and our free time, it’s what we do during the workday. Like we are obsessed with technology or coding.

We’re reading. My partner loves Dungeons and Dragons. Like that’s just what we do. And so when we find founders that have that genuine passion, we get really excited. 

And is this the same as what you were doing at Sherpa? 

Yeah, very similar. We have friends that we have the entire team, but we’ve added a bunch of people, added three new partners. But it’s the kind of core operating team, the back office, everybody is still intact. So from a culture perspective, a team dynamics perspective, it’s it’s all the same. We we’ve definitely refined things and focus them. As I mentioned, we had a growth fund in our second vintage. We don’t have a growth fund.

So what’s the tradeoff there? Why did you decide to go that route versus a growth fund?

Well, I mean, it’s a virtue out of necessity in so much as we were raising the first Acme Fund. And it’s a little hard to go to market saying, hey, everyone, we want to raise a couple hundred million dollar venture fund and a half a billion dollar growth fund. And they said, well, maybe we should date first a fair point. But the reality is, I’m not sure we will like the the the the drawback of not having a growth fund is you can’t just write checks.

Right. We still have to then we have to go around and work with our LPs educate them on the companies. Now it requires more work on our part. But when you look at our LP base now versus when when I started, we have some incredible institutions, endowments, sovereign funds, pension funds, and these guys are really sophisticated and not all of them do co-invest, but the quite a few do.

We’re registered investment advisor. We took that extra step, which most venture capital firms don’t date.

Most VC firms operate as ERAs exempt reporting advisors. We are regulated by the SEC. So we’ve got these guys in suits that come in every year and take a look around and I don’t know, ask our CEO questions. And and that allows us to be a little more nimble with doing the investments and working with our ops, because we can do work in secondary, well, let me stay on that for a second, which is is this Acme fund one size? Oh, jeez, don’t get me started. When we went out fundraising, we’re like, OK, well, actually we first call it Acme X, which we thought was clever because it’s a variable X and technically it’s our tenth fund. Our LPs looked at us like, what are you talking about? You know, we have no idea what you mean.

So we said, OK, it’s not really Acme I because we have all of the legacy portfolio from Fund I and Fund II. We have all those portfolio companies and all the partners have have interests have cash in those funds. So it’s really our third fund. We just changed the name, you know, so it’s like a name change. So it’s technically Acme three is is the fund we’re under. OK, I thought it was a simple question.

OK, so but you still have the chance. Where I was going with this question is you had a chance to sort of rebrand, rethink about things. And so, you know, when you’re looking at the VC landscape, did you think about there are specific things I want to do different or carve out certain differentiation for this fund the most important thing is culture and team. Like, if you don’t get that right, I don’t care how smart you are, how good your strategy is, the wheels are going to come off. And so the big decision that I had to make is do I go it alone or do I find. Co-founder and, you know, I thought about it for like two seconds and the answer was, I absolutely want a co-founder.

If I could find somebody that had the following 10 things. And, you know, as I went out and talked to people, I was lucky to find two or three. And and the challenge with VC firms is you have these golden handcuffs. And so much as your carry is 10 years out and you’ve got like 10 year vesting and you could have there are people that are, in essence, trapped in venture firms that don’t have very good cultures.

They’re good people for their cultures aren’t great. And they would they would leave if they could. I don’t want to suggest it’s an epidemic, but there are examples of that. And so some of the people that I thought would be great to partner with just weren’t available. And and then it was actually a founder who’s like, hey, have you talked to Hany? And I was like, God, Hany, I’ve known Hany for, whatever, 10, 15 years.

I knew him back when he was a Glu mobile and I was at Goldman Sachs and I was like, no, he’s at GGV, he built GGV. He was a co-founder of GGV. Like, the guy’s a legend. And he personally was responsible for returning a third of GGV realizations to date. And that number has gone up with with draft kings, obviously. So anyway, long story short, and I connected and and it was so fun, like like we we got through the hard stuff and about I remember we scheduled this like five hour session.

We were in Copenhagen together. We scheduled like a five hour hike where we were going to do culture, economics, you know, all the tough stuff that you wring your hands on. And I don’t think we had gotten to the trailhead. We’d figure it all out. And so we spent the next five hours, like just eating food and kicking around like. So I knew right away that there was an amazing partner and he didn’t know yet because he was still kind of finding his way exiting GGV.

And so I brought him in. He sat in on investment committee meeting one of our associates, now a principal like she was going toe to toe with me, disagreeing with my opinion. And he was like, this is unbelievable. I love this. This is this is what it’s really about, a flat culture where everybody’s sitting around a literally a round table and and it is just a pure meritocracy and intellectual debate. There’s no hierarchy. There’s no you know, I’m the partner, you’re the whatever.

None of that.

Well, I feel like I should ask you about investments. I could ask you a lot about culture, but let me ask you some about, you know, some of the investments maybe that you saw early. There are a bunch of examples like early days I spent with Reed Hoffman, early days at Facebook, like seeing that, oh, my God, there’s something massive here.

And if you go back and look at my notes, I used to call Facebook data sponge like this was, you know, whatever, ten. A long time ago, I didn’t want to think about how many years ago, where everyone is talking about it as a photo sharing platform, like, no, this is this data, especially once they started doing Facebook Connect. So it’s those sorts of early insights that I get super excited about. I’ll tell you, one of the traps, though, that I’ve learned is you can’t finish the founder’s sentences.

So when a founder is pitching you, it’s so tempting to be like, oh, my God, you’re right. And if you do that, you can do this, this and then this and then pull a 180 and then do this and turn that corner. And the founder goes and then you walk out of a meeting being like this, this founder’s amazing. She’s going to crush it. And then, you know, a few quarters later, a year later, you’re like, what happened to all those other turns?

And so it’s really got to come from the founder. And it’s a long way of saying, I don’t take credit for these ideas at all. I’m lucky enough to partner with them. And one of the fun stories is, is the Uber story, because actually they’re a bunch of fun stories about how you meet founders. In Uber case, I met Travis at a pub in Ireland where we were like eating Irish food, meat pies or something and.

And I was there with a group of founders that I knew well, but I had never met Travis and Travis happened to be sitting to my right and I was like, what do you do? And and he gave me some pithy line about how he was taking down the taxi industry. And I was like, thank God somebody needs to. And that led to several beers and then a run in the park and the run in the park was pretty amusing because I had gone running.

And then he came out to run with me and he didn’t stop running and we kept going around. And, you know, it’s not a big park, thank goodness. But we just kept going around and around and around around. I was like, oh, my God, this guy’s got a lot of stamina. And and we hit it off. And I talked about the things, my view of what he was doing. And and we made the investment in the Series B and didn’t know who any other investors were and just thought the company was super interesting.

I remember the investment committee discussions at Goldman were not straightforward at all. There was absolutely a difference of opinion. But frankly, some of the best investments that I’ve ever been a part of and that Hany’s ever been a part of are the ones that are the most contentious.

So anyway, the Uber one’s a fun story there. You can look in our current portfolio and see some other stories like that of like how I got to know Marcello at Ipsy, how we got to other guys. Cue How I got to know David Khalaji. So yeah.

Let me jump. Like how did you get to know the Cue team. That came through a tech whatever it’s called, an incubation program. And they were doing it today. And we had gotten a heads up from our friend who ran the program, and he said, hey, this thing’s kind of interesting. And it was two guys who had taken apart a glucose meter, you know, in their apartment and said, OK, interesting.

You know, there’s there’s some things that we could do with this. And their vision was to basically take Quest labs and put it into this little thing. And we quickly kind of grabbed them off stage and had a term sheet signed very quickly and been with the company since its formation.

We were the first capital in and we brought in Johnson and Johnson. So we introduced JNJ to the company. They led the Series B along with us. We brought in basically BARDA, which is a US government agency like the Department of Defense. But for health, that’s part of what we do is just bringing a lot of other people to the party, so to speak. And so that was a fun story of them kind of coming out of the incubator.

And and there were other people sitting in the audience, the other venture capitalists who are still waiting for those guys to come off stage so they can have their meeting. That’s amazing. But, you know, Cue was just in the news recently. They got a four hundred and eighty one million dollar order from the US government. So that business went from zero revenue, spending a lot of money on science for seven years, six years to all of a sudden having over half a billion of revenue.

When you say you get it done fast, how fast do you do you usually move on until do like.

I mean, it depends. We can move extremely fast. We need two partners to make a decision. So if if two partners are advocating for an investment, the investment will get done even if two other partners hate it.

And so we rarely I don’t think we’ve ever had that situation where two partners hate it because we feel like it’s incumbent upon us to at least get the other partners to a neutral position, because if they hate it, it means they don’t understand it or we don’t understand it. One of the two, if they’re neutral, at least they’re saying, OK, I hear you and I believe you. So and answer your question, we could have a term sheet out in the night if we needed to, because we could scramble.

Now, the good news is we don’t usually need to because we get the opportunity to spend time with the company, get to know them, kind of work through their process. But I don’t I don’t think there’s been a situation where we’ve in earnest gone after an investment that we haven’t succeeded except where valuation runs away. Hmm. And frankly, those are mistakes,valuation shouldn’t be the key determinant of investment in this series A. Yeah. If you’re off by a little bit and you’re Series A, it doesn’t matter.

Yeah. So you alluded to this a little with Cue I want to ask kind of what’s your style like? You’ve seen all sorts of great investors and I think one thing you said with Cue is you bring in a lot of people around the table. I mean, I don’t want to embarrass you, but the Wall Street Journal article said something like, Yuri Milner calls you for introductions. It was something awesome. But how do you think about your style once, once you’ve made the investment?

It was very kind of Yuri to say that my mom had never heard of Yuri Milner, but she was really happy to see that article. So although it was pretty embarrassing article. Look, you’re just on the Yuri point. He and I go way back. I met him when I was in Moscow chasing the Yandex IPO, and I was like, well, where’s the rest of the Internet? And they’re like, oh, this guy named Yuri Milner has bought some Internet assets.

So I went over and knocked on his door and said, Hey, Mr. Milner, I’m I’m Scott. That led to me saying, well, you’ve got a great business. Here was a holding company he called DST Digital Sky Technologies, and he’d assembled some assets. And so I invested I got Goldman to invest in his firm. And then we became quite close. Goldman, we ultimately took took DST public, but then I introduced them to Zuckerberg and introduced them to Facebook.

And that’s where he met Marc and really built his franchise. And so he’s very kind to say that he I call him for advice, to be clear. So, look, we have something that we call IVA. It stands for impact value add. Everyone talks about value add and oh, we have this network or we’ll give you advice in your board meeting. Whatever. We we kind of took it to a different level and we said, no, we we would love for the founders to talk about us.

This is our goal. It’s a very heady goal to talk about as positively in their memoirs. So so we know these companies are not ours. They’re not our ideas. We don’t take credit for the execution. But if we can help plow the road ahead of them and bring them things like David Bonderman to to Uber, then then we know we’re really doing our job because.

If we’re asking a founder, what can we do, then we’re not doing our job.

And so, you know, it’s easy to get caught up in the moment and be overwhelmed by all the activity we’ve got, I think five or six companies that could be public next year. That alone is just a tremendous amount of work. 

And and yeah. So that’s what we call IVA. And we actually have KPIs and we judge ourselves, we rank you. We have a system that says, have you added value this month?

And if you haven’t, it turns yellow. And if it goes for two months, it turns red.

So how do you think about how you spend your time? I mean, if you’ve got five or six companies that might go public and you’re trying to always be I envy and saying how much of your time do you spend with your portfolio versus looking at new investments versus other things?

I mean, luckily, I have a very understanding wife and and two daughters, because I think, like most people, you know, I’m constantly working. And the good news is this is this is my hobby as well as my profession. So I don’t mind working for hours on the weekends on this stuff because it’s fun. But, the true north for us is making sure that our portfolio companies are thriving. But you don’t want to do is is ignore your portfolio to go fundraise or ignore your portfolio to go chase the next shiny object, so tired of your current portfolio, maybe some more. I want to make sure I save a little time to do that so we can talk about L.A. Let’s talk about L.A.. Sure. And there’s so many things I want to talk about, actually. Let’s talk about L.A. for sure. Clear.

I’m loving L.A. I’m like, put me on a billboard. I’m a huge fan of L.A. And this is after 14 years in San Francisco. I grew up in Indiana. I spent my undergrad and graduate education on the East Coast. My first job was in New York. So I don’t know if I’m ever leaving. And the beauty about L.A. is I can do this job and I can live the life I want to live. Like, I I have nothing to do with Hollywood. I have nothing to do with what agent is pitching, what deal or whatever. And so talk about luxury. You know, when you’re when you’re in San Francisco, you can’t help but be surrounded by hearing about what you’re missing out on. And you’re, like, worried here. I don’t care if I’m missing out on the next, you know, Star Wars, Batman, Superman film, whatever doesn’t matter.

And so that gives you some some kind of clarity. But but to be clear, there’s a great kind of emerging ecosystem, but it’s emerging. And I get asked this question a lot like when I’ve in spoken in different countries and different cities of like how can fill in the blank be more like Silicon Valley? And, you know, it’s it’s you hear different versions of the same story, and that is it’s it’s like a coral reef, it’s like a forest, it’s like any other ecosystem.

You need a bunch of ingredients and and then you need time. And so I do think L.A. has all the key ingredients, and I do think L.A. is absolutely trending up.

But we’ve got to be patient and we’ve got to stay on course and the biggest thing that scares me is politics. 

Look, California has so much going for it. We all know the stats. I mean, it’s the fifth largest country. If it were a country in the world, you know, trillions, even SoCal alone has over a trillion of GDP. 

There’s there’s a lot of, you know, consumers. So you can test things locally, which is really important. That’s one of Israel’s hardest challenges, is they’ve got brilliant founders, they’ve got brilliant universities. They don’t have a market. It’s a tiny, tiny little market. And so we’ve got a ton going for us. The thing that makes me nervous is regulatory.

And Joe Lonsdale published a really thoughtful piece in The Wall Street Journal where he basically said, I’m out, thanks, California. It’s been real, but I’m out. I’m moving my entire firm to Austin. 

There are a lot of people moving out of California, not just the Bay Area, because they see the handwriting on the wall or they’re worried and this kind of vilification of success and additional taxes. And it’s just a problem. And we just have to ask ourselves, like, do we want to go down that path? We California can make up our own mind of who we want to be in the relationship we want to have with innovation and with business.

And I’m not suggesting it’s easy. I’m not suggesting that everyone doesn’t have to make some sacrifices, but we got to get that right. So, OK, so there’s a very tactical piece, which is taxes. 

But then how do you think about the role of that vilification? He’s like because you said this to me, you’re like, I want to be anonymous. And I was like, well, could you come on my podcast?

Look, I think. I think. Politicians or organized government can do more than just taxes, right? There’s opportunity zones where you can you can actually create incentives and downtown LA like was one and maybe still is one. And those are great. That’s very positive housing. Like, you know, there are there’s this there’s this weird thing in San Francisco where everyone complains there’s enough housing and then there are these crazy zoning laws that allow you to only have something 12 feet high or something like that.

So you can’t put any high rises up. And then you have this antiquated tax regime on on real estate taxes that never change until people sell their house. And so. So, look, it was a joke about anonymity. It’s more just kind of who I am, like I personally love to be.

You know, the guy taking the picture. I love to. I find it’s the opposite of schadenfreude. I find pleasure and others pleasure and other success like that makes me happy to make other people succeed. Is there a word for that? It’s a good there should be.

But if you leave it up to the Germans, they’ll only you know, maybe we need to go to like the Spaniards, the Spaniards. Probably word for that because they’re happy. So, look, that’s that’s kind of my just my who I am, my disposition I think we all need to make compromises, all of us, everyone around the table. And I am more than willing to make compromises. And I think everyone needs to and I think we can. And I do think we’ve got really solid leadership in California.

OK, how do you think things are evolving, are going to evolve or like I mean, this has been a huge, crazy year.

So much has changed, you know, what have you changed your mind on or has your view of how things are going changed? We honestly like this is this has been a great opportunity for those that are in innovation, because there’s this adoption phenomenon. We call it five and five, five years of adoption in five months. So we’re investors in doctors on demand that companies struggled for a while because people were like, well, that’s this is weird.

How can I trust just a set of pixels? You know, I of course, I’ll go sit in a waiting room for half an hour to go see someone for five minutes. Like that’s just the way it’s done. I don’t think we’re going back to that. Right. I don’t think anyone’s excited to go sit in a waiting room and read Boys Life magazine. Like, that’s not how we want to be spending our time.

Now we’re like, oh, wait, all this stuff we’ve been waiting for happen. Now, as a venture capitalist, we’ve got to cast out another five years and say, well, what’s that going to look like? Yeah, now we have some catching up to do, obviously. And so, you know, we have a little bit of time in terms of adoption. But look, the rate of innovation. If you ever read like Kurzweil books about Singularity, he’s got a great graph in there about exponential change of innovation and it is literally a wall like, you know, it was like a nice bloke with a cotton gin and the printing press and all these cute little mechanization of labor things.

But then when you look at the rate of innovation in the last hundred years, it is ramp’s like this. And in the next hundred years, it’s like the collapse down on top of us, basically, because when we automate thinking, which is AI, it’s a complete game changer, a complete game changer. And that’s why we’ve started making investments in companies that focus on like quantum computing.

And so I think you’re going to hear more about that company, you know, as time progresses here. It’s called IonA And so, look, our job is to get out in front. Our job is to cast forward.

And it’s been made harder by the rapid acceleration. But at the same time, our portfolio companies for the most part are thriving.

I really haven’t thought about it that way, which is your job is to see five years out, but five years out. We all are seeing it right now.

That’s right. And what about that?

Anything else about Acme or the stuff you’ve been chewing on for your your vision of things that are going to be big in the next five years that you want to share with us?

I mean, look, I think we’ve covered a lot. I think we are going through an interesting phase as humans with technology right now. I mentioned singularity, which we don’t need to go there.

The ultimate merger of technology in humans, which I’m a deep believer in. But that’s we’ll talk about that in another podcast. What I think is happening right now is I’ve been using this term enlightened tech or enlightenment, which is like people are realizing that initially tech work for us and we now are working for tech. And is there a way to kind of find that balance? Like if you haven’t seen the social dilemma, it’s worth watching? It’s very thoughtful.

And I totally agree with with what they’ve highlighted. I think there’s an opportunity here to for us to really harness technology to to make. Our lives better to to free us from the chains of labor, so to speak, as opposed to just replacing us. And that’s like a pretty existential challenge and opportunity for society. 

We’re right now going through some real growing pains with technology where we haven’t seen anything yet, like there’s so much coming that’s going to be highly disruptive. And so I I really would love to find ways for the innovation discussion to move out of the lab and out of the venture capitalist term sheets and investment memos and into the broader dialogue not to encourage regulation because it’s going to happen like saying stop is not going to work.

It’s more like, OK, this is coming. We have to deal with it more endemic, like there are some people that deny the pandemic. And there are some people that said, I wish I could deny it, but I have to deal with this and we have to have the same view towards technology. And we’re not prepared as a society to have that conversation yet. We’re still fearing A.I. and vilifying the big bad tech companies that are destroying whatever.

That’s probably not the most healthy approach because all it’s going to do is drive innovation offshore, because just because we vilify it here doesn’t mean it’s going to be vilified in China or this can be vilified in Taiwan or in Russia or elsewhere. And so we need to embrace it and own it as opposed to vilify it.

I mean, it’s innovation is kind of a bright spot of our country right now. So you’re saying this needs to go outside of, you know, the venture capitalist medium posts into need to bring we need to bring politicians and thought leaders into that dialogue?And so we’ve got to find a way to bridge that. And I’m not smart enough to figure that out. And so, you know, I put my head down and I write more term sheets and I find new founders disrupting more big industries and onward we push forward. But, you know, I’d welcome that dialogue.

Yeah, well, it’s great.

I know we’re running out of time, so I want to be respectful there. But I think it’s an interesting note to kind of end on and think about. And I’m glad you are continuing to write term sheets and helping your founders. And I’m really glad you’re here in L.A. I think it’s a big win for L.A. to have you here. So. Well, thanks for thanks for coming on the show. Thanks so much for taking time out. And I couldn’t be happier being here in L.A. and I definitely look forward to finding more ways to be more integrated with the community.

Dan Zinn — Rivonia Road

If you have any questions if debt can help your startup, feel free to give Dan Zinn a call.

Dan’s firm, Rivonia Road, provides a much more bespoke solution than traditional venture debt.
 
We also talk about how Dan built a billion dollar hedge fund and XPRS, a small business lender.

View Transcript

Dan Zinn is the founder and managing partner at Rivonia Road Capital, a venture credit fund and previously the founder of a billion dollar plus hedge fund vaenture credit didn’t immediately sound super interesting to me until I got to better understand how Dan is helping venture backed companies with non dilutive capital. Also, Dan and I are classmates from about 20 years ago, and he is one of the most interesting individuals I know. So there’s a lot that we’re going to learn from him today.

Hey, Dan.

Hey, it’s nice to see you. Yeah, it’s fun to be recording a podcast with you.

Oh, as you said, you said quite a high bar over there. That was I’m going to have to do some real work to try to match it. Yeah.

You’re going to have to be super interesting, like my introduction said. But let’s start with Rivonia Road and start there and then kind of work backwards from there. So just tell me, like, kind of the basics of what you’re doing there and maybe also compare it to venture debt and how what’s what’s the difference there. Sure.

So I think, you know, venture credit is not a word that has been really coined. And so basically what we do is we bridge the capital gap for venture backed firms who originate assets. Right. That are financeable assets that have maybe cash flows associated with them, or that they’re just like things that you can see, touch, feel and, you know, and and turn into cash.

At some point, we help turn those assets into cash quickly for those businesses. 

We focus really on the underlying collateral, i.e. the things that a lot of online businesses originate these days, whereas venture debt really is more about just, you know, debt, you know, investing debt in a business and getting some warrants and hoping you make your return like that. Got it.

And so when you’re talking about venture credits, I guess it’s not always a physical asset. Right. So what would be examples of things that you could lend against?

So it’s not always a physical assets like a car or, you know, a house or something, which actually has got nuts and bolts in it. It might be a cash flow stream, right. So it might be a royalty stream. Rights and royalty streams are kind of predictable. And there are a lot of businesses that actually these days are disintermediation, the traditional media market. And they have these royalty streams that they might own or they might be originating online like they might be buying or helping artists or singers, songwriters monetize their royalty streams.

So it might be something like that. It might be loans. You know, loans are a lot of loans are originated online these days. So you get consumer loans that are originated by lots of different avenues, kind of like, I’ll give an example, Prosper or Lending Club originate consumer loans. Those are not kind of nuts and bolts things, but they have a cash cash flow stream associated with them.

And we can help release the cash with a capital that’s embedded in those in those assets for the business to go and and and grow. So that would be another another example.

And so and are these usually like in my parlance, like a series A company, a series B company?

Like how big does the company usually what do they look like when you talk to them?

It’s a really good question. So we actually deal with companies that are all the way, you know, that really run the gamut. So we deal with really early stage companies that are in the seed stage, especially if their business model is really focused on originating assets online in some way, shape or form. That’s really helpful for them to start to speak to us early. And frankly, at that point, even though we might not necessarily finance a business at that stage, it’s really helpful for them to talk to us that they know path towards that financing.

Very often you want to think about these things early so that you can put in place the structures and the systems and the processes to enable a financing to happen quickly. And so it really runs the gamut all the way from really early stage to, you know, pre-IPO potentially. Hmm.

And so, you know, will you give me free advice on whether my business looks like something like if I’m not sure about whether, you know, venture credit is right for me, can I just call you up?

We don’t charge anything for for advice, just like you, though. So we actually in the business to help businesses. That’s the way I see it. You know, the businesses to help founders. It’s a really kind of unfamiliar territory. This is unfamiliar territory for most founders. Most founders don’t really understand the capital markets as well as they should. And or frankly, at some point they need to. And we’re there to bridge that gap. You know, we’ve we’ve had over the last 10 or 15 or maybe even 20 years now since we kind of left business school.

This is a massive boom in online stuff. And I don’t think the capital markets have kept up. I think with the capital markets are so way behind.

I think, of venture debt as someone Silicon Valley Bank, Square One bank comes and right after you raise your series, they offer you like 30 or 40 percent of that series amount in a credit facility.

And it sort of seems like a playbook now. And I think you’re taking a much more bespoke model. Is that a fair characterization?

Yeah, no, it really is a fair characterization. I think venture debt, you know, is is something which has been around for a long time. Traditionally, venture debt providers have a formula. That formula is pretty much exactly as you described it in in return for what they provide in capital. They get warrants and some type of like coupon or whatever it might be. But traditionally that’s a loan directly to the company and it sits in some sort of seniority relative to like the other equity in that company.

Right. And it’s really it’s not it’s not bespoke. I mean, it’s really an off the shelf solution. I mean, you very, very rarely see a venture debt company come in that says they can do anything with outside of that box. 

But we look for more kind of discrete things and we look to to price those things in a very sophisticated way, which allows the maximum release of capital for business.

Great. So so we can come to you for free advice. And I would. And the reason that, you know, we’re talking today is I certainly would in part because of your you’ve got so much experience in this field. So let’s fully rewind and go back to, like Dan Zinn growing up in South Africa.

And just, you know, how did you how did you go from South Africa to Harvard Business School, which is where we met?

It is where mad and thankful. Thankful for it. It was a lot of fun. It was a fun couple of years. And I learned one or two things. So, yeah, it’s just a somewhat fortuitous you know, I grew up in South Africa and, you know, I was kind of lucky to actually make it out alive in most instances. Like I wasn’t like I was destined to go to Harvard at any point I was kind of looking to get out of South Africa at the time. I’m always looking for an adventure of some sort. And it was really an adventurous and adventurous move for me. What was South Africa like?

Like you were in apartheid when you were growing up, right? Yeah. Yeah. What was that like living through that?

It’s a it’s you know, I think about it often. And I remember even at business school when I first left, I left South Africa in my mid twenties, I came straight to Boston with like a pair of shorts and a sweater and yeah, literally, well, maybe I had a pair of jeans as well, but I’m not much more than that.

And I remember speaking about this in the context of HBS as well in the classroom discussion. And we were talking about what it was like to grow up in South Africa. I mean, it was it was a place where you knew that something was wrong, right? There was something deep inside you that knew something was wrong.

But it’s just kind of how the world is in your life. And so you just kind of go do the things that you do. But it but it was for sure a highly challenging environment to be in. You know, there were all sorts of issues like sanctions from, you know, the U.S. and, you know, we vote in this country and we really it’s not just splitting hairs, but they’re real issues.

But the type of issue that I voted on in South Africa for the first time in nineteen ninety two, I think it was was do we open the country up or do we let Nelson Mandela out of jail? Do we do he unban the ANC or do we totally shut down and go backwards like those were the two options. You could literally the vote was yes or no. Wow. And the the white population in the country with any population that had a vote voted almost overwhelmingly in favor of.

Yes, at least in the context of a of a vote, which is an extraordinarily hopeful thing. And so maybe that’s a long story. But it was just it was an incredible period of time in many respects, to grow up somewhere so different from the world that we know it at the moment.

Right?

Well, yeah. And so then that’s a big transition to show up at the Harvard Business campus. Sweatshirt and jeans on, right?

But then you don’t just go from that to having a billion dollar plus hedge fund. So.

So how did you how did you how did you start that journey?

It’s orange capital. Right. Was your was there a time. Yeah. How did you start that and how did you grow it. You. Yeah.

So it was again somewhat on the journey, on the adventure. I mean I see life as a journey. You know, this is all a journey and you better enjoy it and you better do some interesting things along the way because there is no real ultimately there’s no destination that I know of that is necessarily satisfying. So that’s another subject entirely, maybe a philosophical discussion later on.

And so I went from business school to I worked at Goldman Sachs for a few years, about three years between London and New York. And that was fun for a little while. But that just for me, I think I’ve learned everything that I needed to learn after three years and I wanted to make a move.

And so a friend, a couple of friends were starting a fund. We raised, you know, about sixty million dollars at the time. And it didn’t just happen like that. I mean, you have to have people to trust you. But we were fortunate to have that.

And also we had the wind at our backs that was kind of like the Internet era of hedge funds. And and so there were three guys in the room. We looked at each other trying to figure out what we were going to do with this capital, really, and being as venture as adventurous as we were. We got on an airplane and headed to China because where else do you go?

I don’t know. I think. Of anywhere else, it was 2005 and the Chinese capital markets were totally undeveloped in many respects, they just they resembled they were quite a mess actually. They were Chinese domestic markets that were non-functional and not open to outside investors. We were very successful in investing in China through some of the more established markets like Singapore and Hong Kong. But it was really before anybody who’s sitting in New York in in a suit was was even thinking about China. That is for certain. And that’s always really kind of guided my path. Politics, where’s the opportunity? Where are the underdeveloped markets?

Where are people not? 

China, 2006 or something, were you in, you know, tier one, tier two cities, were you going to be manufacturing? Like, what sort of what did it feel like then?

It’s, you know, even the Tier one cities, which let’s call the two big ones like Beijing, Shanghai, and there obviously some others, they felt like, you know, in really emerging markets. I mean, there was they were very underdeveloped. Those are the tier one cities that we visited, but we visited tier one, tier two to three, tier three cities in the tier three cities might have five million people in them.

I mean, they’re they’re they’re comparable to some large cities in the U.S. But it was the Wild West. I mean, it was really the Wild West. It was it was me and maybe my partner at the time literally stepping into a world where sometimes I’d wake up in a hotel room and look outside. And I would literally I would think I was I was on another planet.

We went anywhere where there was an interesting investment opportunity where we could meet the management team, see the assets, see what they were doing, and try and understand whether there was value, underlying value in in that business and the proposition so you went from 60 million, you know, your you made some good investments that, I think another thing that we did, which, you know, it’s a hedge fund, it’s different. You have a different time horizon from a venture fund where you were thinking in, you know, five, 10 year periods of time in a hedge fund. You’re thinking in really six months, 12 months, periods of time.

And so that’s a good thing. If we did was, frankly, get out of the capital markets almost entirely when we saw we saw the instability in the credit markets in 2008 and 2007.

And at some point you walk away from this, I’m taking you back to to to lending and what you’re doing now. But so at some point, you walk away from your hedge fund and start XPRS.

Right. So give me the quick version of what XPRS was doing or still is doing. Yeah.

So I’ve in 2013 left orange. It was an incredible run. And I looked at, you know, where I thought the opportunity was.

Again, the dislocation like, where is the capital not going? You know, who needs the capital? And that’s always informed my investment decisions, whether it was China or whether it was, you know, the alternative credit markets in the US, small businesses. And there been a an implosion of and vaporization of credit availability to most small businesses in this country by 2008 and on.

Oh, OK. So that’s what happened. So after 2008, 2009, you stopped being able to get a small business loan, I guess.

Yeah, for for all sorts of reasons. I think the main reasons were banks just became more and more risk averse. A lot of banks went out of business, many of them consolidated. Small business loans have never been a profitable business segment for the banks. And so, you know, we started up a business to help those businesses and to allow them to access capital very, very quickly and at a reasonable cost, I think was our was our our motto.That business still operates out of Santa Monica, California today in 2020. So it’s been a it’s been a pretty good run.

So you’re helping. So XPRS was helping small businesses access credit, but Rivonia Road is helping venture backed businesses access credit.

You know why? Why did you move from one to the other? It sounds quite similar to me. XPRS is a much more retail driven model. It’s actually a it’s a it’s a it’s an originator front facing B to C to Top Model. And our marketing strategies will be to see. And so I think about that more as like an operating company and then operating company Nete, because it it makes loans. It needs to figure out a way to have an efficient balance sheet. And as I went through the process of building a business, I realized very quickly that there was an opportunity in financing companies like XPRS, right. So instead of so where XPRS is the front facing retail driven operation, its balance sheet needs to be financed. Right. And and there are not a lot of good alternatives for that in the market. It’s kind of like a bit of an oligopoly.

And so I was sitting there in a situation where I understood the operator, I understood the company or the venture funded company, but I also understood.

These pockets of capital, these deep institutional credit markets. And so Rivonia Road was really born to fill that gap. And as far as I know, we’re we’re we’re we’re the only guys out there who who are.

Operators and investors and provide credits to venture backed companies. It’s a very unique thing and it puts us in a very unique position.

How much money do you give people at?

Depends how much you want to get.

We would do all sorts of things that are out there. Right. So we’ll do anything from kind of, you know, fairly small deals in the kind of low single Malin’s right to. We’ve just we’ve just completed our transaction, which is a 75 million dollar transaction. So that’s kind of our wheelhouse is in the sub hundred million dollars we would do. We like to speak to businesses at the earliest possible stage of their development and maybe do something which might be a little bit might be considered small for us and our balance sheet.

But really what it is, is a seed. And we like to plant that seed, which laws, which gives us a window into the business, just like venture guys invest, you know, start small and then gets bigger. That’s that’s how we think about providing credit as well.

Hmm. And then do you stay involved? Like, do you you know, if you’re making 75 million dollar sound investment in that investment line of credit, I guess.

So I do think about it as an investment, actually. I think about an investment in the debt of the business or the credits of the business. So we’re more concerned about like the downside, protecting the downside with having some exposure to the business growth prospects, because we want to have both.

And the best credit investor out there will be concerned about your growth as well. They’ll want you to grow. Right. So if you can find if you’re ever looking for credit and you can find the credit at accredited investor who is also invested in your equity, they have they’re thinking about the business like you’re thinking about the business. But what you don’t want to be that is at odds with your your your credit provider, which is the case with most banks that the customers credit funds.

It’s a somewhat acrimonious relationship. Right. We like to be in the middle of both.

What are your motivations for doing this? Like you you obviously stepped away from from orange. Why build Rivonia? Why build XPRS?

Yeah, it’s a it’s a good question. By the way. Sometimes I ask myself that question and then quite often because it’s an interesting path. You know, a lot of people they like become an investment banker and then they’re an investment banker and they go through their entire career as an investment banker. I like to learn something and I like to use what I learned to move into something that I feel is more expensive at that time. And so I don’t like to jump into things that are really expensive. And because it’s just not maybe how I think about the world. There are some people out there and incredible people who can, you know, start an electric car company and then they’re going to Mars.

And, you knowe I think, you know, my motivation really, when I think about what I want to come down to, like, interesting question, like, what are you what are you doing on this planet? Right. Or what are you trying to accomplish? You know, I believe we’re here for a journey. Right. And I’m I think to myself, what are the skills that I can use to enable that journey in a way that has, like, maximum impact?

And I know what my skills are. Right. I mean, I know that I’m good in this business. I know that that I enjoy. And I say this business that’s business in general and investing. And so how can I paint a picture such that when I look back on my life, it’s like it’s something which I like to look at. Hmm. You want to have an impact.

So I’m a venture backed business.

Yeah. And the answer is, with your non dilutive capital, I can grow faster mostly.

Absolutely. So let me give an example of that. I think it might be because we’ve we’ve spoken in generalities and like I’m already speaking of speaking in generalities, sometimes I’m not going to like figuring out whether, you know, people I’m speaking to actually on the same generalities.

So sometimes it’s good to be more specific about it. And so, as an example, we’re we’re we’ve just we’ve just closed on a deal which is going to provide 75 million dollars of financing to a business broadly in the mortgage origination space recently did a series A. They’ve raised maybe 10 million dollars in total. But the residential real estate market, as you can imagine, are highly capital intensive

Ultimately, without capital, it can’t grow, what was the alternative?

Yeah, so, you know, that’s obviously it’s a big but what would be what else I want to see, like who are your competitors. But what would they do?

I don’t think they I don’t. So they could. I don’t actually know the answer to that question, by the way, because at an early stage, they have to find a provider of capital that believes in their business model and their abilities to scale. Right. And so a lot of hard work when you’re really early stage kind of series. A company convincing the capital markets to provide 75 million dollars of capital. If you’ve raised maybe 10, let’s say.

And so what we give them is the capability to 10x their origination almost immediately. So to take those venture dollars and go back for another round and show the venture dollars that they actually have to show their venture investors that they have access to the capital markets, which is almost an enabler for this business.

Mm hmm. So that’s where we come in. It’s early, we believe in the business. We do enough work not just to go in behind, you know, a venture investor and say we’re going to put some debt in there and give us some chance. And that’s like a venture debt. But we actually put in the work to really understand the business model and make a commitment, you’re like a VC in that in the diligence, totally. In fact, I would say that the the the work that we’ve done in understanding this business and not to not to say that you guys don’t you don’t know where you’re going.

Where was I going exactly?

You know, the work that we’ve done is because in some ways where so you guys are and I’m not going to it’s not going to look like venture venture investors are. How big is the market and how good is the management team?

Mm hmm. Like, those are the two big questions, and those are incredibly important questions as a venture investor, right. But in general, like you’re not you’re not in a situation where you’re getting ten out of ten. Right?

Right. For that answer, yeah. I can lose on a couple investments. You can’t.

I think that’s exactly right. I can’t lose on a couple. I can’t actually lose I can’t actually lose on any. Right. 

Back to the philosophical then. Thank you.

What have been some of the big learnings of your that you didn’t know when you were, you know, 20 years ago?

I would say the first thing is just getting really in touch with, like, my intuition, you know, you can do as much work as you as you can do. You can. I mean, you can do analysis until forever. Right?

And I think some of the best decisions I’ve made have been intuitive decisions and decisions where I did not apply.

All of my you know, the the analytical side of my brain to the situation, and I’ve really kind of felt into them.

How do you how do you get in touch with that intuition? I mean, I agree. Yeah, I think I have great intuition, but how do I know what it is?

I think you have to you have to establish like a baseline level of trust within yourself. Mhm. Very often we’re so analytical because we don’t trust our own capabilities to make decisions quickly.

And from a point of more limited information, sometimes those decisions are the best decisions because they actually come from a point of maximum information. We’re just not mentally integrating that information. You know, we’re not when I say mentally, we’re not consciously. Hmm. Coming to the conclusion. And so I think it’s you know, a lot of that is just getting to know yourself. And I know and I think, you know, and trusting yourself. So, you know, how do you get to self trust?

You know, I think everybody might have it. People might have different path to that. You have to get somebody else on the podcast to provide advice for different show.

So. Yeah, exactly.

So so I think that’s the one, the other one which is which I think would I think would. You know, there’s a mentor of mine who came out of the same business school that we came out of and was an extraordinarily, extraordinarily successful hedge fund investor in his day, and he’s kind of closed down that fund. But he’s kind of what I would consider one of the greatest in that business, certainly an incredibly brilliant guy. I would walk into his office just before I left orange.

And I’d say, like, I just, you know, like, you know, just looking for something to rub off on me, you know, listening for some wisdom and some some mentorship. And I’ll ask him questions. And he said to me, and this isn’t for everybody, right? Because some people might have view the world differently. So what is when you set your path is like what is your audacious goal? Hmm? What is your audacious goal, you know, and.

I think about the world sometimes, and I make my decisions about what my audacious goal is, and and I think it’s important, especially as a as a as a young business, in really defining what the landscape looks like and understanding how big you can be, what things you can do, and really defining what that what that audacious goal is. It’s beyond anything which might even sound like it makes sense and it’s as big as possible.

And and so that’s how we achieve great heights and can sort of, you know, sometimes being successful in following that advice and sometimes not. But it’s actually something which sticks in my mind.

I love that they kind of dovetail for me, which is my audacious goal, and being in touch with being able to admit it and know what it is. Anyhow, that’s great. I appreciate that.

Well, Dan, I think I’m going to let you go now and say thank you for sharing your your view on life as well as I’m just excited for the venture backed companies here in L.A. to know you’re here and you’re you’re a free resource. If they want to consult with you, any time. I mean, where I’m around and, you know, I’m always I was always here to talk.

Great. Thanks so much. Thanks, Minnie. Great seeing you.

Nicole Quinn — Lightspeed

Nicole Quinn says “you can’t be called Lightspeed and move slowly” and explains how they can get a term sheet done in 2-3 days.

Lots of insights on building an enduring brand that are applicable whether you are in the consumer space, or building an insurance company.

View Transcript

Nicole Quinn is a partner at Lightspeed, one of the iconic funds of Silicon Valley. Nicole focuses on early stage consumer in Internet and fintech with an amazing portfolio, including Calm, Goop, Lady Gaga House, Rothy’s, Zola, Girlboss, and so many more. Before that, Nichole spent nearly a decade at Morgan Stanley covering e-commerce, retail and consumer companies. Nicole, thrilled to have you on the show today.

Thanks so much for having me. Many great.

Well, maybe we start with the basics of light speed. I know earlier this year there was a 4.2 billion dollar announcement. But tell me a little bit more about sweetspot of a company size check, that sort of thing. Sure. So at Lightspeed, we actually started in January the year 2000.

And I think that shapes who we are as a firm because we are all about sticking with founders through the good times as well as the very tough times. So we have 10 billion assets under management. Our last fund was a four billion dollar fund. And the idea there is the sort of old growth capital, 70 percent that actually goes into companies we’ve already funded. So we’ll start to invest in companies at the seed, series A Series B stage and then we’ll continue to be that capital partner for their life.

And so our average check size on the early stage is about 15 million. On the growth stage, it’s about 30 million. But we’re excited to work with founders of all different stages and and sectors. Great.

And will you do preseed or will you do companies that don’t have revenue yet? I would say like ninety five plus percent of our investments are post revenue.

Our investments in seeds typically range between one and three million. Three is usually the cap for our seed investments. But I would say that valuations have certainly been creeping up and they probably used to be 10 million posts for seeds and now they’re sort of 15 and 20 million.

So we really see lots of different valuations and there’s probably a hundred people or so at Lightspeed.

How do people or you can correct me if I’m wrong, but how does someone know who to approach? If I’m an entrepreneur wanting to approach lightspeed, how do I know who to go to there?

Of course. So we have about you are right that we have about 100 hundred people at Lightspeed. We have twenty investment professionals, and then the rest really are on the operating side, which I think is something really special about lightspeed to have teams who help with business development, PR marketing, growth, hacking, hiring. We have two different hiring teams. So most of the people on that side of things. But on your question, with regards to which investment partner to go to, I would say go to LSVP.Com, our website, and you can find all of us.

You can filter it by the different geographies that we’re in. We actually have nine offices globally. You can really read our bios and see the areas that we invest in and find out who is the best person for you and what you’re building. 

Great.

I just send everything to Alex Tausig and he just forwards it around for me. So or you can do that anyways.

Maybe this is not a fair question, but like, do you compare yourself like who’s an equivalent, like his an Andreessen similar to a lightspeed.

Is that a. He requested. Well, that’s so interesting, I think, like people compare different voices and it’s interesting, I spent 10 years in equity research and I guess is like Bill Gurley at Benchmark who did that and Kristin Green at Forerunner, who did that. So I sometimes look at individual people, but yeah, there’s sort of top 10 voices. But you know what? There’s a great quote by Bezos, which says, like, yes, you should look at the competitors, but really you should be focused and obsessed with the consumer.

And so that’s exactly how we are at Lightspeed. Yes, there are others who are, you know, top five VCs, but being focused on the consumer and the startups. And that’s exactly where we want to help. That’s where we spend our attention. Yeah, no, I agree with that.

Do you think do you think being an equity researcher, you know, I guess what are multiples right now in the public markets for the sorts of companies that you’re investing in?

And do you think do you think about that when you’re making an investment, like how are the public markets doing?

Later stages. Certainly, I think that when the market started to crash in March, April this year, you know, that probably was reflected in some growth stage valuations. And then quickly, as the public markets turned up again, you know, the same is true.

And so for me, like I think about like the fact that we did the Facebook Pandora group on IPOs when I was at Morgan Stanley and we’d meet those companies two years before they IPO’d. And we work with them on a story and making sure that they really were in the best possible position to IPO. And so I think about the growth stage companies in a similar way. And yes, we certainly do look at the public valuations because I think private, there was a period where the two were very out of step with one another and now they’re definitely coming back.

And in fact, I would say public market valuations have really rallied and private have not done in the same way over the last few months, which is in complete contrast to what we saw over the last few years.

So I don’t do consumer investing. And so what are what are sort of your growth stage multiples now in the public and the private areas? I was looking just the other day at some of the Internet stocks, public multiples, and the range is huge.

So if you look like an EV to sales, multiple ranges from like 10 to 50 times.

And, you know, companies like Snapchat, where we invested at the seed round forty times.

So they have certainly really rallied to her, especially over the past few months.

And then on the private side, you know, it really depends on the sector. I would say on the e-commerce side of things, we see everything from I mean, gosh, like one to 10x with the average being about four x four times revenues, marketplaces more towards 10x, but then fintech and SaaS companies can be above that. Absolutely.

OK, great. So let’s talk about your investments, because that’s kind of the core of this.

So I named a few of your I mean, you have a much wider profile. You have great companies in there of the ones that have really successful where any kind of controversial did you have to, like, bang the table and fight over any of them?

It’s such an interesting question because I feel like a lot of people do feel like you got to bang the table. That’s not how we that’s how we invest Lightspeed.

I would say at Lightspeed we have the benefit of having some really smart, sharp, experienced minds around the table. And so when I come to the whole group with an investment recommendation, I am looking for feedback. And so I do think to some of the most controversial ones are ones where people do not vote as highly.

And so I think Cameo, for example, we had a couple of lower votes, but that gave me more conviction because I think the very best companies are often like the best products where you don’t get a load of five and six out of 10. So you get some ones and you get some suntans. 

And the same is true with other voices of the VC said to me, Oh, I can’t believe you invested in a cameo, not excited about that company, and then buy the next round. They saw the numbers and they were like, oh, now I’m very excited about this company. Can I invest?

Yeah, yeah. Interesting. So will your the side of the Lightspeed team that does B2B investing, will they vote on a consumer company as well. Do you all vote on all of them. Yeah, exactly.

We do. It’s something we’ve done for twenty years and something we will continue to do.

I think that it’s important to have a core group of people who are enterprise infrastructure, health care, consumer, or seeing different things in those investments and bring different perspectives to the table.

So, yeah, we all vote.

Interesting. And does that change for the growth stage companies versus the seed stage company? Like can you do a million dollar check without everyone having to vote on it?

So we have a slightly different process for seed stage, which is that we have to partner process. So two partners need to meet that company and approve it. We still do the investment memo, but then from series A onwards, the all founders come in to present at Lightspeed. We will see it, hear it, discuss it afterwards, and then vote on the company with our excitement level.

Are there any good? So the investment members was at Bessemer who released all their investment memos. I think it’s Bessemer. You’re right. Are there any good ones from you guys? Where have you put out your investment memo and calm? It would look totally different Rothy’s or someone that you like. Oh, yeah. That was a very different one going in that it looked like coming out. That is such an interesting question. I love to actually look at past memos and sometimes, you know, I send them to our founders and they say to me, gosh, you know, this makes me so excited about my own company saying how you see it through your eyes.

Yeah, but I would say if you think about it like Rothy’s, Calm, Cameo, oup, they actually all are very similar to how they were, you know, three, four or five years ago.

Great. So those are all very iconic brands. And you tweeted five things to look for in an iconic brand, something like that, and an enduring brand.

Yeah, so I tweeted that because I think the people often think that a brand relates to e-commerce, and I would say a brand does relate to e-commerce, but it relates to so many other sectors.

So if you’re a fintech business and you’re building an insurance company of today for millennials and you’re competing against the Gekko’s of the world, you want to build a brand like Geico is a great brand, may have very catchy marketing, and it is a true household brand name.

And so that’s why I asked the question, what makes you a true brand, whether you’re a marketplace, a fintech company, media business, you really have to think about, like, am I a brand?

And some of those questions help. So it’s things like it’s consumer.

You know, I said the school, which is often debated about I do think the customer satisfaction of your product is super important and then a referral rate, you know, that really that really depends on the business. But we do want to say that people are offering others. We get excited when there’s often, you know, 10, 20, 30 percent of the business of new customers coming from referral. The organic percentage is another one where we also see businesses have over 50 percent of the business come from organic of some kind, whether that be word of mouth or whether that be referral or PR marketing.

And I mean, with Cameo, it’s about ninety nine percent organic and with e-commerce companies. Yeah, we get excited where it’s over 50 percent or maybe over 30 percent off a series B, so those are some of the numbers that we show. Yeah. How so.

50 percent for e-commerce brand you might be seeing at the early stages. Yeah, you really do.

People when they love a product they really talk about it.

Mm hmm. What are you looking for. Another metrics, like a good early stage month over month growth. I mean I know that varies, but what might stand out?

Month after month, it’s so hard because it’s you know, we’ve got to think, hey, has the company been around for three months, has been around for three years?

I’ve been to YC. Exactly.

So I would say, like, if you look at, like, the yearly numbers at a seed stage company, we want to see between three and five x year over year growth at the series a year, three X by a series B, two to three X.

I mean, some of these the best businesses, either even a series C and D round are still growing over one hundred percent a year. And so those are primarily the numbers that we look look for.

So I’m looking at a company right now that’s like SAS for retailers.

What is going to happen with retailers?

And should I just, you know, should I just assume retail is going to be down because everyone is moving online? Or how do you think about the future of retail? Should I still be investing there?

If you think about SAS for retail, historically, retailers have been some of the hardest big corporations to sell into. Now, I wonder whether that is changing because of covid on the negative. You could say that retailers, especially brick and mortar retailers, are really struggling so they won’t have the same amount to spend on some of those tools. But on the other hand, and this is side, I believe I think the retailers are now seeing a seismic shift in their e-commerce penetration and some who maybe were left behind are not as invested in e-commerce are realizing, gosh, we have to really quickly move here and we have to start using a lot of tools to do so.

And, hey, I don’t need to have a huge engineering team. I can use all these incredible products like Shopify and Redcap to be able to do this. You know, I think the rise of no code is is really only just begun.

What are other places where you’re really pushing a lot of brands like how about subscriptions? When does it make sense to move from, you know, I’m buying one of these products to I’m buying a subscription in something.

So subscription really depends on the product, so calm, for example, subscription makes so much sense because if you look at like the engagement of these people, it’s incredible. We had to sleep stories and instantly tripled the engagement and retention of the business.

Whoa, whoa, whoa. Say that again. You had. Oh, interesting. So if you think about it, people coming in and they were spending 10 minutes a day meditating, but they were subscribers. And so they were already paying the money and they were very happy when com added on all this extra content for them, they felt they were getting so much more value from the app is already become a super app where you can listen to music, you can meditate, you can do yoga.

And my favorite, you can listen to sleep stories. And so instead of just doing 10 minutes of meditation a day, then people coming in and doing 20, 30 minute sleep stories..

And also the additional cost to the company is so low that you might as well offer a subscription. That’s what I think subscription really does make sense, which we see in companies like Peloton’s case.

Yeah, great. Do you have does everyone at Lightspeed have RFQs that you’re working on and do you in particular have like do you write them all out and, you know, let the world know what your theses are right now?

So some VCs are very focused on these these and some are just purely focused on when they see an inflection point. And moving after that, I would say we try to bridge the two. And so we do have broad theses and yes, we do write them out. 

I probably have, you know, a few different theses at any one time. But the most important thing is. So we have to ears and one mouth and we should be using them in that proportion. And so I always want to be listening to what the customer is telling me. 

When we hear a founder come to us with a really interesting insight around why the world is changing, why it’s going to look differently in the future, and why now is the time to do this, because maybe regulation is changing or, you know, the world’s looking different ways of covid or another reason, then that’s when we got to move quickly. So I tend to be more on that side of things.

Do you have a good thesis right now that you’ve written down? So one of the areas I’m most excited about is. A lot of different sectors moving to be virtual, so in the past, you and I probably would have done this podcast in person yet. But you know, we’ve all seen the rise of Zoom. And so it’s thinking about like what are the areas that apply to for me that applies to live virtual shopping? That’s an area I’m excited about.

It’s also live virtual conferences and even live virtual networking. So I just invested in a company called Lunch Club, which is a website is Lunch Club DOT III. And this business started off by matching people through a really smart algorithm where people could meet one another in person. But if you’re meeting someone in person, don’t you find like there’s some difficulties with picking a coffee shop in between you parking? So they switch to be virtual, only removed all that friction and we can just jump on a phone call or jump on a zoom and speak to one another.

And they match people based on status and experience levels and interests. They really pay with some fascinating people. I’ve met friends through this company and it’s it’s a really exciting one.

Interesting. I have done it. I did it a while ago when it was still in person.

Oh, you did an in-person lunch club. I love it.

Yeah, but it was it was a little while ago, but I lived in San Francisco again now in L.A.. OK, great. I’m going to check out Lunch Club again. Life shopping is interesting. So I live. Am I shopping with friends or something? You think?

Gosh, there’s so many different ways of doing it and there’s so many different companies who are trying different approaches. And so, yes, you could shop with friends. Yes, you could do twitch for shopping. Yes. You can do a version where you’re going in to see the retailer, but virtually you’re literally looking around the store. So there’s lots of different versions of it. But there’s some super exciting companies emerging. And I feel like this is just the beginning.

You know, people have been looking at live virtual shopping in China for a long time. I think you look different in the US. It will not look the same as in China, but it’s a really interesting opportunity.

And you say and so millennials right now are like 20s and 30s broadly, I think I think and GenZE are kind of teens. Now, will you be looking at like what are the GenZE in China doing or how do you how do you try to see the future? This is one of the great benefits of having nine offices globally, you can call up like our amazing China investor, James Ma, and say to him, Hey, I know you invested in Duoduo.

Tell us what some of the interesting trends are that are emerging in China.

Will Lightspeed lead like a series B? Let’s say if Sequoia did the A?

I say two things. I say A, you can’t be called speed to move slowly. So we always promise you that we will move quickly and not take up too much time. So you’ve got to be building your business. And secondly, it doesn’t matter who else is investing, so it doesn’t matter who else is investing in this round.

In a prior round, we will do our own analysis and we’ll build our own conviction around that founder and then we will invest in you. And that’s it. Like we want to be your biggest believe your biggest fan and be on that board with you and helping you on this journey for the next ten plus years. And so, yeah, we’ve invested in companies in the next round of the Sequoia. We’ve also invested in companies in this area and they’ve invested the Series B and C rounds.

So it goes both ways. How fast will you guys invest? What? I’m sure you track your metrics and say, you know, from first meeting the term sheet, that’s, you know, on average, like, how fast are you moving?

It’s definitely moving a lot faster now that I can definitely tell you, I would say, like in the last few years, the time has probably doubled from first meeting to timesheet or halved, rather, it’s just going a lot faster.

And so if it’s a seed company, you know, we can meet a company one day. The next partner made them the next day. And then we can present our investment recommendation to the partnership on the Monday and give them a timesheet that same day. So it can often be like two or three days and we definitely won’t over the weekend for series. It’s a little bit longer, but honestly, you’re still talking days. It’s no longer weeks or longer than that.

Yeah. All right.

OK, I have to ask you, just like a couple more random questions, I know we’re tight on time.

How about celebrities? You have all these amazing celebrities in your portfolio. If I’m a startup and I’m working on something in the mental health space, like, do you have recommendations?

Like, how can I connect with the celebrity or or how should I think about it? I have a definite recommendation you can use.

Kamir, I actually think if you’re an individual or a company cameos the most incredible way to get in front of a celebrity because people think about it.

Yeah, I was going to say you have to clarify what Cameo is, because I think of it as Snoop Dogg giving me, like, happy birthday wishes.

So Cameo started off as a way for you to order a video, shout out often about the message from a celebrity or influencer. Now we have 20000 influences and you can do some calls with them synchronously. You can send messages to them as well as getting these video shout outs, which is still absolutely the cool part of the business. And so if I was building, you know, a tennis app, I would make sure that I would go into Cameo and message, my favorite tennis people and see whether they wanted to be involved in the company.

It’s just such a great way of getting in touch with these people at a pretty low cost, especially the dark messages. That’s brilliant.

And I don’t know why I didn’t know that. I’m not sure if that’s totally widely known or just not known by me, which is also possible.

Now, you are absolutely right. It is not widely known to get in contact with them that way, but it is definitely starting to give them the growth.

Totally brilliant.

If you could be a movie star or a v.c, which would you be? I would be AVC if I couldn’t be a v.C, I would be a journalist, I’ve always thought that being an anchorwoman or being out doing all the doing all the international work would be really interesting. But I love being ABC. I wouldn’t change the world.

You can start a podcast and it kind of scratches the itch. You get to like, you know, choose you go to international, you know, podcast reporting.

That’s so true. I love it. Yeah, it’s so fun. You have a ton of followers, do you? Who do you follow? Who do you respect in the industry?

I love that question, I often ask companies which companies they respect in the industry. Listen, I mentioned that a couple of those days before, but I really respect Bill Gurley and Kirsten Green. I think that both of them have really thoughtful tweets, and I think you learn a lot from them. I would encourage you guys to also follow Alex Tausig, my partner, who we also mentioned. I think Alex and also Jeremy Lowe just have really interesting insights, so follow them on Twitter.

Great. I do. In fact, you have had all these great success. Would you say that you do you consider yourself like a self-confident person?

Wow. You asking me questions that nobody else has ever asked me? I love it. I actually consider myself to be a lucky person.

And so maybe there’s some self-confidence that goes into that. But I think I’m a believer that the harder you work, the luckier you get. So I don’t think I’ve got anything by chance in this life. I think that I’ve just worked really, really hard and really wanted something. I believe if you put something out into the world and you work hard towards it, then it dramatically increases your chance of getting it.

Yeah, I completely agree. And you were an athlete, weren’t you? Yeah, she’s a sprinter. And I mean, you got to work hard at that, right? It’s a similar. Yeah.

You have to train so hard and then the ultimate decision comes down to 12 seconds. So it’s not like you say you spend years doing it and then it comes down to a very short period.

The motto, I love that. Anything else I missed and should be asking you today. 

No, this has been awesome, I love the conversation, your energy’s amazing. 

Oh, fantastic. No, it’s been great to have you. It’s been a delight. Keep funding great companies and especially great L.A. companies. 

Thank you so much, Minnie. I have to say that over half my portfolio is in L.A., so I will not stop. I’m excited about it.

Marcos Gonzalez — Vamos Ventures

Marcos Gonzalez is the managing partner at Vamos Ventures, a seed-stage venture fund investing in Hispanic and diverse founders.  
 
Over half of LA county is Hispanic. Seems like a great time to be investing in this community! 

View Transcript

Marcos Gonzalez is the founder and managing partner at Vamos Ventures. Based here in downtown L.A., Vamos Ventures is an early stage venture fund focused on tech companies led by Hispanic and diverse founders. Before this, Marcos was twice in private equity, once a founder, and he grew up here in L.A.. Marcos, nice to see you. And congratulations on building Vamos Ventures.

Great, thank you, many thank you for the introduction and the invitation to be on this podcast. Great. Now it’s been fun getting to know you, so maybe if we just start with the basics of, you know, how long has Vamos been around? And you know what? What are you doing?

Sure, sure. Absolutely, Minnie. So while this is a new fund, it’s a first time fund. The idea kind of came about in the year. Twenty, fifteen, twenty sixteen. So it’s something that I’ve been working on for, for a while as you said, we focused on diverse teams. So we have an emphasis on LatinX entrepreneurs. But really, it’s it’s it’s pretty broad. So we look at entrepreneurs who come from underrepresented areas, so African-American women, veterans, disabled, LGBTQ, etc.

So that’s where we are.

And you guys, you’re writing checks now. You’re actively investing.

We have started to invest.

So it’s one hundred or five hundred thousand dollar range. But I think we’ll be doing more on the two fifty side of things and then follow on investing. Check sizes will be half a million and above.

Great, great and super needed. I’m glad you’re here in L.A. Do you know what percent of L.A. is Hispanic?

Yeah, it’s certainly over fifty percent. Not that. Yeah. To me.

Yeah. And if you being good former business school students, you know, we look at the data in terms of like cohorts and we look at 65 and above 40 to 60 and so on, that number changes in. And certainly when you look at the older demographic cohort in this city, it’s a lot lower percentage. But when you look at eighteen and below, it’s it’s clearly over 50 percent. And if you look at, you know, five and below.

So kids and going into kindergarten, it’s probably something I would bet, probably something around 70, 75 percent. It’s a heavily, heavily Hispanic county. Certainly city. Yeah.

And, you know, I knew it was very high, but I know that high and and the U.S. as well. I mean, it’s not it’s not fifty percent, but it’s a huge percentage of the United States. I don’t know the number. Maybe you do.

Yeah. No, from a from a U.S. perspective, I do. It’s, it’s approximately eighteen, nineteen percent of the U.S. population. It’s the largest minority group in the country and it’s super high growth. One of the data points that we throw out from time to time is that, you know, every month eighty thousand Hispanics turn 18 for the first time ever in the U.S. system, system wide Hispanic students were the largest.

A group of students entering the UC system, so if you think about Asian, Caucasian, African-American, Hispanic, it’s never been the largest. It’s been creeping up. But this last year, the number of admitted students, the largest demographic group, was Hispanic students.

Well, good for us. I mean, good for good. I’m not Hispanic, but they are good for California, good for the Hispanic community.

I didn’t know that at all. So staying on this topic, it’s interesting to me as an investor, obviously, the young demographic, which is fantastic. Anything else that you think about when you sort of put your investor hat on in terms of, you know, consumer behavior or whatever?

Yeah, there’s there’s a number of points. You know, it’s kind of stepping back a little bit. Know Vamos Ventures is a, you know, early stage fund. Some might say micro fund. Right. Twenty five million dollars is where we’re at right now. We’re probably going to end up at about twenty seven million. But there’s plenty of funds like this.

And I always tell folks when we go through the data that this is why it’s an interesting area from an from an investor perspective. And it’s just a happy coincidence that we happen to be Hispanic and we happen to know it and have access to it.

And so there’s two of these points, right? One is from an investor perspective, one’s from from an impact. And I’m mentioning that because these are two categories that I’ll get to us now with with some data. And so on the investor side, not only is it young so twenty eight is the average age of Hispanics in the country. Forty two for non Hispanic. So that’s that’s a pretty dress. So you’re looking at runway, right?

You capture a customer at a young age, you’ve got you’ve got runway to work with. So it’s especially young in high growth. And I told you the eighty thousand a month number and that’s ninety two percent driven by domestic growth. This is not immigration, so it’s domestic driven. So that’s going to continue for good. While 60 percent of future growth in the United States is attributable or projected to be from the Hispanic demographic. So we’re looking at 18 percent, 19 percent of us, I suspect, today.

But in the next 20 to 30 years, we’ll be reaching something around twenty eight percent. That’s over a quarter of the country. 

So that’s huge. But but what’s more interesting is that from a consumer perspective, buying and brand loyalty is over indexed when it comes to Hispanic consumers. So the what we’re looking at is how do we identify opportunities that play to these demographic trends.

So one of the areas we’re looking at is consumer packaged goods and the whole CPG tech world is most of that population natively English speaking Spanish, speaking bilingual and and does the way that you reach them. Does it have dramatically different channels and cost of acquisition?

So really, really interesting. Good questions. So the breakdown in terms of language, I can give you the specific numbers, but roughly for anybody listening and it’s roughly a third, a third and a third. A third is English dominant. Very little Spanish. If any third is Spanish dominant, understands English, you can probably figure out some directions that they need to, but they’re Spanish dominant. And then a third is completely bilingual in consumer broadly. I think people always talk about how hard cost of acquisitions going up. And so, you know, is that the same in in the Hispanic community or different?

The way you reach them, some of the ways are very traditional ways that we would use on any consumer but the Hispanic demographic, which like the African-American, when it’s very tech savvy to the Facebook, you know, the Google ads, the social media channel, whether it’s SNAP or it’s it’s absolutely critical to reaching this consumer group. What are the data points I didn’t throw out is that every year the number of Hispanics receiving STEM related degrees is doubling.

A lot of these young folks with STEM degrees are going to be getting into the engineering world and innovation and entrepreneurial world, that’s a great indicator of future.

Yeah. Do you think, like for these brands, do you think it’s do you think it’s like developing a whole new brand for this market, or do you think it’s modifying messaging around existing products? Or how do you sort of think where do you think the breakouts will come from?

I think it’s going to be both, but I would rather not. I would rather focus on new brands or existing brands and giving them a makeover so for example, chips.

Right. So everybody knows tortilla chips. Right. And who doesn’t have tortilla chips right now in their house somewhere or the last month had them in their house. And so everybody does it. But but here’s the big company we saw the other day. And this company is focusing on formulation and they’re using cactus to develop their product. That’s much more healthy. It’s a different ingredient that’s better for you versus all the processing that goes to the whole corn base, MySpace future.

And in these guys are all young guys and gals who grew up either here with Mexican parents or in Mexico, know the community, know the consumer and have a reverence for the product. But also know that if you want to see kind of this, there’s opportunities for new growth of new product, you know, keeping the cultural side of it and I.

Justified in peppering you with all these questions, because my understanding is before this, you did private equity for a while focused on the U.S. Hispanic market. Tell me more about what were you doing?

Like what? What was the actual job? Look, were you acquiring companies? What is private equity?

Do I still don’t put you up to. So so for you mentioned I’m from Los Angeles, but I left at a young age and I did brown undergrad and then business school at HBS like you did. And after that I got to BCG and I worked at the Boston Consulting Group and did a lot of work in the US and Latin America. And I lived in Mexico for a while. I lived in Buenos Aires for a while and in the US for four years.

Of course, we looked at consumer packaged goods clients and I mentioned got into private equity and within private equity. One of my roles of the last war I had in the private equity world was looking at the US Hispanic consumer. And for us it was kind of a dual view of looking at companies that were established, brick and mortar businesses that were run by Hispanic entrepreneurs or any company with any ownership that was servicing the growing domestic emerging market in the U.S. market.

In the private equity world, as you know. I mean, even for folks that are listening, it’s it’s very similar to venture capital. There’s some major differences. Of course, some of the major differences are that you’re looking at companies that are a lot more established, have grown already, are more brick and mortar than they are technology and software driven.

But we got to know and I got to know the food and beverage world. And to be honest, this is not was not a priority area for for me in Vamos ventures. That’s not why I started Vamos Ventures. But it’s clear to me that that’s a meaningful opportunity for us in the venture world, because 15 years ago, 10 years ago and, you know, we didn’t have the kind of consumer targeting capabilities that we have today.

We didn’t have the broad outreach opportunities that we have today. It’s it’s really an interesting opportunity to focus on this area. And CPG, let me ask one question.

So I think a lot of people find v.C a little bit more inspiring or something like you’re you’re you’re creating something. You have a vision. But what do you think you can learn from private equity?

I think that one thing is that you have got to go not get carried away with with some ideas. And, you know, the private equity world, there’s a lot of tire kicking that goes on and you have plenty of tires you can kick. In the VC world you don’t have a lot of depending on what stage. And we’re talking about early stage. There aren’t a lot of tires you can kick, but certainly there are some, one of the things that we can learn there is that mature teams are are also good, thoughtful business analysis and strategy is worth something, kicking the tires and really kind of doing some diligence, not getting carried away with the latest fad. And the latest idea that’s coming out of Silicon Valley, I think is a good thing to to stay away from that and perhaps suspicious.

I I think that you are going a different direction than most of the VCs I talked to. And I’m not disagreeing with you, but like, I just had my since on the podcast. And he said that almost all of the deals they’re doing now were they’re writing a three to five million dollar check. They are pre revenue companies. And I think you actually, according to your website on your website, it says, we prefer companies with revenues.

Yeah, sure. And. Mark, obviously very successful here and not just here in Los Angeles, but successful investor, and that’s that’s great.

We will invest in companies that are, let’s say, CPG tech companies. And if you don’t have even five thousand dollars in revenue, then and we’re not maybe going to say no, but we’re going to absolutely create a different structure to invest it the fact that so many investors in the very early stage are basically safe agreement signers, that’s that’s fine.

But the world that I come from is that’s not what you’re paid for.

We’re investors and that means we do deals, we don’t sign agreements, we do deals. 

So going back to business ventures in the Velma’s venture story, when you go out to raise to start a fund and raise money for a strategy that, you know, four years ago was not that popular or well known, hey, we want to raise money to invest in diverse teams with a focus on Latin. People would look at me like I had two heads on my shoulder. What are you talking about? I don’t know. Founders and entrepreneurs, you know, is this a pipe dream?

And so I realized early on I’m going to have to do some deals and short pipeline so that we have access so that we can pick something, we can add value and that can be successful. And so I invest in about six companies.

You said something on a someone else’s podcast that I liked, but I want you to unpack it for me, which, as you said, there’s a difference between being a fund manager and an investor.

Yeah, for sure. So tell me what you mean by that. Well, you know, I’ll say that I received calls and emails, often from mostly younger men and women who aspire to be a venture capitalist, and that’s their words. And they’ll say, hey, Marcus, I’d love to talk to you. I’m so and so. And I want to I want to invest in a lot. Next entrepreneurs, for example. I’ll say, great.

Do you want to be an investor or a fund manager? And they’ll say, well, it’s the same thing. I said, Well, well, no, it’s not. I mean if you want to fund your now a fund manager and it’s it’s much more than it is writing a check than just writing a check. If you want to be an investor and you take out your own checkbook, you write a check.

You’re an investor now and that’s great. But if you want to raise money from other folks and third parties, you’re now a fiduciary and you’re a business owner and you’re an entrepreneur. And there are many parts to that business. And if you don’t have experience in it, it’s a it’s a it’s a tough business. Right. First of all, I don’t know anyone. I don’t know Minnie. Maybe you do. But if anyone’s come on your show and said it’s an easy business, I’d love to meet them.

But it’s a hard business. And I’ll tell you, I’ve seen a lot of things happen in my own experience in the private equity world that have blown up and how you deal with it. And I think if you haven’t seen some of this and spent 10, 15 years, doesn’t have to be that long. But for me, it was 10, 15 years of listening to your senior partners tell you, Marcus, don’t do that. Here’s why they want to do it like this.

Here’s why. Stuff you don’t read in the textbook. But I also sometimes counsel to spend a couple of years, you know, come work here or be a summer associate with us or do these things and and dig in and learn on somebody else’s dime, you know, even if it’s our time.

And so you can get out to market and do that.

And that’s great, because I think you just said, come work here and you can learn on my dime you are hiring, are you not? Do you want to say that on this show?

Yeah. Yeah, we are. We’re still building the team out and we’re looking for somebody right now who ideally comes from a different background is mid levels, had a few years out doing deals as part of a fund and coming in at a pretty senior level. That that’s great. And we’re also looking for somebody that’s very junior.

That’s great. I think you you’re setting up a lot of interesting sort of pipeline structures, which is great to see. Yeah, no, I agree with you completely. Like being a fund manager. It’s not it’s not all that sexy. The two and funding model, you know, with a twenty million dollar fund. Thirty million dollars and fifty million. I find it’s still not that much now.

Now anything else on on Vamos. I don’t want to leave the impression that you only do KPG, right? That’s right.

We don’t, we made a decision early on to say, look, we’re going to be pretty broad, but there’s a handful of areas that we really like, we have experience in and that we’re going to we see a lot in our pipeline, and that’s financial services, health and wellness, CPG, retail broadly and media.

And so Palladin is a company that I invested in some ago, the Chicago and New York based fund by two women. And they created a marketplace for lawyers that either must or want to do pro bono work. And on the demand side, families and individuals that need legal help can’t afford it. And it’s a great business. It’s it’s now raised three rounds of funding. We were part of the very first round and they’ve done a lot of great work.

And there’s a real value proposition there to law firms principally, which is how do you get your attorneys to do pro bono work that they have to do efficiently and save their time so that you can build them out at market rates. And number one and number two, you use this to attract lawyers because young lawyers say they want to be engaged, so tell like Vamos Ventures, you know, you had a cushy job. You know, private equity is usually larger funds.

You know, this is more this is a mission for you. I know you’re from L.A. So so maybe take me back to childhood and how that’s, you know, your journey to here.

I think there’s plenty of venture capital professionals out there that feel that it’s a mission because of the type of work that we do. It certainly is for me, for sure. And but I grew up here. I was born in El Sarino. I’m looking out the window right now and I see City Hall and it’s just beyond it.

And so I grew up there and born there. My my siblings were two and my parents are from Mexico. My parents immigrated to this country sixties. They met here in Los Angeles. But my brothers, my sister and I were all born in Los Angeles and then at a young age moved to Alhambra, which is just the very next community, the very next city outside of anybody listening to this knows L.A., you get to drive east and eventually you go right into Alhambra and then Pasadena.

But I went to Alhambra High and I’ve always been part of this. I’ve always felt part of the city in a weird way. The East Side, the real east side is very, very Mexican and have cousins, uncles, whatever. You know, over in East L.A., myself, you our family in El Serino and kind of really grew up in that environment, that Mexican house, Mexican neighborhood, et cetera. But when we got to all Hambro, I was a very different story in Alhambra.

We were probably one of the first Hispanic families on our block, hebra. And but in a matter of years, three, four years, it was all Hispanic. And it was really interesting to see in the high school that I went to Alhambra High Public School, very large. I was half Hispanic, half Asian. That was my world. Very, very different than the brown, for example. But, you know, I remember, you know, I grew up loving the city of Los Angeles.

And my my parents love the city ballet. So they would take us everywhere downtown to see, you know, and they built the Bonaventure Hotel. We would go up and down the elevators. That was our weekend event. And so but you know what? I got into Brown. They had an event on a Saturday or Sunday. Bel Air, and it was for admitted students, and I remember clearly my dad and I driving down Wilshire and his truck.

And I swear to you, when I was 18 and driving down Wilshire and looking around and thinking to myself, where are we? I have never been anywhere in this part of the city. It was possible to grow up then in those days and be very sheltered. The original point is that I grew up here.

I was born here. I love Los Angeles. But I would say that I love and identify with a particular part of Los Angeles that is not a very broad piece of it necessarily. Nothing against the West Side or the other valley. You know, I grew up in the San Gabriel Valley. I get it. We’re not San Fernando Valley. But but that’s the part that I definitely I completely agree.

I mean, I’m in the house that I grew up in right now. And I think it’s a big trend, actually, in L.A. versus San Francisco, San Francisco, everyone moved to San Francisco to do entrepreneurship. I don’t think you feel the same commitment to the community as you do when it’s the community that raised you.

And so.

And how did you see your parents immigrated here? It’s kind of the American dream. How did you end up, you know, going to Brown, where you were you were they, you know, were you just very academically focused?

And I was very motivated. I was very ambitious young kid. And I wanted to do the best and I wanted to be the best. And I thought, OK, where can I apply it?  But it was my parents, completely American dream, super hardworking, super entrepreneurial, resourceful, tenacious, smart, common sense, you know, stick to it, Omnes Froogle, everything you want and find.

And an entrepreneur, they have me. And and so that’s that’s part of the reason why Vamos Ventures, you know, it’s when somebody tells me, look, Marcus, I don’t think there’s a pipeline for this or I don’t think there’s any entrepreneurs out there that, like, I grew up around this. You cannot tell me that this doesn’t exist. I’ve seen it all my life. And, you know, Peter Thiel is very famous, saying in his book One Zero or one of his articles about one of the questions that he has zero one zero zero one zero zero to one.

Maybe I’ll come up with a one to zero. So maybe he’ll write one. But he asks the question right. Of what do you believe that others don’t believe or something that. Yes. And early on. This came up in a discussion and I said, yeah, I clearly I I don’t think most people believe that this community has amazing entrepreneurial talent, including in the tech world. And but I believe and I’m willing to bet on it. And I questioned myself many times, like, am I ruining my career and my life that no, no, I have you know, I had to follow my instinct on this one. And that’s that’s what drove it.

I mean, immigrating is an extremely daring, entrepreneurial endeavor.

You know, you say, oh, it’s scary to start a company. Well, changing moving countries is is a daring endeavor. Absolutely.

And so now I’ve heard you, as I said, I heard you talk about what you’re doing with with the entrepreneurs who come and pitch you. You can invest in all of them. But I think you’re doing a lot of giving back to the community. How do you think about those those ventures and what you want to be building there?

Yeah, you know, it’s it’s really hard. I think we’re all investors and we all have our number one priority is generating returns for our investors. And we’re very clear on that. If you start a fund, as I do, to to give energy and momentum to creative expression through entrepreneurship of entrepreneurs of color, if that’s your mission, then how do you reconcile that with having to say no to ninety five percent of the folks that reach out to you and they don’t just reach out to you.

They say things like, gosh, I’m so happy to see what you’re doing. Marcus, congratulations. Thank you for doing. This is amazing. Gosh, I’ve been telling you, by the way, I’m an entrepreneur. You what we’re doing and then what? Sorry. Not for us. Yeah. Oh, don’t reply.

Yeah, yeah, yeah. I mean, that’s devastating. And I’ll say we got four things to do.

One is we recognize everybody may not be the very day you email us. It may be a week or two later, but we’ll recognize everyone who reaches out. It’s not easy. It’s part of what we think adds value is that we see you and we recognize and number two, we we provide feedback. If you want it, we’ll give you feedback, honest feedback. Three, we’ll make connections. If we know anyone that could help you on your journey, we will make the connection and then for you will have an open door.

And if you want to come back, if you have other things you want to discuss or you have a new company in the future, whatever it might be, we’d love to hear from you again. This is not a no don’t ever bother us again situation. And we found that that’s all great, but it’s not enough. And so we developed a program called the Founders Roundtable and oh, no, no, sorry, it’s brand new. We’re actually launching this next week.

It’s it’s actually the founders roadmap, you know, zero one one zero what’s instead of the founders roadmap it’s a monthly video, fireside chat discussion with a founder and an investor. 

And so we’re going to talk about what works, what doesn’t work from a lens of a Latina entrepreneur that has started a couple of companies, has raised a couple of rounds in this company and what works, what doesn’t work for her. And then turns out, coincidentally, a Latino investor at a local financial clocktower ventures. So so a friend of Arizmendi actually at The Onion. And so this is a great, in my view, a really interesting opportunity to do several things.

One is to promote these two young women, an entrepreneur or an investor. And give them a platform to articulate their personal brands and then more kind of bricks and mortar or kind of brass tacks would be what what they look for as an investor. What’s what gets immediate no.

Here’s what I struggle with the most in terms of what gets an immediate no or yes. It’s the founders. Right. And the stage we’re investing in, it’s a lot about the founders. And I’m not great at giving feedback. Like if the reason I’m not investing is because. A view that’s a much harder thing than hiding behind sort of I’m not investing because I don’t believe in the tailwinds of the market.

How do you think about giving meaningful feedback when it’s, you know, it’s a more personal sort of feedback? You know, this this also comes up and there’s a particular example of a founder and we had gotten to know each other and had developed a relationship and so is fundraising. And he was frustrated and kind of expressed frustration. And I said, hey, can I can I be really honest? Sure. I said, well, and it was a very honest personal feedback on attitude, on behavior, on the way you’re dealing with the way you deal with folks.

And nobody, I think, disputes that. You’re a smart guy. It’s these other things. And honestly, people this is not just I’m going to write a check. It’s somebody’s thinking, do I really want to deal with this guy for five to 10 years?

Is there anything else I missed that you’d like to talk about otherwise? This is great.

Well, you know, I would like to say I know this is L.A. based podcast and we’re relatively new on the scene. But I would love to just develop relationships and get to know local funds and investors and collaborate, you know, over time and start the process of getting to know each other.

That’s great.

I’m excited for the enduring institution that you’re building and it’s it’s a very exciting time to be building what you’re doing. So it’s so great. Thanks for being on the show and thanks for doing your work.

You bet. Minnie thank you very much for having me. I appreciate it. And I look forward to being in touch with you.

Thanks, Marcus.

Arjan Schutte — Core Innovation Capital

Great discussion with Arjan Schutte about democratizing prosperity and running Core Innovation Capital, a finTech fund that measures its impact on society and has invested in Ripple, NerdWallet, Synapse, Fundera and more.

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Arjan Schutte is the founder and managing partner of Core Innovation Capital. Core invests in financial services companies that empower everyday Americans. Core is making seed and pre-seed investments out of its one hundred twenty five million dollars third fund. They have a great portfolio of companies like Ripple, Synapse, Opportun, NerdWallet and more. Arjan, welcome to the podcast.

Great to be with you. Great. I heard you say that you are your mission is something like to democratize prosperity. I really like that, me too. How’s that working for us?

Well, if it wasn’t obvious that we needed it before covid, it certainly is obvious today. And how’s it going? Well, mixed honestly, you know, worse, we’re a small fund, and it’s a big, gnarly, complicated problem that that needs more investments and is getting more investments but can’t only be investments. There needs to be a policy side to it as well, which on the side of my desk, I’m trying to figure out how to do a separate story.

But there there are so many ways in which the private sector can figure out this set of public sector problems. And it’s just fun to see the emergence of mission driven fintechs of so many shapes and flavors out there chipping away at this. Yeah.

What are the what are the big levers are where you focused? So we really started looking at the unknown under banked where we perceived there to be a boatload of people, shockingly so I had no idea how many people were on an underbanked and then be a complete absence of technology, like it’s kind of an old school world of like, you know, place based check cashers and such that serve that industry at significant scale. Consumers are spending like a hundred billion dollars on stuff that you and I get entirely for free.

Where where does that come from?

Yeah, it’s fees. So I want a cash this check, oh, that will cost you one to 10 percent of the of the of the face value of that check for me to assume that you didn’t Photoshop it and give you cash in return or its fees on payday loans or on title leases or, you know, a whole litany or on Western Union checks, Radware, or even just paying your bills like a shocking number of people walk into a physical location, 7-Eleven to pay their bills.

Right. Like we do this for free. I get I get miles for paying my bills. Like I’m actually making money, paying my bills. They walk into the 7-Eleven, I actually don’t really know the experience they’re having, not had to do it myself. And 7-Eleven charging fees to pay their bills. Yeah.

So you’re walking with with with your with your Comcast, you know, paper receipts and you say, I want to pay this. And they say, great, you know, do you want to do. How long do you want to take to, you know, typically like if you if you want to wait a week, it’s free or cheap. And if you need expedited today and that’s typically, you know, how long you’ve waited because you’ve got kids and you’re in you’re hanging onto your cash, you know, as long as possible to wait for what you needed for.

And then when you come at the 11th hour and you want to declare today, it’ll it’ll cost you up to 20 bucks per bill just to have it expedited in real time so that the power doesn’t go out.

So are you looking at, you know, solutions to eliminating those fees? How do you approach that? Yeah, so. By shifting from a cash based economy to a digital economy, you can eliminate a lot of this stuff. And so that starts at the payroll, right? Because how people end up with cash in their hand is because they get a paycheck and then they take that to a check casher and then they sort that out.

Right. They put some in their pocket use up to pay your bills. You pay your rent in a sense of home, wherever your home is. And, you know, and that’s kind of how you conduct your whole financial life there. And and it’s very fee extractives. If you can get direct deposit, which which is a very positive trend that has grown in the last 20 years, where a direct deposit started with something like eight percent of the population, and now it’s something like 93 percent of the population.

Very positive trend. And so then you can do a lot of these things digitally or more or less digitally, and you can chip away at all the middlemen basically who are who have got their hand in the middle of the transaction.

Hmm, play this out for me a couple of years? Sadly, it’ll look pretty similar for a couple of years yet because our infrastructure lags dramatically. So, for example, we’re like the only modern economy that doesn’t have a real time Federal Reserve system. So ACH, the automatic clearing house, which is like, you know, the way our techs used to run.

And now everything digitally runs from our bank accounts is not real time. And so consequently, all of these lags are still there. Those need to be eliminated. And check has been or cash has been eroding pretty consistently for decades. But what people don’t realize is that the amount of cash in circulation is so high that even if it continues to erode at the rate that it has for the last 20 or 30 years, it will be a prevalent form of payment for another two hundred years.

I had no idea. Nor I know and of course, you know, that won’t be a straight line and it’ll be an accelerating line in the punctuated line, but not. But the point is, you know, the bigger point is like where we’re going to have cash in our lives for much longer than most people presume. Hmm.

So but OK, so back to the infrastructure not being at a point where in this country, you know, our infrastructure needs get upgraded, I guess.

Will you invest in sort of the more infrastructure things and and why not why can’t we just copy other countries.

Yeah, great idea and, you know, the the benefits of being in a competitive free market economy are that we’re great innovators and the disadvantages are that there are no autocrats who will mandate a single standard.

And so the way banks are regulated is extremely complicated. And there’s not one prudential regulator, there’s four. And so there’s banks of every shape and flavor, and so then it’s just like an endless quagmire of political constituencies and bureaucracies that other modern economies can, you know, can just have a have a government mandate to say we’re doing this. Now, that is less the case here. And what was the other part of the question? Well, I’m just interested on that.

So we have four regulatory regulators, is what you said. Do you think the regulator. Do you think there’s regulation that is potentially feasible that could really move the needle here by any of any of our current regulators?

So the Federal Reserve Bank has had a real time payments task force for the last 10 years, have been on and off of it repeatedly, and nothing really has happened. We’re still having the same conversations. I mean, I got this I moved here from Holland and I moved here in the in the 80s. That’s a long time ago now. And in the 80s, I didn’t even know what a check was. A paper check. We still have paper checks, paper checks to our gardener, for heaven’s sake.

I’m sorry. It’s not funny. Yeah. OK.

And so, OK, so with your core your core innovation hat on here, you’re looking at these things and are you sort of looking at where you think the future will go with your realistic core innovation hat on and trying to back the entrepreneurs who are innovating on, you know, on these, you know, whether it’s real time payments or elimination of middlemen, I guess.

Yeah, we kind of have a technical, technological view of this Martin Luther King quote, I love, which is the mark, the arc of moral justice is long, but it ends. Oh, I forgot the end of it, but it ends positive somehow.

And basically, the way the way I see things technically is very similar. I feel like technology and and private markets, you know, in long form are are a are a are a march towards liberty and a march towards emancipation. And we’re placing bets against both the world that we wish the world that I want for my kids. And we’re placing simultaneously we’re placing bets on where we think the puck is going.

What are some great examples? Well, Ripple’s, a great example, along the infrastructure side, we have tens of millions of people move from poor countries to rich countries and send back every year tens of billions of dollars. And at a cost of somewhere between 10 and 20 percent, which is crazy when you think about it, the poorest people are paying such tolls and they’re working so hard and leaving. They’re like all these crazy. And we and we certainly see this in spades in L.A., like there are so many immigrants, something like half of Western Union’s domestic revenue is made in Los Angeles County, which is huge.

So. Ripple is basically just modernizing cross-currency settlement technology, right, like if you want to move money from here to there today, the probably Swift will be part of the story, whether you use it directly or whether Western Union or a third party uses it. And swift technology was literally written when the Apple two E came out, and we’re still using that today. And it’s moving 50 trillion dollars per year today. And it has a six hundred basis point error rate because someone fat fingers a number because it’s intended to number and someone has to physically type that in when you’re sending someone 300 bucks or 300 million bucks across the ocean.

Yeah. So keep going. So Ripple is building a modern tech stock that makes up real time and virtually free and secure and addresses a whole litany of issues that have kind of just gone by the wayside. Happen to you as a cryptocurrency, which is kind of a sideshow where the point is just as a modern tech stock for making cross-currency settlement as easy as sending an email is across borders.

How did you decide that this was actually going to be, you know, a startup disrupting this multi-decade old industry? How did you decide that this would actually work and be worth betting on? Well, as you know, right at its dumbest, we basically look at Team and Tim and so this was an incredible team. Chris Larsen is a serial visionary who founded eLoan and he called it. Right. He founded Prosper and called that right and has always been and in the scheme of things, not that many people who are right repeatedly.

And so there was a formidable founder who is a force of nature, and that’s an important part. And then there’s a TAM know, that’s like a trillion dollar tin, like the world spends two trillion dollars on fees for getting money from A to B..

But otherwise, honestly, when we invest it in, like, you know, mid 13, we had no clue that any bank would ever buy them, let alone be moving billions of dollars across borders with them today.

And we were willing to take a big bet very early, and I’m glad that we’ve done it, although there’s plenty of examples where we did it. You know, I rue the day.

Yeah.

And so. Right. So this is your third fund. You’ve been doing this for a while.

Also, just can you tell me the story of how how you came to be doing this?

Sure. Know very much by accident. So out of college, I fell into a startup. I hacked my way into college grading system, and that got me a job at a startup down the hill in Portland, Oregon. And so I was developing educational software and had a real B in my bonnet around, you know, making education better by by developing software for the Media Lab in MIT, which your firm has a connection to, and a couple other education startups.

And then someone gave me a book in 2002 about Muhammad Yunus and Grameen Bank and micro lending, which is all completely new to me. And I read that cover to cover over a weekend. And I was like, holy moly, that is awesome. I love everything that that it’s about, and I was just blown away how this is basically a Bangladeshi man who was a US trained economist and who learned about free markets. And he went back and he devised a system of lending which is economically empowering, which is incredibly efficient.

These are loans to the poorest people on the planet of Earth, and they have one to two percent default rates, which is insane. Jamie Diamond would kill for the thrill of a default rate from a prime customer. So anyway, I was just like, wow, this whole thing is so very cool. And so I was looking to start something like that in the US. I realized for a variety of reasons that microfinance isn’t going to work in the US.

And someone introduced me to a bunch of hippie bankers in the south side of Chicago who had started a financial institution called ShoreBank in the 60s when all the banks were getting a lot of shit for redlining and they were not making loans or black people lived. And these were a bunch of renegades who moved their bank into like the South Side black ghetto of Chicago and created a cottage industry around community economic development. And now there are hundreds of Shore banks around the United States.

And the other aha was, you know, they were 50 years into their journey and that whole cottage industry was serving one half of one percent of the population. And so I was like, well, this is great, but it doesn’t scale right, like half a century later, it’s just barely scratching the surface. They’re incredible.

Place based organizations are hyper local. Mm hmm.

And so how do you solve the problem at a national level? And so a woman called Jennifer Tushar and I started a think tank spun off from ShoreBank called the Center for Financial Services Innovation CFSI, now called the Financial Health Network, and started asking the question of how can technology basically. Creates economic empowerment, and I started making small investments off the side of my desk and one thing led to another as like this will be my next startup, so.

So many questions there. Can we can can I rewind and ask why microlending doesn’t work in the US? Yeah, totally. What makes microlending work is shame and shame is a is a. Is a deep cultural phenomenon, and the reason that the default rates are so low is because there is relatively little migration in poor communities in developing countries. You’re kind of grow up in the same tribe, in the same place, and so every week you pay, you make your payment against your loan and you get together with a handful of other people.

And if someone doesn’t have payment, then the other ones in the group have to pay for the person who couldn’t pay. And the shame is the red like it is just unconscionable to not make a payment, there’s just no fucking way that you’ll do it. And hence, it’s so people scramble and just make it work because they’re because they’re they don’t want to live in shame with their neighbors. And for a variety of reasons, good, bad or indifferent and not all bad, you know, we don’t quite have that cultural construct here and and poor communities are much more migratory here.

So you came from a think tank and now Core, you’re here in L.A. Kat, who I know a little bit. She’s in the Bay Area and you’re you’re investing in the US.

Across the US.

Yep. Fantastic. So let’s go back to kind of what you’re investing in.

We talked some about infrastructure and fees. You know, it seems like fees don’t matter if I’m not making any money. I mean, not don’t matter. But like how do you think about helping people have jobs, keep jobs, have jobs that pay more money, that sort of aspect?

Yeah, that’s a great question. Something I’ve been I’ve been much more mindful of lately, 10 years in. And we collect both our financial performance and we measure the externalities of our work. So what is our social impact? And our portfolio companies have in the aggregate created about forty five billion dollars of savings for twenty five million Americans. 80 percent of them are low moderate income. And that’s starting to really add up. And I’m really excited about that.

If our investors didn’t care about a return and thankfully all of them do, and thankfully all of them are happy we would have an incredible social return on investment. Right.

If they were all foundations and they gave this to a charity, it’s something like we’ve created six hundred dollars for every one dollar that has been invested in the core in terms of of measurable value to an end consumer, which is should be a wake up call to philanthropy, which can hardly deliver this kind of our why.

But all that you know, all that said, I’m cognizant of the fact that. Cheaper and better financial services are positive, but only mildly so. And what people, as you say, need much more than the cheaper alternative to a payday loan or a cheaper way to find an auto insurance or whatnot is they need more income, they need more steady income, and they need better protection from shocks because it shocks that send people down these rat holes that they can never come back out of.

So better, smarter insurance. And then on the income side, you know, we’ve we’ve looked for quite some time in small business finance, which is a big driver for income. We spend a lot of time looking in and around housing because for so many people, home ownership still is. There is the the main way to create some form of wealth. It’s basically forced savings regime across all of the positive and negative stories is net positive for most people.

And you’re measuring your social impact. I just didn’t don’t want to let that that that comment go away.

I don’t know a lot of VCx who measure their social impacts.

Yeah. I don’t either. More should I said read like we’re badgering our portfolio companies to measure everything, not just their financials. Read to read like we’re talking about OKRs and KPIs all day long and what are the right ones and what are our dashboards and all the stuff.

So we measure what we care about, right you know, like we have a bee in our bonnet about leaving the campsite a little bit better and I feel like, you know, being in this asset class, so many people do.

We’re like, we’re all doing this because we want the world to be a little bit better.

How how how do we know we’re doing? Well against that. We’re like we know how well we’re doing or not financially. And for almost all of us, that’s basically it. You know, we’ve measured it for a decade now and we found lots of opportunities to do a better job and to and to avoid this kind of business model, to seek out this kind of business model.

Do you have any specific it sounds specific recommendations.

Yeah, we basically measure three things skill, quality and alignment. And scale is like, are we reaching enough people because the reach five people, not interesting, we want to reach like the lion’s share of the US population. That’s the way you can make a dent. And then within within the scale is like reaching the right people. We’re like super wealthy people. They’re fine, the super wealthy. 

And then quality is like, you know, are are we advancing better quality products that are cheaper, that help in other ways? Read like by using this, your credit score can go up really good performance can actually be net positive in other ways or you’re better protected in case of a shock or, you know, et cetera, et cetera. 

And then alignment is kind of the adventure veteran. I’d like if we’re right, we’re not compromising returns. In favor of social benefits, if we’re right, then therefore investing in companies that create more value to consumers, they’ll be more valuable companies. And so we’re just mathematically measuring the correlation between the financial performance of our companies and the social performance of our companies. Mm hmm.

Mm hmm. One of the things you said was it’ll lead to improved credit scores or things.

Can you tell me some about where that’s headed and how does data factor into the future?

Yeah, and so many exciting ways. Great answer. Thanks.

Like we’ve we’ve had credit scores for a long time and credit scores have have basically taken very few inputs. Our performance on other credit instruments, those are the traditional trade lines. And we’re increasing nontraditional trade lines all the time. And it’s a it’s a fairly laggy process. I invested in two thousand seven in a company called RentBureau that we sold for not that much to Experian that collected rental bureau rental payment data so that you could report it and build a credit score.

Only now, how many years later, 15 years later, this. The FICO nine score contemplates rental data. And but that’s an accelerating curve of adoption in terms of non-traditional data, and then people use a credit score for more and more things, are the permissible use for credit scores is expanding, not contracting. And that’s just the official credit score in the official credit bureaus.

There’s a whole litany of of unofficial credit scores and another interesting trend of data that I’m super excited about is. You know, today it’s FAANG, the big tech companies have largely monetized our data exhaust.

Mm hmm. And I’m excited for that to shift. Mm hmm. And for us to be able to monetize more of our own data exhaust.

Mm hmm. To come back to an earlier question of like, you know, how do you make up for people’s income? I’d like since the 70s, the how we’re paid for our time has flattened well, our productivity has gone up.

So that’s that’s why people are basically, you know, dusted for inflation as poor, rich as they were, you know, 40 years ago, more or less. You know, we need to find more and different ways by which to bolster our net income. You wrote a great title. It was something like ten, nine, nine problems, but two eight one. That’s pretty good because there’s got to be a lot of different ways of bolstering, as you say, our income.

More people are making more of their income on form ten ninety nine versus form W-2. So as a contractor versus an employee and just as a secular matter, just for purely financially, that is to the consumers. Disinterest. Because our whole social safety net for four, however good or bad it is, I am a European, so it’s bad here.

Is is conceived through four two. Mm hmm. Right.

Are pre tax benefits are accessed for one in retirement health insurance. All the stuff is through a W-2 relationship, not a personal relationship. So that is a policy question, and I think.

The sad reality is like what made America’s middle class the richest middle class in the history of the planet. Was the labor union, hmm? And it was Labor who we love to hate today who fought tooth and nail, and it did ugly things in ugly ways and just pushed and pushed and pushed and pushed obscenely.

You know, in ways that is very distasteful to to us modern people, but got like a working class, a great income, and with labor mostly dead and in many cases I feel like. Rightfully so, random in so many so much meritocracy has been upside down but what will take its place, right, because.

Yeah, so we’ll see. Meanwhile, we’re writing checks against things that can just create financial efficiencies no matter where things go, but it is a real question. Yeah.

So I want to save time to ask you a couple of other questions. But in terms of where you’re writing checks, I think we kind of covered your your point of view of the world.

Anything else about Core to know? 

I can’t compete against the next guy or gal on finding a full stack developer. But where we can really help is like, you know, your chief risk officer, your chief capital markets person or, you know, that kind of thing. That’s easy for us. And then navigating all those all those relationships, how do you find a bank? How do you find an insurance carrier? How do you deal with the state regulators versus the OCC versus the FDIC versus the Fed?

All that stuff? We love that stuff.

It shows, that’s great. OK, first first random question. If you if you could start a company, what would you start?

What would it be solving?

I think I’d want to start a company that employed a lot of people and paid them a great living wage and built an ESOP in a world where ESOPs don’t really exist right in the startup world, everyone’s in ESOP. And that’s kind of part of the ethos here. That’s not true in most of the economy. And with no pensions, the lion’s share of people are just making their money on their hourly toil. And so so I’d like maybe like start a light industrial company and like, you know, make auto parts or plane parts or drone parts or something like that and and build a great ESOP so that people could really build, like, you know, intergenerational wealth as part of a normal working class gig.

Mm hmm. So having equity in the company that they are building, I like that.

Um, would you say, like, do you feel like you did a big career change in your life? Like, I was done with DA Wallach who was on tour with Lady Gaga before becoming a biotech investor. I of the.

Oh, he’s amazing. And but he was such a big career change. Like, do you feel like you did that?

Yeah, totally, yes, very much so. I feel like I’m an accidental v.c. I’ve I’ve always just followed my nose and my career. I have I’ve never made the, you know, the move to the like, learn a skill or look and use it later.

I’ve just always followed my nose right and realize that the best things that have come to me have been a function of serendipity and not volition.

I think this has been a great discussion. I don’t think I have a lot of other questions. I know I told you I was going to ask you about about how you evaluate founders, because I heard you say something great, which is actually negotiating the terms, yet a lot comes out.

Yeah. I always tell the team I wish we could negotiate the terms before we negotiate a term sheet. Right. Because everyone’s courting each other right before that point. We want to be the VC of choice. They want to be the entrepreneur of choice. And so it’s all best foot forward and everyone’s courting each other and it’s all good and it’s typically way too fast.

And you have no idea who the counterparty is, which, by the way, I think is a is a problematic phenomenon where we’re engaging in ten year relationships, literally ten years plus for successful outcomes and forcing on both sides, you know, forcing this into a you know, into a seven, 14 day decision process. Neither party knows who they’re dealing with–unless you do for better. For worse. We did an analysis for L.P meeting the other day or the other month.

To see how long we’ve known founders before we get a check on average at 17 months. Hmm, that isn’t to say that you need to run the 17 month series a process to get our dollars. Don’t. I’m not saying that.

But on the term sheet, you know, instead of you’re not courting each other anymore, you’re suddenly negotiating and there is such a diversity of how we negotiate. And there is so much useful signal for making an investment decision in how a founder negotiates, right, someone can be a product visionary but not be able to strike a deal if their life depends on it. And you kind of have to do all kinds of deals in order to make a company work.

Hmm.

And so, yeah, we found ourselves occasionally in situations where like, oh, my gosh, like we’re really doing this for like we’re. Yeah.

Well, I’m not going to ask you any more about negotiating term sheets, although I could instead just say thank you so much for coming on the podcast.

And, you know, I hope you I hope you can bring back the American dream.

Really. Well, it’s going to take a bunch of us, so thanks. I really enjoyed it. I so appreciate your your happy curiosity and enthusiasm for for your subjects.