D.A. Wallach — Time BioVentures

One of LA’s most fascinating investors, DA Wallach, tells us about touring with Blink 182, making a song with with Diddy, becoming an investor with Ron Burkle, and his current life science focus at Time BioVentures.

 

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David and I are here today with D.A. Wallach. D.A. is an extremely thoughtful life science and health care investor and the co-founder of Inevitable Ventures and Time BioVentures. He’s backed some impressive companies like Spotify, Space X, Ripple, Doctor on Demand and Beam. D.A., thank you so much for joining us today.

 

Yeah, thanks for having me. It’s so great to see you. Likewise. Good to meet you. Yeah.

 

Good to meet you. Well, you know, David and I are super interested in hearing about your health tech investing, but I’m going to be super remiss if I don’t start with a little bit about Chester French and getting discovered by Kanye, touring with Lady Gaga. You know, it’s hard to skip over those exciting events.

 

Yeah. So what you’re alluding to is that I had another career before I became an investor and just started right after college. It actually started during college my freshman year. This is in 2003. Feels so long ago. But I started a rock band with some of my classmates. And then right before we finished college, we met Kanye and Pharrell and we got a record deal. And so I moved out to L.A. not to be a venture capitalist, but to to work my rock band.

 

And so we spent about four years making records and touring. And that was, you know, as you mentioned when we toured with Lady Gaga and Blink 182 and Weezer and all these awesome acts. And and it was via my music career that I found my way into investing. And Spotify was that first real investment that that got me hooked. So was it glamorous, you know, in a way, I mean, I think it was kind of surreal.

 

We were 21 when we got the record deal and it was kind of, you know, it was the dream, right. Like, we had started this band. We’d worked really hard for a few years with the ambition of doing it professionally. And, you know, and then a year later, we were like playing in stadiums with artists that we had grown up being huge fans of. So, yeah, it was amazing. I think the unglamorous part of it was the reality of living in a tour bus with eight guys, you know, which is it’s a very specific lifestyle.

 

So it wasn’t the right one for me. It wasn’t something I kind of looked into my future and thought. Do I want to be doing this when I’m 50? And the answer was definitely not. So I kind of over time, music became a hobby. And that’s what it is today. I mean, as you see, I’ve got a bunch of music crap all over here, and I still do a lot of fun making music. So would you tour a particular country and just hop in a bus and drive across the country?

 

Is that what was going. Yeah.

 

I mean, you know, at first. At first you’re in a van. So, you know, when you get a record label, it’s like a little company that gets a seed round. You know, you don’t you don’t start out in the big office with the fancy conference room. You’re driving around in a van. And so it was it was me and six other guys in a in a Sprinter van, you know, driving across the country over and over to and shows every night.

 

And then ultimately, sort of as we were a little more successful, we’d get a bus. And that’s sort of the the big breakthrough, because now you’re not driving. You know, you’re sleeping. Well, you go to the next city and it’s a part of what makes the lifestyle weird is you you sleep at night. I mean, obviously sleep at night, but you sleep well. You’re getting to the next city. So you kind of wake up in a parking lot somewhere, hang out all day, do a rock show, go to sleep in your boss, and you wake up in a different city.

 

And that’s that’s the life.

 

Wow. OK. When you put it that way. But I still think that a lot of kids who are, you know, whatever, 18 years old that is still their dream is to get in that sprinter van.

 

How did you how did each step of that how can someone recreate some of that success?

 

Like what were the big breaks that that let you get there?

 

Well, I mean, the big break was was when Kanye made a bet on us. I mean, he didn’t he didn’t sign us, but he tried to give us a record deal first. And so he was kind of like the big break. And again, you know, because of the topic of this conversation, it’s it is kind of a good analogy to start ups. It’s like, you know, you’re some little startup. No one’s heard of it than Sequoia comes in and does your series or something or TenOneTen.

 

So it’s you know, you need that kind of validation now.

 

We were coming out at this interesting moment of transition where the industry was going from one that was very gatekeeper driven to now one that’s much less that way. And so, you know, today the artists that get big tend to kind of get big organically on the Internet. We were part of the first wave of that. A lot of our early credibility came from building a fan base on MySpace and Facebook and then Twitter. So

 

That’s that’s how it works now. It’s a great segue  over to your you know, how you got into venture and through Spotify. How did you go from being a performing musician to being an investor or being connected with Spotify? Sure.

 

So, you know, I’d always been interested in technology. Making music involves a lot of computer. And in high school, I had done web design to make a little extra money and that sort of thing. I was also an engineer in in the recording studio.

 

And then obviously through my music career, I really came to understand how the music industry worked. And people had tried to do streaming music several times before. But the big enabler was broadband, mobile Internet.

And so to me, when that moment occurred where you could stream any song ever instantly to your mobile device, I thought, OK, now this can happen. And there were, I think, four companies that I looked at at the time that were trying to do this, Spotify being the one ultimately that I that I chose to work with.

 

But it was like Spotify Rdio, la la, which Apple bought. There are like four of them, Pandora.

 

I went in Pandora. Well, Pandora was already public Pandora’s public.

 

And it was kind of they’d built a great business around this, quote unquote, lean back experience. That was kind of like if you weren’t if you weren’t a super music fan, you’d get Pandora. And you’re just one of those people who’s kind of like, yeah, I like everything, has put it on in the background while I’m at work. But if you were a collector of music, you were still in a file based, a download based behavior.

 

And so anyways, I met all these companies. I concluded Spotify was the most tenacious and the people were the smartest. And they had a big advantage coming out of Sweden because for historical reasons, the Swedish music industry was much more amenable to doing licensing deals with them. And so they were able to build a pretty huge footprint in Sweden and basically prove out this model in one constrained market. And then they used that example to convince the rest of the world that this was an OK thing to try.

 

That that was the hard part of Spotify was getting the record labels to do these deals.

 

And my view is kind of like whoever has the stomach to get that done will be the winner.

 

But now you’re you’re really full time investing in inhealth tech. Is that true?

 

That’s right. And I would sort of distinguish between healthcare and life sciences and more in the life sciences side. But I’ve I’ve done a bunch of both.

 

You know, normal early 20s rock stars don’t look at find a company and figure out how to get their money into it. How did you do that? You know it. It wasn’t obvious to me at all what to do. It was it was kind of like. You know, I think I had always had this almost aesthetic intuition about certain artists or fashion brands or products where I’d like discover something really early.

 

And I’d be like, man, this is gonna be huge. And historically, I just I’d never had any way of acting on it. And so when I had that feeling about Spotify. Then then, to your question, it was a tactical matter of like, what do I do? So what I did was I met Daniel, who had started the company. He introduced me to Sean Parker, who had just invested in it. Sean was still at Founders Fund.

 

Sean kind of saw this as the unfinished business of Napster. And so he’d been kind of dying to make this happen for 20 years. And and then I just kind of convinced them that. Basically, they they needed me to act as a translator to artists. I think, you know, that that was all I had to offer was was basically, I understand in a very sober way how this business works and how your model works. But I also am an artist and I also know other artists and they’re very emotional.

 

And, you know, to their credit, they bought that.

 

And then as I met more people in the technology world and then people in Hollywood who were sort of dabbling in Silicon Valley, like Ashton Kutcher became a really good friend and, you know, just sort of realized, oh, there’s this interesting kind of merging happening now between the worlds of technology and the worlds of media and entertainment.

 

And then, you know, that led to me learning about and having access to other companies. And I would just start asking them, like, hey, can I put some money in or can I get some sweat equity or some options or whatever it is? There was no strategy at first. It was just when I think something’s gonna be big, I just want to be a part of it somehow.

 

And now that’s all I do. So anyone listening who’s not in those areas, I’m irrelevant to the four areas that I invest in are drugs, diagnostics, research tools. And then sometimes health care, I.T. or health care services, businesses.

 

And so those are the four things I do. We generally make investments between two and six million dollars and we try to invest very early, which can vary depending on how big a company is going to get. Maybe, but, you know, as a general frame, it’s like seed through Series B tends to be where I’ll invest.  And Inevitable Ventures.

 

You started with Ron Burkle, who also was he an investor in Ashton cultures or he was one of the co-founders of Ashton Kutcher Catches First Things. It was that kind of the the bridge. Can you tell us more about how you got to know Ron and how you guys started that?

 

Yes. So the connection with Ryan, interestingly, was also kind of via music and in very unexpected. I had years ago become friends with Diddy, Puff Daddy, and we had made a song together and a music video ours.

 

So this is you know, this is like 2009 or whatever. And so when I started working on Spotify, I called Puff and I said, hey, you should really invest in this. And I raised a bunch of money for the company from artists, friends of mine like him. And then that same year, I guess this is 2011. He took me to the Clive Davis Grammy party that he was hosting, which is like I’ve only been that one time.

 

It’s like the best party. Ray Davies from The Kinks was performing it. Was it memorably it was the night that Whitney Houston died and she was meant to perform at that party. And so it’s kind of morbid. But she was. Her body was still in the Beverly Hilton Hotel as we were in the ballroom having this party. And that kind of put this weird shadow over the evening. But nonetheless, I went with Puff Daddy and he and Ron had been business partners for a long time.

 

He had done some clothing companies like Sean John, and maybe just give us the background.

 

I doubt those listeners probably know who Puff is or dead. I’m not sure. But but regardless, Ron Burkle, Maybe you could give us some color there, too.

 

So Ron’s just a great and he’s one of the great L.A. investors. So he grew up in Yucaipa, which is, you know, 100 miles east of here, and started as a bag boy, I think, in the state or brother’s grocery store and, you know, ended up owning the whole grocery chain and then buying more.

 

And Ralph’s was a business of his a sort of became the most important grocery entrepreneur in the country and made a bunch of money earlier in his career and then has since then owned a series of operating businesses and just been a great deal maker and Rons really a terrific value investor, an operator. Among the things in his portfolio have been a mirror. Cold is a large cold storage business on the more glam side. He owns Soho House, which has been a very interesting story in the world of hospitality over the past decade or two.

 

And then Ron has. Along the way actually had a lot of success in technology investing. But he’s largely done that through other people and backing younger investors who he’s met. So as you pointed out, he had been the partner in A grade, which was Ashton Kutcher and Gug Oceare and Ron. And I mean, they were just phenomenally successful. I mean, SBN be Uber, Spotify, Warby Parker. They made some amazing investments. And then at a certain point, Ashton and Guy spun out and they now run a firm called Sound Ventures.

 

It’s also great. And Ron and I. By that time had become friends. And he approached me about kind of creating a successor to a grade. So that’s what we did. And that’s what Inevitable Ventures has been. It’s just me and Ron. And and now Time BioVentures is this new fund that I’ve created and Ron as a partner of ours and that as well. Got it. And so time biosensors, if I’m an entrepreneur approaching you, I’m kind of approaching you about time BioVentures.

 

That’s right. Doing those those four areas that you talked about. Yes. Tell us more about about what you’re doing at time, I guess.

 

Who are the entrepreneurs you’re usually meeting? I imagine it’s not exactly the, you know, MBA student who’s coming up with a new drug discovery or something.

 

Yeah. So, you know, you’re getting at a key attribute of our model, which is that we invest in very technical companies, companies with generally a lot of intellectual property at their core. So oftentimes these originate in academia.

There are some investors who go out and they kind of look for this intellectual property and then they try to build companies and they do the spin out. We like to invest once. That’s kind of already happened. So we’d like there to be amazing technology that’s really protected and defensible legally through patents paired up with a really great entrepreneurial talent. 

 

And so we spend most of our time looking for new drugs that we think can be game changing for patients. And then I talk about kov. It is a really good kind of window into what we do because it highlights how those four areas are all connected.

 

So if you think about this crisis, everyone who’s been watching the news will appreciate that you need innovations in all four of the areas I talked about to put a dent in it. So we hear a lot about vaccines, antibodies and other therapeutics. Those are the drugs that are ultimately going to treat patients or prevent infection. So that’s the first box. Second is diagnostics. And we’ve all heard about the antibody test or the active infection tests. So those are diagnostics.

 

The third area is research tools. Those would include rapid DNA sequencing technologies. And it’s that kind of tool that enabled us to very rapidly understand the structure of the corona virus. And it was within weeks that we actually knew the genetic sequence of the virus. And that has opened up all of the abilities to both diagnose and treat it. And then the fourth area that I talked about, his health care I.T., the example in this instance would be things like contact tracing.

 

So and maybe Covid is a good example, but what’s the relationship with, like Big Pharma in these cases? Like. When is it the right thing for a startup? When is it the incumbents?

 

Well, Big Pharma is kind of like a record label. So just like really very similar. What?

 

So what I described earlier was that kind of before our time as as a band. But even while we were getting started, the goal was when you’re a little new artist, you want a big record label to pick you up and make you a star. And what it’s now become as a result of the Internet is you kind of got to make yourself a star first on online and then they’ll just come buy you and you’ll get a record deal. But they’re going to give you a lot of money.

 

They’re just effectively buying the profits that are sort of a sure thing. So in the pharmaceutical industry, what’s happened in the past couple decades that’s very similar to this is that a lot of the 

 

big new drug is used to be invented at the pharmaceutical companies, and now they have shifted to this model of buying startups. So the big pharma companies, which are generally big public, multi hundred billion dollar megaliths, their business model is to let the venture capital market develop new inventions, get those drugs to a certain point where they’ve been de-risked, and then Big Pharma comes and pays a lot of money to buy them. So when we’re looking at investing in drugs, there’s actually no shame in our intention that if they work, a big pharma company is going to come and buy it.

 

And that’s basically what what you want to happen. That’s how most companies exit. And I think there’s an amazing stat that I don’t remember about how much each year farming companies are spending, but it’s a lot.

 

Yeah, they’re buying, I think, 15 to 20 billion dollars worth of start ups a year for the past few years.

 

That’s huge. Do you think that’s a good thing, that that you sort of need those billions of dollars to put a drug out to market and the system right now can’t really work it a different way? Good, bad, indifferent. Yeah, well, you compare it to the old model I described, and in the old model you had these huge companies effectively trying to do startup stuff. And as you can imagine, because they’re big companies, that was very inefficient.

 

So in a certain way, this evolution, I think, is a good thing for for the whole system, because now they’re they’re sort of banks there, like investor. They’re like basically late stage investors who bet on things once they’re de-risked and then they have the capital to do the very expensive clinical trials that you often have to do.

 

So it depends what kind of drug we’re talking about. But say you had a great drug for hypertension, which, you know, if you wanted to to deploy that drug at scale to get it approved by regulators, you might need to do a clinical trial that costs over a billion dollars.

 

The tenacity of those big multinationals comes from their control of distribution still. And so, you know, you’re talking about a company in L.A. that’s involved in drug distribution. You know, most drugs today still get sold through a doctor prescribing them. And that doctors typically being called on by a sales force that works for the big companies. So you got, you know, tens of thousands of these sales people still running around in the physical world, talking to doctors and teaching them about the new drugs.

 

Let’s take on distribution in the sense of, you know, right now hospitals are these huge forces in how we all get service

 

I think hospitals are very dated, 19th century model.

 

You know, that the kind of two big unconquered institutions are at least two of them that stand out are schools and hospitals. And they both are products of essentially the industrial revolution. So, you know, we used to have one room schoolhouses where kids of multiple ages co-mingled and it was much more kind of organic. The industrialization movement led to this idea of schools as factories. You move kids through them at the same pace in these defined cohorts.

 

And similarly, in health care, you know, we had these sort of the doctor who does house calls and knows you for 30 years and really knows your family and all the context. And instead, we changed that into this, you know, huge factory model of hospitals that, you know, in theory give you some kind of economy of scale, but in practice don’t actually seem to do that. They just create huge amounts of inefficiency all around.

 

where do you see things changing on the delivery side, I guess?

 

Well, what you I mean, the the big goal on the delivery side should be it should be a global goal. But let’s start with the U.S. and the goal should be that every patient receives the best care that human knowledge and technology can deliver. So at a minimum, we should all be aspiring towards essentially standardization. You want to bring the quality of everyone’s care up to the highest possible level. And the only way you do that is by making it much less local.

 

I guess what I mean by that is right now there’s huge variance in what kind of care you receive if you are rich and you go to a Memorial Sloan Kettering or Cedars Sinai. And if you’re poor and you go to some E.R. every time you get a cold, which is what poor people do, they just go to the emergency room. They don’t have a doctor. No one knows what’s going on with them

 

I was that asked how you sort of square the idea of a standard of care in a standardized care with innovation and the need for, you know, some fluidity. And you’re talking about maybe a model of how we look at things is broken. Yeah, that’s that’s a great question. It’s in some ways that is like the question that I think about the most just consistently that issue is at the core. So for listeners who aren’t aware of this, there’s this concept in medicine that you raised the quote unquote, standard of care.

 

And what that means in practice is that when a patient comes into the doctor or the hospital and they’re diagnosed with some condition, the standard of care is what the physician is supposed to do. And that is meant to be informed by the collected evidence that exists. And generally, the standard of care is defined by medical societies that are particular to each specialty. So, as I said, the head and neck cancer doctors will have a national society. The I don’t know what there is is, but it will be the American Society of head and neck cancer doctors and they’ll have an annual meeting.

 

And at that meeting, all the gurus will get in a room and they’ll compare notes and they’ll basically put out what are called guidelines. And those guidelines will specify what the standard of care is. Now, just with that example, you can begin to see how it’s inefficient because the refresh rate on the standard of care will be. However, frequently that society has their meeting, which might be once a year, it might be every other year when the physicians, these gurus get in a room and they talk about this, you know, in principle, the choices they’re making are related to what’s the newest evidence.

 

But they also are informed by, you know, assessment of risk. So some guru in that room is going to go, yeah. You know, there is some evidence that doing this procedure instead of the old one will be more effective, but it may also invite more malpractice risk. Or did you think about that? It may also be, you know, so it’s an imperfect process, updating the standard of care. And then the final issue is effectively around the the implementation of that standard of care and how quickly it’s implemented everywhere.

 

So its ability to be put into practice is contingent upon the physician at the local hospital having read up on on the new standard of care. So, you know, there are I would say fundamentally two types of medical cases in one case. What should happen to the patient could essentially be turned into an algorithm and there would be so little ambiguity about what the physician should do, that it should almost be a computer program that just takes in all the patient data, all the diagnostic test results, and then spits out what should be done.

 

And that that could probably drive care decisions for, you know, I’m being arbitrary.

 

But 70 percent of patients then the other segment of cases are, to put it simply, cases where if you’re the patient, what you really need is for a doctor to think.

 

And, you know, that’s why they’ve been you know, that’s why they’ve gone through eight years of schooling and rad to read all this stuff and memorize all this stuff, because what you want them to do is integrate all the information. But, you know I think what we want is more technology for the first cases, the 70 percent and probably less technology in some ways back to how it used to be for the 30 percent.

 

Let’s talk about investing for a second. Are there certain things that you’re getting pitched all the time that you’re just like. This is not in my area of interest? Like, can you help guide entrepreneurs a little bit better?

 

Yeah. You know, I mean, the one thing I’ll throw out there. Because I assume a lot of listeners are kind of more tech startup oriented software people. There’s a very pervasive naivete when people from the world of software and computers go into the world of biology and the world of health care. And the the two. Kind of flavors of this naivete are on the health care side. They think that the health care industry, the delivery industry, hospitals, insurance companies, the government, all that they think it’s about to be disrupted, just like everything else has been OK.

 

And in fact, not everything else has been. you know, there’s a reason that it’s been slow to change.

 

You’ve got real monopolies. It’s heavily regulated. So public policy is really important. So it’s like that’s the first naive thing is thinking like, oh, we’re just going to come in and, you know, we were two guys at Google, so we’re just going to show the health care industry how it’s done. And like, that’s almost always stupid. The second is the equivalent in biotech, which is software people essentially thinking that drug development is easy and that A.I. or whatever software they have is about to, you know, upend the global pharma system.

 

And, you know, you see I see these kind of pitches from people who just don’t know what they’re talking about all the time.

 

But how did you become knowledgeable, uncomfortable investing?

 

I just through making mistakes, you know, I mean, I kind of I, I say all this not I don’t know, I’m not speaking from on high about this. Like, I had to get the scar tissue and I wish I wish I could have skipped that step.

 

But, you know, one thing I would say is that, the user experience can can definitely be improved. That’s just like build good software. And so there’s a lot of stuff that dies in health care tech, not because the product isn’t good. Very few things die because the product sucks. They almost all die because it’s impossible to get customer traction. So, like, I can’t tell you how many awesome things I’ve seen.

 

Smart software people build that hospitals should all use. But then they go to each hospital and it’s like, oh, what to do? Let’s do a six month pilot unpaid. And then you do it there at Cedars Sinai. And then you go to UCLA and they go. It’s great that it worked at Cedars, but let’s do a six month unpaid pilot. And we by the way, we need a bunch of customization. And, you know, now the company is at a series A.

 

. It’s got no paying customers. It’s got two pilots. And it’s totally unclear how much of a clinical impact it’s having. They’re not making any money. It’s hard to raise more money.

 

So the thing to mind is the business model. That’s the that’s usually the rub with these healthcare software stuff. Well, in the interest of time, I think we need to like, not endlessly talk about health tech investing and move into talking more about you, D.A., the person one of the big questions I have is, is sort of around how you remain creative.

 

Yeah, I don’t. I don’t know. I mean, I think it’s. Know suspicion of authority mixed with like curiosity, open mindedness.

 

I think, you know, just kind of. And exploring, like, you know, like I was talking my friend yesterday when my best friend and we were we were talking about how. There’s there’s not much question for either of us that reading is the most valuable thing we do. But like we always are struggling to have enough time for it and discipline to actually do it. And the reason I think it’s so important is it’s like the. I think we have this assumption that creativity comes out of thin air.

 

But like, it doesn’t really. I think it comes out of, like, constant consumption of ideas. And then they do they stew up in your brain and you maybe get some weird ones. And so, you know, if I think about the artists that I’m friends with, musical artists or whatever, I mean, they’re endlessly listening to other music. So for me, you know, like. Both to have you as an investigating, both to have an information advantage and to get new ideas.

 

It starts with just ingesting tons of information, talking to lots of people, reading lots of stuff, and and then just kind of randomly, you know, new ideas pop out.

 

Yeah, it’s unfortunate. I’m really not very literate. So I, I, I’m not. So I appreciate that perspective.

 

My equivalent might be surrounding myself with really interesting people, because if you’re around those people with interesting creative ideas and you’ve had this chance to rub elbows with all sorts of people.

 

So like, Kanye just announce he’s running for president?

 

Yeah. Very creative idea.

 

Good answer. Good answer. Oh, my gosh. Well DA, I don’t have a I don’t have a lot more probing personal questions.

 

You do have exclamation points in your name, do you not? Just on just on email. I didn’t, you know, came out of music. I did years ago. One of our big early kind of mentors was Travis Barker, who is the drummer from Blink 182. And Travis is just like the coolest, nicest dude. And he kind of took us under his wing when he got to L.A. And he used to have like in his email name, not the e-mail address, but like the, you know, the display name.

 

It was like Travis Barker. But like the A was a star. And like, every letter was the coolest alternative symbol that you could recognize. And I loved getting e-mails from him because it just like spiced up my inbox. And so. So years ago, yeah. I just I just made mine D.A., but instead of periods, I did exclamation marks. And I don’t know if it’s fun for people to receive, it’s great.

 

I love it. I got your e-mail and it’s a deal. It’s got these were A. S Lezley like coming to you. Fantastic.

 

I appreciate that. Keep it up and see where he’s having you on the show today.

 

Yeah, it’s fun talking to you guys. Thanks for having me.

Rachel Springate — Muse Capital

Great connecting with Rachel Springate about her path into VC, raising consumer-focused Muse Fund II, her partnership with Assia, and diversity in venture.

 

 

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Today I have Rachel Springate partner and one of the founding partners at Muse Capital. Muse is a seed fund investing in the consumer space. Currently investing out of Fund II. Congratulations. With companies like Motherly, Maven, Beekeepers, Clarity Money and many more.

We were gonna have Assia with us, but we cut her. We gave her the boots. She had Internet problems, unfortunately. Anyways, Rachel, thank you so much for joining me.

Thank you for having me. 

Well, let’s let’s talk about Muse and what you’re building and who you are. Maybe you could start there with. Give me a little bit more about your background and how you came to Muse. So I’m originally from the UK.

If you couldn’t tell from my accent, my my dad’s a Brit and my mom’s actually from the Philippines, but I grew up and went to school in the UK. And I started my career in brand research of all things. And so that was how I got to build relationships with marketing directors of Fortune 500. You know, everybody from an Apple to a Coca-Cola to an IBM. And then from that job, I was headhunted into a completely different world, which was the world of luxury lifestyle management.

And I joined a group called Quintessentially. And if you don’t know what Quintessentially is, it’s a very high end concierge service for high net worth individuals.

So if you think of a Richard Branson in his hometown of London, he would know everyone and everything lifestyle related. But if he went to Tokyo or to Rio, there were basically people on the ground who who knew the city’s inside out and they would help those networks navigate whatever they needed.

And actually, that role was fascinating because it’s how I built my influence.

The network, it’s how I built my relationships with athletes and sports teams, obviously just solidified my brand network. And after four years of doing that, I came back and realised that corporate accounts for 80 percent of the revenue of the company. And I just thought to myself, I don’t think I’m going to go any further here and there’s got to be something better I can do with this network and then make a lot of money for these guys. And so in 2012, I left and was doing some consultancy work in Asia, and I met a guy who changed my life.

A guy who we all know in the L.A. ecosystem called Troy Carter. And this is 2012 when he was Lady Gaga’s manager. And she was probably the biggest pop star in the world at the time. And I remember meeting him and sitting with him and say, you know what’s exciting to you? And he said, technology and early stage investing. And I said, you know, I was expecting you to talk about new artists.

And he said, no. He said, I’ve been spending a lot of time in Silicon Valley. I’ve just written an angel tech into this great company. You should know about called Uber. And I was like, wow, like what is even more importantly, what I letting you know why you’re investing. And he said, oh, you know, I let I use my network to help these companies grow. Right. So it’s a really important part of our future.

There’s very few people like us that have the network and the relationships that we do. So you should spend more time there. And, you know, he’s the one I open my eyes school to all of it and a really close with his team. And I think we’ve we’ve done like four deals together now at this point.

And so and so you started doing helping out these early stage companies and how did you end up connecting with Assia and forming Muse Capital Fund one, I guess. Well, one of my clients is actually in the music text banks, actually in the deejay space at the time because I was a big rock stars. Calvin, Calvin, Dead Mouse. Yes, I all these guys. But most importantly, it was helping them get their technology integrated into Spotify and Apple.

And when I was doing the deal with Spotify, the person that I was connected to was Assia and I’ll never forget it.

She did that meeting and she looked at me and she was like, this is great. You know, I am super interested in technology, but who are you? And, you know, for those that don’t know Assia and maybe I can give a little background on her about how we met. But Assia is really extraordinary, non-linear background also. So she’s originally Italian, came to the States when she was nine and went to Barnard College here and then went back to Europe and actually ended up running TV radio and a for a big music company in the U.K. called Ministry of Sound. And all the things that she’d done in her career. She she actually ended up putting one of the first ever music channels onto YouTube, which is how she met Chad Hurley, which was Ministry of Sound and through that was just networked, obviously, into the digital space and was becoming this leader in a time when no one really knew how to navigate that.

And through that, she ended up meeting Daniel Ek Spotify when he was very early in the development. They’ve just proven out that this was working in Sweden. And he asked you said, look, I need help expanding this internationally. 

So she actually came to help open the L.A. office, which is crazy. Think about Spotify didn’t have a presence five years ago. But, you know, alongside doing that. So she was working with Daniel, but also had met the Aneli family and the Aneli family, a very prestigious Italian family.

They own like Fiat and Ferrari. And you Juventus football club. And she’d been again advising them and their family office on media and tech investments. And actually through that. One of the any family became the chairman of Juventes football club. If you don’t know what you meant to say. It’s one of the biggest sports teams in the world. It’s a publicly listed company on the Italian Stock Exchange. And she actually ended up becoming the first female and youngest board member of Juventes football club.

And she’s still on the board today. So nine years later and has certainly seen a lot in the last nine years. And they signed Rinaldo in the last two years, the biggest soccer player in the world. And so when it comes to kind of sports, media, entertainment, Assia’s networks, this is so vast. And then as well as that, she ended up joining the board. Of Northtown Ventures. And no sign if you don’t know.

It was one of the first institutional money into Spotify. I need to ask some about Muse, what you invest in to tell me some about. You know, right now you’re investing out of Fund II. What sort of you know, are they all seed companies? They’re on the consumer space. What are you looking for when you’re investing?

Our idea at Muse is to be one of the most helpful investors on the cap table and actually bring something very different to be invested, because along with our check comes this 30 year combined network of access to these decision makers.

And so with Muse, what we look at, we we are a broad consumer fund. So we say products, platforms, marketplaces. So long as it touches the consumer at some point. We like to take a look. And, you know, fund one was more of a proof of concept fund where we were just proving out the model and seeing if this would work. And it actually went really well. 

And it’s really interesting because. Pre Covid, you know, we weren’t we were already very interested in sectors that are just being accelerated by by this.

So we were already investing in areas like telehealth and women’s health and online education. We we don’t do. We don’t typically do CPG unless, you know, if the founder is trying to change the entire category.

How you can kind of assess that potential to go from sort of an initial like products into more of a developing the brand and developing up a platform, say. Yes, so it’s interesting. I think a really good example of that in our portfolio is a company called Motherly. So if you look at Motherly, it started out as a platform for millennial mothers.

And they built this. They bootstrapped it. And, you know, it was resonating with the audience. So much so that they had, you know, incredible engagement.

Right. And now they reach 30 million millennial mothers a month.

And so Motherly is a great example of a existing platform that can now expand into a marketplace. Right. So they’ve already built that trust with the audience and they kind of know what they like, what they don’t like. 

And I think I think it was Connie Chan over Andreasen who talks about super apps.

Right. And how they. People are less likely to download new apps and focus on those that already out there and already have engaged audiences and build on top. And that’s why I think. Motherly being a platform to marketplace, then doing so much more with that existing audiences. They are the kind of company that we would focus on.

Got it. And, you know, I know there’s never a rule of thumb exactly. But when you’re investing into these companies, you’re you’re leading or participating in a seed round. What sort of traction do they often have that will make you think it’s like the right time for for you to invest?

Yeah, I think we’re unique in that we typically will not do your kind of pre product, pre pre revenue, to be honest, because if you look at all content. Our value add, it’s to supercharge a company. Right. So typically we want to see the product, a company in market with some traction. Because if we’re then going to take that into major brands, major corporations, they are going to want to see it working before they going to consider a partnership.

So when you’re doing that business development, are there lessons that other people can learn, like other ways of doing business development? You know, if I don’t know all the top to your talent other than working with Muse.

Yes. So I think it’s really important, you know, to get because business development sounds so vague. Right. And it can and it can cover many, many aspects. And, you know, it’s very easy for people to think because we’re based in L.A.. All this is it. I mean, obviously, we get me in front of celebrities influence, and that’s actually not what you know. That’s just one tiny part of what we can do.

And, of course, it’s important. But, you know, we’re just as likely to look to do a partnership view with a Fortune 500.

And actually, a good piece of advice here is talking about elephant hunting. Right. And you always want to try and go for that big deal. But to be a really good business development person, you have to have a balance.

So you need to have both the low hanging fruit. Right. So those smaller deals that are going to bring you revenue, bring you distribution when you customers, but then also have, you know, the elephant, the one that is going to be the deal that will define your company. And so I feel that entrepreneurs often overlooked that. 

And it’s so, you know, looking at examples of successful case studies, I guess that already out there. And then, you know, quoting that and then pitching it to the company as well.

Did you see this? We can do this for you. I think that’s actually really powerful, too. Yeah.

That makes a lot of sense. Great. So in this one, too, I meant to ask sort of what is your target check size, that sort of thing.

Our average check is 250 to half a million into the seed round of a company. So, yeah.

And just for use, sort of more personally, like you’ve gotten into VC now, you’ve been doing this for a number of years.

Do you advise for people who want to maybe follow your path? Like, is there a path there to follow or are there different ways in?

For sure. And I think that, you know, Assia and I over the last three years have been just doing it right, heads down working, not really telling our story, but we actually think it’s really important because especially today. Right. I think that given the current environment and what’s happened with Covid and what’s happened with Black Lives Matter, I think now it’s more important than ever that we have diverse emerging managers. Right. And diverse, diverse managers who can write a check.

This been the hardest thing I’ve ever done in my entire career.

By the way, going out and raising that first fund without the right background necessarily or a different background, I should say, by the way, while pregnant and having a baby. Just when you thought it couldn’t be harder, you know, it was definitely really tough. And I think for Assia.

And I you know, we really came to kind of share our story and some of the mistakes that were made and how we can make that easier for other emerging managers to follow the path.

But we believe in diversity. I’ll give you an example of this. So when Assia and I went out to create news, we actually didn’t have a mandate that we had to invest in our only female or only like minority entrepreneurs. Yeah, when we when we look at our portfolio, just naturally, why?

Because we are we look at the world differently. Fifty percent of our portfolio is minority or diverse. And we were really proud of that.

Do you have any tips, things that you might have done differently other than realizing that it’s incredibly hard, I think one of to pass on advice would be, hey, guys, this is how it works.

These are the people you really shouldn’t be talking to yet. And here are the people that you should and why.

I assume that most endowment’s institutional investors are just looking to invest much larger sums of money into later stage funds.

Exactly. And, you know, it’s tricky cause, you know, there seems to be this movement that more investors do want to invest in female and minority emerging managers. But when you actually peel back the hood and you look under it and you’re like, you know, what does that actually mean? It’s like, oh, you know, you have to be raising at least one hundred million. And then you’re like, OK.

And then, yeah, in terms of the fund raising process, I mean, it took us 18 months. And I know that that’s kind of normal. But for us, it was like, wow, this is you know, this is not for the faint of heart.

Yeah. And we’re in such a moment of time right now. I mean, we are in the midst of Black Lives Matter right now.

And I think everyone’s getting more exposed and having harder conversations about white privilege, about our societal structures.

Now, are you maybe it’s a more personal question, but, you know, are are you guys getting involved?

How have you been experiencing this this moment in history? We are definitely getting involved.

And honestly, I’m all kudos to my Assia. You know, she’s very passionate about this.

Assia is a co-chair of L.A. All Raise. And, you know, taking those resources and sharing that with always and making sure that we’re doing that.

I mean, you know, hats off to Assia. She’s she’s niche. I don’t think she slept for the last four days.

Yeah, I was going to ask about sort of what is your maybe not this week, but, you know, normally, you know, how much. How are you able to lead your life with. I know you have. Is it a 10 month old baby?

I you I mean, my question, I think, you know, that’s the beauty of partnership, right? I feel that I honestly don’t know. You know, when I look at solo founders, I’m just like, you know, how do you do this? Because we we definitely couldn’t do it with our each other.

Right.

And yet it is I mean, it is a position of power. You’re you’re it. You are a capital allocator.

I remember saying to Assia the day that our CFO called us during this fundraiser and said, hey, guys, congratulations. You got to a point in the fund, right? Well, you know, you’re here to stay. And this is real. And, you know, so many emerging managers don’t even get to this point.

I literally was crying because. Wow. We’ve given everything to this. And honestly, it’s because. We truly believe the, you know, being diverse. As an emerging manager, having the ability and the power to write a check understanding is more important now than ever. And we’re really passionate about about about that and making sure that the world changes.

Fantastic. I think if we’re gonna have to wrap up.

But I really appreciate talking with you today. It’s been fun getting to know you better.

Now, you, too. And now I’m sorry Assia had technical difficulties, but hopefully I did. And then. All right.

Of course, we’ll get her next time.

Clinton Foy — Crosscut Ventures

Really fun talking with Clinton Foy about the gaming industry, founding Immortals, living in the metaverse, and who his favorite Crosscut partner is.

 

View Transcript

Today I am with Clinton Foy. Clinton is one of the four managing partners at Crosscut. Crosscut is one of LA’s largest early stage funds and one of the most established.  Before Crosscut Clinton was COO at multi-billion dollars. Square Enix, a Japanese video game publisher known for Final Fantasy and other big name franchises. Clinton, thanks so much for joining me on the L.A. venture today.

Thanks so much for having me.

So I was learning more about your background, and I would say that must’ve been quite a transition going from Square Enix, from a multibillion dollar public company to joining the guys at Crosscut.

It was a shock. I was driving into the office today and, you know, we’re in the midst of Covid right now just as a snapshot. So no one’s in the office. And I’m going from a 300 person office and a 3000 person company at Square Enix, where I had two executive assistants to book everything that I wanted to fund that I think was investing out of a 15 million dollar fund. And I was an unpaid venture partner.

I had zero salary for the first year, year and a half. It was quite a shock. It was a lot of kind of re learning and learning to hustle again and learning to just network my ass off.

No, I mean, I think a lot of people don’t realize how much venture is just like being at a startup. You know, it is especially when you’re at a seed stage v.c like we are. 

But you guys are still a early stage venture fund right now, if you can share. Like what? Right now, what is your typical valuations or valuation ranges that you might be investing into.

Sure. So. I forgot who said it. But somebody said, is smarter than me. Your fun size is your strategy, and I think that makes a lot of sense. So we’re investing out of one hundred twenty five million dollar fund.

So that puts us squarely in the seed, mature seed investment categories that we invest anywhere from one and a half million to two and a half or three and a half million. And we flex down and we flex up. 

We’ll lead or co-lead. and them.

And the valuation that you guys are doing. Has that changed much?

So it’s a great question. We’ve seen it definitely flex up over the last six, seven years since I’ve been at Crosscut. You know, we still see, you know, a decent number of first time founders come in. We call it five million dollar valuations post. It seems like more common. A seed round looks more like a ten million dollar post right now, raising two or two and a half million. And then we have, you know, Silicon Valley style deals where there know, a 15 million dollar post or 20 million dollar post in the first round funding.

And of those, how much are you personally and still focused on gaming and eSports? Because that’s get such a strong background there in L.A. is such a natural fit for that?

Yeah, I would say initially the first company that I invested in it was called Super Evil Megacorp and I love it.

Yeah, it was it was a gaming company and a game platform with its own proprietary game engine and the natural flow was. I started seeing other game companies like glitzy sports or stream labs.

And, you know, those were also game platforms and game companies. And then I co-founded the Immortals game company, the Immortal’s eSports Team. I didn’t want to be pigeonholed and just doing that.

I also wanted to do broadly more consumer stuff broadly, more streaming broadly, more mobile, and also look at new platforms and emerging platforms. And so that’s what I’ve been doing over the last two to three years as well, is continuing to look at games, eSports, but also branching out into other records.

And so I think it’s a really robust, interesting ecosystem, but it’s also in some ways insular. And you kind of have to know who the players are, what you’re doing. And it’s hard to be kind of a tourist investor in that space. How do if I’m if I’m building a game? Do I always do that? Do they all become eSports? Like, do people compete in? I mean, some are obviously like I don’t think there’s like a SIM City free for league or something.

But do they all become leagues? Do they aspire to.

No. I mean that the gaming ecosystem is really call it a hundred fifty to two hundred billion dollar a year business. And that’s, you know, the Microsoft and the Sonys and the Amazons and all the publishers, all the developers that within itself there’s all of these different genres. You know, there are console games, there are p.c games, there are mobile games. And a sub genre within games is eSports. And eSports is one of the fastest growing year over year categories within games.

And it’s you know, it’s grown from zero 10 years ago to call it, you know, two to three billion dollar a year business. But it’s probably, you know, in terms of compound annual growth, the fastest growing category within games, one of those. And it’s one that’s captured the imagination, because I think when people think, what is the future of sports like, what is the future of entertainment look like? What is a post Covid world look like?

People say, oh, well, eSports makes a lot of sense. You know, baseball, football, soccer. Ah, you know, one hundred years old, plus 50 years old or 60. And, you know, those professional leagues are things that have been around for a while. But what is the next iteration of that look like? And a lot of people are saying, well, eSports could be that.

And I actually don’t even have regular sports work. But some some of these, you know, in the NBA or something, there are franchise teams and Immortals is a team that competes in one of these leagues, whereas like tennis, as I understand it, just has like tournaments. And so Immortals. Tell me more about Immortals.

Sure. So in 2015, I met a young gentleman named Noah Winston. I say young because he was 19 years old and he was considering dropping out of Northwestern to start a professional eSports team. That’s a fucking crazy idea. I love it. I’ve always wanted to have a sports team since I saw the first one of the first League of Legends championships back in 2000. Ten, 12, 13 and 13, 2013. It was at the Staples Center. And I just thought, that’s an amazing, amazing kind of new industry where you can watch people play games.

You can fill out Staples Center with twenty thousand screaming fans from around the world and it’ll sell out. And then, you know, 20 million, 40 million people will watch it from around the world. And when I met Noah in 2015, young, talented, super smart genius, I thought, but really raw as as an entrepreneur and as a founder. I got to know him and over the course of three or four months said, listen, let’s let’s do this.

Let’s start in a eSports team together. I don’t know if Noah could have raised the money on his own or started it on his own. He might have, but I knew that by helping him out, we have exponentially better chances together doing it. And now it really became the face and the CEO that I was, the executive chairman

And so since then, you know, Sequoyah Founders Fund and Bessemer have all invested in sports teams and there’s been a rising tide of eSports.

And that’s a really good. Wow. I hadn’t really thought about the fact that, like Immortals backed by Crosscut could be competing with whoever else backed by Sequoia.

Well, I don’t want to take responsibility for that. It was more like we spotted a trend early and we jumped on it. 

And how does the money flow in it for, like Immortals or for one of these teams? Like, do you win prize money and do you have to pay? Is it like a franchise team in the league where you have to pay to be in the league?

Yeah. So you do have to pay franchise fees for the established franchises. So League of Legends has a franchise fee. You know, overwatch as a franchise fee. Call of duty as a franchise fee when tolerant, eventually franchises. It’ll likely have a franchise fee. And so there’s there’s a there’s a cost to doing that business. Part of why we raise money back in 2015 was to buy in to buying another team that was already in League of Legends.

And that’s a cost to doing business. But I think the more interesting thing is, are those franchise fees going up? Where where does the value go to and wh I think you said 150 billion. Two billion. Few billion. Here. There. That money. Is that coming from game sales or is that the the skins? I don’t play games. Clinton said I’m just new to the skins.

I just, you know, so virtual items and skins selling of skins is something that’s been around for a while back. Even when I was at Square Enix and COO over there, you know, we had a game called Final Fantasy Eleven and people sold skins or they sold virtual characters or virtual items on third party sites within those games to get up a virtual sword that was worth, you know, ten dollars over one hundred dollars. Or the character could be worth a few thousand dollars.

And she built it up. And so that’s a component of the business that’s not actually really tracked that much within that 150. And I said two hundred billion dollars. There’s a whole gray market area that isn’t, I think, captured.

And what what that that hundred fifty billion dollar market really is his hardware sales, Microsoft X boxes and consoles. It’s it’s mobile app sales. So, you know, on the App Store with Apple, we all have phones and we all have app stores, either Google Play or Apple. The majority of the revenue on those app stores are games and they’re virtual items in those games or they are games themselves or their subscriptions within those games. And I think Apple and Google and I think Amazon are are really realizing that.

And it’s a strategic component of their growth as well. It’s it’s some of their biggest growing areas within their businesses.

Are you following. I have not really been following the BaseCamp, just blew up on, you know, on fighting Apple about their 30 percent fever in app purchases and. Do you think that gaming will go? You know, how do you think the gaming ecosystem will will evolve?

It’s a great question. I mean, for a while, in some ways, Apple really had a monopoly on mobile games. And then Google Play has come along. And, you know, Google Play also also is is pay to play in some ways where if you have something on their platform, you’re paying 30 percent. And I think that, you know, maybe that 30 percent is something that’s a holdover from traditional publishers, traditional developers. And it’s something that Steve Jobs thought up in his had quite a while ago.

And I think that’s changing. I would suspect that that comes down as more competitors come in as platforms within the ecosystem and you see Discord or you see Amazon having its own platform.

It’ll be interesting to see.

And I want to talk about maybe one other startup that I think is really interesting called Play VS, which is a platform founded by DeLay and Parnell, who’s one of our CEOs who we backed early in the first round of financing expense, raised about ninety six million dollars based here in Santa Monica. Domain’s the super dynamic black entrepreneur and sole founder from inner city Detroit.

He really has a mission. Wanted to elevate eSports as well. He played sports and he sports all throughout high school and college. And he said, why isn’t there a high school sports league like the is for football? Why isn’t there you know, you’re able to play for eSports State Championship. And it meant so much to him that he said, I want to do this and I want to create this myself. And, you know, we’re lucky to get in the first round of financing.

And it’s you can play now for state championship alongside and get that glory for your school and for yourself, and then put your self or set yourself up for scholarships for college, which is also what Play versus is getting into now.

Yeah, I saw him speak and he is so powerful. Yeah, I think I saw some statistic.

There’s like two and a half billion people in the world are playing mobile games is something mind blowing to me. So it’s it’s certainly an interesting area. OK. So you and I, we both just briefly talking about Brian Garrett’s episode on L.A. Venture, and he talks about how he shared the Enneagrams for all of you, including one of you memory. He called you an investigator. Yeah. And he said that that means that you have all these deep thoughts, but you don’t always share them with him or something like that.

I think I think Brian was also the challenger, which isn’t surprising if you know Brian. He is very competitive.

And the investigator Enneagram is it it it’s it’s one where it shares the same personality types and probably saved too much with Einstein.

That’s good. That’s good. That’s right.

Right. I forgot what Brian shares this thing with, but it’s it’s someone who thinks deeply and looks at looks at trends, reads a lot, internalizes a lot and thinks about, you know, the future or thinks about the past or thinks about what could be.

But is also another one who shares that space. That’s great. Like it makes a Budda Einstein. Yeah. So I don’t think it was that bad. And according to our coaches who helped us out with this evolution, they also said the prototypical D.C. is actually an investigator. So what one who would fit that Enneagram type is also Peter to respond. Great, great.

Keep going.

But you also have a tendency to internalize too much and not to communicate with your co-workers or with your colleagues. And in your very best, you could be an Einstein or you could be a food at your very worst. You could be a raving psychopath who is very paranoid and doesn’t want to share any of those things. So, you know, you have positives and you have negatives. And I think the key is to understand your own personality, to understand your communication style, your investigative style, your investing style, and then figure out what your teammates are and then be able to work together and be able to work together as a team to get the best results you want.

And I’m grateful that. We’re all very different at Crosscut. Brian Garrett is really the heart and soul of Crosscut, super empathetic, you know, went through some childhood trauma and is very vocal about that and understands, you know, it really pushes us to communicate better as a team. You know, Rick Smith is he’s an achiever type and also, I think is really considered in some ways the godfather of L.A. VC. I mean, he was investing in L.A., ABC as one of the first investors and back some of the original voices in L.A. and Silicon Valley as well.

And Brett Brewer is in many ways an iconic entrepreneur and founder. Within L.A. and in, you know, founded Intermix MySpace and sold it to Fox for 750 million dollars. And and in probably one of the most enthusiastic spokespeople for Crosscut and very gregarious and, you know, is always out there in the community talking. And he should be on your podcast. He does a great job of telling the Crosscut story. 

Well, you know, I was going to ask you who your favorite is.

You know, it it varies. It honestly varies week to week and day by day.but Rick made time to meet with me and was the first person who brought me in and kind of mentored me and said, hey, Clinton, if you want to get into VC and you’re interested in going from Square Enix to D.C., you know, we need a games person who understands interactive and mobile and streaming.

Once you just come to our partners meetings and just start looking at pitches and bring some deal flow and we’ll send you some deal flow and we’ll see what happens. And that’s always been super, I think, impactful to me. And, you know, models for me, the kind of behavior that I want as well in all VCs, which is the open to it, you know, be welcoming, you know, think about, you know, giving those people a chance who, you know, are knocking on the door and let them up.

And in many ways, I have to say that, you know, Brian and Brett are like brothers and Rick is kind of like that father figure of Crosscut in some ways. He doesn’t want to be seen as like that older guy, at Crosscut.

But in some ways, he is. And he helps to hold it together. So it’s it’s hard to say where that is. By the way, we’re actively recruiting for a sister figure as well.

I would love to bring on a great female partner.

I mean, the women, we have a little secret network. So you kind of need you need some more women in your partnership for sure. So you tap into our secret networks.

But let’s talk about we’re still, you know, really, I think all of L.A., all of the world right now, it’s talking about Black Lives Matter.

You know, do you have any thoughts on how else L.A. and L.A. venture can build a more equitable ecosystem here the three guys who founded Crosscut Brian, Brett and Rick thought about as well as, hey, we are three white guys and, you know, let’s bring some diversity, this partnership. Let’s bring some some different thought leadership to this partnership. And I was grateful. It was it was me. Yeah.

I mean, and also we’re only audio, but you are not white. Right. I think you’re right. I am Chinese American. And my kids are growing up speaking Chinese. Thanks to my wife, I don’t really speak Chinese that much, but I spend a lot of time in Asia as well. And I, I also really, I think, have thought hard about who to invest in. You know, we see 4000 deals a year and opportunities to invest in amazing entrepreneurs here.

And I’ve maybe led 12 investments or so over the last six years or so. And I just went through the stats earlier this morning. And 10 of those twelve teams have had people of color or black founders or members. And of those 10, you know, three have had African-American black founders. And I can do better than that. I know I could do better than that. And I want to do better than that. I mean, but those have been great teams and they’ve, I think, been financially successful and good investments for Crosscut.

And it was just the lands that I was looking at was we these are the best teams that we can find. I feel comfortable with these teams. I want to invest into these people because I believe in them. And it’s going to create a great outcome.

I also think I mean, I wonder if games is a field that has more diversity. I tried to hire women into my used car startup and it was pretty tough, actually.

But I think some of these investors and founders, I also think industry, some industries letting them selves to more diversity. In many ways, I think games and eSports are an ultimate meritocracy. And I think. You can have an online persona or you can have eSports persona that you developed yourself and you can choose, you know, in many ways to show as much or as little as you want of yourself. I mean, there are people who play online who are, you know, might self identify as a male, but play as a female with a female avatar or on on twitch.

They might cross dress as as a male or a female. And in many ways, I think the online community, while it does have its bullying, it does have its kind of white male, you know, perhaps racist, small minority.

The color of their skin doesn’t matter of language. It matters. You know how well they play matters how well they play with others. It matters the persona that they have. And I think that’s pretty inspiring. I think that’s what we want.

Absolutely. I hadn’t really thought a lot about it.

I really hadn’t thought about how race changes online, especially in games.

I didn’t mean to totally pigeon hole you, though, only talking about games and ease for it’s when I started this question about any grammes.

I’ll tell you what I was really going to ask you was if you’re the thinker and spent a lifetime reading and generating theses, I was going to ask if there’s other areas that you’re really diving into. Have you been looking at VR? Have you been looking at the future of advertising? You know, what’s what’s on your mind lately? What have you been reading?

I do think a lot about the future. And I read a decent amount of sci fi. I’ve read some sites I had recently that I think is really interesting. And I’m just rereading Snow Crash by Neal Stephenson, which is an epic sci fi kind of canik canonical novel about a future dystopian world that has a metaverse in it. And I’ve been thinking, what is the future? What is the metaverse look like? You know, what do virtual beings look like in that metaverse?

You know, what are the startups that are going to be, you know, the core technology, the powers that metaverse? I think that’s interesting. And in many ways, games is a part of that. EA Sports is a part of that. Your virtual persona, your virtual character and avatar. So part of that. So that’s something that’s a thesis that that I’ve been looking at and diving into. Personally, I love to run and I love health and I love yoga.

And so I’ve been looking at also, you know, health tech startups or startups that help people get addicted to exercising in the same way that you can be addicted to games. And so we invested in the first round in a company called FitOn its Fit on app. And it’s the fastest growing mobile fitness app on the App Store. And it’s just surpassed peloton, just surpassed Nike. And the founder is amazing.

It seems like a lot of these different pieces of our regular universe are colliding online. I think that’s right. And I think. You know that. Who knows what the future is going to look like 20 to 40 years from now? I mean, things have changed so massively in the last 20 years. I feel like in another 40 years, you know, we we could be living in a world where, you know, we do work and live and, you know, go to school all online, all through some kind of virtual interface.

And we have these virtual personas. We have a true metaverse. But, you know, with different platforms. We have one for education. We have one for entertainment. We have one for social. And we’re starting to see that now. We’re starting to see that in what we’re doing right now through Zoom or through Google Hangouts or in an Epic’s case to a fortnight. And those are all in their own ways. Little better verses of this is how people interact with each other through this business environment, how people play and see concerts through their play environment.

But will that all join together? Will that be stitched together? You know, I’m interested in that startup that stitches all those together and makes it seamless in some way, and that allows you to have a persona in all of those. That’s super interesting to me. I don’t know when that world is going to exist, but in some ways I think to myself, well, maybe it’s time to make that startup again or to do that stuff, to make that future that I want to see.

I pulled a quote from from the Web site that you read and write it down on the Crosscut Web site. It said, if you don’t prioritize your life, then someone else will. Clinton.

So if you’re gonna build this startup, I’m all for it. We’ll fund you. We’ll give you some money. Clinton, thank you.

I appreciate that. I think Crosscut might have first dibs, but we would love to co-invest with you on that Minnie. Well, thanks so much for coming on the show.

It’s been great to chat with you today. Thank you.

Eric Manlunas — Wavemaker Partners

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Are you exclusively focused? I should know this year.

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

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

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

We consider ourselves a startup as ourselves.

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

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

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

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

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

Maybe your first business. Sure.

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

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

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

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

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

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

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

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

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

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

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

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

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

What do you mean about being uncomfortable?

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

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

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

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

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

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

Tom McInerney — TGM Ventures

Tom McInerney is a full-time angel investor with 120 angel investments.  He shares how he gets into rounds like Clubhouse, Tala, Segment, his view of investing during Covid, and why he spends time hanging out in Clubhouse.

 

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Tom McInerney is one of the most prolific angels in L.A. with something like a hundred and twenty angel investments. Tom is an investor in Notion, Segment, Bird, Tala, and recently in a very hot Clubhouse round.  Before doing angel investing full time, Tom was an engineer at Apple and then at Sony. Tom, David, thank you both so much for joining us. Thank you. It’s great to be here.

So, Tom, did I.

Was that a fair characterization of your background and of your angel investing? And do you want to share a little bit more? Sure. So I moved to L.A. about 12 years ago. 

I’d come from the Bay Area. And I invest both in the Bay Area and in Los Angeles and occasionally in other markets, but really try to concentrate on those two. But it’s been kind of amazing to see the evolution of of LA tech. Very cool. And there was a thread on I guess there’s a Twitter thread that said like name. Who’s a really who’s the best angel investor in L.A.?

And everyone said, Tom McInerney is so glad to have you on here.

Tell us more about the the the investing that you’re doing. How are you usually coming in into seed rounds?

Is it pre-seed, will you do later stage?

It’s often the first money, maybe not the first check, though, sometimes the first check. But, you know, in the first rounds that that come together for subsequent rounds, they occasionally will invest in the A’s and B’s, but generally try to come in early and and develop a relationship with the founders in the beginning.

And just to be clear, this is your money. This isn’t a fund of some sort. Correct? Yep, my money.

I tried to, you know, take risks and make early bets. It’s typically 50 or 100 thousand. Sometimes twenty five. And. Yes. How did you get started on this path?

I’ve been an entrepreneur and it was pretty exhausting. And I wanted to be engaged and involved. And so I just started doing it. I just started meeting people and and taking pitches.

I think, David, I shared with you and Minnie as well. The second angel deal I saw was airBnB. And I thought, well, I should probably look at a bunch of these before I pull the trigger, which is a big regret for me. But yeah, it’s just you just kind of wade into it. What were your first couple? Let’s see, Segment was relatively early, cause it was I remember it was right when Y Combinator hit.

Was this the early days of Y Combinator? And I remember going to YC and so different now, by the way, you go in there. Last time I went to Y C, I just I didn’t even get in the building. The line was so long, I gave up. There were just I think felt like thousands of people, but obviously pre Koven. But back in the day, Y Y Combinator was six cement metal folding chairs, maybe 30 metal folding chairs, and Paul Graham and his wife, Jessica.

And, you know, I’d say like, OK, everybody settle down, sit down. And then the entrepreneurs would get started.

I happened to catch Segment and they were doing something totally different and they ended up going through two pivots. They were doing something back in the day called Class Metric, where in class students could have their laptops open and if they didn’t understand something during a lecture, they would push a button.

And the professor then would become alerted to the fact that, you know, like 20 out of the 30 people in the class weren’t weren’t understanding what was going on. And he could even have or she could even have a graph of the understanding over time in the lecture and things like that. And it turns out when they gave her laptops in class and spent time on Facebook and had them work, and then they pivoted and tried to make a they pivoted and tried to make an analytics tool.

But in order to make the analytics tool, they created Segment to make it so it was easy to implement the the analytics tool that everyone’s like, we don’t want your tool. We want we want segment. We want the ability to store data and use lots of different tools. This is kind of funny how things evolve.

Yeah. So many great companies, infinite. It’s a long way from doing a couple angel investments and in those early days it yrc to becoming a full time angel investor. And it is your full time job, right?

It is. Yes, it is. And how long you’ve been doing it sort of at that level?

I think about eleven years. I mean, from when I got started and this is one of these things where it really is, there’s an expression that’s the get get rich slow business.

Do you think you’ve gotten better at it? I mean, hopefully you’ve gotten better at it. And can you share some of the things you maybe used to look for, used to do that, you know, you’ve learned from?

That’s a great question, I’ve asked myself that question, I me any better at this than I was standing because it’s it’s full of surprises.

And we’ve talked about this. You know, it’s full of surprises. As soon as you think there’s a rule or a or a, you know, kind of a perspective or something, you get surprised. And for example, with clubhouse, you mentioned that one, I, I very nearly didn’t do that. We covered had just begun. And and then the team there were focused on consumer and social and, you know, looking from the outside, it definitely had a lot of headwinds.

It then a whole lot going for it. And I almost said no, but I was so impressed with Paul Davison. He was the person I interacted with most. And I decide to invest because he is clearly super sharp.

But I think your gut gets a little more fine tuned over time and you’re probably maybe better at coming up with quick nose or or or maybe estimating a market size. 

Can you tell me more about clubhouse? So I’m curious. So, number one, I still don’t have my invitation. And I know David hangs out. Thank you. David hangs out there.

What makes it so special? For the most of our listeners who are not yet on clubhouse, what do you think is a secret there? Yeah, yeah. I think in the end, they have pretty good timing with Koven where people weren’t able to go out and socialize. So it’s a pretty social place. You go into a clubhouse to start the app and you can either join a room or start a room. And then within the room you have the kind of the microphone when you start a room and you can invite people up to speak and then you have an audience and they can raise their hand if they want to, if they have something to add.

But it’s incredibly simple. It’s only audio. And we just talked about that at the beginning in this call. The video adds an extra kind of cognitive load. So it’s audio. So you can be a, you know, in your bathrobe or your underwear. And just having a conversation or in bed or something with someone. And there are people that join from lots of different time zones, for example. And it’s dead simple to use and it allows people to connect.

And I think they also did a nice job with the initial community that they’ve curated. So, you know, it’s it’s there been some kind of knocks on it for being invitation only or whatever. But I think what that’s allowed them to do is control the community so that they just have a good energy to start in. That kind of sets the tempo for the for any kind of social network. I think your initial community kind of sets the feeling and the vibe, and that’s important.

I’ve been I’ve been various very curious about how it’s going to scale from here me too.

That’s the that’s really I mean, it’s the first minute of the first quarter for this business. It’s it’s really the hard work in terms of scaling it and making it work. Well, I’ve heard Paul say that, you know, they’re really super focused on making it so speakers or people that are talking have a secure environment and a good experience so that if they attract good speakers, they feel like the audiences will follow. And I think that’s probably true.

OK, I’m going to work on my invite there. And so so clubhouse was a hot round, as I understand. I wasn’t part of it. But, you know, multiple VCs wanted to lead that.

How did you get involved? Like, does an entrepreneur seek you out to use names, say, oh, this is a company I really want to be a part of? Well, this one, I got lucky I was involved before it got hot, and then incredibly a month later it got hot, which is and it was like a, you know, a 10 X on paper in like might might be one of my best hours ever. But the way I do it. The way I get involved in cool companies is just to have a network of people that are close that I check in with.

And oftentimes, you know, the things come through that. And so I think having a network of good founders and it was another founder that made the introduction originally. It’s kind of an interesting company of our time, too, as you said, like it probably benefited from the fact that we are all locked in our houses right now.

You know, what do you think about the current times we’re in and how that will affect your investing?

I had a thesis going into Covid and now a different pretty significantly different thesis. You know, in the past, you know, months later, the initial thesis was like, oh, my goodness, this is like the Lehman Brothers shock. Or then, you know, the the 2009 financial crisis or or the Great Depression. I was very pessimistic. Singh thought people would be locked in their homes and businesses would be shot. And the federal government has done a good job, I think, with stimulus.

And and then I I sort of modified my thesis when tech stocks start going up and sort of we saw that instead of instead of a withdrawal from markets, there was more of a shifting and the shifting went from airlines and casinos and commercial real estate and industrial companies and probably minerals and other other things into tech companies, things like Docusign and Twilio and DataDog. And so they’re there. In the end, there wasn’t necessarily an outflow in the markets, but rather a shift into tech.

And so my new thesis is this is the this is the comment that killed the dinosaurs. And it is accelerating a lot of the secular trends that were already happening. For example, you know, watching movies at home and streaming and remote work, you know, things like DocuSign, where you just do electronic signatures instead of go in and see a notary and sign sign a bunch of paper. So more and more, my feeling is that this is going to accelerate things that were already happening.

And so it’s it’s made me. Initially, I was very conservative, but but now I’m actually more and more bullish on tech. So it’s it’s probably going to accelerate my angel investing. Yes. I think we’re generally with you, like there’s a lot of. As slow moving industries that are all of a sudden having to be faster moving in. Mm hmm. Exactly. That’s right. And and don’t. And it’s forcing them, you know, they were able to sort of kick the can down the road on digital, take a company like Disney.

They make a lot of money from movie releases. They make a lot of money from theme parks. They make a lot of money from selling toys. But when all that stuff goes away, it makes them really concentrate on Disney plus and digital and digital initiatives. So I think I think, yes, that that this actually forces a lot of companies to accelerate the move to the shift to pure digital. How do you think it affects our lives? So that’s a good perspective from what you might invest in.

But if we’re now doing a lot more digital and we’re we’re not going into the office nine to five, five days a week.

You know, how do we how do our lives change? 

We are inherently social and I think we need to be social. I think one thing I’ve noticed with a lot of friends is this, myself included. There’s kind of a reconnection with nature as well and an appreciation of nature. 

As we talked about a bit of an environmentalist and. But I mean, I think some of the challenges are for people whose jobs were lost or lost in.

This has been very hard on a number of different industries. And I think it can potentially accelerate the gap in income inequality in a number of other issues.

And I’d like to see Tech addressed that if we can. And yeah, I was overall initially pretty impressed with how people came together.

And then in the end, there was sort of there were sort of, you know, the riots and. And then, you know, there was also I think I think Kovik kind of pressurized society.

I mean, let’s let’s talk some about Black Lives Matter, because I’d love to know, you know, some about the conversations that you’re having.

I think a lot of these things that were happening and not being recorded, a police brutality and so forth are now being recorded such that, you know, that that’s a good thing. Right. We want we citizens are being abused by officials, then that needs to be stopped. And that needs first we need to know it’s even happening. And so, you know, you take something that would have been a he said she said and then also and you have it on video and it’s clear as day but happened then that does change the game.

So it’s a it’s a democratizing factor. Yes. You said something, you said tech can help, and I think you were talking some more about the situation with kov IT and unemployment. But I’d be curious to dieser on where you see the tech help beyond just the fact we all have have cameras on our cell phones.

Yeah, it’s it’s I like this idea of distributed work. I like this idea. Imagine, you know, in the future, some period in time you wake up and you just kind of morphed into the future and you have you know, you could walk up to a vending machine by a cell phone and you didn’t know anyone but you you know, with that cell phone, you could start doing work, whether it’s classification stuff for artificial intelligence or image classification or, you know, different Mechanical Turk stuff or or gig economy work.

I like the idea of the of the phone empowering, you know, distributed work. And you asked me a question or e-mail about a gig work. And I’m a fan of gig work because I I think ultimately it provides a lot of flexibility. And I’ve spoken to gig workers. So I think there it can make for an a more elastic employment situation where it can maybe democratize opportunity if it’s done well.

Yeah, I mean, I think I saw that you posted something about eighty five, the the California’s push for gay workers to be felt to be classified as full time employees.

How do you I mean, it’s a it’s a tricky one, right? Because I agree with you. Good work can be very empowering. But how do you still protect workers to make sure that they, you know, aren’t working 40, 50 hours a week and still not able to support themselves? Right. And I guess one simple answer is, if they if there was a better job, they’d be choosing that other job. So if your gig working, like it or not, your alternative is unemployment.

Right. The better job would be the one they’d be doing otherwise. And the worst and the worst thing down from that could be unemployment. So I’d say it’s better than unemployment. And my my concern would be that if you if I mean, I’ve Binish Uber shareholder, I ended up I’m no longer an Uber shareholder. But if they’re losing money, so I don’t see that they necessarily can start to afford to pay benefits and things like that. 

There is a devil’s advocate argument that, you know, that if everybody is subject to the same regulation, then then maybe those companies can charge more. And yes, consumers can decide whether they can still afford it and pay more or not.

And I would agree with you on that. I think that consumers could pay more and and perhaps those companies have been too obsessed with gross, for example. So perhaps they modulate their growth. They charge more and they pay workers more fairly. Yeah, I’m open to that as an alternative. 

So I don’t want to get too into the political stuff. I just I was kind of hung up on this, like, future whereby I’m walking like I wake up in the morning and I just like walk over to a vending machine and it like it dispenses my job for the day. 

For sure. Yeah. You can go to the App Store and choose what you want and what you like. And that would be something I’d love to see tech enable.

Maybe choosing sort of other things that you commonly invest in. I know you’ve done a lot in in AI/ML recently.

Yeah. Yeah. There’s actually one that just very similar to what we talked about. It was kind of an example. I use a machine learning classification system that’s an X, a space X team, former space X team that is building a system where people can do image classification. That’s that’s basically training for training for machine learning and classily classification to help build neural nets for A.I.. And you and you get paid to do it. And actually, I like that the founder founder is an example.

He said you you get in line at the grocery store with no money in your wallet and you start working at this. And then by the time you’re at the front of the line, you have enough money to buy a sandwich or something. That’s probably a little bit exaggerated, but I think there’s there’s some neat stuff like that. And I’ve looked at recently a company doing synthetic data, which is generating like data that is used to train neural networks.

That’s synthetic. Which is helpful because for privacy reasons, you sometimes don’t want to be using real data. And so I think there’s a lot of promise. There is still definitely early days, though. You know, it’s interesting to see which industries are really going to adopt. And again, it’s all about having their proprietary data sets that create really. It’s either having that proprietary does it or creating it, as you say.

I was going to ask you sort of back to investing. You know, you talked there are some investors who who, you know, really like I would call us this kind of investor who really look for markets that have tailwinds in them. And yet, you know, you invest in clubhouse, which you said had had big headwinds.

Yeah, I would say that. I almost don’t look for tailfins, I look for the weird stuff or things that are different in strange things that are, I don’t know, things that are out of favor. I was doing a lot of clean tech investing over the last many years. And and there were, you know, at least five years ago, I’d say clean tech was pretty out of favor. Three years ago. And it’s getting more in favor now.

But it’s hard to even get sandhill species to look at clean tech. So I tried to. It is tempting now, for example, just to continue to do SAS companies like Notion or Segment because they just work when they work, they do work really well. But I try to find the next sort of strange thing that that becomes important. I mean, I’ve had friends that were buying Bitcoin when it was it seemed very strange. And so I think you’re for me, I sort of challenge myself to think of of stuff that’s a little more off the beaten path.

Why can’t we all just invest in clean tech? Why? Just because we always care about David’s also often nature right now.

You know, an end to the problem is I care so much about it.

But where do you think the interesting opportunities to invest in clean tech or just in the environment are?

Yeah, I think I think carbon there will be eventually markets for carbon. And so I think that’s going to be one that’s ultimately big and important.

I think a lot about materials. For example, you know, it is hard to live your life without using plastic, especially now, in fact, with Cauvin, it seems to have gone up.

But, you know, the one time these plastics are frustrating to me to think, well, I just took a bottle of water and this this thing’s gonna be around for like two hundred years in a landfill or it’s going to break down into micro plastics and end up in seafood or the, you know, the water with trains and things. So I think the the consumables and the waste stream, there’s a ton of opportunity to do innovation there.

So let’s let’s sort of move into our final step, which is just like more about Tom’s section here. Tom, I’m really interested in this aspect that you are a full time angel investor. I just don’t meet many people who are doing that. When you think about your your days and your time, how do you are there are there activities that you feel like you spend too much of your time on?

And kind of the converse of that is. Are there things you don’t spend enough time on? And how do you really hold yourself accountable? That’s a great question. I, I, I feel like I spend sometimes too much time on the little things in life. During Covin, I followed those kids constantly doing dishes, three meals a day, basically. But I’d like to spend more time just thinking, just really purely thinking about ideas. And and I find when I take walks, it’s very helpful to think.

But I’d love to be having more great conversations like these over the phone. So I think. Yeah. It’s it’s I think that there’s just a certain amount of overhead to keep your life, keep all those plates spinning in your life that you you spend time on.

So. I love a little more thinking and writing time perhaps, and a little less time doing dishes.

Great. And need anything else from you or tell me anything else you think and would be really useful to cover. Now, it’s just been a real pleasure. Thank you. It’s been fun to see the evolution of ballet and and so great. Grateful to have you guys in the eco system. And thanks for having me on the show. Oh, great.

No, I mean, you’re doing so much for the eco system and you’ve been doing it for a long time and it’s great to get the chance to sit down with you.

Adam Lilling — Plus Capital

Adam Lilling probably has the coolest job.  He’s the founder and managing partner at Plus Capital, where he works with celebrities like Ellen and Portia who want to invest in growing companies (post-seed) that align with their values.

 

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Adam Lilling is with me.  He’s the founder and managing partner at Plus Capital, where he works with celebrities who want to invest in growing companies. Adam is one of the original L.A. startup people previously starting Launchpad L.A. with Mark Suster and Peter Lee. He was the founder of Pazanga and Pentagon CDs, which is one of the first Internet sites to sell CDs and tapes online.   Supercool. 

Adam, thank you for joining me.

Thank you for having me. So just to set context here. We are a couple weeks in from George Floyds Killing. And I just wanted to start by saying, how are you doing? Where’s your head at today? 

I was at a protest with my wife and two daughters over the weekend. And, you know, your heart goes out to everybody that has been fighting this fight so long. I mean, it’s it’s we at Plus Capital put out a statement. It’s hard to it’s not hard to know what to say. 

It’s hard to because you’re just not in someone’s shoes, like I feel like I’m somebody with a lot of empathy. I think people that know me know I really care about other people. But in this situation, it’s amazing to see the momentum building across the world. I mean, it’s there’s been flashpoints so many times and just nothing happens. And people say, well, you shouldn’t protest. We shouldn’t do anything. But it makes a difference. So I’m just hoping that change comes.  That’s it. 

But my wife was saying this to me the other day, like, you have to be vocal. And I’m not. I’m more of an action and vocal person. But when I’ve listened to a lot in the last week especially or two weeks, I just think you have to be vocal and you can’t be quiet. And that’s not my nature. But I’m doing a lot more talking and a lot more statements and a lot more standing up.

Yeah, absolutely. I mean, yeah, it’s just opening up every day, opening at Twitter and watching what’s going on on the streets with police and protesters. It’s hard not to feel angry.

You know, last night was the you know, a lot of things have gotten to me and shook me up. But last night I put it I tweeted about it last night I retweeted somebody else, baby names dot com, which I used to name my kid, my both my kids. I just sat there and looked at names and they put on their home page all the names of not all but dozens and dozens of names of black men and women that got killed by police and and just saying that these were somebodies baby, too.

And I still get my hair. And when I saw that, just thinking of that, because it’s just so real, it’s like as a parent, you know, it’s important to think of everybody else as you would like your child like they matter. Yeah.

Yeah. That is tingly.

And here we are talking about venture capital, by the way, which, you know, has terrible statistics for black venture capitalists and black founders, both male and female, in terms of dollars that go against it. And even the things that we’re seeing seem a little tokenized right now. Like, I really believe it’s an ethos. You have to have each firm, even at our firm. The female founders side, I think forty two percent of the founders or co-founders at that are backed by an artist or an athlete.

Plus’s is female. I’m a big believer that there should be balance. And I think you just have to do it. I mean, and then the statistics will change. It’s just hard to keep talking about it. I think you have to you have to have it in your ethos.

Absolutely. But I started by saying a little bit about Plus. But help me characterize what you’re doing when you’re backing these founders and connecting them with celebrities.

Well, you know, it was about 2012. Marc Suster had started Launchpad L.A. in 09 and brought me in as a co-founder of around the mentorship program with him. And then we brought in Sam Teller to run and co-found the accelerator. I was lucky to invest in 40 or 50 companies with him and Mark and Peter Lee and Jim Andelman and the team of investment team that was backing Launchpad companies.

I I was trying to figure out what I was going to do with my next 20 years. And I was mentor chief at a Launchpad. I mentor the startup. So I always used to say, you need a mission and a minimum viable product. And then you’ll figure out the business. And I had been a founder since 1995, and it was always the business. To sir the mission. So I just stopped and I and one day I was waiting.

This is the real story. One day I was waiting at a friend’s movie premiere. I wasn’t a Hollywood guy. I just have to have a couple friends in Hollywood. And an infamous person walked out of the bathroom as I was waiting for my wife. And I said, well, she can do more to effect change in the world in a day than most people can in a lifetime.

So if we could combine the amplification of people who can effect that change and tie it back to the best operators and entrepreneurs.

I just thought that was my mission. I thought I could move the world forward faster by teaming up with the people who could speak where I was not. I wasn’t blogging or posting like the Marks of the world. I just that’s not who I am. I just wanted to say, you have a voice. You have a passion. Let me help you get behind. Know the person who is the better operator than me, too. I was never the best operator.

I never had the biggest voice. But I really felt like those two needed to come together at it.

And so by bringing them together, I don’t really understand the basics of sort of how a celebrity in this case, they’re actually investing money in exchange for equity, but they’re also lending their their brand name or their.

You’re actually asking us capital do. And I just gave it the mission, but not because it actually started as a small fund where we then we had limited partners that were artists and athletes and their business managers and their entertainment attorneys. And we started to just test the thesis of how this worked. The product that we have today really falls under investing your financial capital and or your sweat equity into a great venture backed companies. We also have a second part, which is we advise celebrities on all things startup.

So we advise Ellen DeGeneres on it by Ellen or Portia, her wife, Portia de Rossi, on her company, General Public, which is the art that’s behind here that unlike you can’t see because it’s audio. But from the video, there’s a art on my wall and it’s sold in R.H. would be say, with Zoe Saldana. We have like eight or nine companies where we advise celebrities on them being founder. But 50 plus companies, we usually have the artists or athlete invest in a top quartile, venture backed company post product market fit where they can be more gas on the fire, helping with customer acquisition, business development, press, things that once you’ve got the product now we will have an artist or an athlete invest all the way through to precede or seed.

But typically, like the sweet spot for what we do is we figure out how to construct the involvement of an artist or an athlete in a venture backed company, because there’s a lotta you know, there’s a lot of intricacies to use of name, use of time, use of social platforms, all the things that go along with their money.

And that’s what we specialize.

And so is that a company that’s raising around that financing and the artist, it being investment becomes, you know, on the cap table during a round of financing, or it might be at any point getting involved.

It’s at any point in time. Sometimes it’s in during a round.

Usually, look, there’s a power to having an artist or an athlete on the cap table in the right way. There’s no power if you do it in the wrong way. 

The one thing that I think we do differently than it used to be in the past when I started actually one people, Google Ventures. This is probably 2012. So we did a study and it looks like celebrities have no effect on their success or failure of a business.

And so I dug in a little bit with them. I go, what stage you’re talking about? Like 70 percent of companies are going to have a pivot, you’re never your first products are never gonna be your long term product. You’re going to fight.

You’ve got to wait for product market fit. So it’s hard to say. I love this product.

OK. Now I love it now. So show.

So there’s this moment in time for for for a venture backed company that could be series A, B, C, G.

It depends.

But you’re finding that product market fit. And then all of a sudden, it feels like magic. And you’re like, I need everybody behind me that I can. And so our job is to find who is authentically a believer in what this person is doing, who has the right engagement and audience to bring that message worldwide. And how do you then set it up so that they can help use the infrastructure? They use their voice tied to their existing initiatives, like if it’s just a social pose.

It’s not going to go anywhere. If there’s a marketing spend, then all of a sudden celebrity is a growth hack, as we like to call it. All of a sudden it makes sense or you’re trying to get into that really big retailer or that big partner. You know, having a big name celebrity, say, I’d like to take a meeting with you, CEO of that company. You want to drive an enterprise deal? Let me tell you, we have athletes that can sit in a room and we have artists that can sit in a room and close a seven or eight figure SAS contract.

So like the artist or athlete, we’ll actually take a meeting. We’ll show up and be there. We got it at it. Interesting.

We really focus on at the highest level things that are better for the planet and the beings that are on it. We don’t call ourselves an impact fund, but we just want to know. Here’s the line in the sand. We always want to be on this side and on the on the right side of it.

But it usually translates into five key areas for us. The future of work. The future of education. The conscious consumer. Health and wellness as a general category and sustainability as a general category, those are the five pillars that we know across the board, whether it’s veganism for Ellen and Portia who have or plant based protein with Ellen Portia, because it’s part of their Very Good Ventures that we help them invest in or, you know. Shaun White doing better sleep and better eating nutrition for what he’s doing.

And so these celebrities have already sort of had to go through this process of deciding on the causes that they care about.

I ask that and it sounds obvious, but sometimes like at a company, we go through these value discovery exercises.

And it’s just not obvious.

Well, yes and no, I mean, there are people who have pillars that they walk in the door with. 

But many times we’ll go through an exercise like when we kick off with an artist or an athlete, we’ll spend an hour to three hours just talking about what their hobbies are, what what they do at eleven o’clock at night when no one’s paying them and they would be paying they’re using their own money for it or, you know, what are the brands that they love, whether or not they’re endorsing them or not.

Like in the world we live in, it’s all about authenticity. So it doesn’t matter. Like the world is like we just caught a wave. The world in social media, it’s shifted from you can get, you know, five, 10 million dollars a year from a brand, whether you like it or not. Now, you’ve got to go on social media and talk about it and it’s got to be authentic to you. So, you know, we come along and say, hey, I know you don’t really love that company.

We’ll make you in the long run more if you just throw yourself money wise and sweat into the company love. So it’s a lot of the beginning is just figuring out what are they, why they love, what they love and why they care about, what they care about.

And then us figuring out how to connect the dots back to why companies need scale partners or amplification partners.

And like when you’re talking about scale partners, I don’t know the world of celebrity or influencers very well. What sort of scale are you talking about and how much influence are they expected to bring and how many how much reach are they expected to have?

By the way, it’s not a silver bullet. It’s nowhere near it. It’s part of a larger plan. Right. If you’re going to spend this year, 10, 20, 30 million dollars in customer acquisition, marketing and you’re looking at a CAC of 50 bucks, you can a celebrity or an artist or an athlete help you bring the cash down to 30 bucks or thirty five bucks for half a million people that you’re gonna go reach out to, like maybe a lot of times.

Yes. If you do it correctly. It’s not the organic post. It’s not that, hey, I’m going to show up at this event and shake hands. It’s not the traditional endorsement stuff. 

It’s taking the audience. It’s taking the awareness. It’s taking the trust. It’s taking those building blocks and putting that in to what the company’s plans are in the right way at it.

And I’m interested to ask more about celebrity, but may stick on just like technical stuff here. And so you then as Plus Capital will often then sort of co-invest at the same time.

Yeah. So first, we’re always in this world knows a lot of people that have no plan. Both sides. Right. They’ll work with the brand and they work with an artist. We have a mission that’s about artists first. Right. Or an art athlete first. So the first thing we think about is what’s best for the artists to the athlete. What is the right company? How do how do we get them involved in it? And if it fits a certain criteria?

For us, it’s usually like Series B or later top decile venture firm, you know, where the the artist or athlete is accessing a company that a traditional venture capitalist would never be able to access on their own, because this is a unique situation. We then have a set of capital to invest alongside our artists and athletes. And in the beginning, we just asked, hey, do you mind if we write a check next to you? And they were like, oh, my God, we don’t know.

You liked it so much. Of course. And then we called a company and they were like, well, I thought they were going to write a much bigger check. So we allocated more money. So then we started doing it and we realized, you know, I think we’re pretty good venture capitalists, too, like we helped sell downstream. We we we we put our sweat into it with a much smaller check. And the lead investor, I think dollar for dollar is pretty helpful.

So we’ve gotten into this pattern where when it fits, our mandate will we’ll invest alongside our artists and athletes, but it always starts with them first. We’ll never invest in a company if it’s not made for an artist or an athlete. If someone just invites plus into a deal when I already check it.

So I’m new to L.A. and it’s very striking. The tech world in L.A. has more celebrity involvement. It’s fun. But I haven’t yet sorted out who’s who. So there’s business managers and there’s lawyers who work with these celebrities and and advisers of different forms. Can you tell me that? Do you resemble an investment adviser or who do you interact with? Like, is it always directly with the celebrity? So we have a deal plus that we will not work on a celebrity without having direct relationship with them.

So just answer your question. Typically there is an agent. There is a manager is a business manager. There’s an entertainment attorney is a publicist.

There’s a lot of people in there life.  The main people that fee off them as a back end participation are the four that I first said, art agent, manager, business manager and entertainment attorney. We started with entertainment attorneys and business managers because business managers like the CFO, entertainment attorneys are like the general counsel.

Managers are like the head of business development. Agents are legally allowed to close deals for them. So they are the infrastructure for their sales. You know, they’re they’re they’re they’re head of sales managers are more, you know, understand the brand. Right. And and then than anything else versus a business manager which is handling the money. That’s their infrastructure that’s there. That’s the management team. We started by going to business managers and entertainment attorneys. Then we started to do more sweat equity deals.

So we had to work closer with the managers.

But we just handle it like we are there. We actually have an investment bank, a broker dealer that we set up last year because we believe that these are securities. The S.E.C. and FINRA believe that if you’re going to negotiate securities on behalf of someone and get compensated on it, you need to be registered broker dealer. So we went through all of that 

We do have a lot of celebrities that introduce us to their friends now because we have that kind of relationship.

But that’s that’s the industry. That was a long winded way of taking you through the industry.

So now celebrities introduce you to their celebrity friends. So you have got the coolest job around.

I have Amanda, Ryan, Jordan, all of us. We think we have the coolest job.

I mean, it’s not a job. It’s the comparison. Before this, though, you were really deep in the startup world, right? You were in tech. You were building an online store for tapes and CDs, which I found funny.

Do you think there’s a lot of similarities in the culture. A lot of differences. Now that you’re kind of bridging both both sides of the Hollywood in tech, the culture is to me completely different.

You know, no one or two in the dot com crash came. A lot of people went back to big companies like when we started doing Launchpad. Like, you could count the people that were in the startup community on a couple hands. Like, I mean, it was like when we threw our dinners at Launchpad. It started with 30, 40 people, maybe got to 50, 60, 70 people like like you.

We could we. I know that. Yeah.

I know a lot of the people get put.

And you’ll see a lot of those people around town that are just revered in terms of them being mentors in this community. 

It’s funny. But when I was growing up, everyone had a screenplay and then I moved to San Francisco, where everyone has a business plan they want you to read.

Do you think, like, there’s better ways of building bridges between the two communities? Should other people be doing more of what you’re doing? Yes and no. Like when when I think of Hollywood and I think or I think of the artist community, I think of technology. I always call that the imagination economy. Right. In Hollywood, you can take a script that says, here’s these bloop people on a planet. And it becomes Avatar. And here’s, you know, Evan saying, here’s disappearing photos and it becomes Snapchat.

These are both imaginations. These are ideas that need a different kind of execution to get to scale. But I don’t think from a business perspective, like do digital media companies and startups have to do more together?

I actually don’t think there’s a lot of venture capital backable media like we’re seeing it a lot. It’s hard to do media as a venture capital, bankable business, just like music, is a tough venture capital, bankable business. So I would say aerospace. Yes. Right. There’s a lot of industries that are L.A. dominant industries like aerospace that I would I would prioritize over Hollywood to be more ingrained in the tech community right now. It’s a looking thing.

Right. You have a lot of celebrities wanting to get involved in tech and not necessarily for the right reasons. And we actually avoid having someone write a check into a company just as it’s cool, like we want them to do it because they it’s something they’re passionate about, because just like what happened with Covid, like all of a sudden valuations are changing and oh, my God, there’s going to be a pay to play. And you have people freaking out when it’s about money, but when it’s about the passion or the mission, you’re like, well, what do we do to fix this?

But but backing entrepreneurs became cool right in the locker room. And everybody starts talking about what companies they’re invested in at the parties. Everyone’s saying, but I’m invested in that company. I’m a backer of that company because it’s cool and cool fades. So it’s got to be about more than cool.

Yeah, actually, that was that was one question I did want to ask. I see some similarity. I just did. Deb Benton. Do you know her. She was the president CEO of NastyGal. Yeah.

And shoot as with Kim Kardashian and says, you know, we were taught we were talking about how people can really get beat up in the media. And we and obviously Kim Kardashian and Sophia Amarosa are our big celebrities in their own right. But, you know, we always talk about our startup founders needing to build grit. What do you see working with celebrity celebrities get totally beat up at times. Do you think there’s either lessons learned there or things you’ve seen with with the media turning on people that we can learn from?

That’s a good question. It’s a tough question. I mean, look, I’m biased, but I think Ellen DeGeneres has done more for this world in her lifetime than most human beings. And she’s getting beat up right now. Right. And I know she’s got an incredibly compassionate heart. And I know she just loves to do good for others. She’s lived through enough in her lifetime that she is not going to complain and she’s not going to even sit there and go, oh, woe is me, she’s just going to like she did this week, she’s going apologize and do better because she’s all about the mission.

I think that that lesson goes to entrepreneurs, which is like you’re not used to it. If you were like just like artists and athletes are not used to the things that you’ve been beaten down like this. My third Black Swan event in my lifetime, I got lost everything in the dot com crash. I lost so much in the 08, 09 financial crash. And I feel guilty about it. But we’re having the time. Know everybody in the world wants to work with us right now because they’re home and they are passionate about changing the world.

So I’m having like I I’m working every minute of every day, including weekends. So, like, you just have to live through these moments to understand them. So I think the lessons that you can translate between artist and athlete and entrepreneur is if you haven’t gone through it many times before, you’re not going to be great at it. You’re not going to understand it fully. You’re just have to be more of a study of history and other people in their shoes than having to always learn through your own experiences.

I think you made two different points that I think your first point was some of and maybe I got I, I that I always forget.

I know, but I’m not sure I got this right. But there was something about it. Your if you as your celebrity grows, you’re more media figures. Some people love you, some people hate you. Get used to that fact that you’re not always a darling or something.

Correct. Whereas to be taken down by somebody. Right. And whereas this started, CEOs sometimes go really do become media darlings overnight and get crapped on the next day.

And they’re just not used. They’re not used to it. Right. And so you just go through it. But I guess my point is, can you really just study history and learn that, or do you just have to go through and you get better at being resilient by getting crapped on on some days?

Yeah, I think that’s. I find that there are some people that are calm under pressure and our studies of history and they’ve figured out a path and they have a plan.

I’m not one of them, by the way. I mean, I am very emotional. I have to go through something and my team will tell you I’m terrible at planning show and process. So I just look at those people and I think, you know, you asked yourself, how did Brian Chesky just get through what he just got through at being beat and did this incredible, like, severance package and let like he put great people around him. He learned from others.

He took advice, like he didn’t have experience in that. I mean, I think that sometimes when I talk about so-and-so is really smart, what I really mean is they’re able to absorb that information now from it.

Exactly. So, OK, so you’ve done a lot of mentorship, as you were saying. Were you the mentorship in chief or something like that at launch? A mentor in chief.

All of it. What do you find? What sort of advice do you find yourself giving nowadays? More.

You know. I loved being the first check and I love being there when people were first getting a product launch. I mean, it’s a personal passion of mine. I probably manifests in my ability or my time that I put in with artists that are launching their own brands or their own companies as founders, because I get to do that with them. But really, my time is spent advising people on structure, my mentorship comes in the form of helping people find that fit, find resolution on that fit, find scale through that fit. And honestly, I get just as much, if not more joy out of it, because the tangible results are so quick. When you see, like, it’s funny, I’ll I’ll see. I’ll be sitting and watching TV with my kids and five brands will show up in the course of an hour that I talked to that founder in the last week, I had worked on something really cool that made that happen.

I was always the early stage guy. So now working on this is just a new fun chapter for me. So that’s my aunt. Do you think I mean, it is a hard question how you live your life this way. But do you think about things that you wish you were spending more time on the things I wish I spent more time on.

Yes. Years and years ago, but I’ve corrected that. Like, the only thing I wish I spent more time on is my family. And I’m trying really hard in this new chapter of my life to do it as a startup founder. I spent three hundred sixty three sixty 365 days working and it was stupid. It was the wrong balance. Like it mentally mistake. Like you think I have to. If I’m not working right now, I’m failing.

Again, things you didn’t get mentorship for more learn from other people. That was one of my mistakes. But now the only thing I look at is, am I am I am giving up an hour of my time that I could be with my kids and my wife. But when you love what you do, it’s not a job. When you have a mission, whether it’s a job, a nonprofit, a hobby, whatever it is, when you get to spend time on something you love.

It doesn’t feel like work. And when you get to do it at the highest level. I got lucky, right? I mean, again, timing tied to luck. One of the first artists, if not me, first artist I got to work with directly through this model was Ellen, and so, you know, getting the next one being blank was was the question from the business manager, the manager or the entertainment attorney or the agent was, well, who do you work with? And it took me a year before I even asked, is it okay if I use your money like I did in the agency world? You may not even work on that person, but if they’re a client of the agency, you’re calling and going, I represent Ellen DeGeneres.

I never used it because I came from startup. You don’t open your mouth and you think you got something there. And so I said they said, well, I can’t say everybody, but I work with Ellen DeGeneres. And they said, Can I call business manager Harvey Newman or can I call her lawyer? Given your. And I said, you’re here, give him a call. And I put him on an email and then I got the next client and the next day.

And so I got lucky. I got to start at scale with people who can change the world.

And where do you think and where do you think you want to be in in five years? You want to just be doing the same.

Do you have a vision for how this evolves?

I do have a vision for how it evolves, but it’s more on the same mission, like everything that we do is around. How do you Bakry? How do you put the great AMPA, the great founders and great operators, together with the great amplification artists and the great artists and athletes that have that amplification, and that can be us growing more around the world. That could be growing into more categories, that can grow into more stages. We’re working on something with a public company right now.

So you’ve seen the power that these celebrities have. Do you ever yourself, does celebrity appeal to you or would the closer to you? Does it appeal to you?

More or less. I never came from Hollywood. I’m not the person who goes and hangs out with celebrities because they’re celebrities. To me, it’s it’s they’re just people. We care about what they can accomplish. And to me, that’s what I care about celebrity. It’s really the social capital and trust that they have. Well, it’s great.

And it seems like a very natural fit to be building this in the L.A. market. So it’s great to have you on the L.A. Venture podcast. I could keep asking you questions for hours, but I think I’ll I’ll let you go back to your regular life here.

Oh, thank you. I’m big fans of 10 110, so thanks.

Deb Benton — Willow

Today we chat with Deb Benton about her new fund, Willow, that she founded with Amanda Schutzbank.  Deb is on the board of Carbon38, TomboyX, The Leaf Group and she has all sorts of insight on how to do consumer investing well and what sort of metrics to look for.

 

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I am thrilled today to be chatting with Deb Benton of Willow. Deb is an expert in early stage consumer branded companies. She was the president and COO at NastyGal. And before that, at ShoeDazzle, COO at ShoeDazzle. She’s a board director at the Bouqs, Carbon38, and public company, the Leaf Group. She’s a really impressive track record. Pre Willow investing in Tapcart, Skylar, Thankful. And now she has her first fund Willow.

Congratulations, Deb. Thanks for being on the show here.

Thank you so much. It is such a pleasure to be here.

Yeah. It’s really exciting to see you raising your fund. Tell me some more about Willow.

Yeah. So I had been I’ve been investing for the past six years, basically with the thesis that consumer brands, early stage consumer brands need to be assessed, valued, capitalized and scaled in a way that is unique to them as a category. Different, different than a SAAS company, different than a software company. So I started investing about six years ago. Angel investing check sizes, generally anywhere from $50 to 200 into these seed stage rounds, and had a strong belief that the founders and the companies not only needed capital, but also needed operational and strategic support where I could provide help.

So I took a lot of advisory seats. I took board seats and I have 15 companies in my personal portfolio. And then about a year ago, I decided that it was time to institutionalize because what I was finding was that for these early stage rounds that I was doing.

There really wasn’t an institutional source of capital with this particular thesis. And so I decided to institutionalize exactly the same way that I had been investing for the past six years. I really wanted to do it with another woman.

And I’d known Amanda Schutzbank for many years. We’ve invested together. Amanda was at Amplify, which is a fantastic early stage preseed fund here in Los Angeles. We did a first close on May 1st, and we just finished our first deal last week.

Congratulations. And so will you be leading you’ll still be focused on seed investments. And we have be. Yes. Leading those rounds.

Will you be co investing some of both. Yeah. Probably a little bit of both. Ideally, we’d like to lead as many as we can in the consumer brand space and within consumer brands. We are more focused on self care. Personal care, which includes beauty, colour, skin care, hair care, anything to do with personal grooming. Health and wellness is another big category that we’re really focused on. And I’d say the intersection between those two is really growing.

I really like apparel and accessories. However, I’d say the lens that we look at those opportunities, it needs to we’re very values, like we have a very values led investment thesis around consumer brands. So with those companies, you know, they need to have something that’s highly differentiated. It could be around sustainability. It could be around supply chain transparency. It could be around production or fabrication. But they there needs to be something that is incredibly unique.

It’s a very tough category. And I think to really stand out, you need to have something that’s very highly differentiated. I also really liked food and bev. I don’t know that category as well. So in that area, I would probably tend to participate with a strong lead that knows that just the sales and distribution is very different than what I’m used to. So but I really like the category again, particularly as it intersects with health and wellness.

We have carved out a small portion of the fund for what we’re calling consumer tech enablement, and similar to Thankful and Tapcart that I have in my personal portfolio. Those companies support the brand or support the consumer’s experience of the brand through technology. I like that as well. So we’ve carved off a section of our fund that will be dedicated to that, those deals. We will participate in. We won’t leave those. There’s much better funds that are very tech oriented that can make those.

Got it.

And so maybe you’ve answered my first question, which was going to be about how do you assess these companies?

I would say broad table state criteria for revenue states. We’re looking at one to five million in run rate revenue. The categories that we’re really interested in and specifically the companies really interested and have very strong product margin profiles. E-commerce is e-commerce has its own set of challenges. In some ways it’s easier than physical retail. But when you look at things like distribution and outbound shipping and returns, you know that that’s an added cost, that that is substantially more than physical retail.

So, you know, the PNL is a little bit different. You really need to have a pretty robust product margin profile to be able to succeed. I think online, unless you’re going to be a massive volume play like an Amazon Target or a Wal-Mart, and that’s not an area that we plan. They do that very, very well. I have I feel no need to compete with them. We’re kind of at the very other end of the spectrum focusing on very emotional connected brands like what line items?

Are you really looking at to understand whether it’s a healthy business? Yeah. So the first line item that I would look at is what I what I call product margin. And that’s that’s simply your product revenue minus your direct product costs landed to get to your warehouse. So before any kind of variable costs run your warehouse, it’s simply your landed product costs. It varies by by category. I’d say for personal care, I’m really looking for seventy point plus in product margin.

At least scaling to that. Some of these categories can be over 80 as well. That’s fantastic. It also happens to be that those categories, which makes them even more attractive, the return rates on those categories tend to be low. So accessories tend to have a very high product margin. They tend not because there’s not a fit involved. They except for footwear, they tend not to have high returns, beauty, skin care, personal care, grooming products.

They tend to have a much lower return rate as well, and they tend to be seventy three or above in their what I call initial markup or their their product margin with apparel. And again, this is why we probably have an even tighter set of criteria around apparel. It’s hard. Returns tend to be much higher, particularly in categories like dresses. Returns can be anywhere from 35 to 50 percent, which is crazy. And it really, really upsets the income statement when we have those kinds of returns.

It also affects LTV and repeat purchasing because you tend to have more dissatisfaction on the consumer side. So there’s secondary effects of having a higher return outside of just the financial implications. I would say for for apparel, there’s a there’s a couple of different ways that you can tackle apparel if it’s a pure vertical integration. I would I would really want to see 70 points and above again, or at least scaling to get there with them with volume. Some of these companies are taking what’s called a hybrid approach, and they are, in essence, outsourcing some of the internal design and production costs.

And they’re doing it with a partner. So that is a that’s a blended model. I would want to see probably sixty three to sixty five percent on the product margin there, because you’re in essence eliminating some of your internal costs, which usually reside below the line.

Anything below that. It starts to get really hard because the next line item that I would look at is gross margin. And for me that. Product margin minus your net shipping costs, minus your your credit card merchant discount fee and minus your packaging fees. That gets to gross margin.

Anything below 50 percent on a gross margin for me is really, really tough unless there’s a recurring revenue component to it. So that’s subscription. I can entertain that because I can. I can have a safer assumption of LTV than I can around the one I’m purchasing.

How do most of these companies because you said you’re investing when they already have a one to five million run rate.

How how did most how do you. Most of them grow up. Most of the companies that you’re meeting, you know, do they do a preseed or did they maybe are they new to venture when you meet them? Yeah.

The vast majority have raised somewhere between 250 and five hundred thousand by the time they get to me. Some of them have crowdfunded. They use that really effectively. And that’s a really interesting more than much more than I think.

Tech companies, these these types of companies tend to bootstrap because think about it. But these days, you know, I’ve been in this world for so long. Twenty years ago, you needed to build everything and helps. Right. There was no Shopify. There was no social media. There were no 3p ls right. All of these costs that have come down precipitously have allows companies to scale or at least get somewhat product market fit before they really go in and take a lot of capital.

That didn’t used to be the case.

One other thing that you said to me, because I was asking you about a particular investment opportunity. You said, look, you don’t like investing when there’s a product. If there isn’t a brand, a platform, something more there. How do you know when something can be a platform? Like what does that mean to you? I guess, yeah, it’s a great question.

And I should. Say it doesn’t mean that that that single product companies can’t be remarkably successful because they can. They absolutely can. Look, look, look, look around. Anywhere you look, especially in homes, you can certainly have companies that have done extraordinarily well with one product. And maybe they go on to have a couple of others. But it’s really a product focused company. It’s just not what I’m particularly interested in. I, I really get behind and get excited by companies that are built on values.

I think today’s consumer, particularly the younger consumers. But I think we’re all kind of getting there now. We want to use our wallet to shop with brands that support what we think is right. This younger consumer is far more interested in things like sustainability and impact on the earth.

You know, the type of labor that’s being used to supply chain far more than than consumers in the past to them. And I I think it’s fantastic. I think it’s great because I think capitalist power and consumers are exerting the power that they have and should have.

Got it. OK. So that’s some about what you’re looking for.

I could ask a lot more questions.

Let’s talk about how you’re actually helping these companies as they go through scaling. And, you know, I’m specifically very interested in what sort of the playbook is and where you think that playbook is going.

I think team and recruiting is is something that I am particularly interested in coming from my days of operating. Saw how much leverage you can get out of having the right people in the right seats. So I think that’s probably the first thing. The second thing that I’m particularly interested in and I think these companies need support on is just an a fanatical obsession around the consumer and exceeding consumer expectations. Today’s consumer is so savvy and has they have so many options as they should.

They can pick and choose. So really understanding. And the great thing with digital brands is you get access to a ton of very rich data around around your consumers and you can see things that physical only brands really can’t see. 

There’s certain things there around knowing their customers that are non obvious or that you see some companies doing really well, that other companies aren’t doing as well.

You know, you’d be surprised at how many companies don’t just actually talk to their consumers. You know, I it’s probably one of the first questions that I ask. We’ll be in debate after debate about what’s going on. And, you know, my question will be, have you randomly selected 50 customers and just called them literally just just called them?

It’s the greatest source of information. And many don’t do that. You know, you don’t have to go out and spend a fortune on consumer insights and all of these different databases of, you know, prescribed information about your consumers. I think having that one on one connection with them and just randomly having the conversation can be incredibly informative.

I also think putting a a a framework around how your consumer makes their purchase decision and how your consumer values, your brand, what problem it is, is that are you solving for your consumer really getting deep in on that? Often I think we have our own ideas around what problem solving. And then you talk to the customer and it’s actually quite different. And so I think that that adjusts kind of the hierarchy of messaging, of how you build your brand.

I’ve heard people say, well, the reason, one reason to open an online presence. Is because it gives you the chance to know your consumer better. I never totally understood that because online I have so much more data at my fingertips. But maybe that’s why do people go off line?

What do you coach people now about when they should go off line and why?

Yeah, I think it depends. There’s no one said answer. I think it depends on the category. I think it depends on the environment. I think it depends on the opportunity. I think it depends on how much capital is going to be required. I think it depends on strategy, what you’re what you’re trying to achieve. I do think that you that the most successful brands are aware that consumer is the consumer doesn’t get up in the morning and think, oh, today I’m going to be an offline shopper and tomorrow I’m going to be an online.

You know what I mean? Like Batel there, we need those terms for our own, you know, our own internal structure and how we think about it and how we how we allocate resources. But the consumer doesn’t think that way. The consumer just wants you to be wherever she is.

So, again, I think it comes down to knowing your consumer what she will value, where she shopped, what brands are aligned, where where do you want to be and what you’re hoping to get out of it. I’ve seen strategies that some brands simply are looking at and looking at it as a marketing expense.

And as long as it breaks, even they’re fine with that because they believe that the brand halo or in fact is sufficient and they can justify that expense. They don’t want to lose money, but they’re fine if it breaks even. I think that that’s interesting. And I think that that’s good for some of these brands. Others, which are more highly dependent on physical distribution, need them to be moneymakers. So that would be a decision, a different set of criteria and decisions that those brands would go through versus, you know, a brand that is ninety five percent online and simply wants to flagship stores, one in New York and one L.A., one in L.A. for marketing purposes.

It seems like it’s getting more and more expensive online. So maybe that’s your point. Do you know where your customers are? First and foremost, yeah. Yeah. I mean, the paid acquisition has never had the consumers that you acquire through nonpaid have always been more valuable.

Think about as you’ve got these concentric circles going broader and broader, you’re right in the center. You know, your first few circles, they’re going to hear about you because you happen to live in their sphere very directly and you’re catering exactly to them. And they can become your ambassadors, right? They become your evangelists. They’re the ones that you want to figure out how to make so happy.

And they go out and tell the world. And so they’re there. They’re, in essence, an extension of your brand. There’s not like there’s not a billion of those people right there. They’re very limited. So then you have to then you have to figure out what’s what’s your second degree? How do you attract them? And it could be through these evangelists. It certainly can be through paid 

My concern with, you know, like a Facebook, the Facebook advertising or Instagram. I’m just not actually sure how effective it is. I see it’s very expensive. And the way that Facebook likes to attribute it, it gives them very, very, very considerable attribution.

Like, I think 30, 60 day windows, which is a little bit ridiculous. But I do think Facebook today, I see it acting very in a very similar way that TV of 10 years ago acted. It tends to lift all channels. So, you know, I can’t say with complete conviction from a data perspective that that’s that is that’s happening. I believe that to be happening and I’ve seen enough of my company is kind of lower and increase their Facebook spend and kind of corresponding effects on all channels.

So I do think it’s acting as as as as kind of this enhancer of other channels. That being said, not everybody’s on Facebook. You know, GenZE is probably not hanging out on Facebook. My new obsession is tick tock, like I’m obsessed. So I’m trying to figure out, you know, and it has a different nuance to it than Facebook or Instagram again.

Do do a lot of your companies work with influencers? Is that do you coach them on that? Some of them take best advantage of that.

Yeah. Again, I think it depends. I mean, don’t forget, I was with Brian when he launched ShoeDazzle with Kim Kardassian, who isn’t? You know, I would say it’s probably like the Oji influencer. That was back in 2008 and Brian did a phenomenal job with that. I mean, that was just that was extraordinary. Kim’s brand, I think, was very highly aligned with the shoot as a brand and her and it was something that her customers really want.

I’ve seen disasters, you know, in other situations where, you know, companies are just trying to throw talent or influencers at a brand and it doesn’t make sense whatsoever. And there’s like this cognitive dissonance with the. Consumer goes and says, wait a minute, why is this individual ripping that branded complete? Doesn’t make sense. It backfires and it’s a waste of money. I’ve seen the trend has been, I would say, in the last few years to move more towards micro influencers.

There is a general trend happening now, and I can talk about this because I’ve spent far too much time on tick tock. Tick tock is really a platform for the people. And so, you know, if you can think of Instagram, is that perfectly picture polished view of everything’s perfect, whether you’re an influence or even a person like everybody’s life is perfect. I mean, it’s it’s it’s it’s so deceiving. Tick tock. On the other hand, it really is built around, I think, to the everyday person.

And I think we have moved from a trend wise to that. I not sure the celebrity culture is going to be what it was beforehand. I shouldn’t say that because I work with a lot of talent.

If someone’s at one to five million when you invest run rate, how what’s the next stage? How are you? How do you think about the stages after that? Not just from a funding point of view, but grow?

It’s not that it’s exactly this, but in general, you know, brands that are doing it’s going to be more more frequently kind of one, two, three, one, two, four.

They raise a seed. The seed could be anywhere from a million and a half to three. That’s a typical seed valuation is going to be anywhere from, say, five to 10 roughly. We are trying to stay super disciplined around being sub 10 for us the next round. They’re probably going to raise in general five to seven. My guess it’s going to be they’ll be doing eight to 10 in revenue and they might raise anywhere from, let’s say, 20 to 30 pretty money valuation.

That’s kind of roughly where I see it. And then after that, many of these brands, you know, I I want to push these folks to get to profitability sooner rather than later, at least on a on an order basis and ideally, you know, contribution level. So, you know, getting them getting them to that point, they can either if some of these brands are selling at that point in an M&A, they get to 30, 40 million dollars revenue and they’re either break even or slightly positive.

And the acquirer knows that with scale their margins, their operating margins are going to be more they could sell for a very nice multiple. And in the M&A market at that point, or they could take in a growth round from private equity, from a strategic sometimes even a family office.

Are there other any other big things that changed between the way a company looks when it’s a one to four million dollar company and the way it looks when it’s a 10 million dollar company? 

You’re going to see margin improvements across the board as you scale just because you’re going to have the volume of goods.

So you can negotiate better rates for your product margin. You can negotiate better shipping rates for your grip that goes into your gross margin. You’re a three people. You’re going to have greater volume. You’re going to figure that out. Your data is going to be better. It’s going to decrease their their work requirements. So you should be able to negotiate better rates there. So there’s a you know, it’s an ongoing process, always trying to bring your costs down as you scale.

That never ends. 

I’ve been dying to ask you about what we’re seeing today with some of the sort of darlings of the e commerce world, the online e-commerce people, and, I don’t know, brand lists maybe out of voices like what are you taking?

What are you seeing when you look at these companies?

Well, let me first say it’s very easy to be an armchair critic because I know I’ve been on the other side of it and I know it always you know, it’s so easy to be on the outside looking in saying, oh, my goodness, like they did this wrong. They did this wrong.

I think, for a lot of it comes back to my personal thesis around how this category of company, these consumer brands, digitally native consumer brands, how they should be valued and how and how they should be capitalized, meaning how much capital they should be bringing in and and really much more quickly they should get to profitability.

We should be backing into the valuation. Really like, you know, where do we think that this company is going to end up? We know from the data that a successful exit, the vast mass majority, are going to happen in a day.

Right. Two hundred to five hundred would be a fantastic. So if that’s the case, you know, any venture investor going in with, you know, where the three hundred million dollar pre money valuation? Well, they’re not going to be super happy with that exit. So they would have to really believe that that is going to be a billion dollar enterprise value when they exit. That’s possible. It does happen. We do see it. You know, we do see some of these companies going public.

It’s just not the norm. So when you think about a portfolio construction model for a v.c, they they they’re counting on a couple of their exits being this billion dollar exit.

So I completely understand that. But we can’t force that thinking into what we know, these how these consumer brands scale and naturally exit. Right. We can’t we can’t say, oh, no, we need that. So we’ve got to figure out how to make you that. And, ah, that’s not going to happen. Right.

So you’re saying the model is a company that’s maybe doing 40 million in revenue, that’s looking at a couple hundred million in as an exit in an M&A sort of situation?

That could be an option or it could be that it raises. Right. It could raise it, do it big growth round. But then but then whoever comes in that that investor and it’s if it’s a consumer brand, it’s probably going to be a private equity investor. Not always. But probably they’re going to want at least a three to five times return. That’s what they’re going to model out. And I think consumer brands.

I think they’re just very different. I think they they grow in scale very differently than assess company. And it’s not logical to me that we assess them and have the same sort of expectations when they’re fundamentally very different companies.

Yeah, well, that leads me to one of my I’m super interested in some of the stories of how you grew in scale, either NastyGal or ShoeDazzle, but maybe like NastyGal, you took it to 100 million in revenue company right when you were there.

What? Yeah. Well, what what what were the good parts? Were the the tougher parts?

Well, I joined Sophia. She and Sofia Amoroso was the founder of NastyGal, and she had built this really beautiful brand. And I credit Sophia with bringing this aesthetic and this brand online where nobody had done it yet. 

For a long time. She wasn’t even producing NastyGal. I was even producing their own brand. It was you know, they were just curating other. It was really a retail play. But because she did it all online and she did it under the brand of NastyGal, she was one of the first, I think, to be able to create a brand around, ostensibly a retail play.

And that was you know, I really credit her and her early employees.

And that company just took off beautifully. I think the challenge, the challenge came in. You know, we raised at a pretty high valuation. I would say over the years the competitive environment changed.

So, you know, there was a lot of focus on NastyGal, Ellen lot being written. And when a lot about the success of it. And so that welcomed a ton of competitors. I would say that, you know, we probably welcomed in 10, 15 and 20 competitors and a lot of the time they were selling exactly what we were selling and simply undercutting us by 50 cents. 

We invested a lot in trying to build our own brand. And that cost a lot of money. I’d say operationally we spent too much. And I you know, I take full responsibility for that. I think we had raised a really big round. We spent too much. We’ve probably spent it in the wrong ways. We weren’t focused on nearly as much on profitability.

Is that today to do it again? I would certainly be focused on. But, you know, there’s a lot has been said about NastyGal. Everybody wants to come up with this. It was this. It was this. It wasn’t. It was. It was. There was a whole bunch of things going on. Things are changing all the time. That’s the world of early stage.

Yeah. And, you know, in addition to that, not just did the business struggle, but Sophia got so beat up in the media.

Oh, my goodness. I mean, it’s still it’s so trapped. I mean, it’s just it’s just tragic. It’s quite upsetting. It’s quite upsetting. Yeah. I mean. Well, yeah. Go ahead. I’m sure. Is your perspective on that. Yeah.

Look, it’s I think it’s super unfair. There was so much speculation. I think I think we live in a weird society where we want to, you know, we want to put people on pedestals and everything’s great and everything’s great. And then there’s a misstep when we want to pull people down. You know, so, so strongly.

And, you know, frankly, I think women get it harder. I really do. And I think it’s completely unfair. And it got deeply personal. You know, it used to break my heart just reading the articles that were being read and the words that were being read. I mean, they were vindictive and mean and personal and completely unprofessional. I have no issue at all about talking about or even speculating about what went wrong or, you know, what decisions, because we can all learn from that.

But, you know, and she was often eviscerated. 

But then when you’re investing in companies that are built on values and this is some of what you’re looking for, sometimes that gets very infused with the founders themselves. Right.

I mean, it’s an interesting question. I would say at ShoeDazzle, we frequently had the conversation around the need to separate the shoe dazzle brand from Kim’s brand that that the company had to stand on its own. And I would argue that we were successful. I mean, the company is still around today. And Kim’s not involved.

And I’ve heard Gwyneth talk about Goop and how she really wants some Goop to stand on its own. And to be honest. I think she’s actually done a really good job about that. I think Goop’s brand is powerful. And it does stand on its own. And whether or not you’re a fan of Gwyneth, it is almost it doesn’t really matter.

You can still be a fan of Goop. I think that’s the place to be.

And and on the on on your front.

Who do you go to for advice? Like where how are you navigating your own career?

Oh, my. Gandules here. What a great question. I have a lot of friends and lot of colleagues. I have for our very first close, we were very fortunate to have extraordinary LPS you know, some fund managers, some really well known fund managers have joined us. Individual M l PS They are an extraordinary source of mentorship questions sometimes as just questions around fun mechanics and they’re very helpful there. So those folks I have great female friends and colleagues like yourself.

I mean, I’ll be calling you for sure that especially in the investing world. You know, there’s not too many of us. And I think that the more that we build our own community and reach out to each other and support each other, that’s very that’s very helpful. Again, you know, a lot of these are uncharted territory.

So I think the more that we kind of get together, band together, create community support, one other, we we can encourage other women to come. It’s hard.

Absolutely. That’s why I’m really excited about Willow. I would say that mentorship is great. But actually, when you can have women who can make investments with capital behind them, that’s huge. It’s. It’s game changing. Well, great. Thank you for coming on the show. And I’m. I’m so excited for Willow to be part of the L.A. ecosystem. And congratulations.

Thank you so much. I love it. Happy to be due to show anytime. It’s a lot of fun.

Don & David — Global Founders Capital (GFC)

Don Stalter and David Resnekov are colleagues at GFC (Global Founders Capital), a $1.2B fund that will invest pre-product all the way through later growth rounds and will even lead multiple rounds for a company.  Interesting, entrepreneurial approach to VC.

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Today’s show is going to be twice as good because we have twice as many guests. We have David Resnekov and Don Stalter from GFC here. David is our local GFC colleague in L.A. and Don Stalter is the U.S. partner for GFC responsible for all U.S. investments, as I understand it.  GFC is Global Founders Capital, which is a $1.2 billion dollar fund, but they write seed and pre-seed checks and then continue to invest in later rounds. David and Don, thanks for joining me.

So let’s start with David, I’d love to hear from you some of the basics of GFC. What size checks you guys write? How many investments per year are you doing? And a little bit more about your follow on investing strategy.

Of course. So I intend to check size. I mean, you know, we will write checks anywhere and precede around from hundred K all the way through multi-million dollar checks. You know, as rounds progressed. So the idea is for us to back is really, really strong entrepreneurs on right when they’re getting started with the idea of investing around after that, you know, all the way through IPO, M&A.

But you. We have no problem in, you know, leading multiple rounds in a row. I think that’s one of the big things that’s going to separate us from our other funds. And yeah, I mean, past that, you know, just so just pausing on that.

Supposin that’s a most people. I mean, there are other lifecycle investors, but usually if they do the A, if they lead the way, they won’t lead to B. And that’s why you’re different.

Unlike other funds, we don’t have strict ownership targets for our initial investor. You know, we don’t need to grab the 15, 20 percent, you know, whatever the whatever the target is upfront. You know, our idea is to really build with the company, you know, and we partner with a debt fund as well.

So we really think of ourselves like the one stop shop for startups when they want to work with us. And, you know, we’d like to have a very much a working relationship with the company flew back around their capital needs. So just want to always have an open dialogue around, like, hey, look, like, you know, if we get this many dollars invested and get us to the next step in the lifecycle, you know, that’s really the conversation we want to have entrepreneurs.

Got it. 

So it’s like when we were talking with Greycroft, Greycroft says that for under a million dollar check, they don’t need to go to their investment committee, which I thought was interesting.

Do you guys have. So, David, if you get excited about a deal, do you immediately rope in Don? Do you guys rope in other people at GFC or how does your sort of how does the process work? If I’m an entrepreneur approaching you for a an early, early round. Yeah.

You I think one of the unique things about GFC is just the level, just how entrepreneurial entrepreneurial we are as a fund. 

And I think, you know, very much that’s just empowering everybody to really pursue the deals that they capture to them.

So I guess a typical process would be, you know, if I if I meet an entrepreneur, you’ll have to have conversations with them, especially in the early stage. You know, we like to have multiple people from our team. So you’ve got a potential investment. You know, assuming, you know, everything is checking out, then. Then we’ll loop and we’ll loop Don, you know, other members of the organization at large.

Can I get anybody together on a on a final call and then we’ll come to a final decision. Yeah, dad. I can kind of elaborate a little bit like I would say, if the deal is kind of very vertical specific, if it’s like a health care opportunity, for example, we have a health care head now, Sean, based in San Francisco, or it’s a deal’s got an orientation towards France, for example, you know, with members of our French team or Germany, for example, if it’s a cross-border deal we have now, we have Israel partner.

So we have, you know, geographical as well as vertical expertise. and how many people then Don are part of your team?

Yeah. So on my team here in the US, we have five folks. We also have a roster of really awesome interns.

I don’t really know how many partners are at GFC?

Yes. Globally, we have more than 10 partners. And we have partners across Europe. We have partners across Asia. We have partners in Latin America, Canada. You know, the businesses is growing and it’s really, really exciting. And I think, you know, the ambition is to be able to look at a deal kind of in every every corner of the galaxy. That’s how I see it. Pretty exciting.

That’s great. That’s great. And so if you’re leading a deal, let’s say in L.A., for example, does someone have to pitch to all of the partners or does it go to you? And as David said, you’re entrepreneurial. You get to be empowered to lead the deals in the U.S. You want to lead. And are you responsible for all the US? I said that there was no that was so.

The way that it’s set up is, you know, our partners or partner in Israel, for example, if he finds an exciting opportunity in the US, you know, maybe it’s something that we’ll collaborate on. But effectively, like he’ll, you know, take a board seat. You know, folks from our French team or German teams or teams like all over the world, like they can do deals kind of anywhere, which is very, very empowering.

That’s cool. And do you guys all come together or does does is it Oliver Samwar or does he run into you? How do you all stay coordinated, I guess? How do you do collaborate?

We collaborate on almost a daily basis. We also have the opportunity to collaborate with our debt fund on a daily basis. We can bring anyone we want into kind of the IC.

You know, I think it’s it’s something where if we want to be strategic, we want to be thoughtful about making sure that the founder really understands us and the value that we can provide.

Then we’ll we’ll host them with the people who can support the business.

That’s that’s really it. And I think, you know, all over and, you know, the. Samwars. They make themselves available sort of at any point in time, which is absolutely incredible. I’m super intrigued. I mean, I. They are sort of larger than life characters in my brain at least. 

I think, like, you know, while we’re an institutional fund, we very much actually can entrepreneurial fund where, you know, instead of being, you know, financial engineering oriented organization, although we’re capable of that, you know, we’re not you know, we’re not necessarily trying to kind of squeeze out a return or, you know, trying to optimize.

Instead, we’re trying to really support the founder every which way.

And so if I’m looking to raise my early-stage money, you guys will come in. Product at times, right? Absolutely. Yeah. That’s great. There aren’t that many people who say that.

And then the idea is that they do you think about your reserves strategy in the same way that someone else would?

I mean, I think the opportunity to provide additional capital to a company, you know, in in the cases, you know, need or in the case of, you know, additional acceleration, is is there. we just want to be able to support our companies and back up the truck when it when it needs to be the case

And how many companies do you have in your portfolio now? And also, is this are you investing right now at a fund I or Fund II.

I’ve forgotten that you might have a lot of companies eyes were wrestling out of one fund. And we’ve invested in I want to say, I don’t know, David, maybe one hundred and twenty companies. I haven’t really double clicked on that for a little while. We’ve been so busy.

But I think we’re up to about 120 in the U.S. at this point. Wow. 120 and that’s in this one fund. Mm hmm. Mm hmm. And is and maybe you explain it to me before but is your one fund. Is it? It’s all one pool of capital.

The one point something billion is one pool of capital that the Israeli people, you know, all around the world.

But the hundred twenty companies are sort of in your within your pool sort of pocket.

I mean, a sensible way to think about it is like we’re managing them. You know, we’re it’s we know you bite off more than you can chew if you don’t have kind of the right focused team for a particular kind of portfolio. And and I think we’d be very, very overwhelmed if we didn’t have, you know, the team that we have in place to manage this portfolio.

Yeah. I mean, I think I told you that my impression of David. Sorry, David, but is that you’re always on the go. You’re always moving.

And I think if you’ve got a hundred and twenty companies, your portfolio.

 

Explain it. Do you have any, like, words of wisdom for other VC funds that are trying to manage huge portfolios?

Because you guys must you know, you have a large portfolio for a not huge team.

I mean, one thing I would say and David, you know. Let us know what you think. But you got to really, really, really love what you do. You know, that’s true. Yeah.

That’s good. Totally. I was just talking with someone about burnout and I was saying burnout does not happen by working really hard. Burnout happens when you’re working really hard and not loving what you’re doing and getting frustrated. Yeah.

I think luckily we back some pretty awesome people, but it was really like a ton of fun to work with. So, I mean, it’s just fun at this point. I mean, you know, as we as your portfolio matures, it’s been it’s been very rewarding. You’re saying that companies grow along with. That’s great. I’m so in L.A., David, you’re now in L.A.. But I think you moved from the Bay Area. Is that a true statement?

Yeah, yeah, absolutely. So when I first joined GFC, I was in the Bay Area with Don and then I’ll be back in May last year, something around like somewhere on that move down to LA.

Got it. Great. And so you guys have a fairly GFC has a fairly heavy LA presence, it feels like, because Sarra is also in L.A.. You know, are there are there for a large global fund?

Why spend so much time in L.A.? Yeah.

Oh, so one L.A. is just an amazing place to be

But do I think, you know, we’re we’re very much making a bet on L.A. as an ecosystem.

And then also it’s just very exciting to be able just to backs companies that have a competitive advantage because they our based in LA. I mean, if you look at our portfolio, you know, something like the Skills, which is like an e-learning platform both times. Vladek knows that every contact leads to that. You know, it’s a business that very much should be built a way Mothership, which we’re really excited about. You know, last mile logistics very much should be in L.A.

Prema that as a lifestyle brand deathwish be in L.A., Italic also there should be in L.A..

So so you’re somebody there is there are you know, L.A. has one of the what, the largest port in the U.S. So a huge need for logistics. Amazing media presence. So there’s some companies meant to be in L.A..

Do you think? And yet if you look at like absolute number of dollars or number of companies, L.A. is dwarfed still by the Bay Area. Do you think there’s certain things that need to get going in L.A.?

Where would you say the lever, the biggest levers are to really catalyze the L.A. ecosystem? I think we’re going to see it more and more. Given the amount of exits that have happened recently, large exits from L.A. companies, but I think just really giving that sort of underworld of angel and precede financing really established is going to help a lot. I mean, if you if you spend time in the bay, you know, you’re just inundated with just everybody is an angel investor.

Everybody’s investing in their friends. Yeah. Many I’m sure you saw coming out of Google, you know, somebody leaves Google and goes and starts something. You know, they get their friends and Google to invest in it, get them off the ground.

You know, at least I haven’t found out that’s happened in L.A. It leads to the greed to the degree it’s happening in San Francisco yet.

And so as that starts to change and it is changing and as tech becomes much, much more a part of it, I think we’ll start to see that transition.

Maybe I’ll just turn this to Don. Don, your background, you came in contact very early with the Samwar brothers. 

Tell me tell me about the history there. Yeah.

Like, OK. So I was working with the Growth Equity Fund in London. I moved I was in college in Berlin during what I was at the University of Chicago. And I learned German. I loved Europe.

Through one of our managing partners met the Samwar Brothers in London and it turned out that they were building a variety of different businesses. Those are early days. I don’t even. Not entirely sure it was Rocket Internet. It was just more scrappy entrepreneurs building these businesses and was brought in to help build a company called CityDeal, which we started in London and in Berlin.

And, you know, effectively it was a daily deal website, but there were a ton of those kind of at the time off the back of the success of Groupon and LivingSocial in the US. But even if you came to you, us at that same time, like there probably 20 or 30 other similar businesses across California, New York, the Midwest, kind of everywhere. And so, you know, it was very, very opportunistic and very smart in terms of the timing.

I kind of enjoyed the buy side, but literally this was right off the back of the financial crisis in 2008. And our pace of investing was not fast. And I wanted something fast. And so know I was in my mid 20s and I wanted to just do something, not something out of a park type story. And it was just like invigorating to work with such great operators.

And we you know, and this was you and one of the Samwar brothers. We’re starting out in the early days. Yes.

And Chris Moore, who started AutoOne, which is like a large used car marketplace in Europe. Don, don’t don’t forget, I know a lot about used car.

You. So you do. I know you is an amazing guy.

And it was just like a roster of like amazing people. And you know, what we ended up doing was you can see all the news and Republican race where we actually use roll-up. You worked with Groupon and then you know their businesses across Europe and Italy and Spain, in Eastern Europe and then in Asia where, you know, it was like, come in, let’s figure out if it’s the perfect fit.

You know, let’s streamline the business and let’s turn this into a global sort of behemoths. And then at the same time, again, all you know, in Business Insider etc, LivingSocial was nipping at our heels to put it lightly. Erin Battalion, the CTO at the time, was sort of constructing strategic angles on taking over the universe with LivingSocial. And so it was it was almost like a fairy tale. It’s kind of amazing. It was a totally amazing experience.

That’s that’s my reputation of rocket area, and I think you’re saying this is a little pretty Rocket days, but that they have this amazing ability to execute an amazing operators who just turn these businesses, you know, into these huge growth engines.

Well, it was a lot of that strategy. Well, a lot of those businesses roll up plays or where they operationally intensive. And did you get any operational ball, you know, playbook handed to you?

Absolutely both. I think the thinking process that is sort of I subscribe to sort of the playbook that I subscribe to is around just really tracking metrics.

And KPI is from the very second that you start something, the very second that you spin up an internal or external function, meaning like you’ll have time series data or you’ll have data to make key decisions within the first month, two months, three months that you’re iterating on a business and you’re making smarter decisions. 

And in KPI is aren’t just GMV and net revenue and they’re not just PNL. You can be creative around your KPI as you can be creative around your OKRs.

RS I mean, you were at Google Minnie, so I mean, like you’ve seen this. It’s it’s that you can create a lot of ways to measure things. How did you get that wheel spinning enough to actually have the metric to measure?

Yeah, I mean, we were super creative. One of the kind of funny stories back in the day and, you know, Chris couldn’t corroborate this is you know, we when we stood up the Web site, we wanted to drive traffic to the Web site. And I remember going out and taking ten thousand pounds out of the bank and your British pounds GBP and buying Starbucks gift cards and then listing them on the website for a fraction of the price that I actually paid.

Chalk it up to marketing budget. But, you know, we acquired a lot of traffic and we managed to sell quite a few vouchers.

So just saying, oh, we’ve got a deal at Starbucks today, had that good strategy.

I think we did. We accidentally did some of that Shift selling, you know, ten thousand dollar cars for nine thousand dollars.

But we’re giving people a discount, you know. Got it. OK. So you you really got to know you got to know the Samwars really closely then. And how related is GFC to rocket Internet? Like it’s got I still it still has. Oliver is still running GFC, right.

Well, it’s separate, but I would say, you know, if you look at, you know, rocket Internet to a public company that owns your variety of e-commerce businesses and portions of those businesses, et cetera. I think you were a private capital fund and you were exclusively focused on investing. You know, that said, like we have the resources of a Rocket Internet to help support the growth of businesses, 

There’s no like rhyme or reason, I would say, to like a conveyor belt out of business necessarily. Like we believe that everything should be done in a customized, curated, you know, ad hoc fashion. 

I think I’m just like incredibly proud and excited to be part of this amazing team. And I think, like, we’re a global family. And I think, you know, our goal is to be a genuinely supportive and help people succeed, because that’s the most fun thing that we possibly do. 

And so, David, let me bring you back into this. Like, how did you get it? How did you end up at GFC? What was your process like? How did you guys meet? Yeah.

I said it’s a very, you know, San Francisco Tech scene story, I guess. But as I was in a different fund for a couple of years called Green Beiser Capital, I said early stage contact find in San Francisco. And you just through sort of the San Francisco Tech network, actually met Don at a happy hour one day.

And I think, you know, it must have been probably six months that I know we just ended up being on the same networking events, dinner parties, all those sorts of good things. And we got to the point and I really enjoyed working with him. I mean, I think the GFC way of investing and now you get an opportunity to look at just about any type of deal you can ever imagine, ever, you know you know, you don’t any geo you can imagine.

It was very cool. And then so. And the upkeep presented itself hopped over.

That’s great. And do you think, like for you personally, do you do it with their learning curve from where you were in terms of our things done differently? You know, are you looking at a different stage, companies, anything like that?

Yeah, actually.

So, you know, I guess one of the big learning curves, I think there’s just times with time is because we are so generalist, just kind of get, you know, internal benchmarks in my head.

And I like if I’m looking at an Ecom company vs. fintech company vs. a SAAS company, whatever, the case may be, just kind of getting up to speed very quickly on what is a right sort of company for GFC. 

Can you share more on that? Because I think that is a challenge for entrepreneurs. Then also to know, yeah, if I’m an e-commerce company, what are the nuances that that make it more of a GFC sort of company?

So my feeling is if we feel like we could work with the founder operationally day to day, then that’s business that we would probably want to invest in.

And that sounds. Cookie cutter, potentially, but that’s genuinely how we feel. Yeah, I have the same feeling, but but the feeling of who you want to work with, like I notice at TenOneTen, we really like working with nerdy people or I do at least when you say people you like to work with.

Do you have certain types? You’re like. Yeah. This is a consistently good. Type. Like Ben Savage at ClockTower. I was like. He likes investing in associates from VCs firms who’ve left to start companies like that’s a that’s a persona he likes.

Do you have any of those? I thought, partner. I mean, I think like for us, it’s just about it’s about alignment. Like, do we feel like it’s someone that we could spend time with that we would enjoy working with? I think nerdy founders. I think absolutely. I think, you know, super friendly founders. Absolutely.

Like, you know. Can you sell? Can you sell? Do you have charisma? You know, like quantitative metrics driven founders, you know, it gets us very excited. I think the one thing that I think is really important, especially in these sort of oddball times, is these tough times is just resilience. And I think that’s something that we sort of try to really attribute to the founders that we’re looking for right now.

How do you help build resilience, if you will, because you said that was a key characteristic.

And maybe some of it is talking and listening.

I think it kind of is. I think it kind of. Yeah, I really like talk listen, because we’re we’re out in the world of investors all day long. And then, you know, entrepreneurs are hunkered down, focused and, you know, so we can we can share information. We can create a certain level of transparency, predictability. And and we can I think we can help build, you know, if not if not resilience, a certain level of like transparency and confidence around what’s going on.

Yeah. Yeah, it’s a it’s been a mix, though, talking to people about whether they’re. You guys are still investing right now through the crisis, you haven’t sort of had to set down things. Everything about valuations differently.

Yeah, we’re probably a little bit more thoughtful. I think. And one of the things is it’s harder to do diligence when you’re not able to visit an office. And you know, when you’re not, you’re not able to. It’s it’s hard to extract raw data analysis and times because it’s a business that services restaurants or whatever those restaurants might not it provide the data. And so, you know, there’s a whole variety of different kind of challenges. But we’re still we’re still we’re still active and we’re very excited.

Great. So as far as just onfor, there is an L. It sounds like you’re still open for business. Is there any distinction about what you guys focus on versus like? Sarra is also in L.A.. How do we know? Doesn’t often or know if they have a certain sort of company. It’s it’s a to go in this direction versus that direction.

I think we’re all working together and like looking at different things together. But I think it’s more like, how do we how do you manage and how do we manage the pipelines? How do you manage the portfolios? 

You know, it’s a software business. You know, maybe Kendrick out of San Francisco, for example, is a good supporter. It’s an open source business. You know, in particular, if it’s a healthcare business and maybe it’s Traum. So I think it really has to do it’s like, you know, just the ability to help manage and support that portfolio. It until I didn’t really get too much of your guys’s backgrounds. I don’t want to miss out on that.

I don’t know where you from. As I was asked, what are your parents do? How do your friends describe you do?

Give me a David on the spot.

Yeah. So I’m from Chicago originally. So my mom is a public defender. And my dad runs he runs his own business. He has for as long as I can remember. So I stayed in the Midwest for college. And in college in Ohio. And then immediately went out to San Francisco. And now you are investing. So I was going to ask the how do your friends describe? Because I love that question. But really, I should ask Don, how do you describe David?

David, how do you describe Don?

You start do it or should I call it? I mean, scrappier is Hosler, I know. That’s why I keep saying I’m crazy all done. How do you find all these good deals?

Yeah. I feel you’ve got to be pretty scrappy hustler in this business. It’s actually surprised me how much it is. A scrappy hustle sales business.

And Don, you’re also Midwest, right? Your Minnesota. I’m from Minnesota. So cute, efficient. And.

I mean, does that make you nice? Are you nice? It’s just like being from Canada.

I think so. I try to be nice. You know, I try my best, you know.

Well, where? Tell me more about your background.

Well, we like in high school was I like I was I played a lot of videogames. I love online games. I sold enough in the way of virtual items on eBay from a game called Ultima Online to buy my first car. 

David, I see you around a lot, Don. I see you in L.A. a fair amount, too, which is exciting to have such such a good presence from GFC. But so I’ll just wrap up and say thank you guys for coming on the podcast.

Thanks so much, Minnie. This is awesome. It’s so much fun.

Brendan Wallace — Fifth Wall

So interesting talking to Brendan Wallace about how he built Fifth Wall to $1.2B in 3.5 years.

We talk about how the retail landscape is changing, how the work week will change and hopefully how the carbon impact of real estate will change. 

 

View Transcript

So excited to be talking to Brendan Wallace today. Brendan is the founder and managing partner at Fifth Wall. Fifth Wall is one of the largest, if not the largest, active venture fund in L.A. They’re investing into technology for the built world out of three active funds a real estate tech fund, a retail fund, and a carbon impact fund.

And Brendan and team built this all over the past three and a half, three to four years. So really rapid growth. Really excited to have you on this show. Thanks so much.

Yeah. Thank you so much for having me. It’s a pleasure to join.

So I was really excited.

I am really excited about sort of the implications of real estate and how we’re all going to return to work. But before I get us off on that topic, I want to make sure that I got the basics of Fifth Wall correct. And maybe you could tell us a little bit more about your funds and what you’re investing in to. Sure.

Yeah. So Fifth Wall is a venture capital fund that invests in technology for the built world.

So as as we define that technology, that’s strategic for owners, operators and developers of real estate assets. And so that’s a pretty broad aperture. And you talk more about the components of that.

But, ah, I think what really makes us unique is not just our our very intense focus on real estate tech, but rather the way we’ve constructed our fund, which has been very different than how other venture funds are typically capitalized. So we’ve raised about two thirds of our capital from the largest owners and operators and developers of real estate who are themselves the largest customers, the most desired partners, the distributors for the very technologies we invest in. And so our model is to engage with those real estate owners and say, you know, what do you care about?

What’s a tech pain point for you? What’s a tech opportunity for you? And it I think the most interesting thing about that model is that most venture funds, that the challenges, they want to stay small.

Right. There’s kind of this inverse relationship between the size of your funds and your returns. We have kind of a unique dynamic in the sense that we actually have network effects, meaning the more strategic LP is that we work with, the more relationships we can build, the more kind of areas and scopes of technology that we can look out for them. The deeper those relationships become with the real estate corporates, the better the distribution advantage we have for early stage companies.

And I think that we’ve also talked about is a lot of what you’re investing into. It’s not heavy on the technology risk so much as the distribution risk.

That’s right. You know, real estate is an industry that it sat out a lot of innovation. Right. It’s one of the lowest spending major industries in the United States on technology. 

What constitutes real innovation in the real estate world is oftentimes very simple, meaning like take how you get into an out of a building? Right. So being able to use your phone to open a door is not incredibly hard technology at a fundamental level to build.

It’s very hard to distribute. And so the characteristic that we see that’s kind of endemic across real estate tech is that the companies are generally characterized by low technical risk, meaning the big existential questions of can you build it? Does it work? Is it better than the status quo? Does it have a positive ROI? These big questions you typically face in other industries in real estate tech? The answer is usually yes. For almost every single company, the risk tends to hinge on can you distribute it?

So it works. But can you sell it to Marriott or can you sell it to Hymes or can you sell it to British land? Our strategic LP is. And that’s really the role that we see ourselves playing in the ecosystem.

Does that change your relationship with the founders or make it different than the relationship between a purely financial or financial investor with financially backed LPs?

It does. I think it offers something quite different. Right. So, you know, most venture funds are what I would call a generalist venture funds, and they’re backed by financial LPs. And it’s not to say they can’t add value. They do absolutely add value. But it’s a it’s a more generic kind of value. And you tend to hear a lot of the same things, which is we roll up our sleeves. We help out our founders.

We help you think through product market fit. We help you with market. And we help you with hiring. All of which are incredibly important. 

But for an entrepreneur who is struggling to sell into the real estate industry, which I think if you talk to any prop tech entrepreneur, that’s all of them. That’s a very hard industry to sell into.

That’s a really welcome message to say we’ve opened these distribution lanes for you to capitalize on. 

And do your deals look like VC deals or there are different components to them, warrants and things like that?

No, they look very much like venture deals that you see in the space. I think the thing that is different is that we don’t spend as much time as, I think a typical venture fund hunting for deals.

Right. And kind of positioning ourselves to get into deals. Most of the real estate tech companies, they do come to Fifth Wall, and that’s the function, I think, of our network. We’re obviously quite large. We have one point two billion under management, but also because we we’ve kind of done this so often. So it’s it’s oftentimes the other way around where we’ll run like an RFP process, a competitive process between many similar startups who are competing for our investment because they want to get access to the same real estate partners.

Oh, I didn’t know that about you. Is that so? Is that like a literally you’ll have like an RFP process where you say we’re looking for someone who can solve this sort of problem because this is what? All right. We’ve done it many times and they don’t mean it in extreme cases, they’re publicized, right?

Press articles written on our RFD

For the entrepreneurs out there who might be approaching, you might see any of your retail fund is you’ll be investing in brands that are digitally native. The going off line, right? Yeah. 

Yeah. So we have Fifth Wall has a number of products. So we have our North American real estate technology funds. We had our first fund, which was two hundred and twelve billion dollars that we raised in twenty seventeen. And then we had our five hundred and three million dollar fund. In that same strategy that we launched last year, separately from that in that fund again focuses on real estate tech.

So the core of I think what most people know us for. We also have another fund called the Fifth Wall Retail Fund, which exactly, as you said, invests in emerging new occupier’s of space. So there’s a lot of mall owner, shopping centre owners, street retail owners that are struggling with the fact that many traditional retailers are not doing very well, especially now, and they need to fill space. And the thing that most people don’t recognize is that a lot of these e-commerce brands are opening stores.

I know that sounds so counterintuitive and it’s totally inconsistent with what you’d read or think reading TechCrunch. But the cost of customer acquisition offline is now becoming more competitive with online because online has become more competitive, offline has become less competitive. So brands like Warby Parker and Bonobos and Casper, they are just voraciously opening up stores and there’s a whole cohort of new brands behind them that are doing the same. The challenge for retail real estate owners is that in the past their job was pretty straightforward.

If you’re in a mall, you maintain 20 or so 200 relationships with major retailers and you filled up your mall. That doesn’t work anymore because, you know, you have to maintain those 200 relationships. And then there’s probably 5000 new brands that are all considering opening their first store. Maybe their second store. And you have to know about them. You have to understand them. You have to understand how they fit in with your existing brands. And so that’s what our fund invests in.

We have raised capital from large retail real estate owners and we identify these new emerging brands. And then our last strategy, which you mentioned, is our Carbon Impact Fund, which is focused on decarbonisation and sustainability for the real estate industry.

So do you think that’s, to stick with retail? Because it’s fascinating right now. If there was sort of a bit of a playbook, which is once you get to a certain size, maybe in revenue online, you start to look off-line. Do you think that those playbooks are being rewritten? And what were they and where do you think they will be in the near term and where do you think they’ll fall out?

It’s just it’s an acceleration of the same trend.

It’s easier than ever before. It started e-commerce company. The challenge is scale, meaning once you get to a certain point, it gets harder and harder to acquire customers online. And most people don’t notice. But even with all of the e-commerce growth we’ve seen over the last two decades and Amazon, you know, much e commerce or online retail represents the total U.S. retail. Now, I’m, I guess, 10 percent.

I was going to guess. Well, I was going to say. Good.

So it’s it’s a crazy stat, right? Because most people in California, New York, they’re like what I thought was like 50 percent, because our experience is that. But, you know, out of every ten dollars that is spent by the U.S. consumer, nine of them are spent off-line and stores. And so, one, you have just a huge pool of capital that’s still spending money off line. You’ve got these rising customer acquisition costs online. And so what many brands recognize is that rent.

Right. So retail rent is a form of customer acquisition. It’s really the same thing as paying for Google AdWords. It’s getting customers to see and experience and potentially buy your product. And as rents have fallen, online marketing costs have risen. And so in many cases, we’ve crossed this inflection point. So we typically saw maybe two years ago is that at like 50 million in revenue? Many brands would say, I got to go off line. That number is getting lower and lower.

Like the first stores for many digitally native brands started online. They’re opening their first store at like 10 million dollars of revenue. And there’s other reasons that I can talk about, you know, understanding your customers better, the intimacy that can omnichannel component of being where your customers are. There’s many other reasons. But at the most essential level, it’s economics. It’s cost of customer acquisition.

Now, I can talk more broadly about what happening in retail in light of the current circumstances we’re in. But that might be a separate topic, though.

Please do so that what we’re seeing in the US retail industry is totally unprecedented. I mean, this is in so many respects. This crisis has had unprecedented consequences. But the idea of just closing retail assets and in many cases indefinitely.

And at the same time that’s happening. You have the biggest one time forced adoption of e-commerce ever. So e-commerce transaction volumes in March of 2020 were up 74 percent over twenty nineteen. And the reason is you couldn’t go to a store, see, in some cases just had to buy stuff online. 

And so you have this almost perfect storm for US retail. And it’s happening at the worst possible time because so many these retailers were already overstored over levered.

And I’m talking largely about the established retail names. I don’t want to name them specifically, but we all know who they are. And you read about a bankruptcy of an established retailer almost every day. But the issue is that too many stores and too much debt. And so they were already compromised. And now this happens. So I think you’re going to see a surge in retail bankruptcies, especially the traditional retailers. And that’s really bad for retail real estate.

But at the same time, I do think it’s this. It can create new life and it can. It can breathe new life into retail centers and and shopping districts that had become antiquated and stale. We now have a once in a generation opportunity to refashion, reconstitute, re characterize what what goes in ah ah ah centers.

And I think that’s a mix of new emerging brands, smaller brands, brands that are harder to access.

Will people be comfortable going through these experiences? Will they go to movie theaters?

They’ll be in malls anchoring them.

It’s a great question. And the way I think about it is. If you can get the same thing basically online, you will. So consumer staples buying paper towel. Why would you go to the grocery store to do that when you can buy that airline? Right. There’s nothing nice or experiential about buying paper towel or, you know, basic nice laundry detergent. I think more of the things that don’t require an intimacy between brand and product and consumer, those things will happen more and more often.

But I haven’t had a haircut in three months, four months. I can’t do that online. I can’t get a haircut online.

I got to go to a physical space and someone has to cut my hair. There’s all sorts of experiences like that to simply can’t happen off line.

But I think the net of it is the consumer is going to have a higher bar. And so it puts more pressure on retail landlords to deliver a differentiated experience and to curate that experience where that, you know, what a mall was supposed to do, which is create that serendipity.

Oh, that looks interesting. Let me walk into that store. You can’t do that. The Gap, Old Navy and Abercrombie anymore. It doesn’t do it because you can buy the same things online. And so that’s, I think, what’s going to happen. So do you think there’s some parallel with what employers are going to have to do in terms of not quite having experiences for their employees? Because that sounds like I’ve spent my whole career working at Google, which I have.

But we’re going into the office is going to change dramatically. And what employers as well as landlords are going to be providing is going to change a lot.

It was already happening before this crisis. And again, this crisis accelerates. There’s a different trend, but a related trend, which is. You don’t need to all work in the same office for most companies. 

I think what most companies and I would put Fifth Wall as a company that falls in this bucket is they never really wanted to test it. We were too stuck in our ways. It’s too easy to have an office. And that was just the way things were done. A new work, five days a week, you know, nine to five. This changed all that. It, like, just shocked the system. And everyone was thrust into this new experience of running their companies remotely and interacting with their colleagues remotely.

And the general sentiment and this is anecdotal, I don’t think there’s any real data to suggest this, but anecdotally, it seems like most professionals have been surprised. Borderline shocked at how productive they are working remotely. I certainly am.

The same thing. Zoom in. Telepresence has been around for years. I just never used it. And so there’s been this moment in time where everyone’s done that and creating a full service, immersive experience of an office, becomes more incumbent on landlords and tenants to provide that for their employees, because otherwise, why do you need to go to an office and take that risk and deal with that inconvenient.

But David did a really nice thing and called our portfolio company CEOs together last night, actually talked about returning to the office. And while a lot of people said that they’re feeling more productive. You lose the camaraderie. And so, you know, how do you onboard a new employee? You know, it’s not about productivity. It’s about in inculcating them.

You said one thing that was interesting. You talked about the nine to five, five days a week. Do you think that’s going to change?

Yeah, I do. I’ve always wondered that. I’ve always wondered why, you know, we it’s like if you look at our economy and our labor force, we went from a largely agrarian economy to a largely industrial economy, to a knowledge economy. And yet our workweeks didn’t change. And I think the reason for that is the same reason that everyone continued to just do things the way they’ve always done, that there was just a kind of inertia to that change.

But it doesn’t make sense. And I never really actually thought a tremendous amount about that. But I was like, why do we work five days a week? Why do I ask my employees to commute to the office at the exact same time as everyone else is commuting to the office on the exact same days of the week, irrespective of whether jobs relate to one another. And there’s an opportunity to reimagine that. Now, there are certain structural considerations, right, that you still have to consider.

Many people are religious and they still want the weekends for religious observation reasons. You also have schools, right, that have a particular time. They operate. So there’s certain reasons why the status quo is going to be fairly sticky. But I do think you’ll start to see companies reimagine that. It might be smaller offices where three days a week, half the company comes in another three days, another half of the company comes in or you have kind of rolling teams or it’s more episodic.

You work in the office for three months. You travel remotely for three months.

I think it just becomes more fundable and more flexible over time. How do you think the industry is going to take up the slack if fewer people are going to go into the office or if people are going episodically, you probably need less real estate.

It used to be that the real estate industry self conceptualized itself as, what do we do? Well, we build buildings. We keep the heat in. Right. And we keep or we keep the cold in depending on the climate. We keep the bad people out.

We keep the rain out. We keep the lights working. That’s what we do. The reason many companies like working in, for example, industrious one of our portfolio companies is that it’s turnkey.

They show up in the office. It’s a beautiful office, nicely designed, beautiful aesthetic, but also all the things you need as a knowledge worker or in that office and to manage a team of knowledge workers are all there. You have functioning Wi-Fi. You have good acoustics. You have good lighting. Well, that’s been thought through. You have IT support. You have coffee. You give everything that you want. And it’s that tenants have started to conflate in their minds the experience of an office with renting space from a landlord.

We’ve been I think that for a very long time, start building to start cycles. All that tell you that exposure. That is payment cycle.

Right. Particularly, it’s going to start to converge with. These are the services that I’d love to hear a little bit about your the real estate industry. And I think the most forward looking, landlords will use all that to their advantage to really advise tenants.

And hey, here’s how you should think about your workforce. I know what works for companies like yours. And that’s very compelling, I think.

So let me ask a different question, though, because most of the entrepreneurs who are listening to this show are probably not the 10 thousand person workforce. Right. When they’re approaching a landlord, let’s say it’s early in their move to being having an online presence. What should they be asking for now? Maybe they can be asking for what should they be thinking about now that in some sense the balance of power maybe has shifted some in terms of what they can get from landlords?

The main thing is flexibility. Right. You know what, this crisis is underscored for so many people and it’s not just small companies, it’s big companies, too. Is that the future is very hard to predict. 

And by the way, that is a theme that is true across the real estate category. This kind of consumerization of real estate, where if you think about real estate, is, you know, a a a service that’s being sold to any kind of customer, whether it’s a tenant of a multifamily building or a tenant of a shopping mall or an industrial tenant, they’re all starting to think like consumers, which is I want more flexibility and I want more services.

And that’s a trend that’s been happening for a very long time. Yes. So our carbon impact bond is very much model off all of our core funds, which is we look at problems in for the real estate industry where technology and emerging new companies can provide a solution. And so one of the things that we focused a lot on, in part because I personally care a lot about it, as does our firm, is sustainability.

And what most people don’t realize is that real estate is arguably the single most polluting industry in the US. It’s funny because many people that consider themselves sustainability experts are very quick to talk about things like heavy manufacturing and transportation, mining. But those are polluting industries, but they’re just so much smaller than real estate that they don’t have the energy, consumptive power of real estate. So real estate is responsible for 30 percent of all carbon emissions. The US is by far the biggest single manufacturing.

What is and which component of real estate is causing that? The use of it evidence happening inside a building. So it’s like it’s back or something. Yeah, the lights that are lighting all of our offices right now. Like that is that is costing energy. You’re spending. You’re contributing more to carbon emissions by virtue of the utilities in your offices and your homes than you are on your cars. And so the I think in the first wave of sustainability, there’s a lot of focus on things the consumer can do which are superimportant, like driving a electric car or not using a plastic straw.

But the actual impact, the actual magnitude of those changes is very small. Like, if if we want to solve the climate crisis, there is no other way than through real estate. It is the single most important space to solve. And it’s true not only on the operations level, but in the construction of real estate’s assets as as as cement cures. It releases enormous amounts of carbon into the environment, more than you could generate on a given building by driving back and forth across the US to pickup truck.

It’s just it’s dramatic the scale difference in real estate versus most other industries. So that’s the kind of table stakes is like real estate’s really important in the climate crisis. And what’s happened is that three constituents have started to really recognize this. The first is tenants. So the Googles, the Netflix as the world’s, they’re starting to ask questions of their landlords to say, well, is this a LEED design building? What are the sustainability standards like? What are the materials in this building?

That’s one side of it. Second side is capital markets. So lenders, insurance companies, major capital markets, investors are saying we will preferentially deploy capital to lower no carbon impact real estate owners to real estate owners are saying, well, we have to do this. The market is telling us to do this. The third thing that’s changed and this is been more recent is that cities have started to enact carbon neutrality laws.

So at a federal level, the Trump administration pulled the United States out of the Paris climate accord. And the Paris Climate Accord has certain carbon neutrality standards for real estate assets. So the US at a federal level doesn’t have to comply. So what happened last year was that both New York and Los Angeles enacted new carbon neutrality laws where if a building is in violation of them as early as 2024, they start to get fined and the fines are very punitive and very large.

If you look in New York alone, defines are so heavy for real estate owners that don’t comply with these new carbon neutrality laws that even in a conservative assumption, probably $400 to 500 billion with a B is going to have to go into retrofitting existing buildings to become energy efficient.

That’s in New York City alone. 

There’s an interesting thing right now, it feels like where landlords are sort of regulating office opening in a way that you’d expect almost our government to be doing. But it seems like there’s a really interesting thing going on. Yeah, it’s is.

Well, this this crisis has thrust a responsibility on landlords. They never had to actually internalize, which is the well-being of the occupants of their buildings. And that’s true of rain and the elements. And, you know, traditional security, but it’s now true of microbes as well. And so I think landlords are increasingly conceptualizing themselves. It’s like micro mayors, right? Like they have control over their building. Right. A building is a small city of all different sizes.

And so there is a real social. That goes hand in hand, I would argue, with environmental responsibility that building owners have. And this this crisis has just thrust this on them. And I think the the CEOs of real estate companies that recognize that their responsibility is a lot more grave and a lot more important than a lot more socially consequential than they ever would have imagined. They’re embracing that as opposed to running from that. And so, yeah, they’re actually taking a very proactive role in deciding how people are going to come back into their buildings because they care about their the occupants of their buildings.

They really should care.

That’s interesting.

OK. But I want to ask. I want to make sure I get some perspective on all this. This is a really interesting conversation. But, you know, you only started this, what, three or four years ago, right?

Yes. About three and a half years ago, we started Fifth Wall, that’s incredible.

It’s awesome. And someone has given you people people give you a billion dollars. It’s awesome. Congratulations, first off. Thank you. What do you feel like?

I have been some of the surprising learnings for you. As it is surprising learnings for me were. You know just how challenging it is to build a really institutional asset manager inherently. But then also to build it with the complexity that we’ve we’ve put on ourselves, which is having a strategic component to our LP base in these real estate owner operator developers and serving them and supporting them and encouraging them to adopt our new technology. That takes an enormous amount of work.

We really put our shoulder into into that to do that well. And I remember when I you know, when I first launched Fifth Wall I first went out and fundraised as a one one thing that I just remember, which was is funny now to think about. So I went out to a lot of LPs and I was like, yeah, I’m going to start a real estate tech fund. And LPs would say, well, it’s not like kind of nich isn’t that kind of small?

And it’s like, no, it’s not. And the fact that you think that is exactly why many venture funds don’t perform well, which is they missed orders of magnitude with respect to scale. Real estate is the largest industry in the United States. It’s the largest capital markets, bigger than the US stock market, the largest debt markets, largest store of consumer wealth. And it’s been one of these late adopting industries. And I think LPs is that we’re conditioned to thinking about gaming or cannabis or kind of these emerging hot new spaces oftentimes missed huge opportunities that we’re hiding in plain sight and real estate just happen to be one of them.

Does it feel up into the right? Like, do you feel like do you have the opportunity to sort of take a step back and be excited about what you’ve built?

Yeah. I mean, I’m an entrepreneur at heart. So I approached building a venture fund, very much like how I approach building companies that I founded in the past. But what’s so different about our firm is that there are these network effects and we feel them. 

What I believe is that a single solution, a single firm, and I hope its Fifth Wall that supports an industry adopting tech leads to the best outcomes.

I believe fundamentally that that is the Paredo efficient outcome in that industry around innovation and that the wrong solution is a network of smaller funds or cottage industry of corporate venture investors trying to do it on their own and entrepreneurs having no idea where to go. That was the world we were three years ago. And I think because I have that vision that there should be a single solution just in our industry. And I don’t take over every industry, but in the real estate industry, every corporate should work with us and we should be able to help all the best real estate tech companies.

And we’re very early on into that. I mean, it sounds impressive that we have a billion two and 54 real estate corporate jets, but this small percentage of the total actually is a lot more that we can do.

Well, you’re good.

I hear founder pitches all the time, and you you outline a compelling vision. David, do you have something? There’s been so many bumps in the road. Look, I started a venture fund without having ever worked in the venture industry. So, you know, that’s a challenge. I approached building a venture fund like a startup, like a startup see approach, building a startup. I think that actually gave us some advantages.

As you can imagine, and thinking about things differently. But I didn’t have a lot of the kind of requisite like how do I build an investor relations function? Like how do I built like the core stuff that I think many would is second nature to most. Most venture capital GPs wasn’t second nature to me. I had to learn it all. But I think in the process of learning it all. I always tried to reimagine what it did.

And as you can imagine, a lot of things didn’t work out of the gate. And so I, I kind of tried and failed in a lot of systems like basic stuff, how we do our CRM, how we track deals, how we support our portfolio companies, how we structure deals, how we track performance of our investment team, how we build new products, how we take them to market. I’ve iterated on all of those with models that I think to most venture funds would be very atypical.

And so in all respects, I think we’re different. But I want to be clear. The path of getting to where we are has been littered with tremendous failures.

Do you think a lot of that growth is going to come in LA? 

I think we’re going to build more of an international presence.

L.A. will always be your headquarters. And is our headquarters today. So, you know, the reason we’re in L.A. is I love L.A.. I think L.A. is a fantastic place to be. I’ll say this. I think it’s just I don’t understand why people live in San Francisco when they could live in L.A.. And think it’s crazy. It’s a testament to human irrationality. But they do. But I think more people are becoming rational and they’re moving to L.A. and I’d be surprised if this crisis doesn’t instigate more of that.

Now innovation can happen anywhere and it happens where people are and where people are happier.

And L.A. is absolutely one of those places I think that’s great. I think we agree, and I think it does a great note to end on. Yeah. Well, thank you so much. 

 

Jason Schoettler — Calibrate Ventures

Jason Schoettler started Calibrate Ventures where he invests in advanced automation (usually Series A).  

He and long-time partner Kevin Dunlap have made some really good investments (Ring, Dollar Shave Club) and some newer pretty cool looking ones (check out the Moxie video).  
 
We talk about why he feels comfortable investing in hardware (when there’s a subscription), how to be a good board member, and much more.

 

View Transcript

And we are on Zoom with special guest Jason Schoettler from Calibrate Ventures.  Calibrate is an $80 million dollar fund writing checks in the three to six million dollar range, meaning that Series A is probably the sweet spot there. Jason, David, how are you both?

Great. Great. Lovely to be here with you guys. As Jason says, it’s Covid day 46. Jason did I get the basics of Calibrate right in that introduction, mostly focused on b2b.

Yeah, we are we’re series A venture capital firm that invests in advanced automation and typically invest in companies when they’ve got signs of early commercial success and view our job as one to help them scale through 20 through 20 million in revenue and through hundreds of millions if we’re doing our our jobs right and work with the right folks. So it’s it’s it’s a great place. We think in all time, but especially right now, to be investing in that in that space.

And my understanding is that you have a pretty concentrated portfolio, is that correct? Yeah, we we founded Calibrate with the belief that we it’s small funds typically outperform. And also the concentration is a way to generate outsized returns. And so we designed our first fund with eighty million dollars to invest in 12 to 15 companies and really lean into our winners. And so we do run a typically more concentrated portfolio than other some other funds of the same size.

Got it. And how do you I mean, that’s that’s. That’s not that many shots on goal. We’ve been very lucky to have some you know, some great some great exits as a result of concentration and really leading into our winners couple here in Southern California. I like Ring a dollar shave club, which were both outstanding. And so, you know, we’ve also had situations where we’ve lost stuff that we’ve been able to pick some good winners and have been disciplined in our follow on capital, which is where where it really matters.

With concentration. And do you then have seed funds were that are like good feeders for you?

Like, should you know, should we be sending you all our advanced automation company?

Absolutely. We’ve been building our network for for 17 years.

One of the things that makes us an attractive partner to both seed managers and the founders is that investing out of a small fund with relatively small capital, you know, we’re not investing in 30 million dollars to Series A round.

We’re investing in rounds that are five to fifteen million generally. And we’re trying not to overwhelm either the cap table or or the boardroom in that regard. So we’ve had a lot of success doing a lot of repeat business with some seed funds and are always looking to build out new relationships. So someone is raising 5 to 15 million usually. What is a series A valuation, typically pre Covid and what do you think you’ll be post Covid?

I mean, we it there is a range. I think we’ve seen everything from the kind as low teens to you know, we’ve seen deep this is what we’ve seen in your low teens, up to upwards of, you know, 50, 60, 70. And I think it will be lower as we get into Covid. In general, I don’t.

I just think I think there’s going to be less capital. And I think the supply and demand means that, you know, you’ll end up with a little bit lower valuations in the in the period ahead.

Yeah, I’ve been thinking about this a lot and discussing it with other VCs. There’s there’s a question in my mind of how long it takes to get that valuation reset, because there’s that there’s money in the system that’s waiting to be deployed. A lot of it’s going to depend on how how long we’re in this period of sheltering in place and how long it takes for for founders to get a read on what the path out of this looks like. And I think until we have a real good handle on that, it’s I think we’ll see less capital flowing in just because there’s going to be a little more uncertainty.

Also, you what you said at the beginning was you tend to invest in advanced automation.But advanced automation, I would think, is also something that people will need more of, if not rather do less of in a post world.

Yeah, we we tend to think that lots of executives and business leaders and technologists are rethinking how they operate, how they run their businesses and from their homes, right from their garages, their living rooms or dining rooms or bedrooms as a as they have really an opportunity to pause and think about business post-Soviet.

And we think that automation is going to play a key role. And for us, there’s two two aspects of automation. Software makes everything go. And there’s a there’s kind of physical automation. And then there’s also digital automation. We think they are both going to play a key role and be accelerated through this as as as executives and managers look to do more with less. There’s a whole host of really good things that happen when you when you can turn routine tasks and workflows over to two machines to do better.

Whether it’s a computer system or software system or or a robotic system. Is that a change from from your point of view from officials? Because something like ring, for example. Jamie’s approach was was always to build a ring of security around the home and then around neighborhood and around in the community.

And I think that, you know, a lot of what he was able to do was to bring bring our front door to our pockets, right to our phones. We’ve done well in consumer with a host of investments, but I think we’ve seen the opportunity and more B to B and the B to B to see opportunities, particularly for the advanced automation stuff.

And I think the reasons, the reasons why we see. I mean, just to be real specific about it. Advanced automation. It it solves a labor shortage problem. It certainly solves labour mobility problem that we’re facing today. It increases and always has productivity and reduces operating costs. And we think actually promotes safer operations for employees. And that’s I think if we look at some of our portfolio companies today, we have some in construction and some in agriculture.

Whereas kind of human labor was a cost and availability issue. It’s also now health and safety issue for many industries as well. And we think that’s going to continue in the decade ahead. Why? Yeah, it sounds like I think you said you do invest in hardware, but everyone says don’t invest in hardware unless you really know what you’re doing.

Well, we think we’re pretty good at it. We’ve got a good track record of investing in hardware. And I think I think you need to know what you’re doing when you’re investing in hardware. I think we don’t invest in hardware businesses that don’t have a subscription component to the revenue, for example. It’s one of many rules of thumb that we have. I think you also need to be very cognizant of the, you know, inventory issues and supply chain issues.

And you need to work with great teams that know what they’re doing because it can be a very challenging place to to to invest. But we’re we’re quite enthusiastic about how kind of that’s the way software gets into the real world in some cases. Right. And that’s really exciting for us to be part of that. And so hardware that still has some substance, you’re not selling something that doesn’t have a subscription, although I will say, geez, I just watched this video of this robot.

What’s its name? Moxie is you.

Did you check out. Yes. Yes. Does it have a subscription?

It does. It does. OK.

What’s a Moxie robot? I don’t know. You got to watch the video.

You’ll have to post it on your notes.

But it was announced yesterday. So we’ve in the last 10 years or so, we’ve made four investments in that way. We’ve invested Ring, Dollar Shave Club, Evolution Robotics, which was started by the guy by the name of Paolo Pirjanian. And that company was acquired by iRobot and would Paolo. It became CTO at iRobot for a number of years. And then he left about four years ago to start Embodied and Embodied there’s about it’s A.I. and software and robotics platform platform for care and wellness.

And they just announced yesterday. So we’re really excited about, after all these years, the getting Moxie out into the wild. And it’s an actual cute little robot companion, animal companion. Yep, it’s awesome. Thank you. Didn’t my dad get it wrong there?

You you talked some about like automation for new industries versus old industries. And how much. How do you think about investing in big old legacy industries that don’t have much tech vs., you know, flying cars and people?

And I think I think a good way to do or a good way to to address that for us is, you know, we’ve not we’ve been very interested in autonomous vehicles, but we have not invested in anything that is related to like consumer automobiles that carry people. The way that we have thought about how to play.

That has been more around ways to.

And by the way, there’s tons of money that has been made. It will be made in autonomous vehicles for the road. But we’ve taken an approach to say, look, where are some industries where machines can do repetitive tasks and add a tremendous amount of value because we’re taking we can do it cheaper or faster or safer than can be done otherwise. And a couple of examples for us with autonomous vehicles are in both heavy construction equipment. We have an investment in built robotics, as well as with a company called Farm Wise that is working in the agriculture space.

And the reason we we like some of these we’d like both of those bets enormously is because your operating vehicles on private land and you can control for a lot more of the variables and you can drive them down Market Street in San Francisco, for example. But at the same time, these industries are have labor shortages and challenges, both with the affordability of of labor. And they really have the because they’re not at the forefront in attracting a lot of attention from kind of tech generally.

There’s a real opportunity to help with some of the leading Delina operators in those spaces to help bring bring some automation there in a new way, the way that Silicon Valley has done well over the many decades of bringing automation to other industries. And I guess the last point that I would make is that when you look at. When you look at these industries, one of the big tipping points is the cost point for hardware and software. And that’s that’s another important reason why we’re comfortable investing in hardware.

Because the component costs and the ability to prototype and iterate in scale and the supply chain, those costs have all come down dramatically over the years. And I think they’re at a point where it makes a lot of sense to bring them into those industries.

And on this software side, what is I mean is the software side more traditional automation of sales processes, customer service, processing?

Yeah, we’ve done we’ve done stuff on on on the enterprise side that’s focused on sales automation, that’s focused on connecting customer, you know, stuff that drives revenue for businesses. So for us, it’s been around product tools, developer tools and soft sales force automation. We’ve looked at in and continue to look at lots of things in the in the A.I. space. And we’ll continue to do that as well.

So I want to loop back and ask you about how you work with companies with a smaller portfolio, you should have more time to spend with them. What is the relationship and how do you see an optimal way to work with companies?

We we we lead about three quarters of time and we take a board seat when we lead. One of the lessons that we learned early in our careers and that I hold very dearly to me is that it’s all about people and the value of putting people first and realizing that that sometimes it can be a lonely walk as a founder. I mean, we were founders ourselves.

We really do place a premium on working with the CEOs, with the founders and being there for them when they have issues. I think a lot of the hard work that the best board members do is off line and in bringing to bear their their operating grants and sharing, you know, tricks of the trade or perspectives that they have off-line and not necessarily. I think that’s one distinction that’s appreciated by my founders.

And I think the you know, there are other board members that are very technical in and we find it that those those folks are really instrumental at the early stages of investing.

And then there’s, you know, as you move as companies get grow and mature and scale, certainly the profile of investor changes is growth. Investors enter the mix. You typically take a more financial orientation, which is perfectly appropriate as companies grow in scale.

This may be obvious to both of you guys, but when you join a board, how many people are on the board? And when do you roll off? And how many people are on the board when you roll off?

When we get involved is Spike Lee anywhere from three to five directors. Usually there’s a founder or two and maybe a seed investor or two who are on the board.

And at the time that we’re investing, it typically grows to somewhere between five and seven. And and as the company has progressed through their companies, progressed through their later financings, we typically roll off as as the boards grow. But I’d say it’s usually in a three to five range. When we get involved, then that’s how we exit somewhere in the five seven. If it gets larger than that, it gets unwieldy. That is my experience. I mean, the future, if you are the better.

Interesting. I was going to ask you that, which is like what really what’s a dysfunctional board look like? How can a board really screw things up for a company?

You know, that’s a good question, and that’s probably there’s a whole podcast series you can you can do on that bad boy gone wrong.

But, you know. For me, the one of the things that I have noticed in my career is when when a board. Either because because a founder has some some certainty or some lack of clarity about what to do. And and goes to the board for advice to help set strategy. Right. And and really leans on the board to help provide guidance and framework and direction. It.

That’s typically been a cause of concern. We love founders to be bold and to have a point of view and to debate it and listen. But if there’s a lot of uncertainty around what to do, that can be a that can be a problem because it invites the board to get involved in more management issues and more executive issues.

And we’ve seen that that play out badly. And I would say that’s kind of that that can be an that can be a challenge with the founder. The other side of that coin is where boards have a very strong point of view and kind of enforce themselves, enforce themselves or assert themselves in the process, which is kind of the same dynamic. But I’ve been on some boards where, you know, the boards have a particular point of view and want to go charge that hill as opposed to some other hill.

And that makes for four rough dynamics as well.

I find that a really tricky needle to thread, so because I was always sold when coming to my board, don’t just come with an update. Don’t just come with like you’re the numbers.

Like they can read that. So bring the real issues that you’re, like, actively debating. But I think what you’re saying is bring the real issues. But don’t look to us for guidance. Just share.

Well, I think yeah, I think I think that is it is tricky.

But I think I do think that the best board meetings I’m in are when you get through like the second slide and then you spend two and a half hours working two or three major issues with with the couple. Those are very productive. I feel productive when I’m leaving those board meetings. And I know the CEOs feel the same way. 

You’ve been shook up to those times that you’ve been doing this for a really long time. And I know that you were at a different fund prior to Calibrate.  Calibrate’s.

Pretty new, right? Yeah. Kevin and I, my partner founded Calibrate and 20. Middle of twenty. Seventeen. And and we talk a little bit about Shae Venturers and what used to be for sure.

And maybe if I go, you know, go all the way back just to connect the dots. I mean, I’ve I’ve been in tech all my career. I started as a as a management consultant for Ernst and Young in Silicon Valley, where I was working for HP and Agilent for a couple of years in the dot com kind of late 90s period.

And then I was recruited to join a product in a product management role, a startup out of JPL and Cal Tech that was commercializing software that was used in the Mars Pathfinder mission. And then Shea Ventures, which was the largest investor in that startup. We recruited me to be the first investment professional. And then Shea ventures a family office that was one of the pioneering venture capital investors going back to the late. Late 1960s, and that was just a tremendous, tremendous opportunity, we invested off of the balance sheet for a number of years and then we ran a couple of funds that included outside investors most recently.

So it was a wonderful, wonderful place to learn to learn how to be an investor. Does do companies if if there’s companies like companies that are looking for investment, which just a lot of them do, they would they go directly to Shea ventures? 

I suspect that the predominant investments they’re making now are are probably later stage and and into funds.

But they do they do do some core investing alongside some of their managers as well. They’re one of our tailpiece. So we know that know pretty well. What has changed? How have you changed the most as an investor? I’ve learned a couple of things in my career. I’ve learned that it’s it’s all about people. We’ve talked about that.

I’d say being intellectually honest is another big lesson. I think that’s something that that both Kevin and I try to remind each other, that the value is that we’ve both been really good at sleeping on things and not holding so tightly to two preconceived notions and being being open data, I think is really important part of being an investor. And then I’d say that it’s good if it gets to your your last question like it’s OK to make mistakes, like as long as you’re learning from them.

Right.

And as long as you’re you’re able to, you know, fold the learnings to the next the best, because we are going to have we are going to make mistakes. Are our founders going to make mistakes and we’re going to lose money along the way. But that’s part of the business of investing in startups. Maybe I was. I was going to I was looking at your Web site. It said something like, our decisions are guided by our founding values, not herd mentality.

I think what we what we mean by that is, is not feeling as though you’re you’re missing out on on something and feeling like you need to invest in X, Y, Z sector or a company that is pursuing X, Y, Z, technology or market because everybody else’s. So I think we try to be really independent in our thinking. And and and I wouldn’t say we’re always contrarian, but there have been times when when we’ve invested in things that weren’t obvious, that it turned out to be great, you know, great investments.

I know both.

I know the ring know Jamie is definitely had some dark periods of trying to raise capital. And, you know, we invested he was doing about three million in revenue and it was a great investment. It rang a lot of people invested in that early on and a lot of people passed at the time that we were looking to that we invested. And I think we feel really good about not being persuaded by other people saying no, no investment or saying yes to investment.

What is it? Give us some guys. They give us dirt on Kevin. What is Kevin? Why do you talk about being intellectually honest? Like one of the things. What are his hot buttons? You know, where do you guys agree or disagree? Do you push each other on?

Well, he he’s a mechanical engineer by training and practice. And I’m I’m a liberal arts person by training.

And and I think I think we work really well together because I think I think there’s a quantitative and there’s a quantitative and no B.S. kind of analysis that Kevin brings to the table. And I think he would agree with that. You have to ask can’t get him on the show and ask him. And I think there’s there’s there’s a bit more of a softer side of things that I sometimes come to come to the table with. And my kids are a little older and his verdel younger.

And so there’s he’s feeling a little more under siege at home in quarantine than I am right now.

So that’s maybe a hot button.

But I think we’re very different personalities.

We’re very different people, but we’re very close friends. And we’re we’re four we’ve been business partners for four or fifteen years. And it’s it’s there’s no one I’d rather be in business with. Street. Is that as you in cabinet, obviously, you guys are, you know, BMF is about as did the other has the rest of your team.

So we’ve got you know, we’ve got a great team of operational support here in Southern California and financial support. And then we we recently added Dan Murray and Amy Lifer as venture partners, which was a big move for us. We added them in January after looking at lots of folks, and we couldn’t be happier with the fact that they’ve joined us. So I get asked a lot about how do I get into it’s a common question. So for you, these venture partners, are they full time? Are they not full time? How do they. I mean, because it’s sort of a path for people who want to be more full time and adventure.

So I think that’s one that’s one way is to become a venture partner. I think, you know, for us, a venture partner means, you know, we’ve got some tremendous athletes. They have full time, full time gigs already. And they have about what we expect to get about 20 percent of their time over the course of the year.  They’re part of our partner meeting every Tuesday and they work with us, kind of like diligence and and other calls as well. Got it. And and is Kevin also in Pasadena? So you guys are your offices in Pasadena, which is one of the things I like best.

We we love Pasadena. Yeah. So. So Calibrate intergalactic headquarters. Is it in Pasadena? And and it’s been here for since we founded the company.And where are you from? I was born and raised in Fresno, California.

Up in the Central Valley.

What do your parents. What are your parents do? How do you end up in Fresno?

Well, I was born there. That’s how I ended up there. My parents, my my.

My mom was a who was a schoolteacher when I was growing up. And she’s now a children’s author. And by my dad has been in the in the mortgage banking and real estate business, his career. So it’s been it’s been a fun run.

David, do you got anything else? No. It’s been great. Yeah. Thanks for playing along. Well, Jason, thank you so much. And we look forward to going over all of our advanced automation companies with you in the near future.

It’s great to be on with you guys. Thank you. And I know what you’re gonna. Yeah, good. And you’re gonna see me zoom, zoom on our strategy. We can’t wait. Yeah. Big time. Very exciting. All right. Thanks, guys. OK, see you. Bye bye.