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.

 

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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.

Dovi Frances — Group11

Dovi Frances is the founder of Group11 VC, one of the nation’s top decile performing FinTech funds.

Group11 has led fintech investments into category defining companies such as Tipalti, Sunbit, TripActions and next insurance to name a few. (Series A sweet spot).

Dovi is a bold thinker who isn’t afraid to throw jabs at other venture capitalists for hosting too many lavish parties and yoga sessions. This one is a fun listen.

 

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Dovi Frances is the founding partner of group11, formerly as SGVC. group11 is an L.A. based venture fund. Investing in fintech, Dovi has led investments into companies like TripActions, Tipalti, Sunbit, Home Light, Next Insurance. Before becoming an investor Dovi worked for a decade in the financial services industry, but I was going to add Dovi. I’m super excited because I happen to know that you’re married to a world class surfer, you are a shark on the Israeli version of Shark Tank and you’re super bold.

I’ve been reading. I’ve been reading and listening to you. You’re really bold in what you say and write. And I think that you make a good conversation.

I sure hope so. Yeah, I hope so too. But first up today, did I just get the basics of group11?

It sounds fine. I mean, we can talk more about that as we as we dive deeper into their phases. And what makes us tick.

Yeah. Well, please do tell me some about your thesis. What makes you tick? As I understand it, your sweet spot is a series A investment into a fintech company.

Yeah. You know, when I was reading the questions for this interview, I thought to myself, how interesting that we’re trying to put all of us into some kind of like, you know, I understand we’re doing it for the audience and there are many entrepreneurs listening to your podcasts. And by the way, congratulations. I looked at the numbers. They’re pretty staggering. It looks like, given the very nice saw the next 10x improvement over time. Who the with the podcast and the newsletter.

So really, congratulations. You are doing a great job. And actually, the content is interesting. But I was trying to say that it’s it’s for me, I feel when I speak with prospective limited partners that it’s kind of tough to put to put us into one specific box 

But in general, we invest in financial technology companies first and foremost. That’s my sandbox. I don’t get out of the sandbox.

I feel like I could spend many more lifetimes before I can master the art of being a really good financial technology investor. And that’s my aim. My aim is to be, you know, if you ask me above it all. My aim is for group11 to be the nation’s best financial technology investor in terms of performance and performance is tangible, right. In our industry. Everybody, like in the real estate, in the real estate brokerage industry, everybody talks a big game.

It’s quantifiable, right? Participate in capital distribution, debating capital IRR.

So I really want to kind of like master my craft. Right. So, anyway, fintech number one. Number two, software as a service. I’m far more intrigued than interested in companies that help disrupt mundane human intensive processes.

So I consider it like men-machine symbiosis in financial services.That’s secondly, companies that are led by seasoned entrepreneurs. It’s typically not their first rodeo. I prefer to put significant checks behind founders that have done it before, succeeded or failed.

But at least have the muscle memory of how it is to scale a company from zero to one.I prefer to invest in California. It’s easier for me to take a board seat, to travel, to add value, to meet with the executive team and so on and so forth.

And lastly, which is interesting, about 60 to 70 percent of our portfolio is led by people like myself, people who left Israel about 10, 15 years ago and are now here. And I guess it’s kind of like a it’s a it just happens naturally. Right. I’m Israeli and I tend to gravitate toward those people and I guess vice versa. I also understand them. Right.

That’s what I was going to ask is, is it your pipeline or do you think it’s a personality fit? And if it’s a personality, sort of fit. What is it about that entrepreneur that resonates with you? Yeah, I feel like, you know, pipeline is not necessarily disjointed from personality fit sharing. If you think about it, our companies are kind of like in our founders are kind of the same people that we would like to hang out.

We then have a beer. Right. So. So that’s that. And definitely it’s a cult. I think it’s a cultural thing. You know, I spent four and half years in the army in my last well, I was a company commander in Officer Academy. So. I tend to resonate with other people who were officers as well. And and many of my founders were officers and special forces or intelligence units and so on and so forth. So there was something about that insight.

And the second thing is that the Israelis is a fairly poor country, maybe with good PR, but fairly good. The PR around tech. Right. Not around human rights, but a fairly poor country with not too many natural resources, if any, maybe apart from the Dead Sea Salt. Right. So. So I feel like many of the founders that we invest in and have maybe R&D centers and these are also the cost is actually lower than the costs here for engineers, but also have that time type of like grit.

Nimbleness that I think characterizes so many of our portfolio companies. So that’s that.

Yeah. And then going backward, one thought on. Well, I guess one question is, what if I’m not Israeli like it?

The next the sort of 40 percent. OK, ok. Fair enough. Yeah.

I do not discriminate between Israelis, non-Israelis. I still happen to have statistically invested more in people like myself who left Israel, moved to the states and started the company. And I think that’s just kind of like how the pipeline also works. Yeah.

And the SAAS focus is that. Have you changed as over the course of your investing to have more of a SAAS focus? Yeah, I mean, look, when I when I started investing in tech, I was still running a family office out of Santa Barbara. And. It was kind of like an escalation of commitment, like over time. I just fell in love with it and decided to turn it into my full time profession. It took me about five years to get there. So I left the family office May of 2015 to focus 100% percent of my time on venture capital investing.

So it took me some time to to kind of like figure out what my sandbox is like and what where I feel more comfortable. And the answer is that I feel much more comfortable predicting the future where I can see a path that is a consistent path off of value of value add and and MRR, ARR appreciation, and that typically calls with software as a service. Right. Yeah.

Well, then what? I mean, you it sort of sounds like you put yourself in a box more than I mean, I called you a fintech investor. It sounds like you’ve actually narrowed your focus. I was actually alluding to the questions that you sent me, like, what is the average check like? And, you know, I like I think they’re we kind of differ. I will do things from super early before there is any proof of concept. It’s uncommon, but I’ll do that to investing in series B if I feel like there is still a 10x potential for the company. So 10x potential mean that the enterprise value can grow 10x from where we invested.

So that’s that’s what I meant. But in terms of kind of like the areas of interest, we have limited hours in the day. Right. But I prefer just to choose areas that are enterprise software, for example, accounts payable, accounts receivable, invoice automation, financial reporting, a payroll, global payroll processing, and the list goes on and on.

I think in one of our descriptions of TenOneTen, we said yes. The less sexy, the better.

So, yeah, I want to say I wanted to say boring. But then somebody told me recently from my team that I use the word boring too often. And I decided not to use it in the description. But you’re absolutely right. Boring is the new sexy guy.

And group11. As the brand group11.

You guys used to be SGVC. Right.

So there’s kind of a new new fund name at least. Yeah.

You know, we rebranded about a year ago. I wanted to rebrand. Years ago when I left the family office, the family office name was S.G.. And that’s how the name SGVC was born. It’s the initials of the principal. And when I left in May of 2015, I really wanted to rebrand. But it didn’t have the money. I was I was really busy. There’s like an infinite list of things that you can do around branding and marketing. Most of. Most of it cannot is not tangible. Hard to know how it is as a fund manager is very, very difficult to do. To a certain what really adds value or not. Like I see a bunch of VCs here, like doing yoga sessions on, on, on their balconies and so on and so forth.

Like I couldn’t care less about this bullshit. For me, I wanted to change the name to a name that reflects and encompasses what we are about. Right. And because we focus on fintech, I thought to myself, okay, what will be a really cool name to choose that? That kind of flex speaks to what we’re doing in group11. Obviously from the elements chart are basically all the precious metals. So it’s gold, silver and copper and another one that is not a real but a real metal.

So that’s that’s why we chose the name. OK.

But I have to go back because I think you just, you know, call it something like the touchy feely bullshit that, you know, the yoga sessions, which I guess might push back.

They are a little bit if it is pushed back, is that, you know, mental health is super important. I agree.

And what does it have to do? What does that have to do with my profession? Go to betterhelp.com or talk space or see a shrink. Right.

Right. So you think not the role of the venture capital is to be leading the yoga sessions for their founders?

You know, I think with time there is a very blurry line between venture capitalism. I’ve seen a bunch of venture capitalists. I won’t name names, but, you know. That I think lost a little bit of direction between what matters and what adds value to your limited partners and your and your companies and your overall community and what does not. And I see I definitely see us as a part of our overall greater community. My responsibility is first and foremost.

I have two customers buy two types of customers. I have my limited partners on one hand. And I have my portfolio companies on the other hand. That includes the founder, C suite level executives and their employees. Rightthe greater community. So I just don’t think that there is a good bank for the buck and me hosting any events, doing any type of press, paying a PR agency to promote my brand and so on and so forth. I just don’t see value in it. I don’t think there is a good bang for the buck in it for me.

I think that our story needs to be told and carried forward by our portfolio companies, employees and investors. And as long as I service those two communities properly, I think that we will build an excellent brand name over time. And of course, we need to also succeed and deliver results. But that’s kind of like how I want to play the venture capital game. I think I think it cannot be that there is such cohesiveness among so many of our peers.

If everybody is deploying capital on lavish events and yoga with minimal clothes on the balcony in a nice office in Venice, then, you know, I probably should not play that game. I should be contrarian if I want to win. Yeah. Yes. And yet, you know, you could say that a a seed stage or a series, an early stage entrepreneur benefits a lot by having a big brand name investor on their cap table. And so establishing your name helps them.

It helps gives them some stamp of approval. Let me tell you.

I think. Let me. May I. May I give you a contrarian?

Yeah. Absolutely.

OK, so what is the importance of a brand name today? Like in the end, it’s a question that I kind of like asked myself as well. What do I forgive me for putting the sunglasses on? It’s not that it’s not the tour. Because we’re in Venice or Los Angeles. It’s really because my hair is getting too long and I cannot hold it any other way. You know, back in the days. You ask your parents or mine about Goldman Sachs or Deutsche Bank or Wells Fargo or Citi.

or any of those like large insurgents.

They would absolutely only bank with the big ones. Right. I mean, that’s basically it. Right. And I think what you’re seeing nowadays, you know, you’re seeing neo banks like M26, you know, Chime for the time is a great example. Chime is onboarding on a monthly basis. More clients in Wells Fargo right now and Citi retail clients. And they have you know, I think Wells Fargo has more than two hundred thousand employees and Chime has a few hundreds.

Right. So brand is a big is a big word, but I think the importance of a brand name is changed as well. Like, I don’t know, today. If if you ask any of my entrepreneurs, and I’m like, yes, entrepreneurs in general, you know, I think, yeah, it would be nice to take money from Sequoia or Andreessen. And I think they’re great. They’re great investors, eh? But, you know, the delta like the distance between it two one investor and a two to investor like like ourselves, and allow me to put us as a to invest investor for the time being.

A is not that the distance is not that long. Right. So a so, so I am trying to make a couple of arguments. Number one, I don’t think branding matters as much as as much as you think. And if, if, if and if he does matter. It matters around. Two things, subject matter expertise and value creation by and I. Sorry. I’m sorry, I just don’t consider many of the events that we’re seeing in the marketplace around brand recognition.

Like yoga sessions or many other stuff. I just don’t don’t consider them as any any sort of value creation to the community. I just don’t. Yeah, yeah.

Well, but what I think about is I’ve spent my whole career in product management. And so we’re we’re told to think, what does the user need? What is the user need? Right. And the user in this case being the founders.

And I tried to think about some what do founders need today and what are they going to need in three to five years that they’re not getting?

Yeah, I think you’re asking such a great question. I think that entrepreneurs. Need three things in general from a venture capitalist. I’ll break it down for you. I would say above that, though, you know how many voices we have in the US now? About 1816. Something like that. As of the end of last year. OK. And how many do we have globally? About three thousand twenty nine hundred seventy three.

It’s too it’s too many pieces. So I think what entrepreneurs need first and foremost is less of us.

I’m not sure I agree because of the number of entrepreneurs is growing so rapidly. I just feel this amazing. I think it’s the huge bright spot of our country and of Israel and some of the other very innovative countries is that you’re getting such so many. So much more entrepreneurship growing out of, you know, universities in the area.

Of course, as long as there is enough of it. Look, it depends on which subsectors and where, you know, where innovation can take place. Right. So we’ll see. I’m sure. Continuous continuous innovation around biotech, sure, culture, technology, financial technology. These are areas where I consider, you know, we’ll continue. You know, the European renaissance lasted like almost 100 years. There is no there is no reason why our renaissance here, which has only just begun, will not continue for decades to come, I think what we have seen over the past couple of years, which might explain, by the way, why prices went went up so significantly, is too much money, too much money in the system and not enough not enough good and good entrepreneurs. So I think we’ll see some some consolidation amongst venture capitalists, and that’s that’s number one. But to your question and by the way, I hope that’s the case because that would allow us to differentiate ourselves and to build some kind of a legacy.

It’s you know, when everything is going up and everybody looks good in terms of total value to paid in and and and and distribution debate and capital and their execs are on companies that shouldn’t have been being sold from the get go. Because it’s kind of like the hay days. It’s one thing. But when everything is brought back into some kind of normality, which I consider the current, you know, the current I consider post Covid 19 to be that over the next few months.

Then when you when you win it, it is warranted. Anyways, going back to value creation, there are three things that I think matter to the entrepreneur. One is that to get they get money from you, but from other deep pocketed investors. And to the extent as a venture capital is that you can bring other venture capitalists with you into a deal as your partners just to make sure that we have enough enough money around the table in future rounds.

I think that’s that’s very important. The second thing is helping with securing customers, because many of our companies are a software service companies.

I think it’s really important to help them win new customers. And this is I consider I consider each one of far. I take big pride in our value creation efforts. Lian Kimia, whom you have Matthews’s leading leading that effort on our behalf. But, you know, I work in tandem with her and so are other members of our team. We take our portfolio companies, we meet with the S.R.O., we meet, we do some of the executives in the sales team and we ask them some fundamental questions like what are your top 100 accounts that you would like to win?

Give us us give us the names of the accounts. Give us some background on where you feilding painting them. And let’s see if we can help you. And too much, to my surprise. Not too many VCs are focusing on that. And I guess I guess it’s a shame because it’s we have learned and you know, if I can inspire anybody who is watching this podcast has to go through or venture companies and demand that they will do it for them, it’s very effective.

When when when when an investor reaches us, reaches out. To a CFO of a company, for example, that’s a target customer. A foolish thing, and just endorses their portfolio company and say, hey, you know, so and so, I you know, I would like I would like to share with you why we’re excited about the Tipalti or TripActions. I would like to offer my endorsement. And I’m happy to facilitate the call with ourselves. And because I think they can add military organization, as simple as it may sound. What I just described doing it at scale. By the way, it’s quite complicated. It’s it’s demanding because once you do it and you do it for a bunch of companies, you also need to follow up.

And you also need to you also need to send a reminder once you send the first message and so on and so forth. But it has been very, very effective. The third thing. He’s helping the company retain top management, so c suite level executives and I feel like we’ve done we’ve done a good job there as well. So these are kind of the three things that we’re trying trying to do.

Yeah. So you you said some about having big parties and yoga sessions and summit, some might not be your thing, but you are doing a fair amount.

I think I just saw you guys tweeting about was it office hours or webinars? See, you are doing some convening and bringing people together.

Yeah, I mean, I, I never hosted the never hosted a party as a venture capitalist in my life. But what we are doing is, is always around a certain theme. So for example, I hosted free office hours since the crisis has begun to anybody in the community. It’s a first come, first serve. It’s always like five to seven people in the room right in the Zoom chat room. We’re doing it for about an hour. Everybody’s presenting a question.

Then we I try to answer. Other members tried to answer it. We just have an open conversation there that has been really nice. I really enjoyed that initiative. And it allows. It just allows us to be connected with the community, with whomever it is wants to communicate with. I force I write my medium post every time I want to. To vent. Oh my gosh.

You write some bold medium posts. Yeah, I know many of my Democratic friends are not happy about it.

Some of what you wrote was things like send everyone back to work. You wrote that early in the in the in the pandemic lockdown here. But you also wrote. You wrote something to Sequoia when Sequoia you said she was great. Like I’m gonna direct everyone back to your medium post. Yeah. Yeah. I appreciate them. They’re kind of funny.

Yeah. They are kind of funny. They’re good actually. I do. But I think in response to basically you said something like, you know, yes, there’s a virus out there. I was. Fundraising’s gonna get no shit. Thanks to you. Yeah.

Yeah. You know.

So do you like VCs? My question is, do you dislike VCs?

I don’t know if I dislike or like VCs. I think all of us in our society, everybody serves a function. And I don’t hate people for serving their function. I hate people for having too much ego when it comes to their profession. And I hate people or not hate people. I hate I I dislike I don’t appreciate people who don’t understand what is the function that they serve. We are conduits of capital. We’re not the end all. Be all.

It’s not about us at all. It’s about our founders. It’s about our portfolio companies. And it’s about the value the day to society. And as long as whomever I work with understands that. And and, you know, carrying that role. Their role with that. With that in mind, with the humidity in mind, I’m I’m down for collaborating with them forever. But the moment it turns into, like all these yogas, parties and all this bullshit. I just don’t I just think it’s crap. And and it maybe it comes to bolster one’s ego. And I just doesn’t resonate well with me. More importantly, the thing I do care about, which I don’t know whether you and I agree on this one, but is what you just alluded to, which is the sort of the value that your portfolio companies are adding to society or to the community. And how do you think about the sort of role of business is a big question. How do you think about the role of business in like capitalism in our society? And, you know, is it is it, you know, maximizing shareholder value or is there something more there?

Well, what a tough question, right? Because many of the companies that we back help eliminate redundancies. So in essence, they also help eliminate employees that are doing today manual labor. Yeah. So. You know, and I think that nothing can stop human progress. And whatever was meant to be will be. So, for example, you know, back in the days, my grandfather was a bus driver. OK. And back then in Israel, being a bus driver was a big thing, like to be a bus driver in Agard, which was the National Transportation Company, was a big thing.

You would get one share. You will buy it with real money, hard earned money. And my grandfather was a Holocaust survivor, borrowed money from the bank to buy that share. And then he became a bus driver. And it was you know, he took great pride in these in his work to retire a, you know, fast-Forward today. You know, being a bus driver, it’s a great job. You know, nobody looks at it as if it was as if you were a banker at Goldman Sachs.

And by the way, when I graduated from business school in 2008, being a banker at Goldman Sachs was a big thing. Well, I think today today being an entrepreneur is the next big thing. Right. So when things evolve I guess I just see businesses playing a bigger role in society than they used to play. And maybe government becoming less effective.

Perhaps that’s particularly true in our country. So I feel like someone has to. Someone is making bigger. A lot of businesses are making bigger decisions than they used to be that affect our lives. So, yeah.

No, I, I. I agree with you, actually. Yeah, it’s interesting what he said, what he said about politicians. 

I mean, I think it’s enough to look, Gavin Newsom is a press release from like two days ago when he’s putting his Thirty Seven Steps program to open California over the next 10 years. Businesspeople?

Yeah, you’re pretty you’re pretty adamant about getting back to work, aren’t you?

We have to. There is not a way around it. This economy was not this society was not built to stay at home scared. We need to look at the odds and we need to open the economy. And the price that needs to be paid is the price that needs to be paid. But mind you, you know, people work through people work for wars. Right? Definitely in Israel. But, you know, look at the World War two as well.

People worked through wars. People worked through bombers flying above their above their homes. The reason for the way around it. We got too spoiled. We have to provide for our families. And we have to get back to work. And by the way, really, the sooner the better, because the second bounce of the ball is coming. And it’s coming to commercial real estate. It’s coming to commercial loans. It’s coming. We have to get back to work.

The price will be unbearable if we don’t.

Yeah. Yeah. Yeah. I’m scared about. I feel like we also have a lot of B2B I feel like the B2C stuff has felt the hits that a lot of our companies are.

I think it’s still going to be a bloodbath later this year, which is scary.

Yeah, I’m not even you know, I’m not even talking about my own portfolio companies.

I’m more worried about the average American that doesn’t have a thousand dollars to her name, that has a family of two or three mouths to feed. They don’t live in a single family residence that living in the apartment building. I worried about those people. And I am as a capitalist, as somebody you know. A came from. I don’t want to say a poor family, but a family that had average. Average means. I know how it feels to be under significant financial pressure.

I know how it affects the household. And I can relate to it just because I remember how it was. And I know that many families are being squashed right now and where we’re not. I’m telling you, we’re not feeding it. I’ve had too many friends that argued with me over Facebook, around my comments. Know, I get back to work. Comments. And they’re all for staying at home, but they have the financial luxury to stay home.

And most people just don’t. Why? Why are you bolder than some? I don’t know what my question is, but that’s what I want to ask a.

Because, look, this is a very short simulation for all of us. A short life. And if I don’t speak my mind, then I just play the game like everybody else, then then, you know, then what the hell? In fact, I feel like I’m not bold enough and I’m not doing enough. So who knows? Maybe I’ll go to politics one day.

I think that’s why I don’t think you will. Because you write to me. Maybe. Maybe because our politicians nowadays are more authentic or something. Yeah, maybe.

And I just I don’t know how to be bolder, I think. Like you, I would like to be bolder.

But I don’t quite know. I’m not.

My head is as well. It sounds like you’re very clear on your direction.

Well, you know, I might be mistaken as well. I mean, I’m very I’m trying it’s very difficult to navigate life. Right? Because because, you know, back in the days I remember as a kid, you know, we had one channel on TV and that was the truth, finding out.

Now, you know, you open CNN. The war has ended. You opened FOX. Nothing has happened. And the truth is somewhere in between. Yeah.

And we all have to kind of like have our own northern northern star. I’m just trying to have mine and that, you know, and I might be wrong or I might be right, but yeah, that’s the name.

So, staying on it a little bit. Is your background’s fascinating. And I probably could have a whole podcast. By the way, I listen to a podcast that you’re on. And it was so good. And I loved it so much. One is huge. See, what was it called?

Say forward.

Say it forward. Yeah. You know what? No, but not too many people. It’s amazing that you found it.You know, I came I came to the book just not even knowing what they’re going to ask me about. There was no preparation in advance. And we ended up talking about interesting things like depression, family, the army.

It was it was great. It was very interesting. Yes.

So, yeah, I’m an add a link. I’ll add a link to it because he was great. You know, I, I ended up liking you more after listening to.

I also was depressed and dropped out of college actually. And I counted as one of the best things that happened to me like was like wham!

Was there anything else.

There’s a whole you have such a rich personal side of things. So are you still on the Israeli shark tank?

I just had to ask. I did two seasons. I think that’s enough for me. I mean, I really enjoyed both seasons and they had great rating actually.

I think on average were anywhere between 14 to 16 percent of all households in Israel was good. It really helped me build a good brand name in Israel, which was to the benefit of the fun because, you know, because we get an amazing pipeline of full opportunities from Israeli to the Americans. Right. The Israeli entrepreneurs leave Israel, come to the Americas, and now they feel like they know you. So that was good.

But this is what we were talking about before, which is there is some value in having a brand name that people know and are attracted to.

 just don’t believe in parties because nobody gets to engage. It’s all about having fun, self-indulgence for that. I don’t need to host the party. I can participate in one. And if I do, it’s definitely not going to be one hosted by NBC. OK.

Thank you. My. I just don’t get it. I just cannot get on anyone’s guest list.

They might invite me just as a contrarian. You know. I guess so.

Yeah. How. Give that guy the mike. No yoga. No yoga. But let me make sure.

Did I miss though. Talking more about the entrepreneurs who should approach you. You’ve got this great portfolio. You’re actively investing. You know other ways that people should best get to know you.

You don’t know. Coming AIDS. We have a good Web site. I think it’s group11. We see where five members in the team. 

Everybody’s approachable. And that’s the spirit of the firm. We’re not that it’s not that difficult to find us. I would just say that, you know, if not a fintech startup, don’t butter. Right? If it’s not a thing. It’s not a bone butter. Just just because we’re laser focused on this on the sector.

Well, we will. We will send our our seed companies that are in the fintech space your way for sure.

I would love that. Great.

Great. Well, I’ll get to wrap this up and say thank you so much for coming on the show. This is great.

Thanks for tolerating me. Oh, no. Here. You’re so much fun.

Ernst & Vaughn — Blue Bear Capital

Blue Bear Capital invests in technologies for the energy sector ($1-4M first check).  We talk with Ernst and Vaughn about the energy supply chain, the growth of renewables and what Ernst calls BroPEC.

 

View Transcript

If you think that the $30 trillion dollar energy sector is important, then you’re gonna like today’s show. I’m zooming with Ernst and Vaughn from BlueBear Capital. BlueBear invests in technology for the energy sector.

But they’re looking at the full energy supply chains. It was a pretty broad scope of investments, as I understand it. Not a lot in your guy’s portfolio. It’s really like on the consumer side of energy. But you guys can tell me about that. Ernst and Vaughn and I are all here in L.A., but we’re on Zoom for this one. So thank you both for zooming with me. Yeah, thanks for having us. Thanks for having us.

I think you were literally our last in person meeting and in the first or second week of March before we all went into lockdown. Remember, we did the elbow bump in your office.

Yeah, I should’ve about my microphone’s had I know Vaughn.

So when I when I start with you, I’ll put you on the spot and just give me some the basics of blue air, what you guys invest in, what’s our attraction, what size checks, all that stuff.

Yeah, absolutely. So BlueBear Capital focuses on investing in data driven technologies that optimize, enable or protect energy assets and the energy supply chain in terms of stage where we’re less focused on the sort of alphabet declination of seeds or is a series B and more focused on companies have demonstrated early customer traction VIER revenue with Enterpriser industrial scale. So once the companies reach that milestone, that’s when we start getting interested. And we are our range of check sizes about $1 to 4 million usually during and around $2.5 million on average for our first check and we intend to follow on.

We save about 2 to 1 in terms of capital for reserves in our versus our initial investment. That’s great. And did I I sort of tried to characterize it as being more this energy supply chain rather than consumer. Do you have certain you know, do you focus on renewables or do you have certain themes within that?Yes, we do. So we really focused on the the industrial activities and the supply chain complexity that are required to get energy from production all the way through to market.

We’re less likely to invest in, let’s say, a smart home thermostat or because a scooter because that’s last mile transportation. We’re more interested in software like operational A.I. or industrial communications and connectivity that’s deployed in a large scale wind farms, solar park, refinery transportation network grid infrastructure. So most of that trillions of dollars of year spent in the energy industry is actually in those complex industrial operations. And that’s where we found the least penetration of software.

So the greatest investment need and opportunity.

And from what you just said, you used wind turbines, solar farms. Do you have a renewables focus or is it more traditional oil and gas?

So I hesitate to say that we don’t touch oil and gas because actually a lot of the world’s largest oil and gas operators are aggressively pivoting towards building wind and solar and grid infrastructure. So sometimes our portfolio companies, customers, maybe a Chevron or a BP or Shell, but actually they’re redirecting a lot of that engineering, procurement and construction talent towards more sustainable resources. And that’s really where the bulk of our Fund one exposure and investment is. And also what we see the outlook and for Fund II.

Interesting. So did you say like so like an Exxon or someone they’re putting more of their they’re putting resources towards the new renewables.

They have historically been a bit of an exception, but even they have now deployed solar and I think even now some wind to power some of the electricity needs on their oil and gas fields. And they’ve been also an early and aggressive investor in things like biofuels, algae. So, yeah, there’s there’s very few players left in the traditional energy industry who aren’t at least hedging, if not more aggressively pushing renewable sources.

I think I think I need to go take a selfie. Buy a solar panel on an oil field.

Somehow that’s too good Ernst.

Sticking with you for a second because you started BlueBear and have deep background in this sector. Maybe start us off by your background. The first energy energy technology investment project I was involved in was actually a hydrogen fuel cell business, and I remember at the time the company was excited that Hillary Clinton was touring the plant. And this is not when she was a presidential candidate or secretary of state, she was actually still a governor of New York.

So it feels like several lifetimes ago. And since then, I spent a few years and energy M&A and then ended up joining a private equity firm that specializes exclusively in energy. So a company that has $40 billion of assets under management and invested in over one hundred and fifty energy company.

And that’s really where I developed the original starting point of what’s now BlueBear’s network of peers of ours. So a lot of people from places like Blackstone, KKR, Apollo, TVG, a lot of the private equity firms that quietly. Direct about 40 percent of all energy spending in the US. So you may think of Chevron and Exxon and BP, but actually a lot of those private equity backed companies are doing a very high proportion of wind solar and traditional energy development.

And we found that they did not have good access to Silicon Valley and to digital tech in general. So that was a big catalyst for making the transition and partnering up with Vaughn.

OK, so tell me more about that, so 40 percent of the energy spent is done is directed by or sort of.

In these companies is done by these companies that are owned by PE firms, is that what you’re saying?

So if I’m a portfolio company of yours and I want to get a contract with one of these, do I go through the PE firm or do I go to the more the operating company?

Yeah, it’s a good question. It’s really more to the operating company and. We’ll talking in a minute about our, ah, close engagement with the founders and BlueBear’s portfolio, but typically if you’re the, let’s say, industrial IOT connectivity provider or the predictive maintenance A.I. and air quotes provider, you’re trying to get the actual operating company to use your software or use your your your technology solution. So you probably have a relationship with the asset manager, the head of operations that are field services, the head of I.T.

And they may be interested, but they don’t necessarily have board approval. A lot of these boards have been pretty cynical about Silicon Valley technologies or things that A.I. is just buzzwords, not a real thing. And that’s one area where BlueBear tends to directly support the sales process and the customer landing and expanding process.

We provide air cover by having the personal relationships at that board and ownership level to reinforce what the field and the asset level people already see as valuable that may not have the authority or the budget to to deploy.  Air cover as a service in any way.

Because because you’re leveraging those PE fund relationships, among others.

Yet we also have pretty close links with a lot of the corporates themselves. But the PE part is is usually the most opaque and inaccessible to tech company founders. Yes, I find the whole PE industry, it’s fairly opaque. And and so at Riverstone, you know, we’re there. Tell me a little bit about Riverstone just in terms of what were you guys doing with with your investing?

The firm would basically find a management team with some exceptional insight and provide a line of capital to build and grow a business. So it’s much more of a venture capital type mindset than more the LBO focused and financial engineering focused firms out there. In this case, the main difference is check size.

Those lines of equity instead of five or 10 million would be two hundred or five hundred million because the capital is going into building expensive infrastructure, whether it’s wind farms or oil and gas facilities.

But I sort of thought in PE, that the idea was to flip it, but not to own it either, not to be the majority owner.

And so I’m surprised that 40 percent of the energy industry is controlled by T if it’s meant to be sort of a more short term relationship. Sure.

A lot of the development spending happens earlier in the cycle. So if you’re building a commissioning or preparing to build, let’s say, a utility scale solar plant, you are securing the land. Your organizing, the engineering, procurement, the construction, the commissioning the grid interconnection. So there’s just a lot of relatively complex industrial activity you have to take care of. And that’s fairly expensive and that’s funded through a combination of debt and equity, like many things.

And then once the business has gone into operations, the private equity investors may have sold out or stepped off the board, but they still maintain close relationships with the management team and the companies activity. So they’re easy for us to get connected to through that network. OK. I mean, I. It’s it’s all very interesting, but I’ll I’ll go back to BlueBear and what you guys are doing here.

Do you as do you do this because, you know, out as a do you have like an environmental focus? And and what do you see kind of today in in the energy sector maybe as it relates to the growth of renewables?

Yeah. I undoubtedly joined BlueBear to be, I guess, to have a front row seat and at least contribute in a small way to the energy transition, which I think is, you know, the defining event of our lifetime. The way that, you know. There are, I guess, two trends that we feel very strongly about and I think are essentially irrefutable. And that’s one increasing digitisation of industry writ large. More data, more digital, more software cetera, and the shift from sort of conventional fossil fuels to a more renewable and distributed energy future.

And even if, you know, there there has been exposure to what’s seen as, you know, a more typical hydrocarbon based generation process, the investments that we’re making are specifically made to reduce the environmental impact that those businesses might might be providing.

Where are we in that transition? Just broad strokes globally, which is similar to in the US. Still between 80 to 85 percent of the energy needs are coming from conventional sources. That’s much lower in certain regions. There was a day recently when I believe California power more than 70 percent of the grid through renewables.

So how when demand is a little bit lower and baseline production from sunny days and good infrastructure is relatively higher, you can get a really high percentage penetration from renewables. And then actually what starts to become challenging is the market structure and some of the infrastructure. So we see the bottlenecks and challenges evolving in each one of those as an investment opportunity set of its own. Exactly. The curtailment in storage. You’re probably next step in terms of major secular shifts with renewables becoming more economical to produce.

Obviously times they can even exceed capacity. And with the excess capacity, you’re kind of stuck in a position where you need to figure out a way to actually store. So storage I think is going to be one of the next emerging game changers.

There’s a little irony because a lot of the oil and gas community has pointed at storage as being the Achilles heel of renewables. Right. You can only really produce wind and solar when the sun is shining or the wind is blowing. 

And the irony is that we’re we’re recording this here on a day where the price of oil dropped to one point to nearly negative $30. Yeah.

And that is because you. If you haven’t been checking out the you know, the the wires today, there is such a. A glut of production coming online compared to the demand as coronavirus and long term other things slow down demand for oil that there literally are not enough places to store the oil coming out of the wellhead. And so storage is suddenly being much better addressed by technology innovations over the last couple of decades.

And wind and solar development and the basic technologies like tanks and and depleted reservoirs are suddenly not sufficient for an industry that’s been operating for 100 hundred years.

Right. I mean, I think of storage when you say storage, I’m thinking of battery technology for renewables.

But yeah, I mean, I’m super interested in your perspective on what’s going on today in the world in terms of the Saudis and the Russians were there.

Do you know? I don’t know.

Having a standoff and have been shipping their oil over towards us.

I haven’t really been following it, but yeah, we will. We like to call it Broke Peck. So there’s this era of complete, complete free for all. And then Overpeck was formed and then more recently, OPEC plus or the Russians were more engaged.

But then over the last about 18 months, there’s been this series of basically playtest interviews, supply global energy supply policy by tweet where m.b.a.s and Putin and the US president basically make promises to each other and and organize how they’re going to communicate that.

And that’s that’s fine. That’s probably a necessary component of of directing such strategically important industries. But you just cannot enforce tens of thousands of independent producers in the US and dozens of countries that are fundamentally having to meet budget demands and fund things like health care and education through energy sales. So to not expect there to be rampant, let’s say, non-compliance with OPEC policies even among OPEC members, let alone a bunch of drillers in West Texas, it seems very naive.

So we’re not surprised that there is a bit of disarray, of course. Nobody expected the economic shut down the corona viruses led to the reason that the contracts fell through the floor today is because they expire today. So, you know, usually folks are trading these contracts and it’s going from, you know, holder to holder to holder. But when the contract expires, there’s actually delivery required. So today, whoever’s holding those contracts is actually going to have to receive delivery of a thousand barrels of oil for every every contract sale.

How much did consumption drop off? About Covid? About 20 million barrels, which is roughly 20 percent. And OPEC has been able or OPEC plus. We called broke back again because it’s really three individuals who’ve got an outsized affect right now.

They they’ve been able to cut something like 10 percent or at least claim to agree to cut something like 10 percent. If you really imagine a lot of these producers, whether they’re governments or private companies, taking one on the chin for the rest of the world, we’ll see what actually comes through.

Well, but until bringing this back to BlueBear a little bit, which is where are you guys, where do you see the tech applied to this situation or, you know, broadly to the market.  Well, part of the part of the origin of this strategy was. In our energy private equity days, we would be sitting at board meetings of major wind developers or offshore oil and gas producers, and you would actually have a 30 foot blade fall off a turbine or an offshore power supply get cut off and nobody would know exactly why or how long it would take to fix or to where to get replacement parts in a very timely manner.

And these are sophisticated operators, so they know it as well as anybody in the industry can possibly know it. That just wasn’t a very high standard. At the meantime, you’d come out of those meetings and you’d order your Uber and it would pick you up on demand. You’d be able to check the temperature in your bedroom from a smartphone app. You’d be able to order whatever you want for the next days or weeks trip on Amazon. So really be the bulk of our investment is in taking. Proven technology concepts enabled by software engineering and data science and deploying them in a very tailored, thoughtful way to these large critical use cases.

There’s something that’s called a great career change going on right now where basically all of the man in the management class is approaching retirement age.

And there is a basically an entire generation left the energy industry during the crash of of the oil crash in the 80s. So there’s this massive generational gap between management of two to five years ago and what management will look like look like tomorrow. So, one, there’s a massive opportunity for this industry to digitize. We have digital natives sort of running running the show. But to there’s a significant amount of knowledge transfer that could put that maybe even three to five years ago would have been lost.

But sort of enabling some of these, I guess, quote unquote, frontier technologies that enable that knowledge transfer, whether it’s immersive computing, whether it’s voice, whether it’s a car, whether it’s AML and LP, but sort of gathering, processing, validating, communicating and transferring that knowledge from the older the older generation to the newer generation is something that it’s really exciting, something that I try and try and take advantage of in terms of investment opportunities.

What does that mean? I mean, I don’t think you mean, you know, digital photo albums or something like. What does that mean to codify that knowledge transfer?

Sure. So one example is a deal that we’re just actually closing on today in the middle of the the. Coronavirus shut down, we’re still seeing both from our team and and some of our favorite co-investors, great continued engagement in the v.c. Funding landscape. But this is a business that basically deploys a voice interface to allow workers to go through any kind of maintenance and operations activities without having to constantly either pick out a tablet or a phone or walk over to a shared workstation and type things in. So it’s an example where we’re using existant technologies to capture industrial operations data and not just do that task faster. It’s like 80 percent faster task completion times that the company Darch has has registered.

But in the course of. Processing all of that information through a voice layer. You’re actually extracting a lot of the. A lot of the knowledge, the context awareness and the background knowledge that these teams have by by taking in exactly what they’re thinking while they’re doing something as opposed to what they want to write down in 10 seconds at the end of a busy day. 

Got it. And so in in that example or in a lot of these examples, you guys said at the beginning that you’re looking for someone who has at least one. I think you said industrial contract ago.

Yeah, so typically we engage once the businesses where we can engage much earlier, but we might invest once a business has demonstrated six figure. Revenue run rate potential or actual revenue run rate. And that’s because we like to see a scale of enterprise deployment that we can multiply through our network. So if you’ve sold your enterprise software to a couple of independent when sold or related service companies, we can take those case studies and present them to dozens or some cases over 100 operators that are quietly owned by the private equity universe again.

I’m going to turn this over to Vaughn, which is fun before this. Well, you should give me the quick version of your background as well. But before this, you were doing Frontier Tech Investing. And so I am curious about your perspective on the on energy investing now.

Yeah, for sure. So, yeah. Prior to BlueBear there I ran that or I guess technically still run a solo general partnership called Autochrome Ventures. It is usually precedes or series a fund where the thesis that I developed was called it Applied Frontier.

So the industrial enterprise application of Frontier Technologies that fund I guess invests in about twenty five companies, everything from immersive computing to human computer interaction, space tech, synthetic biology and AML narrowly applied. I’d say the the most frontier aspects of energy are a little bit more binary. Nowadays, you know, these are things that are usually material science based or, you know, battery chemistry that those sorts of those sorts of deals that are.

Very far out in terms of understanding whether or not they can sort of hit the ground, hit the ground running and promise to return.

I think they’re extremely attractive from a technological standpoint. I understand why, especially a lot of, you know, friends of mine that still invest purely through the lens of sort of deep tech, you know, try and back those companies. There’s just going to be a significant attrition rate around or around a portfolio construct in that capacity. What I’m seeing now is, again, some certainty, some of the technologies that three to five years ago might have been seen as particularly cutting edge a-r, for example, having just extremely intuitive and impactful applications with within within the industrial space.

I mean, you know, everybody’s seen the the old McKinsey or Gartner projection of the size of the VR market and everybody’s going to be sitting in their houses with with Occupy on it. It turns out that that, you know, the most, I guess sort of initial and effective and again, impactful application is our screens for industrial workers to help them with things like compliance management and workflow management. It might be helpful to run through a few quick case studies, I can probably do it in under a minute.

Great, so just giving you a quick tour. Our first investment was in a company called Mineral Soft. There’s really just a ERP system for mineral rights and royalties owner. So a lot of the farmers and ranchers who have energy asset passive income that was exited pretty quickly and successfully to a strategic business called Midian that does remote monitoring diagnostics for rooftop solar. They have over two hundred thousand rooftop solar assets that they manage with with remote monitoring software and extremely efficient and timely missions.

Secure provides industrial cybersecurity, making sure your your tank farms and and gas plants and shipping assets aren’t being hacked into or at the extreme blown-up. Shoreline provides simulation and optimization software for offshore wind development and operations and management. Raptor maps as is really digitizing the entire process of building an operating utility scale. Solar farms free wired does electric vehicle infrastructure, software and components ever activies battery free industrial sensor technology taking just ambient lighting and tiny temperature differentials to power IAPT sensors. Copper manages demand data for power, electricity and water, gas, electricity and water.

Transect is digitizing and automating the ability to run all kinds of environmental impact assessments. If you’re trying to build a transmission line or any kind of energy asset, you have to get permits, identify endangered species, cultural heritage sites, right of ways. All that can be can be done much more automatically and digitally through through their analytics and cloud software.

So. Each of these are technologies that you can map to some other business use case, but they just have not been well developed for managing large complex again, often cases multi-billion dollar assets in the energy supply chain. 

So staying on BlueBear, you guys are both in L.A., Koray, L.A. How many people total are on the team?

Because you have a few. You have some presence in other cities.

Yeah, I can run through the team overview briefly, and that’s, of course, are our greatest asset, our greatest strength. So three of us are full time in L.A. on myself and our GC and C.O.O. Hank, who is a former Latham and Watkins attorney. Then we have Carolyn Funk, who’s in the Bay Area. She’s a p._h._d. Who who supported the German Energy Agency and then worked in the Venture Partnership and Development Team at Siemens for several years before becoming CEO of two different energy storage companies and helping them get from from seed to series.

We also have our CTO was a computer science p_h_d_ and really our expert on software risk assessment and software development acceleration, Rob McGinness and and very importantly, a couple of our most most effective and supportive advisors and investors, people like Tim Kopra, who is a former NASA astronaut and longtime military veteran who’s based in Houston. He was really Hands-On and fun one. And as a leader and kind of our team development and Fund II. And Lord Browne, the former chairman and CEO of BP, was also on the boards of Intel and Goldman Sachs and many other firms.

Again, tremendous perspective, a network in the energy industry and someone I worked for directly for many years. He has a great team. I am I think I told you I heard you on the oil and gas podcast. Good podcast.

Surprisingly good podcasts, actually.

Yeah, they need to rename it because it’s really energy, everybody. And oil gas is re-branding to energy.

Interesting. Interesting. And yes, Tim, your, you know, former astronaut colleague was on that one, but I was glad that I got Vaughn. I just got to say, I said I don’t want him.

I want mine for sure. Great. Great. Well, I’ve really been enjoying getting to know you guys. So on the personal side of things. So Vaughn, I had I had Noramay Cadena on the podcast and she said that she and Carmen and they’re the two g._p._s, they’re two of the jobs at MiLA Capital. She said that they are 10 percent of all Latina general partners in the US.

Is that crazy? Yeah, it’s pretty unfortunate, but it’s not particularly. I’m not I’m not surprised, unfortunately.

Well, I mean, I was going to ask you, like, how many black GPs are there in L.A.? Like it’s got be. I bet you know, the mall is my guess. Yeah.

far be it for me to speak for anyone else. And I think the experience is many splendored. For every black, we see it just like it is for every black person in America. But, you know, I think that it’s definitely a problem that needs to be addressed. I think that, you know, diverse perspectives drive. You know, higher returns. So, you know, you can see the sort of one of the things that I really appreciate.

Actually about about BlueBear is that all of our backgrounds are remarkably different.

So, yeah, I mean, I’ve tried to do a lot from, you know, quietly investing in the funds. As an LP and the funds of a diverse fund managers as well as, you know, supporting on the angel side a fair amount of entrepreneurs. And that’s the only way that I think the problem is going to change is, you know, having capital in those hands. Absolutely, absolutely, 100 percent sometimes. I mean, I’m part of a lot of the women’s network, said the female founder networks.

And, you know, it’s great to have mentorship, but actually capital means.

Yeah, yes. Oh, that’s got to have both.

Yeah, that’s it’s pretty, pretty important factor in this game. Yeah.

And we’re absolutely we’re asked a lot about our ESG footing and as investors in technologies that improve how the energy in and as as is now called climate tech businesses work.

That’s the central set of principles for us. We also believe the S and the G deserve just as much focus. And we we try to have ESG and health and safety and diversity be the top agenda item in every single board meeting of all companies. And then we, of course, have to live that ourselves as a as an investor. That’s great. But I really appreciate getting to know BlueBear better and I feel like I learned a lot today. So thank you guys for making the time.

Thanks a lot. Thank you, Minnie. 

Aditi Maliwal — Upfront Ventures

One of the newest partners at Upfront, Aditi Maliwal, tells us about her path to partner, her investments in Chime, BetterUp, and her time in Google corp dev.

 

View Transcript

Great. Hey, Aditi. Hey. So we’re here with Aditi Maliwal. You’re one of the newest partners at Upfront and before Upfront you were at Google both in Corp Dev and as a product manager. And prior to Google, you were at CrossLink Capital and you led the investments in Chime and BetterUp. Well done.

Those were exciting. Yeah. Still are very exciting. Yeah. So, you know, we had Kara on the podcast and we talked about some of the basics about Upfront being a $400 million dollar fund. So to three to five million dollars sweetspot for a check size. But I’m super curious. You’ve had these great successes, great experience. Great experience. How did you choose Upfront?

That’s actually a very fun question for me to answer. So Kara, as I like to say, was on my personal board of directors before I even was thinking about coming back into venture. So when I was at CrossLink, I met Kara at South by Southwest. And so over time, I’d come to Kara to talk to her about a variety of things from job opportunities I was looking at or investments I was looking at, or friends who were starting companies that I wanted to send her way.

And it was actually spending time looking at a couple of ideas in the women’s health space. And Kara said to me, you know, I’ve spent quite a bit of time in that ecosystem looking at a couple different companies. Are you if you are interested, instead of having instead of building a company in the space, like why don’t you come and join upfront and potentially think of funding some of these companies?

And she was like, why do you come down to L.A. and spend some time with Mark, spend some time with the broader team, came down, spend time with Mark, spend time with Greg, Kobe, Kevin, Eve and Michael. And then ultimately there were a couple of key things that sort of got me hooked onto the the front story here.

I think the team is truly very transparent in the way that they work and the way that they do things to play up to the pun. We are very upfront.

Upfront. I mean, but transparent sometimes is code word for like direct or correct. The firm is very direct.

And, you know, people are not sort of hiding behind v.c lingo or people don’t expect and the firm very much functions in that we are truly a find that works together because we’re not afraid of being direct with each other and whether it’s positive, whether it’s something that’s like providing critical feedback, whatever it may be. And so that was something I learned through the process. I mean, the second thing, which is kind of a strange way to think about venture, but I talked to a bunch of venture funds and I went through a process.

And venture funds aren’t actually that innovative. We invest in innovation, but they aren’t actually quite as innovative. And Mark and Kara, Greg, Eve, Kobe, Michael, Kevin are all really part of this like very innovative story here where, for example, like, you know, partner meetings you to run a certain way and ran a certain way for 12 years. And a couple of people push back and like, this is really not the way that is most effective.

We should be spending more time doing some of looking at pipeline and we should spend less time on pipeline, more time on problem trials or whatever it may be. And we’ve iterated on what our partner meeting looks like a whole bunch of times. And then we’ve also iterated on a variety of different processes internally, which I think was something that I learned and saw through the process, which was just incredibly different from every fund that I spend time with. And I think that’s truly led by Mark.

How is your process easier process for decision making on where to put your investments changed?

So I would say that the way. We even go through the process, as we will tell an entrepreneur right in the beginning, kind of where our heads at when I used to work in Menger, I think I was also in a position where I sort of take a meeting and then be like, great, I’ll come back to you. You know, after we’ve sync it up as a team now and I’ve seen this sort of with some of our other partners is people will be a lot more open to giving feedback in the meeting itself and sort of having a real conversation around, hey, these are the areas that I’m kind of stuck on.

Or these are the areas I know my partnership is not going to get excited about. And then kind of walking them through what our process even looks like as a firm.  I’m going to walk you through my steps today in this meeting as to what I’m going to do and then come to a decision by this date, which I think is something laying that out well in advance is, I would assume, helpful for an entrepreneur.

Yeah. Being able to say we’ll come to a decision by a date is. Yeah. Is a strong statement.

Yeah. And unusual. Yeah. I’m curious about this question of innovation because. Well, working even at our fund I feel like it’s the it’s the least tech company I’ve worked at. What do you think lies ahead in terms of innovation for Risi, is it? Is there something you can see that would be it’s like a step function change or is it changes like how you run your meeting and how the processes handled?

Yeah.

I mean, having worked at Google, I’ll tell you, I mean, people talk about GV a lot, obviously, and people talk about a lot of funds now starting to use data science for things like sourcing and then, you know, hiring an entire engineering team and having like people mining or scraping the Internet for signals that are then going to tell you where people are performing. I mean, that’s obviously like one side of it. And there are folks who are investing in that.

I think other areas of innovation that lie within venture is I mean, this is a people run business.

We’re not going to see the same prototypical successful investor with the exact same background. And I see that see this a lot at upfront in that all of us, I think, have had some have spent some time operating. And obviously we have a few partners who are founders, but we also have some partners who’ve only ever invested. And that’s, I think, the appreciation that people can come from different backgrounds.

So that’s where I believe venture capital has to spend a lot of time thinking about.

And right now, you guys are an eight person fund. Yes. Or a partner. A partner. So that’s what I meant. And so for for finding those pockets of innovation, I think that was really well said. Do you do need one person to be the champion? Can you share more about how that works?

Yeah. So I think the so the way that we actually go about some of our decisions is every partner at upfront. All eight of us are empowered to make our own decisions, which is very much if I got very, very excited about it, one particular deal I would run point on sort of making sure I understand my company that I’m excited about. I understand the thesis.

I’ve potentially built some muscle in terms of understanding that market. And then in a way, I’m coming into the partnership, educating my partnership. I think traditional funds are kind of like, you know, stacked in a way. It’s like you have your associate, your principal, your partner, your managing director, and then you go to icey.

That’s really not the way we work. We have to associates it upfront and they kind of have the opportunity if they want to jump in on a deal or if there’s something that I think Josh or Alice might be particularly well-suited to all say, like, hey, I’d love to bring Josh into this. And if Josh is interested, Josh can decide. And then oftentimes Josh will bring opportunities to me as well. And so we get to work together there.

It’s nice also that upfront has promoted a couple of its principles to partner, which is this is pretty you don’t see it all the time.

We’re not at every firm, but also only to associates. And eight partners. Yeah. I hadn’t thought about it that clearly. Totally. It’s the it’s the upside down pyramid. And I think and the way to think about it is that we’re not.

Your traditional venture fund in that, you know, every partner has an associate dedicated to them. I was an associate. Not that long ago.

And I also have run my own deals before, and the expectation is I get this experience to run my deal.

And so I think that inverted pyramid is sort of functionally empowering you, but also reminding you like you’re responsible.

Yeah, you’re on it. Responsible, you’re leading this. Can we go back a little bit?

And before that, you’re the only person I’ve ever met who has a personal board of directors. Can you talk about that for a second?

Yeah. So I don’t think people don’t officially formalize it. And so I’ve probably been one of the very few people who’ve decide who’s decided to formalize it. My personal board of directors includes Kara, And then there are two others were on my personal board of directors. And they were one is obviously a family member, my father. 

He’s also actually an investor. He runs a private equity fund in India. And the other person is actually someone who’s a close mentor and has nothing to do with my professional world and is somebody that I go to for sort of seeking guidance on the transitions especially.

I think the transitions are always times when we are a lot more introspective. I think when we’re in it, it’s we’re doing the job. It’s harder to be as introspective when it’s going well.

Yeah, it’s not going well. There’s a time for introspection.

Well, can I ask a little bit about how how your previous experience has informed your current themes you’re looking at in your current work.

Yeah, absolutely. when I was at CrossLink investing earlier on, I invested in Better Up and chime amongst a couple other companies and that sort of got me pretty excited, I think in the categories of fintech and people call it future of work.

But I think of it around employee engagement, employee retention and thinking stronger around like how to make somebody in the workplace a better worker or empower them to be more efficient.

And so I do spend time in those categories. Those are interesting to me today. And actually carrying those on. I when I went into Google, I ended up actually spending within Corb Dev and then in product spending time on payments specifically as well. That was definitely to Cat. That was a category that sort of translated through.

And so tell me just what you were doing at Korp, Dev. So yeah, mostly corp dev is doing acquisitions. Yes.

So the way Corp Dev works is it was mostly doing acquisitions. We have yet to do an M. We mostly do ways. And we do have we do uniquely make a few strategic investments off balance sheet. So this is different to GV Capital G. And I got to work on actually some of those when I was there as well. And so what Kaup Dev was doing and what I specifically was doing is sort of being the eyes and ears. Spending a lot of time outward, facing finding new three new themes, new opportunities, investment areas, either product investment or us acquiring a company in the space.

So, you know, we looked at things like what is the future of news?

Whereas a-r going, how do we think more about social, you know, social, something Google didn’t necessarily focus on and Corp Dev would be having these thoughts about what’s the future of news.

Yes. And then bringing it back to the executive team or. Yeah.

Most executives obviously see a variety of different companies that will come through their product managers as product managers spend a lot of time thinking about what the competition looks like in the ecosystem.

But when you have corp dev, which is usually eyes and ears for the company out there kind of meeting with folks, you also get an indication of how these businesses are doing, which I think is differentiated. But also at the same time, oftentimes, I don’t know, podcast became very interesting in 2016 like that sort of kind of exploded in 2016.

It’s so interesting. You’re so low in 2016 when it did explode. Google didn’t have a Google podcast app and we. And then we had a team that actually ended up building that and they spent time thinking about it. But we thought we went out and met with sort of every podcast company and got to know just a lot about how did these businesses work and like where did Google have an opportunity to play? Like, again, do we play that role of aggregation?

Do we play the role of building our own series? We were production content studio, whatever it may be.

And then how did you interact with, like Google Ventures? The nice thing is we’re all in Mountain View. We do have everyone Corb Dev, G.B. and Capital G.

The nice thing. Yeah, depending on where you live. Yeah. Really? So everyone had a space in Mountain View. We personally. The way that Google Corp Dev interacted is we had really good relationships with g.d and capital G. Capital G is run by David Laue, who was formerly the head of Corp Dev at Google and so has a very strong relationship with the with the actual team itself.

And then in addition to that, you know, I think that GV in Capital G make decisions and make investment choices very independently. They function as sort of standalone funds, from my understanding, and corp dev functions very much as we to your point, get through to a stakeholder, buy in and spend a lot of time with internal management to make our decision. We don’t have our decisions are sort of made as the business less as us as an individual entity.

How did you decide between those two paths between investing in M&A?

to be clear, we did not do very many investments. Our predominant business was are predominantly we spend time acquiring businesses and a lot of talent, too, obviously. But I think the decision really came to is this business that we are looking to potentially acquire, invest, direct.

Would it be directly beneficial to a specific product area? Is it enhancing a product area or taking us into a different line that that product area might be exploring in the future?

And just for practical advice. How do you get to APM at Google? Good question. 

I think most people are pretty open on LinkedIn. I mean, I still view LinkedIn as like one of the best resources. And then I would say a lot of PMS are actually also angel investors and have Ángeles profiles. 

Also does e-mail me and I will usually I can find it in to some different product area. Great, great.

OK, so you were at Corb Dev. You doing the A’s? And what why did you move to be APM?

I just felt you spend a lot of time being the eyes and ears of the business. But I wasn’t spending time in the business. 

And actually, I’m from Singapore, so I grew up in Southeast Asia.

I grew up between India, Hong Kong and Singapore.

Originally from India. But spent my most formative years in Singapore.

And so there was a there is a team within Google called the Next Billion Users Team. And so I joined to be a product manager on the next billion users team.

So are what we call the next billion user markets were India, Brazil, China, Indonesia, amongst others. So to have the opportunity one to spend more time in the ecosystem that I grew up in and then building a product for them, I just thought was incredibly unique. And I got to be really part of the core working business. And so that was why I wanted to be APM. Did you run this past the board?

I did. I actually did run it past the board, the virtual world of China. I actually did run it past the board and a few board members not naming which ones pushed back and said, you know, do you really want to be a product manager? You’re not going to spend any more time talking to, you know, startups and spending time with founders. You’re actually going to spend a lot of time talking to users and spending a ton of time sort of.

What was the best part about being a p_m_ was sort of running the user research trips and like getting to go into the market and see testing features with users and kind of getting a very immediate sense of feedback, which, by the way, is such a different feeling from venture capital when. You could kind of not see feedback on businesses that you invest in for a long time because these feedback loops are so much longer. 

Yeah. And like before I move off Google.

You have talked some about how Google has really informed your current investment thesis or one of your theses of sort of things being built by Google being things you want invest in. Tell me more about how Google plays in. Yeah.

So I think of Google as this incredible ecosystem. It’s obviously over a hundred thousand person company now, but they have physical space. They own land. We have our cafeterias and all their things. But Google itself is actually a builder of incredible software that is built for Googlers. So Googlers will spend a lot of time using internal tools to sort of make their days more efficient or make their or to find things, whether it’s internal search, whether it’s obviously we have hangouts and a variety of other products like that.

I have been thinking more about the internal I sort of made a list of every single internal tool that I used when I was at Google and then kind of broke it down into which category of the user’s workflow it falls into and whether there are interesting businesses in each of those categories. So sort of like I would say, breaking apart. What I think was a very cohesive machine in2 if they ever thought about selling any of that product to other companies or other businesses, they could actually be very profitable standalone companies.

But that’s not what Google does. And Google builds a lot for the hundred thousand person company.

Got it. So this is more like companies that are addressing this need. Google’s too proud, too likes to build everything itself. But if there were a company, they were building better. MOMA is the Google internal search to share some yowling something like that? Yeah.

So those are sort of. So those are kind of categories and that kind of goes into this like broader thesis of, as we call it, future of work.

Yeah. Yeah. I mean Google had thousands and thousands of people in just in like their H.R. people obst about.

Exactly. Yeah. Like more than 5000 people and just the people.

I just think that’s incredible. Yeah. More than 5000 people in people up. Yeah. They have.

I mean I don’t remember the exact number, but people people at Google is a very large team. Just because people are at the core of the business like that is one thing I will give Google a lot of credit for is the way that I just think employees are so empowered at the company.

And I think like you see this a lot today, especially like obviously Google is like in the media a lot.

And people are talking about what’s happened. And not to say everything is. I mean, there have been many not so positive things that are going on there. But I think Google is one of those companies that gives employees an opportunity to speak.

I think there have been I think I can think of many, many large organizations around the world where as an employee, you just aren’t given a plot or you aren’t given a voice.

You get fired or you. Exactly. Exactly. Not to say not to be so blunt, but that’s like very much the case.

I’d love to hear a little bit. FinTech has had a really good week this week and whenever this airs, credit karma just got bought for $7 billion and you had some fintech focus. Yes. Tell us about your investment in China and how you thought about that and where that might have moved to today.

Yeah, I mean, chime was an incredible opportunity. Very, very. It was a very early company.

When we looked at it, we at CrossLink, I worked very closely with the partner, Jim voie, and we led their series A.

And at the time, Neil Banks weren’t a thing. People were not talking about Neil Banks, the term neo bank, I don’t even think existed. And you just. And, you know, we spent a lot of time thinking about. I remember Jim and I being spending time in a conference room talking about how miserable my Bank of America OP experience was and how withdrawing cash was sort of the easiest thing that I could do with them. And really, that was very not very much all that was created on the product itself.

And you know, nothing against Bank of America because the app has definitely increased, increasingly improved since then. But I think we’ve done a lot of time talking about that. And in turn, we spend a lot of time thinking about customer acquisition. We spent a lot of time thinking about how China would go out and build their consumer base. And funnily enough, when China was starting off.

They were obviously they were focusing on this on a similar millennial demographic. But one of China’s early investors also gave them access to Dr. Phil. And so they were spending a lot of time advertising. They spent some marketing dollars on advertising with Dr. Phil. And so that gave them access to a different audience. And so, you know, for a while, China kind of had these two very different groups, target user groups. And when we were making the investment, I remember Jim and I talking a lot about like moms in the Midwest and how they could potentially be chime like real times, Digg users.

What ended up happening and I think about this a lot as then I went on to think about this when I was being a p_m_ is that oftentimes like free channels of marketing are ones that you sort of need to really think about whether you take them. And sometimes they can kind of lead you down a path which doesn’t necessarily end up being quite so fruitful, or in some cases you just realize it’s not the right demographic for your product. So anyway, we ended up making that investment in time then, and Jim and I worked very closely with Chris and Ryan on that.

And, the most interesting thing I think about Chime is I don’t know. I like to do this well, go on Glassdoor and sort of look at employee reviews of some of the companies that are invested in better upping one and China being the other. And China has some of the most positive employee reviews and they have such incredible employee engagement and retention. And Pete, there are almost no negative reviews online on Glassdoor on time. And I just think that just gives me so much happiness in the business and the culture.

You’ve done some great investments, like what are those tools looking on Glassdoor, I think is a great one.

But like, how do you just do better? Almost like basic analysts work.

So I actually love using App Annie, for example, like I think App Annie truly gives me some incredibly helpful data in terms of traffic. And I think traffic can be. So I’ll give you an example. Wish dot com. So wish dot com. Their app was not growing very fast.

It was from about twenty fourteen to twenty sixteen mid-2017 stayed relatively stagnant. Twenty seventeen in the app. In app. And you suddenly see this uptick and it’s kind of crazy that like what’s going on suddenly app anay is like showing me that this company is starting to do like really really well. They are getting they’ve then gone on to like go and reduce their shipping time. They’ve also maybe hit their stride on a user demographic like you’re starting to think like, hey, who was wished all com actually built for.

And it turned out that women between the age of 15 and 18 turned out to be a very profitable demographic for them. And that’s how they focus. So I use a lot.

I spent a lot of time on basic analytic tools. So like I do use app and it’s very traditional. I use similar web. Sounds weird, but I do use them. I also use Alexa like Alexa, the web analytics product. And then the other thing, Glassdoor is great. Like Glassdoor is sort of your hacky way to figure out, are people happy there if people aren’t happy?

You probably have a bigger fundamental issue than like I can’t raise 10 million dollars in my series A and then I think that you can also go on. Funnily enough, some companies have Yelp reviews, so they actually have like Yelp listings and then you can go look at those things. So I look at a lot of inside voices like I really want to hear the voice of the person in there. And then I’m not not at all shame. I’m very shameless.

I’ll put it this way. And we’ll LinkedIn message employees all the time and just be like, hey, I’d love to chat with you here.

If you manage to say, as I’m reviewing the company and just saying. So you talked about about getting to know a space we’re investing in. We all know how fun that is to climb the steep learning curve. How do you figure out where do you start and how do you figure out? For example, the competitive landscape, which can sometimes have hidden things all around it?

So if I start very simply, keyword search is pretty phenomenal.

Thank God for that.

It’s true how many times people not mentioned the predator that appears at the top of the stack.

Exactly. So keyword search really does work. You know, it’s interesting. Twitter has recently been in a very interesting source for competitive analysis.

So I’ve been spending time looking at enterprise banking. For example, banks or sort of infrastructure products that are building for enterprises. And I.

Started doing a search on Twitter for this, and you will find that there are people who are talking about it and you can spend time reaching out to them and everyone by the way, everybody does think of themselves as an expert on Twitter, apparently.

How about like better up better app is a is interesting to me because right now it feels very crap like there’s actually I don’t totally know it better. It’s sort of coaching. Yeah. Coaching for employees. Right. That that space seems so crowded. Yeah. I know you’re focused on on employees. What did you call it. Engaging you have.

Yeah. Yeah. Great. So how how now do you sort out the the many different people in this space.

Yeah. So I think of better up really as like one of the I do think of them as sort of the first mover in the space.

They kind of like people have always had L.A. departments, like large organizations have had l.a.’s Cup business units. And I think better up especially and like Alexia Netty spent a lot of time realizing that audience, but now each time realizing they just saw it pretty much right there, which was this is not actually enabled by technology. And like we need to find a way to truly enable this and also increase accessibility.

So I think a lot of times learning and development was very much spent on for the high performer or the executive team. But when in reality at larger businesses, you have people who are growing up the ranks and you want to empower them the right way. So I think better up really did create a category that didn’t necessarily was not tech enabled at the time. That being said, I think, yes, you’re right.

There are a lot of people trying to go after that one. Do you see the success of one company? You’re kind of like, you know, if I were a founder, I would say, like, hey, that seem like an interesting category. There’s not necessarily going to be a winner takes all. Like, why don’t I try to build something similar? So I think, like the way for me now to sort of sort of find the signal to noise is.

I think I think of the employee as the center of every business. Are there ways that you incentivize them through perks? Are there ways that you sort of make processes in their lives more efficient? Like, are they shipping code constantly if their shipping code? Can they do it faster? Can they do it? Are there better communication tools? So there are many. I think of even future of work and I think of even like the employee as the center as like this broader theme by every day and every part of my working day has different ways by which it can be made more efficient.

has your your personal board or your actual, you know, parents or anything? What are some what is Kerry told you? What it was Ben’s advice that really stood out for you.

So it’s interesting, actually, Mark and Greg to my other partners actually gave me this advice right when I joined, which was go-slow.

I think there’s a tendency right when you get back into or get into venture or go get back into venture, which is guns blazing.

I have no boards like I have a lot of space. I’ve a lot of time. I’m gonna write 17 checks in the next seven years or whatever. Not even like in the next five years may get crazier.

I don’t know. They’ve sort of said to me.

They both gave me advice from a different perspective and kind of both came to the conclusion that like going slow helps you build that muscle, which is the filter muscle.And so that was like a piece of advice that truly stuck out to me. And then something actually even said to me,

was like, go with your gut. Like, you can only trust the only thing you can trust is yourself in this process. And like, obviously, we’ve taken a bet on you in the same way that you will take a bet on the founders. You go going back. But he was like, your gut instinct has led you to some good investments and has led you to some mediocre investments.

However, there have been the thing, the only thing that you had and those moments were your gut instinct. Obviously, information, let’s not forget that.

Those are two things that I still think about every single day as I’m evaluating a company, whether I’m like, okay, is this somebody I want to spend time with? 

I like it. One more just before we wrap up. I have no data on this. I said anecdotally in L.A., the women in venture have this disproportionate like have played had been badass athletes. And you were the captain of your squash team, D1 Stanford squash team, right?

Yeah. I mean, being an athlete is only made me better and I think like more focused on my job. I don’t know what it’s like not to be an athlete. So let me put it in context that I have always had schedules, I’ve always had routines, I’ve always had discipline in terms of like there is a goal and there we’re working towards the goal. I think the one thing about being an athlete is we always knew like we want to go to nationals and make sure we win at Nationals.

And we don’t like certain positions that we wanted to play or certain like positions we wanted to end that. I think the big thing that the or one of the big takeaways from being an athlete there is actually creating mini goals is incredibly important in the journey and like these mini milestones and then celebrating them. I think those are two things that like we’ve that I really like learned from being an athlete. And that’s like what I in-court in corporate in my daily life today.

Oh, that’s lovely. Do any mini goals right now to share? Well, one mini goal that I’m always that has sort of like come up recently is finding I think there is.

We’re establishing our office in San Francisco and we’re sort of establishing our presence up there. That’s I kind of set up the office a few a couple months ago. And so one of the many goals is making sure that people know that we have a presence there, kind of getting that out there in the ecosystem and making sure that entrepreneurs have a place to come and work out of two that are within our ecosystem or sort of extensions of. And so if your founders want to come work in our space like more than welcome to it’s just me up there right now.

I love it. L.A. is expanding to San Francisco. Take that long. S.F. lat long. L.A., S.F..

All right. All right. Thank you so much. This has been terrific. Thank you. Thanks to D.C.. Great to have you. Thank you.