Scott Stanford — ACME

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

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

View Transcript

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

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

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

Great.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

None of that.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That’s right. And what about that?

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

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

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

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

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

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

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

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

Yeah, well, it’s great.

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

Dan Zinn — Rivonia Road

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

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

View Transcript

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

Hey, Dan.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Right?

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

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

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

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

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

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

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

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

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

Where are people not? 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How much money do you give people at?

Depends how much you want to get.

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

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

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

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

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

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

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

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

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

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

So I’m a venture backed business.

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

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

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

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

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

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

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

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

Where was I going exactly?

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

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

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

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

Back to the philosophical then. Thank you.

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

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

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

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

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

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

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

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

So. Yeah, exactly.

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

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

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

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

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

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

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

Nicole Quinn — Lightspeed

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

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

View Transcript

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

Thanks so much for having me. Many great.

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

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

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

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

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

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

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

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

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

Great.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So, yeah, we all vote.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I’ve been to YC. Exactly.

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

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

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

What is going to happen with retailers?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Yeah. All right.

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

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

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

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

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

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

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

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

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

Totally brilliant.

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

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

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

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

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

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

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

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

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

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

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

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

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

Marcos Gonzalez — Vamos Ventures

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

View Transcript

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

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

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

So that’s where we are.

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

We have started to invest.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And so.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That’s great.

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

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

Thanks, Marcus.

Arjan Schutte — Core Innovation Capital

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

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

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

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

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

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

Where where does that come from?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I’m sorry. It’s not funny. Yeah. OK.

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

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

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

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

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

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

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

And so there was a formidable founder who is a force of nature, and that’s an important part. And then there’s a TAM know, that’s like a trillion dollar tin, like the world spends two trillion dollars on fees for getting money from A to B..

But otherwise, honestly, when we invest it in, like, you know, mid 13, we had no clue that any bank would ever buy them, let alone be moving billions of dollars across borders with them today.

And we were willing to take a big bet very early, and I’m glad that we’ve done it, although there’s plenty of examples where we did it. You know, I rue the day.

Yeah.

And so. Right. So this is your third fund. You’ve been doing this for a while.

Also, just can you tell me the story of how how you came to be doing this?

Sure. Know very much by accident. So out of college, I fell into a startup. I hacked my way into college grading system, and that got me a job at a startup down the hill in Portland, Oregon. And so I was developing educational software and had a real B in my bonnet around, you know, making education better by by developing software for the Media Lab in MIT, which your firm has a connection to, and a couple other education startups.

And then someone gave me a book in 2002 about Muhammad Yunus and Grameen Bank and micro lending, which is all completely new to me. And I read that cover to cover over a weekend. And I was like, holy moly, that is awesome. I love everything that that it’s about, and I was just blown away how this is basically a Bangladeshi man who was a US trained economist and who learned about free markets. And he went back and he devised a system of lending which is economically empowering, which is incredibly efficient.

These are loans to the poorest people on the planet of Earth, and they have one to two percent default rates, which is insane. Jamie Diamond would kill for the thrill of a default rate from a prime customer. So anyway, I was just like, wow, this whole thing is so very cool. And so I was looking to start something like that in the US. I realized for a variety of reasons that microfinance isn’t going to work in the US.

And someone introduced me to a bunch of hippie bankers in the south side of Chicago who had started a financial institution called ShoreBank in the 60s when all the banks were getting a lot of shit for redlining and they were not making loans or black people lived. And these were a bunch of renegades who moved their bank into like the South Side black ghetto of Chicago and created a cottage industry around community economic development. And now there are hundreds of Shore banks around the United States.

And the other aha was, you know, they were 50 years into their journey and that whole cottage industry was serving one half of one percent of the population. And so I was like, well, this is great, but it doesn’t scale right, like half a century later, it’s just barely scratching the surface. They’re incredible.

Place based organizations are hyper local. Mm hmm.

And so how do you solve the problem at a national level? And so a woman called Jennifer Tushar and I started a think tank spun off from ShoreBank called the Center for Financial Services Innovation CFSI, now called the Financial Health Network, and started asking the question of how can technology basically. Creates economic empowerment, and I started making small investments off the side of my desk and one thing led to another as like this will be my next startup, so.

So many questions there. Can we can can I rewind and ask why microlending doesn’t work in the US? Yeah, totally. What makes microlending work is shame and shame is a is a. Is a deep cultural phenomenon, and the reason that the default rates are so low is because there is relatively little migration in poor communities in developing countries. You’re kind of grow up in the same tribe, in the same place, and so every week you pay, you make your payment against your loan and you get together with a handful of other people.

And if someone doesn’t have payment, then the other ones in the group have to pay for the person who couldn’t pay. And the shame is the red like it is just unconscionable to not make a payment, there’s just no fucking way that you’ll do it. And hence, it’s so people scramble and just make it work because they’re because they’re they don’t want to live in shame with their neighbors. And for a variety of reasons, good, bad or indifferent and not all bad, you know, we don’t quite have that cultural construct here and and poor communities are much more migratory here.

So you came from a think tank and now Core, you’re here in L.A. Kat, who I know a little bit. She’s in the Bay Area and you’re you’re investing in the US.

Across the US.

Yep. Fantastic. So let’s go back to kind of what you’re investing in.

We talked some about infrastructure and fees. You know, it seems like fees don’t matter if I’m not making any money. I mean, not don’t matter. But like how do you think about helping people have jobs, keep jobs, have jobs that pay more money, that sort of aspect?

Yeah, that’s a great question. Something I’ve been I’ve been much more mindful of lately, 10 years in. And we collect both our financial performance and we measure the externalities of our work. So what is our social impact? And our portfolio companies have in the aggregate created about forty five billion dollars of savings for twenty five million Americans. 80 percent of them are low moderate income. And that’s starting to really add up. And I’m really excited about that.

If our investors didn’t care about a return and thankfully all of them do, and thankfully all of them are happy we would have an incredible social return on investment. Right.

If they were all foundations and they gave this to a charity, it’s something like we’ve created six hundred dollars for every one dollar that has been invested in the core in terms of of measurable value to an end consumer, which is should be a wake up call to philanthropy, which can hardly deliver this kind of our why.

But all that you know, all that said, I’m cognizant of the fact that. Cheaper and better financial services are positive, but only mildly so. And what people, as you say, need much more than the cheaper alternative to a payday loan or a cheaper way to find an auto insurance or whatnot is they need more income, they need more steady income, and they need better protection from shocks because it shocks that send people down these rat holes that they can never come back out of.

So better, smarter insurance. And then on the income side, you know, we’ve we’ve looked for quite some time in small business finance, which is a big driver for income. We spend a lot of time looking in and around housing because for so many people, home ownership still is. There is the the main way to create some form of wealth. It’s basically forced savings regime across all of the positive and negative stories is net positive for most people.

And you’re measuring your social impact. I just didn’t don’t want to let that that that comment go away.

I don’t know a lot of VCx who measure their social impacts.

Yeah. I don’t either. More should I said read like we’re badgering our portfolio companies to measure everything, not just their financials. Read to read like we’re talking about OKRs and KPIs all day long and what are the right ones and what are our dashboards and all the stuff.

So we measure what we care about, right you know, like we have a bee in our bonnet about leaving the campsite a little bit better and I feel like, you know, being in this asset class, so many people do.

We’re like, we’re all doing this because we want the world to be a little bit better.

How how how do we know we’re doing? Well against that. We’re like we know how well we’re doing or not financially. And for almost all of us, that’s basically it. You know, we’ve measured it for a decade now and we found lots of opportunities to do a better job and to and to avoid this kind of business model, to seek out this kind of business model.

Do you have any specific it sounds specific recommendations.

Yeah, we basically measure three things skill, quality and alignment. And scale is like, are we reaching enough people because the reach five people, not interesting, we want to reach like the lion’s share of the US population. That’s the way you can make a dent. And then within within the scale is like reaching the right people. We’re like super wealthy people. They’re fine, the super wealthy. 

And then quality is like, you know, are are we advancing better quality products that are cheaper, that help in other ways? Read like by using this, your credit score can go up really good performance can actually be net positive in other ways or you’re better protected in case of a shock or, you know, et cetera, et cetera. 

And then alignment is kind of the adventure veteran. I’d like if we’re right, we’re not compromising returns. In favor of social benefits, if we’re right, then therefore investing in companies that create more value to consumers, they’ll be more valuable companies. And so we’re just mathematically measuring the correlation between the financial performance of our companies and the social performance of our companies. Mm hmm.

Mm hmm. One of the things you said was it’ll lead to improved credit scores or things.

Can you tell me some about where that’s headed and how does data factor into the future?

Yeah, and so many exciting ways. Great answer. Thanks.

Like we’ve we’ve had credit scores for a long time and credit scores have have basically taken very few inputs. Our performance on other credit instruments, those are the traditional trade lines. And we’re increasing nontraditional trade lines all the time. And it’s a it’s a fairly laggy process. I invested in two thousand seven in a company called RentBureau that we sold for not that much to Experian that collected rental bureau rental payment data so that you could report it and build a credit score.

Only now, how many years later, 15 years later, this. The FICO nine score contemplates rental data. And but that’s an accelerating curve of adoption in terms of non-traditional data, and then people use a credit score for more and more things, are the permissible use for credit scores is expanding, not contracting. And that’s just the official credit score in the official credit bureaus.

There’s a whole litany of of unofficial credit scores and another interesting trend of data that I’m super excited about is. You know, today it’s FAANG, the big tech companies have largely monetized our data exhaust.

Mm hmm. And I’m excited for that to shift. Mm hmm. And for us to be able to monetize more of our own data exhaust.

Mm hmm. To come back to an earlier question of like, you know, how do you make up for people’s income? I’d like since the 70s, the how we’re paid for our time has flattened well, our productivity has gone up.

So that’s that’s why people are basically, you know, dusted for inflation as poor, rich as they were, you know, 40 years ago, more or less. You know, we need to find more and different ways by which to bolster our net income. You wrote a great title. It was something like ten, nine, nine problems, but two eight one. That’s pretty good because there’s got to be a lot of different ways of bolstering, as you say, our income.

More people are making more of their income on form ten ninety nine versus form W-2. So as a contractor versus an employee and just as a secular matter, just for purely financially, that is to the consumers. Disinterest. Because our whole social safety net for four, however good or bad it is, I am a European, so it’s bad here.

Is is conceived through four two. Mm hmm. Right.

Are pre tax benefits are accessed for one in retirement health insurance. All the stuff is through a W-2 relationship, not a personal relationship. So that is a policy question, and I think.

The sad reality is like what made America’s middle class the richest middle class in the history of the planet. Was the labor union, hmm? And it was Labor who we love to hate today who fought tooth and nail, and it did ugly things in ugly ways and just pushed and pushed and pushed and pushed obscenely.

You know, in ways that is very distasteful to to us modern people, but got like a working class, a great income, and with labor mostly dead and in many cases I feel like. Rightfully so, random in so many so much meritocracy has been upside down but what will take its place, right, because.

Yeah, so we’ll see. Meanwhile, we’re writing checks against things that can just create financial efficiencies no matter where things go, but it is a real question. Yeah.

So I want to save time to ask you a couple of other questions. But in terms of where you’re writing checks, I think we kind of covered your your point of view of the world.

Anything else about Core to know? 

I can’t compete against the next guy or gal on finding a full stack developer. But where we can really help is like, you know, your chief risk officer, your chief capital markets person or, you know, that kind of thing. That’s easy for us. And then navigating all those all those relationships, how do you find a bank? How do you find an insurance carrier? How do you deal with the state regulators versus the OCC versus the FDIC versus the Fed?

All that stuff? We love that stuff.

It shows, that’s great. OK, first first random question. If you if you could start a company, what would you start?

What would it be solving?

I think I’d want to start a company that employed a lot of people and paid them a great living wage and built an ESOP in a world where ESOPs don’t really exist right in the startup world, everyone’s in ESOP. And that’s kind of part of the ethos here. That’s not true in most of the economy. And with no pensions, the lion’s share of people are just making their money on their hourly toil. And so so I’d like maybe like start a light industrial company and like, you know, make auto parts or plane parts or drone parts or something like that and and build a great ESOP so that people could really build, like, you know, intergenerational wealth as part of a normal working class gig.

Mm hmm. So having equity in the company that they are building, I like that.

Um, would you say, like, do you feel like you did a big career change in your life? Like, I was done with DA Wallach who was on tour with Lady Gaga before becoming a biotech investor. I of the.

Oh, he’s amazing. And but he was such a big career change. Like, do you feel like you did that?

Yeah, totally, yes, very much so. I feel like I’m an accidental v.c. I’ve I’ve always just followed my nose and my career. I have I’ve never made the, you know, the move to the like, learn a skill or look and use it later.

I’ve just always followed my nose right and realize that the best things that have come to me have been a function of serendipity and not volition.

I think this has been a great discussion. I don’t think I have a lot of other questions. I know I told you I was going to ask you about about how you evaluate founders, because I heard you say something great, which is actually negotiating the terms, yet a lot comes out.

Yeah. I always tell the team I wish we could negotiate the terms before we negotiate a term sheet. Right. Because everyone’s courting each other right before that point. We want to be the VC of choice. They want to be the entrepreneur of choice. And so it’s all best foot forward and everyone’s courting each other and it’s all good and it’s typically way too fast.

And you have no idea who the counterparty is, which, by the way, I think is a is a problematic phenomenon where we’re engaging in ten year relationships, literally ten years plus for successful outcomes and forcing on both sides, you know, forcing this into a you know, into a seven, 14 day decision process. Neither party knows who they’re dealing with–unless you do for better. For worse. We did an analysis for L.P meeting the other day or the other month.

To see how long we’ve known founders before we get a check on average at 17 months. Hmm, that isn’t to say that you need to run the 17 month series a process to get our dollars. Don’t. I’m not saying that.

But on the term sheet, you know, instead of you’re not courting each other anymore, you’re suddenly negotiating and there is such a diversity of how we negotiate. And there is so much useful signal for making an investment decision in how a founder negotiates, right, someone can be a product visionary but not be able to strike a deal if their life depends on it. And you kind of have to do all kinds of deals in order to make a company work.

Hmm.

And so, yeah, we found ourselves occasionally in situations where like, oh, my gosh, like we’re really doing this for like we’re. Yeah.

Well, I’m not going to ask you any more about negotiating term sheets, although I could instead just say thank you so much for coming on the podcast.

And, you know, I hope you I hope you can bring back the American dream.

Really. Well, it’s going to take a bunch of us, so thanks. I really enjoyed it. I so appreciate your your happy curiosity and enthusiasm for for your subjects.

Mark Suster — Upfront Ventures

Mark Suster from Upfront explains why the best time to talk to founders about fundraising is 3-4 months after their last fundraise.  
 
He was kind enough to share that framework and others this week on LAV.   #longla

View Transcript

Today I have Mark Suster with me. I was planning to say that Mark is the best known VC in L.A., but there was a big announcement earlier this week. Until recently, Mark was the co managing partner with Yves Sisteron at Upfront. But as of this week, he is the co managing partner with Kara Nortman as well.

Mark, I’m pretty sure that the Kara announcement doesn’t come as a big surprise to most people in L.A. Tech. But I will say it’s a big deal to women in VC, it’s a big deal for L.A. and I know it’s a big deal for Upfront. So congratulations. Thank you very much.

I appreciate it. If I could just say briefly Minnie, you know, my observation about the industry. We know that just a few years ago, only seven percent of VCs were female, so. Ninety three percent were men. And it’s an outrage that that lasted for so long and wasn’t questioned earlier. I tell the story publicly. I called an LP almost a decade ago, and when I was first trying to recruit Kara and I told them is no longer an LP, but not for this reason.

But I told them I was looking at recruiting Kara and its first response was, I hope you’re not hiring her just because she’s a woman. You didn’t even let me say what she did. And I said, OK, so Princeton undergrad, Stanford MBA, five years at Battery Ventures, credit card debt that IAC had an operating role where she helped run Citisearch. Now that I’ve told you she’s more qualified on paper than me, she’s more qualified on paper than Yves.

Can we just talk about, like, what she’s good at in my own recruiter. But that’s like the headwinds that we face. And then secondly, when you look at the great women of our industry, whether I look at Ailleen at Kleiner Perkins or even Mary Meeker. It seems somehow that women had their quit their firms and go raise their own funds in order to be in power.

And the model for our industry has got to be different. We’ve got to promote with them, because if you are in a fund that funds six, seven, eight, nine, 10, 11, 12, we’re like serious pools of capital are aggregated. You know, that’s where women need to step up and have leadership roles. And I think more people in our industry are going to just have to get out of the way and help make that happen.

Kara is not only more qualified on paper, she’s more talented than Yves I are.

And I just look, fifteen years from now when I look back and say, what did she achieve? I’m certain it will exceed anything we’ve done before.

Yeah, I also I feel like things have changed, like it feels for me. It feels substantively different. The the awareness and the people reaching out not to say anything has been solved. But I’m hopeful for the trajectory, so what does this mean for you? Are you then just going to be hobnobbing with Reese Witherspoon?

I would say Kara’s more likely to be hobnobbing with me than I am. I’m not really a celebrity, hob. No, I’m I’m sort of more of a book. Ish computer guy, but so so I mean, I’m still managing partner, right, so I’m still my primary duty’s investing. So nothing really changes. It’s really about apprenticeship. About power sharing, about inclusion/

How do you approach the apprenticeship? And I did ask four questions for you and one of your questions is really good. She said, how do you mentor people to still maintain cognitive diversity? 

So cognitive diversity matters a lot to me. And I’m going to give it to you in a story about Kevin Zhang, who’s a partner Upfront.

So Kevin came from a very nontraditional role, which is that he was an associate at upfront. We had never promoted ever an associate the partner.

He was a video gamer, somewhat introverted biology undergrad at Harvard, went to work at Boston Consulting Group in their health care practice. When he joined like quant, he ran circles around us. He was incredible. And like, he’s just an encyclopedia.

But he was an introvert, so he wasn’t a chess pounder and he wasn’t an arguer. And so I didn’t think he would even become a principal. I just thought what a great resource to do the work. But I started realizing over time that he was also very good at building his network.

So he was getting access to people that were more like him and the people that are like him, who are PhDs at MIT or Georgia Tech, that people like Kevin, a lot more of them are introverted and they’re not chess pounders. And I think humans are very tribal, and I can’t just have all chest pounding Jewish people.

Right like that.

Can’t be it can’t be that. And, you know, all loudmouths and and we have chest pounding, not Jewish people, too. But, you know, it can’t be that persona. And I started to realize Kevin was bringing something really important to the way that we thought about deals. And I started thinking about the puzzle pieces of how we bring together a team that all kind of have the same.

Let’s say ambition and competitiveness, like the same traits that you look for in a partner, hardworking, willing to do the work, you’re willing to do whatever it takes to help founders and being founder friendly like Seth Sternberg, once when I did a podcast a decade ago, he he said to me, short people hire short people and tall people hire tall people. And I laughed.

But but like short people should hire tall people, right? 

Right, and you hired or promoted Kevin, which is fantastic. And you hired most of the partners who are at Upfront now.

And give me a little of the history of you at Upfront.

OK, so let me let me first say one thing, which is the most recent partner we hired is Aditi Maliwal. She was on the podcast, she was great. She’s wonderful. She’s quite young and all the best ways. She’s an old soul. And Kara hired her. You know, we all hired her. But Kara led the process. I said to her, OK, I want to add a female partner. I didn’t say I want to add a partner. I want to add a female partner, and, you know, I don’t care if that sort of rubs a few men in the wrong way because, you know, for hundreds of years, men have had the 90 percent advantage.

And if we’re not going to fight hard to change the numbers, the numbers won’t change.

So you asked about me. I joined the firm in 2007. I was one of six partners when I joined. When I came in, I had already worked with Yves for seven years, almost eight, and I’ve said to me even before he hired me, that he thought I would be managing partner one day.

And we kind of had a 10 year plan and it only took four years, but that was like more circumstances than anything. And so in 2011, I became co managing partner and Yves was on my board of my first startup. 

He’s always nice. He’s always friendly. He’s always a gentleman. Right. And and he gets what he wants with sugar or honey, I guess, as they say. And, you know, watching someone, like, accomplish so much without ever having to be tough.

There’s a lot you can learn from that. Sure.

Sure. I don’t know if this is two questions or one, but it came from Kara. So it’s a good it’s a good one. She said, we all know you have big inspiring frameworks, which I actually didn’t know, but I like that and then explain your style debate.

So I’m not sure if that’s two or one. So roll with whichever one you like.

Well, I I think the single hardest thing for smart people, because almost everybody that we deal with in our worlds are pretty darn smart, right.

But I think it’s a thing that a lot of people struggle with is contextualizing knowledge and information.

And that’s something that I think as a skill that I’ve worked on for the last 20 years and being able to put ideas into a framework, into a box and contextualize them and be able to reference them and say, OK, now I have a decision framework and I can I can deviate from the framework. But I think a framework is a useful place to start from.

What’s a good example of contextualizing an idea and putting it into a framework? Well, for example, what should we be funding? What’s important to fund, you know, and and having like a compass of what fits in that box of what we should fund and when should we fund it? And, you know, I’m trying to develop frameworks for how we think about that. And how we thought about that in 2009 is very different than how we thought about it.

In twenty, twenty, twenty nine, we could sit on the sidelines for six months. We could take our time, we could ask them to hit milestones, we could look and see and we could write a two and a half million dollar cheque for twenty one percent of a company.

And they would be they would have customers. They would have references. We could do all those references. We had very few people like competing for the deals. And so our mindset was very different. Today, almost entirely, what we’re funding is pre revenue. Wow. Almost entirely. And why is that? OK, so here’s a framework for you is, you know, I look at the most expensive round of venture is the round in which they’re raising 10 to 12 million dollars at twenty five to forty or fifty, maybe up to 70 pre.

And maybe it’s 20 million dollars because they have enough early signs that they attract all the capital that wants to compete for those early signs and metrics, but not really the guaranteed success. So you’re paying right now if you have a billion dollar fund or a billion and a half dollars fund. But that’s the world you exist in. But our medium first check is three point five million dollars and our median ownership on first check is twenty one percent. And we know that.

But let’s take clubhouse. Right. The clubhouse could be a transformational company. Like, I’m not a hater at all. I applaud everything that they’re doing. But like clubhouse is like, let’s chuck it out there.

Let’s have some let’s have a great team of engineers working on a problem and like, iterate, iterate, iterate. But like from day one, it’s not like really solving a big world problem.

And it’s like having spent years building this thing. And the third thing that really matters a lot, Minnie is founder Upfront fit. Hmm. Yeah.

And we spent a lot of time thinking, is this someone who really wants to work with us and we’re willing to walk if we don’t think that’s the case. And so there’s a lot of attributes we look for to say, is this somebody that we truly want to work with for the next decade of our lives?

My related question is, it seems like if we’re all playing the differentiation game, like I’m more differentiated than, you know, the guy down the street, it seems like the wrong game to me. Like it seems like I’m adding no value if I’m giving you your eighth term sheets and filling. It doesn’t have to be me. It could be anyone. I’m not actually helping you any.

And I’m not sure I understood the premise,I think differentiation is everything. So let me say this.

Minnie, as you know, I always spend time saying if you look at investing, investing like VC is like a pimple on the butt of the whole world of investing, it’s such a tiny, tiny, tiny thing that we do here that we think is so self-important.

But the real money is like things like public markets and commodities and, you know, currency and all the big dollars.

And they always talk about edge like if you’re if you’re a public person and you’re investing against everyone else, you have to have edge. And I think this is don’t talk enough about edge know, they kind of do, but they don’t really.

And I would say, look, you have to know something or somebody that very few people know, and that’s something you’re not going to be the world’s expert on it and you’re not going to be the only person who knows that if you’re the only VC knows that you’re talking about the wrong market. But my goal is to make sure we’re not competing against eight hundred bucks. We might be competing against eighteen. And so I’ve asked everyone it up front to have a practice area.

And not to be scattergun. So, for example, Kara, when she joined, I’m like, you can take some time to figure out your practice area. So she did a few deals in different categories. And very quickly, I said, I think you would be great at cybersecurity. You have, like, amazing relationships. It’s a growth area. We don’t cover it as a practice today.

And people love you in that sector. You’re smart. You did it at Battery Ventures. You have like that history. And then, lo and behold, she’s gotten into great cybersecurity deals. And here’s the thing is great deals in a category like FleetSmith, which Apple bought, and she made a great return in two and a half years after investing.

But like success at Fleet Smith and Open Raven and bright like success begets more success in that category.

So let’s go through them, Aditi in our practice, focus on FinTech. And that said, she’s spending all her time on fintech. Greg has done marketplaces. He came from eBay like he knows marketplace is better than most people I know. But look at it. He did go, you goat is selling.

I can’t tell you the exact number, but I will tell you that probably in twenty twenty one it’ll pass two billion dollars with with a, B with a B like this is a real company.

Yeah. And Greg was at the idea of formation stage of goat. Right. Like it’s really like a lot of it was his idea. He doesn’t like to take any credit for a lot of it was his idea of threadup which is a marketplace. He hand-picked a company called Rally.

And I think Rally is going to be one of our great, great investments and Rally.

What they were doing, nobody was doing was they were creating fractional ownership with SEC approval to trade initially in cars, collectible cars, but now into collectible items like sports cars and memorabilia.

And it’s such an amazing marketplace model. But like that’s what happens when you do that, Yves, you may not know, but like he was the head of North American investment for Carrefour, for which for a period of time was the second largest retailer in the world behind Wal-Mart. This is pretty Amazon.

And he invested in some tiny companies called Starbucks and Office Depot and Costco and Dick’s Sporting Goods and PetSmart and Jamba Juice. And I could go on on behalf of Carrefour. That’s what led to the creation of Upfront Ventures. So he knows the grocery supply chain. So it’s no mistake that he’s focused on sustainability of food and supply chains and did appeal sciences, which is an amazing company now valued at north of a billion dollars, and Ynsect out of France, which we already talked about.

So that’s his practice area. I have Kobie Fuller, who sourced Exact Target when he was at Insight Partners, knows a lot about the software market and marketing automation. And I’m like, dude, lean into that. Like there’s a ton of great companies out there. So he funded like Bevy and Cordial and a number of players in that sector and he runs in those crowds.

And Scott does a great company called MetaCX, but that’s his practice area.

So my practice area. Sorry, Kevin, Kevin, Kevin.

He focuses on video games, his personal passion. So he had Seriously, which was bought and bought for hundreds of millions of dollars, by the way, which a great return for upfront. And he does applied biology, which is as undergrad at Harvard. And then he went on to do that, as I told you, at Boston consulting group.

And my practice areas is computer vision. And I’ve been spending a ton of time on computer vision companies, anything from Nanit the baby cam monitor, which we’ll do tens of millions of revenue this year, also next year, and density, which is using sensors to monitor how people move around office space, which is just like record growth and covid to Osmo, which is doing children’s games.

So we’ve all got our practice area because we’re looking for edge to know people that let fewer people know and topics that fewer people know.

So so that’s great and made me feel like I need to go find my practice areas a little bit better, but but, you know, it’s my ultimate goal is to serve the entrepreneur.

Right. And that’s kind of why we’re just not your ultimate goal is to make money. If if that’s your ultimate goal, you’re in the wrong business. Right. Like, note that. No, it’s your proximate goal, not your ultimate goal, your job. And this is what VCs don’t understand. Your job is to return capital. 

You need you need to be comfortable waking up in the morning with that idea because this is what VCs are confused about.

OK, that’s your job. Your job is to take someone else’s money, combine it with your money and give them more money than they gave to you. That’s your job. Now, what is your product? Your product is an entrepreneur.

And it’s true that people like me know anyone great who joins this industry joins it because we want to work with entrepreneurs and we want to help them on the journey. I get that right. And that’s where we spend a disproportionate amount of our time, you know, maybe call it 80 percent of our time. And that’s what excites us.

I get all that. But the reality is the job of a VC is to return capital. I hear you.

I don’t think they’re incompatible. Maybe I should have said my goal is to help these entrepreneurs. They can be incompatible.

Because if you if you define your passions wrong or your priorities wrong, you can chuck I can chuck half a million dollars into a whole bunch of passion projects with entrepreneurs I want to work with and feel great about it, but not return capital.

I hear your point. I still think that’s the way you return capital is by helping the entrepreneurs build great businesses. Of course I agree with that.

And of course I’m being controversial intentionally. It’s like a CEO, you know, who’s in love with their product, spends a ton of time on their product, but their job ultimately is to return money to shareholders right there. They have to understand that that their job is not to be a great product person.

Their job is to be a great CEO.

Yeah, I think I mean, it’s interesting. Look at Google. I was a product manager. Right. It was always what’s best for the user, what’s best for the user. And that will, in the long term, bring Google boatloads of cash.

And so I still kind of have that mentality to this, which is it’s a long term think if you’re fooling yourself.

If I could say so. Does Google do what’s best for the user bullshit, you know, shit. Hold on. Hold on. Yeah, let’s answer that question.

What Google does is they optimize ads so that you can’t find what you really want to find anymore. Or in SEO, you click on someone who’s nothing more than an aggregator for themselves to make money.

And I will tell you this story, which is like anything I go to find, any product I go to find, I go to find, you know, I want to find like nutrition products or I want to find, you know, what is the best biking shorts or I want to find that anything that I’m interested in and I click on it is some damn version of like someone who aggregates six other e-commerce sites and then has a click referral to that so they can make my I can’t find like it’s not a good user experience.

Google is not good honestly to the user at all. They’re optimized around how they make the most money for their shareholders and themselves. I love Google, but but you need to be honest about what it is.

Well, you know, my pushback there is I can’t speak to your bike shorts or really to the past, you know, decade go to find a hotel, go to find like a flight, go to find a doctor, go to go find any category and tell me if you really find it on Google.

But I sat in there for ten years and it has drinking the Kool-Aid, drinking the Kool-Aid and watching the decisions and pitching products. And saying to Patrick, who at the time was our CFO, and, you know, I haven’t been there since Ruths been there and I’ve heard things have changed. And but, you know, I pitch products to Patrick and I remember really well and this is not, you know, the e commerce, but it was the Arab Spring.

And during the Arab Spring, they had shut off access to satellite TV and they’d shut off access to the Internet. They restored access to the Internet, but no one could get their news from satellite TV. We were going to start streaming Al Jazeera, you know, on the Internet, which hadn’t really been done before. And Patrick, bless his heart, was just like, look, I was like, he’s got tons of costs, no revenues.

And he’s like, this company. You need to think of it as half movement, half public company. And like, I heard that over and over.

And like, I greatly admire Google. I greatly admire them as a company. And I think they have the best and brightest people out there. So you have no pushback from me. But to pretend that their goal is really to benefit the user I think is misguided. If you were the, you know, the king and waving your magic wand to mix metaphors, you know, would you just beef up our regulators?

It’s a really hard topic. I give people like Jack Dorsey a lot of credit where people are hating on Jack Dorsey. He has a really unenviable position and I think he really is finding a good way to balance a really tough situation. Sundar, I think the same like, you know, Google historically has been very progressive in how it thinks about China, for example, and not kowtowing to China.

So I have a lot I know it’ll sound like I don’t have a lot of admiration. I have a lot of admiration for them.

I have less admiration for Mark Zuckerberg and for what Facebook has done. I don’t know. I guess I would struggle to be an employee at Facebook. And I don’t understand how there’s not a bigger mass exodus. But Mark also has a really tough job. Right, because he probably has compass a lot better than it publicly appears to us. And he’s got to make really tough decisions and he’s trying to do that.

And but but to your question, I have a book recommendation that I’ve been telling a lot of people about called Americana. And it’s a four hundred year history of capitalism in the United States, and when you read about the fights of two hundred years ago, three hundred years ago, one hundred years ago, 80 years ago, you’ll realize that we pretend like these fights that we’re having, this is like, oh, my God, the world has become awful.

And we’re finally having these fights. These are like political fights that we’ve been having for hundreds of years. But but if you read about it, they talk a lot about the history of regulation and the emergence of the consumer economy in the United States, which was the first global place where you truly have consumerism, was a lot of hucksters pitching it to people that didn’t work and that were harmful.

And so people were using the mail and they were doing it via the mail. And then the government realized that if they didn’t step in and say, wait a second, like if you’re telling people to swallow this cocaine product, that’s going to be harmful to people and that’s going to impact our society, our economy, our ability to recruit for wars and other things that governments do.

And they realized they had to play a bigger role. And that’s where regulation came out. And regulation is both a pain in the ass. And the problem with regulation is it’s often legislated and lobbied for by people who have vested interests in setting it up to restrict competition. So I’m not like pro tons of regulation, but I’m not pro zero regulation either.

So I don’t know whether to go back to VC or just roll on global, no, we can go back to VC and we’ll go back to VC. But where was. Oh, so OK. So here is maybe where I need to change my mindset, according to you at least, which is where I was going with this was if I’m giving someone their eighth term sheets, I’m not really helping them in their journey all that much.

If we approached a deal that already had seven term sheets?

My advice to the partner, and as you know, it’s usually not seven, like we sometimes approach a deal that has two term sheets, and I will say to the partner, shame on us for not being there nine months earlier. It matters when you meet the people. Right. So, again, framework and I’ve drawn this all up, I have like the power keynote slide showing this, which is the best time to go out and hunt for a deal and play offense is right after they’ve they’re funded.

It’s probably like three or four months after they’re funded. So let me assume that someone raises angel seed money and let me assume that that’s going to last 12 to 15 months. If I get involved that month, 13, I’m an idiot. Why? Because it month 13, if they’re still talking to me like I’m probably the only one looking. Right.

So, like, if it’s like two months and you’re out of cash and it’s like it hasn’t gone well, I waited too late.

If I let’s again, with my 15 month framework in mind, let me say that I’m looking at month 11 when you really probably are actively talking to people. I’m also too late because now I’m one of eight and like I don’t really have a source of differentiation. If I think on the 15 month time frame and I’m talking to you in month one or month two even, I’m probably too early. Why am I too early?

Because you’re exhausted from having raised the last round and you’re just like, let me just do my job.

Right. So so the sweet spot is month three.

In this case, month three to maybe month nine, you have a six month window. And the earlier I’m talking to you in that process, the more likely I am to get to know you, the more likely I am to get to know the rest of your executive team, the more likely I am to be one of three, not one of twelve, the more likely I am to demonstrate value to you where you might say God, wouldn’t it be nice taking money from Minnie rather than even having to go out to market?

And if you’re in a competitive market, if you’re not there a month three like you’re too late. So when people come to me in month nine or month eleven or month thirteen and I come to me, I mean my partners and they’re like, we have to rush.

They already have two term sheets.

And I don’t know, maybe we fucked this one up and maybe we should just look for the next thing now.

Yeah, yeah, yeah. I mean, I was going to ask you some about the summit or like moments that stood out for you. But you interviewing Josh Kopelman, that’s who it was, I think, when he said his average like first meeting to term sheet has gone from ninety days to nine days.

That bloom like that made me rethink some things.

Well, but but neither you nor I are Josh Kopelman and in good ways and bad ways.

But but they they have the ability to do a nine day decision. And I guess we don’t add up front. We don’t. I mean we can we have. Yeah. But that’s not my best self. Yeah. And we write slightly larger checks, we take board seats and everything we do.

What they’ve done brilliantly is a diversified portfolio in which they do some board seats and some larger checks. But a lot of what they do is smaller checks, earlier stage. They have more diversity of deals and then they’re really good at downstream VC relationships. And so they’re like, OK, we wrote five hundred seven fifty K into this deal. We’re doing a lot of these. Do we trust the series A investor who’s going to take the board seat because they’re going to have to do all the work and they can refine everything for how they get more deals done.

Totally. And and they, like you, also have this big following. And so I guess one question for you is you’ve got, you know, a huge presence on social media and everywhere, you know, do you think that that’s a you know, how do you think about the value of that? And do you encourage that for for others?

The hardest thing to compete for in any market, but particularly in the market we exist. And you already talked about like how do you break out of being the eight term sheet? Right. The hardest thing to compete for a share of mind.

And how do you get your mind like you can only take so many one hour, one on one meetings or thirty minute zoom meetings before you tap out, but you can influence share of mind in entrepreneurs vs. corporates, anybody by getting an opinion out there. And if I spray and pray my opinions across a lot of things, again, it’s also not that useful, but if I write 10 blog posts on cybersecurity or 10 blog posts like Fred Wilson said, I don’t know, a decade ago or so, I was on a panel with them and he said, it’s like Venus flypaper.

I put out the flypaper and I say, I’m interested in crypto. I’m interested in computer vision. I’m interested in geriatrics, I’m interested in marketplaces. I’m interested in cyber. And I read a bunch of stuff about that. Well, everyone is in that sector starts to pay attention first of all, like putting ideas out and getting criticized for them is how you either strengthen your argument or realize your argument was wrong.

So there’s a lot of goodness that comes from that. But it’s really about share of mind.

Yeah, OK. So I know I’m over. I know I’m out of time. So do you like that though? Do you like being a fairly public person?

Like, I feel like a lot of people, you know, you can be a target if you if people disagree with you or don’t like what you’re putting out.

Oh, it’s a love hate relationship. I am a target. I do occasionally piss people off. I don’t enjoy that. I really don’t like making anybody upset. I’ve learned from it. You know, earlier in my career, I would just my opinion mattered more than anything. So I would come out and say something really controversial and mention a company by name.

Then you fast forward three or five years and those people, like, resent you. Oh, my God, what did I accomplish with that?

So I really try to counsel people, be positive. I hate all the people who are, like, hating on Quibi right now. I think they fucking know what went wrong with the analysis on Quibi. So stupid. And there’s people who are publicly doing it who drive me fucking nuts and I’m not going to mention them by name.

Do you have any surprising predictions for L.A. in the next few years. Not for L.A., I think, like the long term structural trends for L.A. are amazing.

I think the flight from San Francisco and I’m from NorCal, like, people don’t know that because I was born in Philly and I’m such a big Eagles fan.

But like I grew up in Northern California, I grew up a software coder, like I’m at my heart, like at Silicon Valley, like geek. But the flight is real and it’s going to persist.

And I think L.A. is going to continue to rise, but it’ll have its ups and downs like every market.

Yeah, yeah. Well, Mark, thank you so much for your time today. I really enjoyed I could chat for hours, but thanks for coming on the podcast and thanks so much for all that you’re doing for L.A. and the community.

I appreciate it.

And thank you for having me and thank you for doing a show it’s great

Petra Griffith — Wedbush Ventures

One of my new favorite LA investors, Petra Griffith, joins to discuss Wedbush Ventures. 

Petra talks about starting a new fund, how she’s seen venture debt work well as non-dilutive funding, and lessons on the content business from Netflix and Yahoo.

View Transcript

I am excited to be catching up with Petra Griffith today. She built and launched Wedbush Ventures earlier this year after a stellar career in a variety of operating roles at Yahoo!, Netflix, GrandPoint Bank. Petra and Wedbush have really burst onto the scene in L.A. and we have been looking at a lot of great companies together lately. Petra, I feel like I’m getting to know your tastes.

Would you say seed, sometimes precede and and how L.A. focused are you?

Yeah, great question. Yeah. Pre-seed, seed. And I like L.A. I have a preference for L.A. but if I look at the companies that I’ve invested in so far, about half of an L.A. and half are not in L.A. you have this is why we’re so compatible.

We’re exactly the same seed, precede half in L.A.. OK, so start me with a little bit of your background.

Maybe maybe take us back. You’re a product manager at Yahoo! Yeah. Yahoo’s changing CEO’s faster than we can remember.

What were you up to? When I joined Yahoo! In twenty six, kind of in the heyday of Yahoo! Actually joined on the team that came out of Idealab, Overture team that was acquired by Yahoo! I joined after the acquisition.

Spent six years at Yahoo! Really learned and really got deeply embedded in ad tech and spent a lot of time and really got passionate about how do you make advertising a good experience for a consumer and for an advertiser. 

Search marketing is great because it’s a great user experience and a great advertiser experience display advertising less so and so we did a lot of work on on. How do you make display advertising a better consumer experience, native ad social ads, its ability to share an ad, does that make it any more worthwhile? And it really doesn’t left. So, yeah, late last year at Yahoo! In twenty twenty through five CEOs, I was on a they called it a skunkworks project.

We didn’t fit into any of the silos at Yahoo! And every CEO, so we were directly funded by the CEO’s office.

Every CEO that came in was like, stop, what are you doing, how are we spending money on this? And we had our little pitch deck and we’d go out and we present to them and say, Oh, this is great, keep on going, keep on going. And so, like, literally took a month to ship an alpha and it was painful. And, you know, Marissa Mayer came in at that point. I was just emotionally done.

But it was really, I’d been in LA since two thousand and three wanted to stay in L.A. 

And having spent so much time in the Bay Area and seeing just how you have these alumni that leave tech companies and then start the next one and invest in their friends, you were starting to see that happen here in L.A. and that got me really excited. And I joined Grandpoint Bank to set up their venture banking division.

So you join Grandpoint ventures, joint venture bank Grandpoint bank, right? No, no, that’s important. And and doing venture banking, but I don’t even really know what that is. So maybe you could give me sort of one on one.

I didn’t know what that was either. When I started I started Grandpoint Bank was a bank, was private equity backed. The founders had started, I think, two previous banks. Before then sold those and so they’re banking entrepreneurs and they’d raise money and in the 2008 downturn to buy up banks that were good banks but put them together and get efficiencies of scale, they had banked legalzoom and their previous company and legal zoom had there were an angel investors and legalzoom and legalzoom had become the largest deposit holder in their previous bank.

And they’re like, Oh, these startups are great. You know, tech startups help us bank more startups. And and I kind of went into that and realized quickly that with startups, one is not checking accounts, but they want capital. And so set up a venture debt product at GrandPoint Bank and GrandPoint Bank, just to be clear, was very much a community bank, a regional bank. They were about five billion in assets when I left.

Did your traditional banking as a community bank. So what I was doing was a kind of a square peg in a round hole, so to speak.

So maybe you could tell me more about, you know, what startups need to know about venture debt. Yeah, absolutely.

So I think, first of all, it’s a very different animal. And I learned that when I was at Grandpoint Bank, traditional underwriting really looks at the cash flow. Does the business throw up enough, enough cash to repay the loan? And then also you always looking for two sources of repayment. And so there’s a lot of personal guarantees involved. You’re looking at the global cash flow, venture debt as a is it just fundamentally different kind of animal through the venture debt that I did?

A couple of different flavors of it is is your fund is your term loan. And so we typically would help startups with their series’s. If you reraised, you know, a five million dollar series, a venture debt would put on another two to three million on top of your series A and when it works really well, it is not as though there’s some dilution with the warrant coverage, but it’s it’s non dilutive capital for the company. It is.

There are you know, it’s not convertible note. It’s not a convertible debt where your interest rate then, you know, just become something that you repay and it converts into equity, doesn’t convert.

That’s what most founders are surprised about. A lot of times they’re like six to 12 month delays. And when interest has to be paid back and then when that happens, they’re like, oh, we weren’t expecting this. And it’s like, right when, you know, your cash flow is tied and you didn’t hit your metrics, I really think about who your partners.

And that’s one thing I really learned is that traditional banks have a really hard time with venture debt because it is such a different way of thinking. You’re not looking at cash flow, you’re not looking at the regular metrics. Instead, you’re looking at who’s backing this company and will this company be able to raise money in the future. And so I really, as a I would recommend for founders to really look at who is giving you this loan and have they been doing this for a while?

What covenants do you have?

Can you tell me a little bit more? Educate me a little bit more on covenants and warrants? Yeah.

So covenants will be I mean, basically covenants are there so that the underwriter can has it has a check in or forces a check in, because as an underwriter you want to make sure that you’re going to get repaid. And so covenants are basically triggers and sometimes they trigger a default and sometimes it just kind of trigger a conversation. And, you know, when you’re once you’re in default, like that’s the language. You should also look really look at, because if you’re in default, somebody they can call the entire loan companies, you can be in default just if you’re a couple of days late on your on your payment.

And sometimes you can be in default just because you didn’t hit your projection by a thousand dollars. I mean, it’s just it really depends on on what those those covenants are. And again, there’s like financial covenants and the. Or covenant’s like key person covenants like the CEO can’t leave, and so just really look at those covenants make sure you can meet those and then the warrants are it just warrant coverage and they’re usually tied to some sort of exit event.

The thing that I think a lot of people realize is that it’s not the Warren coverage that makes the economics for a bank necessarily, but it’s the deposits. And so these these companies bring large deposits. And that’s why it’s so attractive for banks, because, you know, you’re getting you know, you just flush with cash.

You just got a five million dollar raise that’s now sitting in a bank account. And so venture banks are banks that do venture lending will often require you to move your bank account over to that bank. It’s also like checking to that, like, do they have the right system to can they do the wires the way you want to? Like, that’s another pain point. Hmm.

I feel like a lot of the VCs I know aren’t really keen on having their startups raise a lot of venture debt or raise it early.

But we see a lot more companies as they raise their series A. They get those offers of debt. What what do you recommend?

Yeah, I think that series A it makes a ton of sense if the company is hit product market fit and it’s really just growth capital. I, I’ve seen it be very successful because you can kind of increase your overall raise by 50 percent, which gives you more cash to get to the next level and show more growth. 

OK, so you did that for a long time, but but you moved on from there, so I did. So what next?

Yeah, after Grandpoint Bank, you know, I got it’s a very banking is a very regulated industry and I actually think about that a lot as an investor takes like what it takes to innovate in that kind of environment. I really missed the unregulated world of media and had an opportunity to join Netflix, they were hiring their first product team here in L.A., focusing on originals and really thinking through what is the implications of original content.

And, you know, the culture of Netflix also really intrigued me. So I made that jump.

So so both of those are interesting about the product side and the culture side. But kind of on the product side, you know, what did you learn about making originals and distributing that content and how the product evolves?

Yeah, I mean, I think one thing you there’s a couple of things. I think one is original content. Is marketed often differently, so obviously, like the big shows across, all of the streaming players are marketed offline, but a lot of shows are like especially shows that are generated outside of the U.S. They’re on Netflix that you haven’t seen them out in the real world. And so how do you communicate that this is something worth watching?

If you’ve never seen any of the actors you’ve never liked? The title doesn’t mean anything to you. The communication of that is really interesting. And you really learn that a lot of our decision as a consumer, whether or not to watch something, is one trust in the platform. But to also like what? Emote like what? What is the emotional state that I want to be in for the next hour or two and just winning that trust over and over again?

So it’s like both the like how do you how do you how do you convey different elements of what the show or movie is about quickly to somebody, but also how do you gain their trust in the long term so that they’re willing to try something out new. So spend a lot of time on that and spend a lot of time on international content as well. And just how do you introduce people to content that is not in their language?

Hmmm, really interesting. I’m going to ask you more about content as an investor with your investor hat on. But but just the culture and what did you find in terms of moving from a bank to, you know, content production?

How is that culture changed?

Yeah, I mean, I think Netflix is is a jump from anywhere, but kind of going from from Yahoo to the bank and then from the bank to Netflix was definitely a I remember the first week just being like, whoa, drinking from the fire hose. You know, I just say, like, one thing that’s amazing about Netflix is just, you know, they treat you as an adult and they expect you to perform, but they also give you the freedom to perform.

And that’s it’s super liberating. And that’s the very positive thing about Netflix. I think the the thing that, you know, is hard for a lot of people is is just a constant feedback. Culture and feedback is not always you know, oftentimes the feedback is a positive and you get feedback from everywhere. And so how do you you know, especially as a sensitive person or someone who, like, really internalize this feedback, like, how do you work through that?

And how do you how do you figure out what feedback you want to take and which feedback you want to ignore? And how do you how do you work on that?

One of the people who I really love, Francis Frei, she was Harvard Business School professor who worked at Uber and talked about the culture. And she said feedback should be like five to one, positive to negative.

Hmm. Interesting. She’s like when you train a child or a dog, it’s positive feedback. How do you you know what what lessons do you take from that when you’re working with startups now about how they can build their feedback culture in the right way? I think transparency is really important. So the bank, you have to be you know, you’re dealing with other people’s money and so you have to be very strict about what’s allowed, what’s not allowed, how you train someone.

And so it’s just a little bit about being regulated industry. I grew up in Germany, and the vast overgeneralization, but if you talk to a customer service person in Germany, like they’re problem solvers and they’re like, try to understand what your problem is and then they figure it out.

And in the US, as a general rule, here’s like here’s my script and I will now read to you what I’m allowed to say. And so I always try to think about how do you create a culture that’s transparent, that’s about problem solving, that is not afraid to raise issues and not afraid to probe. And that’s the one thing I have to say that I really admired about Netflix is like you’re constantly probing, you’re constantly debating, you’re pushing each other, you’re questioning the status quo.

And then if you come up with information that proves otherwise, the whole organization will really, truly move around that.

And that’s the thing that I always try to talk to founders about is like, how do you know that? Like, can you prove that? Can you be open to the can are you open to to other data points that might prove or make sure that you’re not on the right path?

Hmm. And what about just one more question? What about sort of going from a bank to a very creative environment where you’re working on originals and there’s, you know, actors and producers and directors all involved?

Was that a big difference just lately? Yeah.

Okay, so you decide to be a VC for these services, always take on linear paths. Yes.

I think if you asked 20 VCs how they became a VC, you get 20 different answers.

OK, so but I do think that’s really interesting. How did you decide, OK, I’m at Netflix now.

How how did you go about forming this fund? Because you started it on your own, right? I mean, you are the only partner at Wedbush.

That’s that’s right.

Yeah. I mean, I think I think also to explain a little bit more like one thing I really enjoyed when I was in banking is that I came to banking with a tech background. And so I was able to really translate banking to to the tech world. And when I looked at what Netflix is going through and here you are, like this tech company who’s trying to innovate in a in an entertainment, which is a, you know, older industry and more established industry.

And so what really intrigued me there is like, you know, being able to to translate and build that bridge between two very different stakeholders, attitudes, cultures and being able to learn both. I hadn’t thought about this.

So I always think I don’t I think of Hollywood as sort of some dynamic, mysterious place that I never visit, but full of creative people. I don’t really think of it as sort of an older, established, almost more old school industry. But I guess, you know, traditionally really has been. Yeah, and there’s a certain way of doing things in Hollywood, like just for example, like marketing, it’s all about or not even marketing, but like all movies are made by demographics.

And what demographic are you going to target?

And and here’s how you’re going to finance it. And and and so Netflix coming in with this different model and also the whole production process of like we’re going to shoot a pilot first. And then if that pilot is going to stop this pilot around and the pilot gets acquired, that doesn’t actually even mean that you’re going to be show out of it. And Netflix just looked at it and said, no, we’re just going to buy the whole show and we’re going to put the whole show on at the same time.

So it was really threatening, I think, initially and still is.

Fascinating. And then you’re like, and now I’ll be a VC.

If it wasn’t quite a it wasn’t quite that transition.

But, you know, I think if you’re in an environment where you look I loved learning about entertainment, but I also realized it was not it was not what drove me. And your conversation with Z in the last podcast was super interesting, like this passion and curiosity question.

And I think I just kind of came to the conclusion that what I get really passionate about is helping people kind of take their idea and grow it. And I really miss the venture days of like finding people who who, like, just astounded me and would come with this insight that I had never thought of and and that needed capital and resources. And and I just I just love the energy of, like, take enabling ideas to actually come to fruition.

And I was not getting that, you know, in the role that I was at at Netflix. And so, you know, I left there with this idea of like, I want to get onto the capital side. I want to get into the early stage side. Didn’t quite know. I actually initially thought I was going to do a debt fund. And so debt is great, but that’s not like that’s not the right that is not the right stage for this. So what I really want to do is equity in like early stage, see, investing. And it’s like coming to that realization as one and then to like verbalising it is another.

And and so I remember it was like August of last year and I just had this realization and I was like, well. It’s a hard industry to break into, you know, how do I go about doing it? And I just remember just having one conversation with a friend and just saying, hey, this is what I’m thinking about doing.

And it was like, oh, OK, now I know how to help you. I was like, oh, OK.

And it’s like, you don’t think of it that way.

Like, you just think about like, oh, they’re going to make fun of me. I’m going to sound foolish or and instead it just enable people to open doors that they were willing to open for me.

Hmm. I mean, is it total aside, I think of mentorship, one of the big roles I think of mentorship is helping people admit what they want to be doing is admit things to themselves. Sort of. But that’s great.

So you sort of started talking about it and and then people could help you. And and how did that evolve into to Wedbush Ventures Fund one?

So I when I was a Grandpoint, being a Grandpoint, had acquired what had a commercial bank at that time and and Grandpoint Bank had acquired that commercial bank. And I had help with that, I had heard that they were interested in an early stage venture fund.

They had that previously set up a private equity fund and a hedge fund SBIC fund. And they own my own brokerage. And essentially they’re looking at what a different asset classes in which they can make investments or sponsor funds. And so, you know, had a great initial conversation with them. 

It also happened really, you know, amazingly quickly, like I had anticipated for all of us to take quite a while. And, you know, I put a just like when, you know, when you you think about something for a long time and then you have an opportunity to present it and it just kind of sat down one night and put my like, here’s my ideal venture fund would look like I put that on paper and the next day presented it to the Wedbush team and they said, this sounds great, let’s do it.

And the rest is history.

Fantastic. And so they are more like an anchor LP, like you’re you’re an independent fund. You just happened to sort of have their name.

Yeah. Have their name there. An LP. They do my back office and they also provide me their platform, I’ll say, I’ve been able to meet the investment banking team and the analysts and and that’s been actually really helpful for my portfolio companies and something that I probably didn’t wasn’t really thinking about when we were putting this fund together.

Yeah, fantastic. And now, you know, in terms of deals and things you’re interested in, you know, I keep sending you things that seem, you know, I keep enjoying looking at deals together.

So I look for things that I feel like I know.

And I also, you know, I’m a one person fund. And so, you know, due diligence is a lot easier if you know the industry and the space. They just naturally gravitate to things that I know. And so the. Yeah, so regulated industries is one thing I always think about or I always just having the experience of coming from a kind of a tech background such as Silicon Valley tech background and then coming into a bank.

And just like how do you you know, how do you think big picture, but still.

Work through like think big picture, but still work with with the regulation and figure out which regulations you can bend, but like build relationships to change and which regulations can’t change. And there’s usually a reason why they can’t change. And how do you work with them that and how do you really build partnerships with people who are already in the industry? I think that’s the biggest thing I saw in banking in particular, is like some of the early stage fintech companies just said, oh, we’re going to disrupt banking, we’re to get rid of banking and like those usually don’t work out.

If you need a bank as your back to build your business, you know, you need to what you need to find a bank that will will think creatively and not just see big risk factor, but you also need to be able to talk their language and get them bought into like that. You thought through the risks and because I mean the one thing I learned in making is that people aren’t you know, they’ve seen a lot of things go wrong.

And so when they ask questions, it’s not to be annoying.

It’s not to be, you know, but it’s just it’s actually very much because I’ve seen it before.

And so so I actually really listen and listen to their question and listen to what’s behind their questions, I think is important.

Yeah, interesting.

So, OK, so your background at at GrandPoint didn’t scare you away from FinTech at all?

How about how about content and your experiences in Yahoo! And at Netflix?

Yes, on the one hand you have like it’s a lot easier to be a content creator now. And there are all these platforms that make it very easy to be a content creator and authenticity like tik tock I think is amazing.

But I, I also just think about all these new subscription services that are coming about and and, you know, there’s a school of thought that says, OK, well, you know, if I have this niche audience, but it’s a you know, like if I can just find enough people that will pay me twenty dollars a month, that’s a nice business.

But I just think, I think about what’s the model after subscription or how do we build these subscription models that enable us to really pick and choose what we want, because I just don’t think it’s scalable for us to have like we’re going to run this whole cable model all over again where we are spending two hundred dollars a month on all these different things. And and it’s just not sustainable. And we’re going to get to a reckoning point where we’re not going to be able to, you know, pay the ten dollars for my my powder sports and my yoga and my, you know, like so I think a lot about what is the new wave of monetization.

And I also think about what’s the next platform, because everyone always talks about like, oh, I have this many followers on Instagram and so I can monetize those followers.

But nine times out of ten, when you try to take those followers off of Instagram and somewhere else, they don’t follow necessarily like they follow you on Instagram because Instagram is fun and they like to see you on Instagram, but it’s not like they like you enough to then go to the next platform that you’re on. And so I think a lot about like that. Like what is it again? Like you need to build it. So it works for both.

And we’ve thought a lot about the content creators that we haven’t really thought about. What’s the next thing that we as consumers are looking for?

When you’re thinking about the next platform, how how are you thinking about what that might look like?

Yeah, I think a lot so I think podcasting is super interesting, as do my podcasts right here. And the reason I say that is it’s a it’s something that that one it’s relatively new.

But audio itself is is something you can consume and so many more situations than you can video content.

And for podcast content, like how can you create, like, the Netflix of podcasts, for example.

And then in terms of like, you know, everybody says social is dead and I don’t know what it is, but I think there’s something there’s a next tick tock coming and it’s something around video. And just being able to communicate more closely with the person behind the video is my guess.

Right. So it’s it’s engagement or it’s it’s interactivity or something. Yeah. 

And you think that because it’s more authentic and more likely to give money because I feel connected to you. Yeah.

And I think this is something similar music.

Great music went from not making a ton of money off of the CD itself, but more of the events and concerts and merchandise. And so what’s what’s that equivalent? I think I think the willingness to pay for content will hit a wall soon.

And so I think about other ways in which people are willing or finding value in what this person is creating. And I think it’s around community, I think is around being proud of being in a community and being proud of what the community stands for. Totally.

Yeah. And I think it’s interesting, the community where you and I are talking about this, like my friend who’s been working on erectile dysfunction and hair loss e-commerce, and she was like, it’s hard to build community there.

Right.

Yeah, it was you and me, the private joy and public joy.

And I think a lot about this. Like, I think I think about these like small communities where everyone says, oh, you know, you don’t need a whole lot of people to monetize the community. And that’s true. But I think it depends on the community.

And I think there’s some communities where like like erectile dysfunction, you’re not going to have like a T-shirt saying merchandising stuff.

There are some interesting communities, though, that are very passionate and also very connected. And I think kind of programming towards those communities is interesting. I need to like Wedbush Ventures a little bit more in terms of, you know, what size check writing and how do you like to engage with your portfolio. 

Yep, so given that picked stage check sizes 50 to 100 K as a first check in with the intent of continuing to support the company, I like to get you know, as I said, I like to get involved with my companies going back to our Netflix stuff?

You know, can you coach people on on that sort of softer side, softer skills?

Yeah, actually, that’s one question I was going to ask you, because it’s something I think about all the time, like in the deck, if I get a deck and I don’t understand what the problem statement is and what the solution is in a deck. It’s like, OK, well, does is that just an innocent no or is that something I don’t know. What do you think?

Anything else in terms of advice, you’re giving a lot to founders or even advice you’ve been given.

I think focus is so cliche, but it’s something that I think a lot about also for myself as a one person fund and also her founder, like it’s just so easy to get. It’s just so easy to get wrapped up in and the next shiny object and the opportunity that falls into your lap.

And so just really being clear to yourself about what’s your success metric like. That’s one thing I learned from a mentor of mine, just like being just very clear about like, what is the one or two thing that the most to thing that you really want to knock it out of the park with and make sure you knock it out of the park and then the rest will just kind of go away?

Well, this is a great transition into my miscellaneous personal question section. So, Petra, what do you think about your success metrics for yourself in your life?

Who in my life?

Wow. I mean, ultimately just being able to look back and be.

All right, I’m going to give you two, because family is super important to me, relationships around me are super important to me and I always prioritize those. But I also I want to have no regrets and I want to embrace everything that comes in front of me.

Hmm. Do you have any good strategies for not having regrets?

My strategy is, and it’s not always effective, is just thinking about myself in the future. And is this something that I wish I had spent time on or not? And the other thing I always think about is like, is this going to be an emotionally happy is going to give me energy or is it going to take energy out? And if it takes energy out, then it needs to be quick no.

And also always making time for yourself.

I think that’s the biggest thing for me is exercise. It’s it’s my thing. Also, there’s a chemical impact on your body from exercise. For me personally, I was always I was a competitive athlete all through all through school.

Did I know this that you what did you play in college? I swim. I was a swimmer. Oh I was going to ask you, like, where do you get your confidence from? This was a question I wanted to ask, because I think it takes it’s it’s hard and it takes some guts to start your own venture fund. But do you think it relates at all to playing sports your whole life? I do I also think it’s cliche, but I do and I also think. As a swimmer, you just you learn to put your head down and just push through, and that’s something I learn.

You know, I started swimming competitively when I was nine, I think. And so it’s just like starts to become ingrained in you. And we talked about, like work life balance. And, you know, like I have twins and an older son and they’re now older and it’s a lot easier.

But I remember when they were the age of your kids and and everyone’s like, oh, my God, how do you do it? And it’s like when you’re in it, it’s just like, how do you minimize the drama? Do you just take a few deep breaths and and and just put your head down and move forward.

That’s great.

I love it. Well, I’m really excited to get to know you better. I’m really excited that we get to co-invest and be part of this ecosystem. And thanks for coming on the show.

Thanks for having me. It was fun. Yeah.

Bruce Hallett — Miramar Digital Ventures

Bruce’s new $100M fund, Miramar Digital Ventures II, invests early in software and data.  He explains why many VCs have gone back to preferring notes over SAFEs, and other insights on deal preferences and construction.

View Transcript

Bruce Hallett is a partner and one of the founders of Miramar Digital Ventures. Miramar is a seed and early stage venture fund focused on the future of data.

Miramar has about twenty five companies in their portfolio and about two thirds of those are Southern California based companies, many in L.A. But Miramar itself is based in Orange County. Bruce has been doing venture for a couple of decades and I am excited for what I’m going to learn from him today. Thanks for being on the show. Oh, it’s my pleasure.

Minnie. Great, well, I guess the first question is, did I get the introduction right? And can you share a little bit more about Miramar?

Yeah, I’d be glad to. We have a history kind of through two different series of venture funds. And I go back, we can talk about this later because that’s part of our connectivity with TenOneTen and Gil and Eytan Elbaz is that back in the late 90s when I was a lawyer at Brobeck, I was their counsel.

I was also running a venture investment fund with some other partners at Brobeck. So we were investors in Applied Semantics and a number of other companies. So that’s kind of how I got started in and really got the bug for investing. And then one of my other clients was Broadcom. I had taken them public and they almost wore me out doing lots of M&A nineteen ninety nine two thousand timeframe and then this decade partnered up with Sherman Atkinson, who had come out of his company, originally acquired by Buy.com, one of the early e-commerce companies based here in Orange County.

And then he went to L.A. to help with the turnaround at Intermix Media, which owned MySpace successfully did that and sold that to News Corp. 

So you went from from helping companies like applied semantics to kind of doing corporate venture in a sense at Broadcom. Right, right. Right. And then and then when was when did you when did Miramar come into existence?

Well, Miramar Digital Ventures, which Sherman, I, Sherman and I formed in kind of 2014 time frame we launched and that was about a twenty five million dollar fund and we were focused on data mobile data Iot. And then just earlier this year we closed on our second fund, Miramar Digital Ventures II, which is a good deal larger thankfully. And we hope to by the time we’re we’re done, have about one hundred million dollars under management in the second fund.

And so that enables us to invest not just at the seed stage in series, but to kind of keep up with some of the companies that have been successful in the portfolio, including crossover investments in companies where our first investments were in Miramar Digital one. But we’ve kind of reached our concentration limits, which you understand. That means it’s usually about 10 percent of your fund can go into a single company. And so in this case, with the larger fund, we’re able to continue into some of the same companies from Fund one and try to maintain some semblance of our original percentage in these companies.

So if so, with this larger fund, I imagine you’ll be will you be the leading seed rounds? Is that kind of a sweet spot?

As far as leading, we’re happy to co-lead, we’re happy to go in on convertible notes. We can do SAFEs if we have to. We can talk a little bit about that later. We kind of prefer convertible notes, but but, yeah, we’re we’re really looking for great teams who have high proficiency in AI and data science and are using it to transform existing industries.

Do you have certain trends that you’re following or on companies that are a good fit for you? Well, we first of all, there’s no such thing for us is too early. We are very happy to kind of go in even alongside angels and start out putting a couple of hundred thousand in maybe two hundred to five hundred as our sweet spot as far as the point of entry.

And then we have the capability of putting millions in in subsequent rounds. So we we love that.

And so how do entrepreneurs think about when they, you know, why go to Miramar versus someone else? I would say we’re we’re very quick, we’re very certain about what we do and don’t do, so we’re not there’s not a lot of mission creep with us where we go. We might do that. Let us spend some time and due diligence the nice thing about a bigger fund, is that we can expand the team and we’re looking to add some team members this time around. And and one of the areas we’ve added is Stuart McClure, who is the founder of Cylance, the cybersecurity company here in Orange County that was acquired by BlackBerry last year.

How do you think venture has changed and will change? 

Well, that’s a great question. It’s it has changed a lot. I mean, the big funds, you know, especially in the early 90s when I started working with, you know, Brentwood, Redpoint, Enterprise, Crosspoint, all those funds were sort of in the, you know, 50 to maybe one hundred million dollar size.

And that was pretty typical. There were a few funds and Silicon Valley that were bigger. But even the big funds in Silicon Valley might have been more like, you know, two hundred million.

And then, of course, the other factor is these just mega funds. I mean, these funds that are billion dollars billion plus and come in mid to late stage, but a lot of funds, a lot of those funds are going earlier.

It seems like I don’t know if Andriessen or who’s the best example, but a lot of them are now running their seed programs or something. And so I wonder what that what does that mean for for the for the those of us who are in the sub hundred million dollar category?

I think it means we better we better be there early and we better be there with conviction. And we also better be prepared that we’re going to have co-investors maybe from a series seed or series A who are mega funds and have that kind of tension or dynamic between, you know, we may, as smaller funds want to see more capital efficient. See, and hitting milestones and proof points and the bigger funds, if they’re starting to commit serious dollars, know part of their part of their model is to put as much money to work for serious ownership positions as possible.

A lot of times they’re not too sensitive on valuation. But sometimes, I mean, I’ve seen this. You probably have to where they they can kind of swamp a company with too much money and too high expectations. 

Yeah, no, I think it’s experience that, too. Oh yeah.

Unfortunately, a little like close to home for sure. Before being, before doing like I was a founder and we, we took it, we took a lot of money.

So I think, you know, from the venture point of view though, one question is, you know, in you’re a former lawyer who’s worked on deal structure. You know, are there things you can do on the deal structure to avoid getting smushed by the by the larger funds that can pour money in later? Well, there’s. Ultimately, the answer is probably no. But but but there are on the margin, there are ways maybe we could protect ourselves or steer things into what we think is a more prudent direction.

One of the way, there was kind of a mindset of early stage investors that there was a lot of times, you know, kind of an inclination to in addition to preferences on the preferred stock having participating preferred.

And so what that what that means is, you know, is that the preference just says, hey, you get your money back. You know, if there’s a if there’s a liquidity event before the common does, but the participation says you get your money back and then it’s like you convert to common and you participate with common. So in that situation, the investors with the participation get paid at least twice on their early investment. It’s kind of tantamount to at least a 2x preference instead of a 1x preference and sometimes can be much more.

So what what has happened is that as these rounds have gotten larger, like in the 90s, a company did an IPO or an acquisition at a two hundred to three hundred million dollar market cap. Well, now that’s just like a series B or C for most companies.

And if they hit that milestone, they’re on their way to being a unicorn. Mm hmm.

But the longer you can defer and maybe it’s permanently, perpetually you can defer having participation rights on the preferred stock the better, because as an early investor, you’re later going to get swamped by the big investors. If the company is successful, one of those big investors just have the same simple preference that you do, like a one X preference. It’s going to be a lot better for us and the founders not to have a huge stack of preferences that get paid and then participation again when the company goes public or gets.

So you’ve been doing this longer than I have and you have more background here.

So I just legitimately how often do you see the participating preferred and when does it come in that? I don’t feel like I would see it much at the seed stage right now. And I think liquidation multiples are usually come in later as well. But is that true and how common is it? I think it is.

I think it is true. And what I what I’m saying, though, is that in the 90s and even early, two thousands, VCs from the get go, the series seed or series A, investors would want the the preference and the participation. At this point, I think we’ve all figured it out as early stage investors. And the status quo is not to have a participation and just a one X preference, which means that if the company exits over that one X, everybody’s going to flip over and convert to common anyway.

Right. And everyone converts to common. I’m just learning this. You convert to common when you IPO and when you SPAC it turns out I believe that’s what I’m going through.

Yes. Yeah. That we haven’t had anybody that’s SPAC’d yet, but that is my understanding.

And what did you say at the beginning, I think you said you prefer notes over SAFEs. Did you say that? I did, yeah, I’m in safes, we’re kind of all the rage when they got launched out of the Combinator in twenty thirteen or so, the idea was that they were going to just sort of streamline the whole process by not having an interest rate, not being considered debt, going on the cap table instead of showing up as debt on the balance sheet.

And I think what’s happened over time is that, you know, from an investor standpoint, a lot of us have come back around and in. I have a preference for convertible notes, it’s not it’s not that we won’t do a SAFE, I mean, particularly if we’re the last investor in and everybody else did the safe and the terms are OK. I mean, one of the things the other things that got popular five or six years ago was not having any interest rate paid or discount rate or cap on safes and so on.

From an investor’s standpoint, it’s like, well, why not just wait until the company does a round of financing and get the same pricing, making a lot less risk? And the founders have to realize that for the risk your earliest investors take, there’s got to be some benefit. It shouldn’t be overreaching, but to have a 15 or 20 percent discount to the next round price is a good thing. Having some type of cap.

And then the other thing on a convertible note that we like is, you know, even if it’s a notional interest rate like five percent and we always want to convert that into the into the final, whatever the round is, it kind of gives you a little bump, a little benefit if it takes a while. So all those things contribute to our preference for a no versus safe.

And then the other thing is that and don’t hold me to this because I’m I’m not a tax lawyer or anything like that, but I believe there’s a benefit. If something goes off the rails, the company doesn’t work out. If it fails and you have a convertible note, you can deduct that as business debt versus a safe. I think you just it’s a capital a long term capital loss. 

Why is it sounds very basic, why do entrepreneurs still get in trouble with this in the sense of I sort of thought maybe you can tell me who are the best law firms? Aren’t there?

Doesn’t everyone sort of work with, like a Willson Sonsini, Gunderson or a Fenwick?

Or maybe I have the names wrong, but I’m curious, who do you who do you recommend entrepreneurs to work with? And shouldn’t that just cover them? I think for the most part, and all those firms are should be on the short list. I mean, Cooley, KNL Gates. There’s a lot of other ones to that and even smaller firms where there’s kind of spin offs from from the big firms and they’re very efficient. But yeah, it’s usually not a law firm thing.

It’s usually something where maybe the law firm isn’t even involved and the founder just got to a safe off the Internet and they just want to use that. And sometimes you’re kind of stuck with it because if they’ve raised too much money on the safe side, I mean, you’re not going to change it. So you just have to make the decision. Well, will I take the suboptimal document and go with it and be part of this round? Or do we need to reconsider the whole thing?

And of course, if we reconsider it and of course the company wants or would need to agree with this, we’d usually just sort of change the terms for everybody, you know, who signed the safe at the beginning. And we want to put something in place that is a little bit more formal and investor friendly.

Yeah, but I mean, it seems like we’re founders get in trouble. Also is is the layered notes right now as well, which is their thing.

Again, layered, layered notes from the standpoint of they’ll do one round round of notes for a two or three million dollars worth and then they’ll do another set that’s converts into the next round too. 

I was thinking, you know, I haven’t seen as much as you, but sort of a, oh we have a note with a three million cap and then a note with a five million cap and net with a seven million cap. And then the the round gets priced at eleven. And the person with the three million, you know, the founder doesn’t realize how much ownership they’ve given away.

Oh, yeah. Yeah. And and sometimes that’s not only, you know, kind of a showstopper from the founders standpoint, but if you’re a later investor, it is to or if you’re the person leading the round and you find out, oh, there’s a I’m leading around it 12 million dollars, but there’s a person with a three million dollar cap. I you know, I want the prior investors to be treated fairly for their risk, but I’m really betting on the founders and the founders aren’t going to end up with enough of the company that.

Mm hmm. And this is just the series seed array. So God knows what’s going to happen later. So you don’t want to see that happen.

And then how do you think about your own ownership getting diluted? That’s a great question. It’s probably going to be the end of the 10 year term before those deals see liquidity. But that’s also one of the reasons we’re in modeling this next fund.

We’re figuring that somewhere between 40 and 50 percent of the capital, this fund is going to get invested in later stage opportunities, most of which we developed in the first fund and are now in Series B, C, D and D. And so those are closer to liquidity. And we may even have some that are within 18 months or two years of liquidity, but they’re not going to be the, you know, fifteen to one hundred X that we’re hoping for and the winners at the seed stage.

But, you know, by getting some quick, you know, five X’s from the later stage deals that are dressed and closer to liquidity, it’ll kind of keep the keep the flywheel going as far as capital back to our investors and, you know, keeps everybody happy. Yeah.

And if you weren’t reinvesting into a round, like, how do you either for your fund or for your founders, tell them to think about the dilution they should expect in a series A, series B and and later rounds.

Yeah, I mean, it’s it it does hopefully stepped down as the valuation goes up, but there’s also a tendency to raise bigger rounds, so. It’s it’s the sort of thing where, you know, if a company’s had two billion dollar valuation and they decide, you know, they’re raising two hundred million, then it’s around a 10 percent dilution.

But, you know, it can be considerably more if they raise more money. And there’s a lot of there’s a lot of pressure to do that. And so, again, you know, it’s at that stage where it’s not venture debt, but company at that point where they’re you know, they’ve got the revenues to drive that kind of valuation. I think they ought to be looking at debt facilities and working with sophisticated lenders to use debt for acquisitions and other strategic initiatives versus necessarily just, you know, just kind of adding to big rounds of equity.

Yeah.

So before I get into the personal question section of this interview and tell me, is there other are there other things about Miramar or other thoughts you have for entrepreneurs that we should really cover?

I would just say that we’re we’re big fans of entrepreneurs. I mean, I think and and I would say this is true of most Southern California VCs, is that we see ourselves as supporting entrepreneurs, not telling them what to do. I’ve noticed that. In some parts of the country, there seems to be more of a mindset of, you know, we’re, you know, this fund, we’re masters of the universe. So when you get you get you know, we’ll give you instructions on how to run your company.

And I mean, some of them do real well with that. But I think we see ourselves and we love to converse with people who kind of see it as, look, it’s a journey we’re all taken together. 

OK, I really appreciate that. And first personal question is, is there a wetsuit hanging on the door behind you?

There is. And it’s it’s not mine, which probably makes it even more interesting. Sherman, who now spends most of his time in Park City, is a big surfer when he’s not skiing or doing VC So that’s Sherman’s wetsuit. And, you know, this is his.

So it’s basically just storing it in the office here. 

And do you have any advice that you really like either giving or advice you’ve received? Oh, boy, I guess, you know, it’s it’s just kind of fundamentally, you know, treat everyone with respect. I have appreciation for the job that everybody is doing, and I think people always, you know, show their best in that situation.

So that’s not a very articulate way of saying it. But that’s that’s what I believe. I believe that, too.

But it’s good to be reminded of these things. My mother says repetition doesn’t ruin the prayer. I like that. Well, thank you so much.

I think that’s all I’ve got for you today. And I really appreciate you coming on on the L.A. Venture podcast.

Oh, it’s it’s my pleasure.

Buck Jordan — WaveMaker Labs

Lots of insights on equity crowdfunding today from Buck Jordan.  He’s raising $50-100k/day (mostly on SeedInvest) for the cool robotics and food companies coming out of WaveMaker Labs.

He also has great insights on corporate innovation and how seed stage companies can take advantage of corporate partners.

View Transcript

Buck Jordan is the co-founder and managing partner at WaveMaker Labs. WaveMaker Labs incubates disruptive tech companies in partnership with corporate partners. They have a particular focus now on food and robotics. And I’m definitely going to ask Buck more about his experience as founder of Miso Robotics. And he’s also a partner at Wave Maker. But thanks for coming on the podcast today. Yeah, thanks for having me. Did I get the introduction correct? You got it right.

Yeah. We are innovating at the intersection of food and robotics, you know, for a bunch of bunch of reasons I’m sure we’ll cover later.

Right. I think I kind of called it food and robotics, which sound like they might be separate, but it’s really the intersection there. Yep. 

So something like Miso Robotics, where there’s a robot flipping my hamburger patties over.

Yeah. I mean, we we believe that the future of food is is changing pretty dramatically and it couldn’t change before essentially the past couple of years because because the price of robotics has been dropping to the floor. You know, you can now buy for like eight thousand bucks led in the US at volume of one, you can buy a six axis degree of freedom arm. And then for like two hundred bucks, you can buy Nantel real sense camera and tell an apple from an original pair and biometric data so it can grab things.

So now all of a sudden, really only in the past couple of years, the entire problem of automating low cost labor is is is relegated to more of a software problem and less of a of an expensive hardware problem. 

Something like a robotic arm is how much does it cost? I mean, so.

Well, I’ll give you like a timeline of rough, you know, like like twenty fifteen. A robotic arm might have cost like that, like a kind of a six axis robotic arm. It’s kind of like the size of a human robotic arm. The take would have cost somewhere between like sixty thousand bucks to one hundred thousand dollars before that, even even even larger. Right. When this all started in 2016, they were kind of running in the forties, give or take.

And then now, like I said, like there’s eight thousand dollar robotic arms, that volume of one. So, like, not even like volume pricing. So on land in the US, including shipping.

So got to ENSO and as six axis is what my arm does. No.

Well I guess wanted to, I mean it just needs a very articulate arm, needs like it means I can twist and turn in six different ways. Got it.

So you can just program that with software to do whatever you want.

Yeah. Pretty much. Pretty much like pick fruit, prepare food, cook anything, dispense anything. So it’s really neat really. Like when you work with the robotic arms you have have the ability to you’re mimicking how a human arm moves, not necessarily how to do a specific object like. So people look at Miso and then look at creator. Creator is a really cool company in in NorCal. They do they basically got something the size of a mainframe that prints burgers, you know.

And so Krater has taken this mechanical solution of like, you know, it makes a hell of a burger like kind of on the style burger because you’ve been in that restaurant, you know, but you don’t at but don’t ask it to make a chicken burger. Don’t ask. It’s to deep fry fries and a mixed salad. But but miso is a really flexible approach because it’s because we’re really mimicking how a human arm moves, because we use robotic arms.

And so the same piece of hardware can make a burger, can deep fry fries, can do prep, can do packaging, can do a whole lot of things.

So I find it super, super inspiring, super cool that I could just buy a a six degree, six axis robotic arm for a thousand dollars.

But tell me more about why why the intersection with food is particularly interesting to you. Well, because, I mean, you know, the best investments I think come from the really hard problems and I think that there’s there’s not a bigger problem right now or an industry that’s more under siege than the food industry. I mean, forget about covid for a second. Even before this industry was was scraping by on single digit EBITA multiples, you know, like the restaurants fail faster and more often than startups.

Right. So so this is an industry that’s under massive strain from from all areas. Like there’s there’s rising labor costs, there’s rising food costs. Real estate costs is going crazy. Delivery is introducing a whole new set of challenges. And most of those problems I mentioned are really well served by automation.

And then once you automate, that just kind of takes away the pain. But how do you elevate everything? You know, I mean, if you can automate all of a sudden the level of quality that you can reach can be so much higher, as well as the speed of service and consistency. You know, you can do things like adjust cook times based on the thickness of the meats and the heat at that at the at that particular point on the grill, because every grill is as different, heated, hot and cold points.

It’s really frustrating. And you can do things like coordinate things that coordinate all the food that’s happened in the kitchen.

It’s all very Jetson’s. And so with WaveMaker Labs, what I said at the beginning, which is you’re doing this in partnership with corporate partners. And so who are the typical corporate partners and how does that work when you’re starting these new endeavors?

Yeah, I mean, by and large, the corporations who are who are really well, it’s it’s all over the map because we’ve we’ve chosen to to focus in robotics and food because for a couple of reasons. One, robotics is a highly, highly specialized skill set that almost no corporation that that’s just generally in short supply in the world, but certainly the kind of corporations that we’re talking to, people who run large food organizations, they have no business and no ability to possibly have this kind of capability.

So so so we bring a really unique skill set to to an industry that is that doesn’t have any access to the skill set for the most part. And so the reason why we do this is because we’re not incredible idea faries.

What we’re really good at doing anything I wish, but what we’re really good at doing and what’s repeatable, more importantly, is that is that we can we can understand problems from corporations. And because we’ve got a really incredible, incredibly deep bench bench when it comes to technology and robotics, we can generally solve most of their problems through automation.

And then we and then we basically will go build it. We make sure that they supply a large letter of intent so that when when we have. Completed it, they buy it but like, for instance, we had a fifty million dollar, five zero LOI for our pizza concept, which isn’t called Maestro, please invest. And and that was from a store that had a pizza joint that had about 700 locations, so you’ve got like a fifty million dollar LOI from someone who says if you make these pizza vending machines, I’ll put them all over the place.

Yeah. And just imagine, like just just being a regular startup, like imagine. OK, like I think people are interested in these pizza vending machines. I’ve got zero proof. And when I go pitch another another investor, well, they’ve got to kind of take my word for it because of that, it’s got to be a really low valuation because a lot of risk know. But like but like what if you could start a company before you’ve written entire before you’ve written even a single line of code and you start out with a 50 million dollar LOI and superstrong conviction, you’re tackling a problem that actually matters.

Mm hmm. Yeah. And I’ve sometimes called those, like, development customers or something in the early stages where there are also hopefully, you know, they’re in it with you. And so they’re giving you feedback 

Exactly. How many companies have you invested in where they go six months down a rabbit hole of R&D? That means that is totally not applicable to the customer. Like probably like all of them is my guess.

Buck, I try to help my companies avoid that.

Yeah, but it’s really hard, you know, because, like, you got a conviction, but you don’t really have access like a big customer. You can truly tell you what’s going on. So, so, so we make sure they’re involved on at least a monthly basis with our product development.

I mean, it makes total sense. And I’m super interested in hearing more about Miso’s journey. But also, you know, on the flip side, sometimes we talk about strategic investors coming in and I think maybe it’s particularly in the later rounds where it can be more mixed.

You’re bringing up a point, you know, like how how do we WaveMaker labs, like, engage, you know, companies one hundred billion dollars of revenue a year, which is where we’re engaged one, for instance.

Right. How how about how do you engage them at like a super early incubation stage? Because those guys are serious d investors, if they’re investors at all, you know, and it’s all about the approach, you know, it’s like it’s very much like a partnership approach. If you make them feel like, no, you’re you’re the founders two and you’re going to own a big piece, this company of this things. And if you by nature, you’re just incredible customer weight or market reach, can kingmake this company, then you’re going to win, too, you know?

And so and so that’s that’s sort of how you get like get someone who’s really slow, stodgy, super late stage investor if investor at all, and to doing ground up incubation in some crazy robotics shop.

So they get to feel like a founder. Yeah. Interesting, and I guess why not sort of do it themselves?

Also, a couple of things. I mean, because because we WaveMaker Labs is really highly specialized. I mean, we’ve got our CTO, Martin Buehler. It’s so good to know what he’s doing with us, but he’s really, really good. So so he was director of robotics at Boston Dynamics for five years, built the walking dog from paper to Walking Dog, this guy’s been like number one. Number two engineer at any robotics company that’s mattered in history. And in my opinion and so, you know, and our team’s about twenty two engineers, like, they just don’t have this kind of talent. And they also don’t have the kind of talent to really innovate internally because these corporations, they don’t have the equity structure, they don’t have the incentives.

You know, we will we’ll create the company, we’ll find a CEO, we’ll get it capitalized. We’ll get the next round capitalized. And they just they just don’t have those skill sets internally.

And how do you make them feel like a founder as opposed to just a funder?

Well, we make them come up with the idea and we give them founders shares. It’s really a joint venture. And so, you know, typically we’ll start off with a discovery phase where we will really spend, like I want to say, it’s four to six weeks digging into their business and

We want to solve problems that are really important to them. So we have their attention. And so and so we really kind of like pull the answers from them over the over the course of time.

And so we make it think that we make them think it’s their idea.

Have you what have you learned about corporate innovation in the course of you doing this? So one like I speak to a lot of corporate innovation groups, and whenever I get into a group that is like the innovation group, I always know my job is to be a lot harder because and the reason why is because I think that it’s it’s incredibly challenging to make any progress that certainly it’s like seriously revolutionary or innovative when you’re inside a corporation and you have to deal with that structure did this come out of me robotics or, you know, you were doing this or just give me a full review of you and how you got here.

Yeah, I mean, so I prior to prior to joining Wavemaker, I founded my own venture fund called Canyon Creek Capital employed out there.

Let me just stop you on that. When I looked at your LinkedIn, it kind of looks like you went from business school to starting your own fund.

I did. I did. Nobody would do that.

I mean, it was it was really it was a really fun journey. So, like, I came out of business school around 2011 and and I just come off as starting a fintech company and successfully started it without funding and wound up without funding is is based on a government program.

And I started looking around like a sort of realizing, you know, I would like to make a couple of, like, seed investments just personally as an angel. And I didn’t like what is happening at Tech Coast Angels, but I was pretty, pretty poor and I got an angel.

Why did you not like the angel groups? 

Well, I mean, so so I did I didn’t like it, particularly because there’s a lot of voices in the room. And I think that I think that that a startup that is looking to get funded, you know, doesn’t want to talk to ten people, getting, you know, putting in ranges of like, you know, fifteen to fifty thousand dollars. You know, they don’t want talk to all those people.

They’d much prefer to talk to TenOneTen or Wavemaker or professional venture firm. And so, so, so I felt that like that because like I think venture is all about adverse selection. You know, the the best group of companies like they go initially to institutional venture capital and then they get to go to the angels or large super angels. Then they go to like individual angels, then they go, then they end up at like angel groups.

And so, like the best companies are being cherrypicked all along the way. And so by the time they finally end up at an angel group, everyone in town should have passed and passed on them. But by that point, because because nobody wants to go through the hassle of dealing with ten thousand investors, it’s just really challenging. If you have to if you have to have a personal relationship with them, which you don’t with the other crowdfunding prisons.

OK, I mean, here’s the thing. I agree with you. And yet I would like you know, I want a vibrant, vibrant angel ecosystem.

So so I’m curious on on on what you did. I interrupted. Go on.

Well, well, so, so, so, so, so before I started the fund, I tried to start a different version of an angel group where where really, you know, it’s highly, highly curated, essentially, like, you know, I would vet them or bet the companies myself and everyone would invest behind an LLC. And I wasn’t charging any imagine fee or carried interest or anything. And so it’s much more streamlined process for for startups.

And I felt like I wasn’t so subject to the adverse selection problem. Well, I did one deal and I quickly realized, jeez, that was a ton of work to not get paid for. And then so so I went back to my my group of investors, which is like literally just, you know, friends like chipping in like five or ten thousand dollars, like there’s no no whale in this story, you know.

And then it started start applying a little bit of management fee and it’s a carried interest, you know, so so it started out as a pledge fund and quickly deployed about six million dollars across eleven deals got and was lucky enough to get three really quick exits, you know, sold an ad to a company for basically kind of get your money back. Sold Bluebottle initially and then sold a company called Gyft GYFT, some wallet for gift cards to first data.

That’s extremely impressive. But you don’t I don’t want every MBA to go and think that they can just do this necessarily.

But tell me about just for our listeners, can you explain, like pledge fund versus like an SPV or rolling fund, all the other terms that we hear?

Yeah, I mean, pledge fund is is really just a group of people who are willing to potentially invest in your deals. And if there’s and if they do a deal, it’s basically like an SUV, then there is some margin structure on it. But but it’s a hell of a lot easier for early, early, early investors to start their career because like like when you start, you have no track record. And so I don’t have a track record either.

And so so I just started essentially like selling the deal. I was like, here’s here’s a specific deal and here’s how you how it could work and here’s my analysis of it and got together and that you can get behind.

But but and that’s different than an SPV or is it the same as basically the same for. And would you recommend to people who want to be doing some of this to to, you know, start up their SPVs themselves?

Absolutely. I mean I mean, it’s it’s there are some nice tools out there, like, you know, doing this to Angel. Angel, this is pretty good. You know, AngelList will take, you know, 25 percent of your carry, but it’s about to help. It’s a really easy way to do it.

OK, so that was that was out of business school. What we’re talking about this amazing six million that had bluebottle, gyft and everything else in it.

Yeah. Good for you. And then I’m not looking, I’m not sure I’m going in order here. But then what happened next.

Well so, so, so I sold gift and so sent a bunch of money back to my investors. And so at that point I started to raise a committed fund because investors because I’ll always ask for money from your investors when you’ve just given that give it to them because because you know they have it and then you know, right after an exit because they love you for that moment, but they might not love you in six months.

So Canyon Creek as a committed fund was about ten dollars million. But I kept I kept up my my pledge fund activities and so ended up deploying twenty million dollars alongside of the ten that I deployed out of committed funds. So what’s more impactful?

You know, I think pledge fund, SPVs, can certainly be more impactful than a regular committed fund rate because you get the carry on if you have one deal that knocks it out of the park.

That’s right, yeah. What are the winners? Winners are winners. Good, awesome. 

OK, So what did you do next.

Yeah. So lost my mind. Decided to go back in the startup world a little bit.

Right? I mean, not not exactly. So with with with the last check out of out of the committed fund, it Canyon Creek Capital. I decided to try something different and I was just let’s let’s incubate something, you know.

And so I was kind of I was looking at y why now that I’ve been a founder and Ben AVC, why did you decide you want to incubate something?

I’ve been asking myself that for a long time. It’s because.

Right so hard. It’s so hard. And then what I’m doing, at WaveMaker Labs is like incubating ten companies. So it’s like ten times harder. But like by the time I thought it was easy, it was starting. Companies is not easy. Investing, I think is a hell of a lot easier.

Because like when when when I was kind of when I was kind of just looking back and reflecting on what happened in Canyon Creek and what went well, what didn’t, all that stuff and what what type of companies performed well, I looked at Miso and so we incubated it.

So super low cost basis. And, you know, it was about 15 million dollars like the last round at this time. A couple of years ago, it was at, you know, ten million dollars and a 40 million post. And and at that point, I was basically almost exactly a 10x. And typically, if you’re a seed investor and someone tells it you’re at a 10x return, you should kind of like mentally think, well, that that that company is probably now like an 80 or 100 company, depending on a whole bunch of factors.

Right. But I was at 40 and so I was like, well, gee, is this kind of a magic number? Because, you know, something like eighty six percent of all, you know, exits happen at thirty five million dollars or below. And and yet, like almost all of us are chasing these 10 X plus hundred million dollar, you know, unicorn, God forbid, companies. Right. This this tiny, tiny, super long tail.

And so I thought, well, jeez, you know, if if there’s a way to create to incubate at scale, then I don’t need to sell these companies for a hundred million dollars. I can sell this company for 20, 30, 40 and be super, super, wildly happy.

So I tried to I’ve been trying to to recreate that ever since.

Well, I mean, we all just are watching Snowflake and just the amazing it’s not just their performance, but it’s also the amazing amount of ownership. That is it summit partners who incubated them. And so just looking at the ownership percent does make it tempting to go start more companies. You can see you can own more. Yeah, and and if you if you choose your corporate partners correctly, you’re probably building right towards an acquirer who doesn’t have any diligence to do on you because it’s calling you every month

What has changed about your approach to incubation? What have you learned?

A lot of the same lessons you learn as an investor, it’s all about the founder and the people,

And we also have a pretty unique approach to to financing, you know, we don’t go to traditional venture at all. We embrace crowdfunding almost exclusively.

OK, so tell me about this piece of equity crowdfunding and just give me sort of the 101, the really basic view.

So so with equity crowdfunding, you know, essentially you’re selling shares online. You’re allowed to advertise, which is huge. And it’s really to start you’ve got to have a compelling pitch. It’s a much more involved sale than a typical e-commerce thing. And I’m not like you might buy a shirt based on one advertisement, but if you bought for equity crowdfunding, typically you’ve got to catch them with advertising and then you’ve got to continually tell them a story over several months of your campaign.

And then and then they’ll they’ll hopefully invest. And there’s sort of like a reverse bell curve of like the if you if you’re running a campaign for nine for like six months, you get a bunch at the beginning. It’s kind of like the curve goes down until like kind of not a whole lot in the middle. And then like half your money you could erase the very last month. So it’s super nerve racking. You never know if you’re actually getting anywhere until the very end.

What would be like a typical you know, the person is raising a couple million or one of your companies is raising a couple million. How much are they raising and what size checks are they getting?

And just how does it all work? Yeah, it’s so Miso something. So, for instance, is raising thirty million dollars and eighty million pre we’re at about seven million dollars. Typical check size is like two thousand dollars, but there are people who are writing. So one of our other companies called Graze, it’s a commercial autonomous lawnmower, is just closed on four million dollars. All crowdfunding, one at one investor put in two hundred fifty thousand dollars without even speaking to us.

So it’s mostly the small checks, you know, single digit thousands, but it’s better. But there’s also really big dollars out there to be good to be gotten.

So you’re raising 30 million on an 80 pre. Yeah, on a crowdfunding platform. That’s right. SeedInvest.

I just think of it as smaller dollar stuff. OK, so SeedInvest. Tell me about equity. Crowdfunding is different than sort of a traditional like a Kickstarter. Is that true?

Yeah. I mean, you’re just getting shares instead of a product. OK, but why what are the misconceptions about equity crowdfunding? Why doesn’t everyone.

Because I had the misconception that you were raising, like, you know, a million now and we’re raising like 50 grand a day. If that makes makes it gives you an idea of the scale. And I mean I mean, think about it for a second.

So so the entire venture world is like, I’m oversimplifying here, but L.A., New York and SF. Right. Mostly SF. In terms of volume of dollars.

And I would say that that I would I would wager that technology and startups are like one of the most the public is fascinated by it, you know, and venture capital is the highest return asset class. But the general public has no access whatsoever to it. So it’s sort of a rich get richer story. But like, you know, you tell me like there are people who want to put a thousand bucks into Miso Robotics. There are people in Europe, in Asia, like I’m running a global a global fund raise.

Like if you’re a if you’re a traditional venture fund or a startup company in L.A., like you’re going to go do the circuit, you’re going to find a way are going to do it in one town. You’re going to meet all the people in town.

And how do I know it won’t be a sort of an adverse selection, kind of like what you were talking about with raising from from an angel group? Like if I’m an investor, how do I know I’m not the sucker at the poker table if I’m putting in my two thousand dollars?

I mean, you just have to use that to make your own judgment.

And and everyone in town and every venture investor and every professional investor like you say the word crowdfunding, they meet like wrinkle their nose, like, oh, really? You can get funded by anybody else, you know. But it’s like that’s not the case at all. I mean I mean, like, first of all, like it’s possible for startups to. Seed without the massive brain that is in the VC fund, like the book, but the book for myself.

So so you know, but but but the reason why it is that there’s this like mischaracterises terrorization or just like disdain for equity crowdfunding is because everybody kind of got burned. So the Jobs Act was passed in 2012 and a bunch of investors, including myself, invested in crowdfunding startups or something somewhere in or around that space. They all failed because the S.E.C. took four years until mid 2016 to actually approve the Jobs Act. Right.

And so then after four years of all this hype about that equity crowdfunding, everybody looks at looks at the at the at the crowdfunding market in mid sixteen and says, oh, see, like a like a drop in the bucket. I was like, no, volume is a brand new market, you know, and so I just took their eyes off it. But meanwhile, in the past couple of years, there’s been 10, 20, 50. There’s even been a single one hundred million dollar round get done through equity crowdfunding.

So this is really, I think, a revolution. And I don’t think people should be discounting it, but it is very hard to do.

And is seed investors, how do I know which are the the good ones and why? I’m just going to go back to Kickstarter. Indiegogo. Why are they still, if I understand correctly, set up to be funding in exchange for a product as opposed to for equity?

I mean, just because because I think that there’s different markets or different people, I think people really want alternative assets to be part of their of their their future and their finance, their finances. And and, you know, equity crowdfunding is the only avenue into the early stage venture world to get access to those kind of returns.

Hmm, great. And any other tips for doing it? Well. I mean, I mean, it’s so we’ve learned by failing here, but now we’re really, really good, like we’re launching for more crowdfunding campaigns before the end of the year.

Probably you’ve got to plan everything out. You’ve got you’ve got a plan update’s out for like your entire six month period. Like every week you have a new update to go talk to your your because you’re building an audience, you’re cultivating that audience, you’re convincing them to invest. And you’re talking about like the opportunity. And so it’s not as simple as like as like buying an advertisement on Facebook and having them click and then, boom, you got an investor.

It’s like, you know, you’ve got to really work at it. 

So I think that it’s it’s prudent to find people who’ve done this before and have them manage your campaign in a WaveMaker actually is starting to manage third party campaigns of people who we know just because we’re we’re good at it and scalable for us.

But but if you like an influencer, are you like it’s like a social media, like you’re going to build up your followers or something a little bit.

Yeah.

And we’ve we’ve we’ve also on that point, we’ve also kind of we’ve also embraced crowdfunding because we’re in a unique position to take advantage of it because because we’re a holding company structure that has as many portfolio companies underneath it. And so any time any one of our portfolio companies raises capital and they have like so Graze has almost three thousand investors, for instance, our lawn mower company, you know, those three thousand investors are now in the wavemaker ecosystem.

And we will market them, you know, Miso robotics, for instance. And so it’s like we’re actually capturing a high percentage of the investors who actually invest on seedinvest and startengine and all the platforms. And it’s pretty interesting because now we get to remarket to each of them.

Yeah, yeah. It makes it tennyson’s fascinating. Well I want to save a little time to ask you random personal questions. Anything else I really need to hit from, from wave maker. From WaveMaker no other than if you want to, you know, build cool, cool products and robotics and food, give us a call.

Do you care what geography people are in? You know, we want them to be in L.A. right now or the Philippines.

OK, got it. OK, random personal questions.

What motivates you?

I mean, just creating new jobs. I mean, creating new something. It’s never been there before. Like just because we do a ton of of wholesale creating comes of whole cloth. And it’s so fun to do that, especially when you know that it’s going to make an impact on a customer who is sitting right next to you.

And so so creating just creating value is super fun. I, I love creating, I love unfastening with robots and I like creating other platforms. So when I said that, I mean, we’re looking to do to create wavemaker labs and different verticals and industries and even geographies. And now we’re trying to copy and paste ourselves all over the world to really give ourselves this global perspective and global innovation.

That’s great. Do you have robotic arms in your house? No.

I wish no technical ability of my own, but I would have thought that maybe you just had robotic arm serving your breakfast or something.

Well, I mean, that is a company we’ve been toying around with starting.

That’s fantastic. Well, I look forward to seeing the future that you’re going to build, Buck it’s really been fun to chat with you.

Great. Likewise. Thank you.

Andrew Glazier — Defy Ventures

Pre-election must listen.  Andrew Glazier is the CEO of Defy Ventures and runs an incredible entrepreneurship program for incarcerated entrepreneurs. We talk about developing an entrepreneurial mindset and the need for criminal justice reform.

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Andrew Glazier is the CEO of Defy Ventures. Defy Ventures is a non-profit that works with incarcerated and formerly incarcerated entrepreneurs. They have an inspiring entrepreneurship program and also a new fund that helps fund entrepreneurs coming out of prison. Unlike many accelerators or venture funds, Defy goes really deep on the personal coaching and operates on the premise that being a successful entrepreneur is about building the right mindset of belief in oneself and courage. I’ve seen the program in action and I think they’re going to be a ton of lessons we can all learn from Andrew today.

Andrew, thank you so much for coming on the podcast and thank you for the great work that you’re doing. Thanks, thanks for having me. I’m excited to be here. Well, I love Defy ventures, as you know, but maybe you could just start with telling us more. It’s it’s not like a lot of the the VCs that I have on the show. So give me some of the basics of the program you’re running.

Yeah, absolutely. So we are a national nonprofit and we work with currently and formerly incarcerated adults. And we use entrepreneurship to change mindsets, to get people with criminal histories their best shot at a second chance. So, you know, when we start with people who are incarcerated, what we’re doing with them is we are hooking them in with this idea of starting a business to be a successful entrepreneur, you have to believe you have something to give the world, something to sell.

Once people come out, we continue that support for them initially with the reentry and career support. But then eventually, for those who do wish to pursue that business, we provide continued training and then we have an accelerator program where we really look to find some of what we call entrepreneurs in training or EITs, and we select them for the accelerator program. And then with the help of volunteers like you, we’re able to then work with them to launch a small business. Great, so many questions.

So just the program that you’re running inside the prisons, that’s, you know, I’ve forgotten now it’s a nine week course. People are spending 10 hours a week like it’s a pretty intensive program. Yeah.

Yeah, it’s actually about nine months. Oh, so, yeah, seven and nine months. Pretty bad, but. Yes, but is it is it 10 to 15 hours of work per week. It’s a twelve hundred page curriculum, and then at the end of it, we have a business pitch competition in prison and it’s kind of Shark Tank style, but that’s where we have volunteer judges that come in and these EITs pitch their business and we have a competition.

So when you talk about the mindset change, you said, OK, a lot of people in prison have a lot of the qualities. So I would say when I visited the people I met, they had a ton of hustle.

They had a lot of grit, and they were not they had a lot of entrepreneurship. Now, it may have been slightly you know, it was different entrepreneurship than I usually think about entrepreneurship.

But is that what you meant? And, you know, what do you what do you do when you coach the mindset change?

And. Yeah, so, yeah. So, you know, in the past, you talked about the fire as far as, like, transforming hustle. Right, a lot of it is about. Instilling some focus and putting some parameters around what it means to be an entrepreneur, right, to say, look, you’ve you’ve got skills, right?

I mean, most people in prison that are in our program have been. Business owners before it just wasn’t likely legal business, but as I say, in in prison, when I’m talking to folks, look at.

Just because the business you ran may have operated a difficult regulatory environment with questionable HR practices doesn’t mean it wasn’t a business right and those skills can be transferred to legal business and it’s a lot of it is about contextualizing things they may already know how to do and just saying, look, let’s put some different language on that. Let’s put some different frameworks around that. And now let’s talk about something you want to do that is going to make a positive difference in your community.

And that’s where that personal piece comes. It’s like, hey, where did you come from and who do you want to be? Hmm.

And we’ve got people we work in maximum security, the highest security prison in California, all the way down to moderate and a little bit of minimum security, but for the most part, working in modern maximum security facilities with men and women.

And now you were there at sort of the midpoint where they were really just forming their entrepreneurial ideas at that point.

That’s what we’re giving them some coaching on, how to focus some of that stuff.

Yeah, I was there for they were working on personal statements and their personal statements were incredibly impressive, but there’s also some self limiting beliefs.

Absolutely.

Yeah. I mean, the first thing we talk about when we start the class is this idea of self limiting beliefs. Right. What if you’re going to be an entrepreneur? Right. You need to be able to believe in yourself. Right. So let’s explore that. What is the stories that you tell yourself about what you can’t do?

And now let’s blow those things apart.

And so much about what we do in Defy is is about that that narrative change and taking accountability for their past, thinking about who they want to be and what they’re doing to transform and make creating a vision for their future. And and I think that is such a deeply human exercise.

And I think one of the reasons it’s so moving for volunteers when they come in is that they realize. They’ve got they’ve been on their own journey, right? We all have we’ve all made mistakes or we’ve all done things that we may regret and, you know, coming to terms with those things and not letting those things define us, even nobody else knows about them. Right. But how are you defining those things internally? And those self limiting beliefs are things that prevent all of us from achieving the things we want to achieve.

So can we talk a tiny bit about the steps of the line game? Because it is totally a powerful game and you have a question in there that has something to do with, you know, what’s the worst thing you’ve ever done? Right. Tell me about or tell our listeners, because I participated in some of the questions and how that works.

Yeah. So the step to the line exercise is one of the most it was the deepest one of the deepest exercises we do. And the way it works is we have our entrepreneurs in training our EITs line up on on one side, we have all of our volunteers lined up on the other side. And then we ask a series of questions that range from the kind of silly like who’s your who in the room loves Taylor Swift to, you know. Right.

And to, you know, except the line if your parents tucked you in every night until they loved you. Right.

And what we’re looking for, what we’re trying to achieve there is this moment of empathy where we start to see how we are more similar than we are different along the way, and also to recognize where there are important differences.

And certainly, you know, we’re exploring questions of privilege in there. But but I don’t think that’s the most powerful piece of I think the most powerful piece of it is this idea of we’re all humans and we can be empathetic with each other and and find that shared humanity and realize that we are more alike than we’re different. Yeah, yeah, well, some of those were you ask some questions or deep like who has struggled with addiction in their family or some of that stuff where the volunteers who are mostly, you know, the business community stands on the line as well as the EITs.

That’s right.

But then, you know, who got tucked in and felt loved when they went to bed? It was a very disproportionately one shared room.

Yes. Or who was arrested before the age of 15. Oh, right. Which which are are some of the heartbreaking questions in there that I think are so important to the you know, the recognition that we all we come from different realities in life and, you know, and. In many cases, but for where you were born, right, and what you had in the first 10 years of your life, your life path might have been very, very different.

One of the questions you asked that was a very shared humanity question was because you were leading the session when I was there, was who feels nervous to be here today?

Right. Right. Yeah. And, you know, I was in a men’s prison and it was you know, I was nervous, but so was a lot.

So was a lot of the room that was facing me. The you know.

Yeah, absolutely. I tell people. So we ride the bus in. Right. I think you came in on the bus with us, with me. And as we ride the bus in and I always say, like, hey, who’s nervous? And then, you know, people sort of put their hand up and I’m like this. However nervous you are, the folks we’re about to meet are more nervous. Right. And and because. In many cases, the volunteers to come in may be the first people who did not either live or work at that prison that those individuals have met in years, and that is nerve racking.

And they’re going to get in there and like start to share about themselves. And these are all not norms inside of prison. So it’s a it’s a big moment when we’re doing that for the EITs to have that opportunity to sit across from somebody not behind bars. Right. And have that human interaction and to start to be treated like somebody who is smart and as valued and and can be respected. And that’s a big deal.

Yeah. I mean, there are so many stories, but I’m I’m going to stick with your program for a second half of my visit.

Anything else about the entrepreneurship? You know, my audience is more entrepreneurs here. You know, when you’re talking about how to launch a business or some of the basics of entrepreneurship that did apply to all of us that you think have been really good parts of your program.

Yeah. So, you know, I think. A lot of times when I’m speaking with, you know, individuals in the VC community and I’ll talk about entrepreneurship, you know, I talk about all the parameters of the businesses. We support our. Less than twenty thousand dollars to start a capital cash flow positive within three months, you shouldn’t require a physical storefront and should be built on some experience you already have.

Right. And it always amuses me a little bit when I talk to folks in the community who are like, well, you can’t start a business for that.

That’s not possible. Right. And, you know, my feeling is, well, au contraire, you know, because I see it happen all the time. Right. You know, aren’t entrepreneurship in the small business world, the sort of neighborhood world, I think a lot of times can get lost, the basics are the same. Right. How do you come up with the idea that people want? How do you make more money than you’re spending. Right. You know, and then how do you how do you market it and get it out there?

But we’re doing it at the at this level of kind of micro neighborhood businesses. And and we see it happen that when folks come out, you know, not everybody who does the program comes out and necessarily decides to launch a business, which is which is fine.

What we want them to not do is go back to prison. So what we’re really hoping for is initially they get a job that will sustain them. And then for that percentage, you do want to pursue that business. And we see it over and over again, whether it’s the like the commercial cleaning business or the fitness business or the food business.

One of our volunteers is a great guy. Name is Mark Bowles. He’s a he’s a VC San Diego area. And he mentored one of our folks that came home and helped him launch commercial cleaning business.

And, you know, I remember sitting down with him. He’s like, you know what, Timothy? Who was the EIT? He is the hardest working, most talented entrepreneur I have ever met, because this guy will bust through any walls in front of them and work incredibly hard and it feels entitled to nothing. Right. And, you know, he’s like I just like that’s a guy I know is going to be successful. And, you know, Timothy is a guy we were able to to fund through Defy and Forrest with a seven thousand dollar initial investment.

This guy built a commercial cleaning business is Ian.

Do you have a fellow named Ian on your staff? Indeed, yes.

And Ian said something really powerful that stuck with me, which is the people in prison. I forget how long he was in prison, but it was 12 years.

12 years. Yeah.

And he said something like, there are people who come out of prison better and they make that choice and there are people who don’t come out better. But you make a choice. Absolutely, yeah.

I mean, look, agency is something we take for granted in the world, right? You know, you and I have a ton of agency like whether we agree, whether we choose to embrace our agency. Right. Whatever. Right. But I mean, we have a lot of free will. You know, we can decide what we’re going to do every day for the most part. Right. You know, when you’re in prison, you get to make ten decisions a day, right?

Ten. That’s it. Think about the decisions you make in the first hour of your waking moments. Right.

You know, but so we try to do in our program through entrepreneurship is restore a measure of agency to say, look, you’ve got some choices in front of you now. Right. And you know what? Let’s let’s talk about some of the smaller choices programmatically of like, do you want to do this business? Do you want to do that business? Right.

But then that grows into like, who do you want to be? Right. Because you’ve got some choices right now, even if you’re still going to be locked up for a while, even if you’re going to be locked up for the rest of your life.

And we have some of those. Right. You have some agency about what you choose to do with your time. And and that is what a lot of what Ian was talking about is finding agency inside a prison to start to make some choices about who you want to be so powerful.

One of the things you also asked on the steps of one game was who’s been in isolation?

Yeah, for more than a week, a month, a year, five years, 10 years or so.

And in five years, I don’t know, 10 years like people who are stepping to the line. It was really terrifying.

So maybe could we talk about just Defy ventures and what you’re trying to do and what is the overarching what is the state of sentencing and criminal justice, if you use that word? I don’t know. Sure. Yeah. Yes.

I think of our advocacy and a little bit of a subversive way most of the time, which is that when we bring people in, a lot of people think they’re coming in and then they come in with different motivations. Some people think like, oh, I want to go inside and see a prison, see that I’ve done that. You know, other people are coming in because they want to learn more about the justice system. The people are coming in because, you know, they want to, you know, do service.

But everybody walks out of that day, right, realizing that whatever they thought about the criminal justice system was wrong. Right. And who was inside it and that, you know, that the world is not what they thought it was when they walked in that morning. And what I hope to do with that is. Get people to vote, right, to start to think critically about what it means to vote for politicians who just want to lock people up and throw away the key and what and what it means to be an employer and to be in it, to be part of the solution as a member of the business community by employing people or investing in people.

Because employment I mean, I think employment is a huge driver of recidivism. If I.

Oh, number one. If you are unemployed, the number one factor most likely to send you back to prison. Right.

And so entrepreneurship seems more important than ever. Yeah.

Yeah. I mean, for us. Right. We our first hope is that somebody our first goal and people come out of prison is let us help you get settled, make sure you have access services and that’s helped get a job. Right. So one of the things we look for from our volunteer base is people who are willing to employ and have entry level jobs and are willing to say, I will be a Fairchild’s employer. And I always interview people who have finished the Defy program.

Great. The next piece for us is to say, OK, you have your job, you’re stable. Do you want to pursue entrepreneurship?

And to give them that opportunity and importantly, access to capital if they’re willing to work hard and get there. And that segues into this idea of this venture fund that we’re creating. It’s a philanthropic venture fund, but a venture fund nonetheless. And the idea behind that is to say, look, we have built out this selective accelerator program for, you know, we’re hoping we can push, you know, twenty five businesses through per year.

For those 25 people coming through, we want to give them high quality mentors, intensive coaching, a little bit more curriculum. But they don’t need that much more stuff like building a financial model, know how to incorporate their business, stuff like that, and then having enough money to be able to give them up to ten thousand dollars of a seed grant.

They don’t have to pay back.

And then they can employ other people who were formerly incarcerated. And so that’s where that circle starts to take off. So that’s that’s an opinion.

Let me put it another bit of a plug there. But, you know, you’re running a really lean organization, too.

And so people who want to give money to support your entrepreneurs, it’s going straight to those entrepreneurs. Oh, yeah.

For the fund for the venture fund in particular, 90 percent of that is granted directly. Right. So we’re I’m excited to say we just won a major federal grant to support the, you know, most of the operating costs of this program.

And we have this opportunity in front of us right now to invest, frankly, primarily with people of color, because that’s unfortunately who we incarcerate in this country at over indexed to black men six times the rate of white men. Right. And so when we’re talking about funding potential businesses and really focusing on racial justice, economic justice, social justice. This is where it’s at.

Mm hmm.

Well, I appreciate the work you’re doing, Andrew, so maybe changing gears a bit. Should we talk more about this amazing fund.

Let’s just talk about the experience of you show up in your program. And it’s a human tunnel, right? I mean, got for Randall or someone playing music, but it’s, you know.

Yeah. Coming in. Yeah. I mean, look, we try to make the event a really fun day, right. It’s deep, but we also try to make it a fun day that everybody’s going to remember, especially the folks inside who don’t get fund days very often. And so but when people get there. Right, I think for volunteer is the first thing they remember is walking through the big giant iron gates of clang shut behind them, because then, you know, it’s real.

Yeah, right. You’re inside and then you’re greeted by all these men or women, you know, in their prison blues who are super excited to see you. An when you are inside a prison, you have no choice but to be fully present.

It was so intense. I was chatting with someone. Oh, no, it was Emily Proctor who said that she didn’t know the difference being prison in jail. Yeah. Which I mean, it just emphasizes the stratification of our society. Plenty of people have no contact and plenty of people have way too much contact, 100 percent.

But, you know, I didn’t know all the sentencing guidelines, like a life sentence is far worse than twenty years to life or.

Well, so. So I think it’s interesting thing about life sentence is. A basic if somebody just gets life right. What that means is they will be in prison a minimum of seven years before they can go to the parole board to be considered for release. When you hear 20 to life, what you’re hearing is they have to do a minimum time, 20 years before they may be considered for parole and then they may be denied parole forever. Hmm.

Right. But they can go back to that parole board at a minimum every 10 years and be considered.

So but so I think one of the one of the one of the lies that people sort of feed themselves or think is that somebody gets life, are never coming home.

That’s not true. Ninety five percent of people in prison are going to return. Some people get what’s called life without parole or ELAC, which, you know is I’ve been I’ve heard of people call that civil death. Right, because you’re going to die in prison. Right.

But but that’s actually not that many people.

And, you know, I think the sentencing guidelines, you know, you see that the injustice of the sentencing guidelines, I think when you do this work because you meet people who were sentenced to crazy long sentences when they were juveniles. Right. Right. And when you meet somebody who is sentenced. At age 16, 17, 18, even twenty one, right? You know, the thing I wanted to ask in this exercise is who did something really stupid before the age of twenty three?

Right. And that’s nearly everybody in the room, if not everybody. Right. And, you know, that’s where I think I. Find so much tragedy in the system is when you meet these people who. Lived a difficult life as a child, right, and did something admittedly like real bad, right while they were children, and then the state 

That’s, I think, a really important takeaway. People coming in. It’s like, look. Our government is created around this stuff because we, the people, tell them to do this stuff, nobody ever got elected for being soft on crime. Right. And that I think that’s an important. Moment for folks to say, like, OK, what is my part in this? Mm hmm.

Do you have offices that we should all be paying attention to, like elected officials? Because we pay attention only to the top of the ticket sometimes?

Yeah, I would be I would be paying attention to your day races. Right. Right. These days are in his day in Los Angeles right now. That’s an important race. And this is. They step up criminal justice and sentencing and application justice is front and center in this race right now. OK, read up on it. Pay attention to it because it’s important.

OK, where’s where’s the where’s your vote right now?

I am not making an official organizational endorsement. This is my personal opinion. Right. Right. In my personal opinion on this is that I will be voting for Gascon  for a district attorney because he is not funded by police unions and he has a record of approaching justice differently.

Yep, yep. OK, Andrew, you grew up. Do you? You went to Harvard Westlake. You went to UCLA Business School. You’re from around here. You went to Pomona or somewhere on a college.

That’s right. L.A. County lifer. So I spend so much time talking about your program. But how did you go from that to here?

Yeah, but it said, well, my life is has never really moved in a straight line as far as career path, but, you know, went to Harvard Westlake had an amazingly privileged experience in school.

And then I graduated business school in 06. I end up working for his entrepreneurial firm, ostensibly to do finance, but I ended up running a construction site in that work, I met people on my job site and in talking to them, I met people with criminal histories that I was aware of for the first time. And I remember this guy. He was like he was a framer. And he was like, So how did you make this work?

Well, I didn’t wake up one day and think about I want to be a framer, you know? But I was a tweaker and I was high on meth and I stole a gun from a cop. And I was like, I didn’t kill him. And I ended up serving three years in prison. And this is what’s open to me. And I had to feel, given his realization of like, wow, if you have a felony on your background, a violent felony, like your opportunities are incredibly limited.

And that was really my when I first started to think about this idea of reentry cut to working at an education, get with city year, another education, great education nonprofit.

But you see this school to prison pipeline happening. Kids growing up in South L.A., East L.A., wherever it is, right, and they’re surrounded by generational poverty and violence and, you know, there’s a certain path of least resistance that exists in those neighborhoods.

You know, I remember the first time I went to prison was compensation for women. And we went into this room and we did the Stepto line exercise and everybody was lined up there and it just felt like I was in. One of the high school auditoriums that I’d worked at would sit here in the detention room and you look and you see all these faces and you’re like, I think I know some of these stories here.

Right, right. So now what are you are you the CEO?

Thats what they tell me. Yes, you. I didn’t I didn’t start here. Then I started as the executive director for Southern California.

OK, right. And it was a rapid rise to the top.

There was a battlefield promotion. Yes. Yes. Not only the promotion, but I mean, the reason I bring that up is because a lot of the founders that we work with, you know, they they’ve become founders without every qualification.

You know, it’s not like they run thousand person or or whatever they find themselves somehow into.

One thing we always hear is that it’s lonely at the top.It is lonely at the top. You know, I so. Defy story was a little fraught, you know, when I came in, we had a CEO and a who’s our founder. A lot of sort of classic founder’s syndrome stuff happened there and then. She left and then I found myself inheriting, which was essentially at that point a dumpster fire, and as a CEO and I went to my own junior cell phone and beliefs of like, what the hell am I doing here?

You know, I don’t feel like I have agency here. Right. I’m stuck, you know, and and and I’m not I’m not capable of doing this right. I’ve never raised money before in large amounts. And, you know, I have to figure out how to do this, turn around. And I feel like nobody is helping me.

And I want to I mean. Yeah. Who wants a dumpster fire? Well, right, exactly.

You know, somebody a coach said to me, there is a guy his name is Jason Jazz, that he runs a coaching firm called Novas Global. And he was on one of the trips at that time. He’s like, hey, man, I’m going to coach you. It’s like, OK, somebody else. He wants to coach me, right? He’s like, no, no, no, we’re going to do this. And so, know, I got on with him and he’s like, Hey, man, what are you doing here?

Why are you here? And I was like, oh, well, you know, I. You know, somebody’s got to do it and, you know, it’s like, you know, obligated and I don’t let people down, he’s like, Yeah, why are you really like? Well, I also hate losing. Right. He’s like, OK, I buy that, you know. And and and but what he helped me realize relatively quickly was, look, man, no one’s making you do this, so do it or don’t do it.

But stop complaining about it because you have a choice. And he’s like, look, as long as you live in this world of I’m stuck here and I can’t be successful, you are right. And when you’re the leader of the organization, you can’t sort of pull everybody together and be like.

Hey, everyone, I feel really bad right now and let me tell you how bad I’m feeling about this 

And that’s. I think that’s a lot of it, but also learning how to convey vision, right? I mean, ultimately, I never thought of myself as an entrepreneur. I thought of myself as a systems builder. That’s my sweet spot is like taking something that somebody else made and then making it great. 

Maybe being a systems builder was like a limiting belief. You know, maybe. I think you’re right. I think you’re right about that.

No, you’re absolutely right about that is like I put myself in this box and like, well, I’m a systems builder. That’s what I’m good at. I’m not good at, like, vision and and that kind of stuff. But in the end. Right. I mean, you can be. Yeah. I mean, I needed to be and I was and. OK, I have a philosophical question for you. So how here’s the question, how do people learn to forgive themselves?

Yeah, well, so I would add to that, how do people learn to forgive others and themselves? I think they’re both tough, right. I think it is easier to forgive others than it is to forgive oneself. And in some ways are in a lot of ways. I think you learn I think you learn to forgive yourself by practicing it. Hmm. I mean, you have to start by saying I mean, look, the whole operation, right?

I mean, you know, I remember Saturday Night Live and the guy would get me like I’m good enough, I’m smart enough. And gosh darn it, people like me. Right. You know, and we all sort of laugh at that sort of mode of affirmation and it sort of feels weird to do it. But in reality. Right. That self affirmation. It is hugely important because you are practicing. You’re you’re practicing yourself belief at that point, right, and I think forgiveness is the same thing, is that if you say, you know what?

I forgive myself for this, right? I am like, I know I messed up. I feel guilty about messing up, right? I feel bad about doing that, I certainly regret it. I don’t want to do that again. But I’m not going to live in that space and make that define me, and I think that’s a lot about what self forgiveness is, is to say. I am forgiving myself for doing that and recognizing that I that’s not the person that I am anymore.

And we tell it to our EITs all the time is like, look. When you do affirmation and we do those affirmations, you might be faking it till you make it there, right? But you’ve got to say it like you mean it.

And one day you will need it. And that’s how you change that belief about yourself. And I think forgiveness is the same thing. It’s good.

OK, Andrew, we’re going to have to wrap up so we end with some affirmative statements. Andrew, you are awesome.

This podcast was awesome. The work you are doing for the entrepreneurs in your program, each individual is so meaningful to them. And I appreciate what you’re doing. So thank you.

Thank you. And I would like to offer an affirmation to you, too, which is I think you’re awesome and I. I love it. You’re willing to talk about this stuff and and share it with your audience and be part of our program. And if I could just put a plug in for folks who are interested, check us out, www.Deftventures.Org. And if you want to get in touch, somebody wants to get in touch with me directly about supporting the program.

Andrew@Defyventures.org