Rick Smith — Crosscut Ventures

Posted on Wednesday, September 22, 2021

Rick Smith is a founding manager partner of @CrosscutVC and one of the pillars of the LA tech community.  

Crosscut is now investing out of Crosscut Fund V, but started as a $5M Fund I in 2008.  We talk about growing a fund, a scout program, a tech community and growing personally.

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Rick Smith and I are here live. No, no, not live we’re in person.

Rick Smith and I are here in person in Venice, California. Rick is a pillar of the LA tech community, having started Crosscut about 13 years ago. They’re now investing out of Crosscut V. 

Rick, I kind of buy into this whole notion that startup’s cultures are really set by the early employees and I think the same applies to cities or to communities. And I think LA tech community has been so warm and so welcoming. So I feel like I would like to thank you and others who have set the foundation here.

Well, I think you’re right about that on the early employees. And uh, I think that’s one of the hallmarks of that.

LA community, I think is the warm openness instilled the belief that we’re all in this together. And if the rising tide will lift all boats, we’re still in that phase of, LA and I love it.

So I want to go back, like when I met you, I thought, okay, smart, successful Harvard law school. But really that’s all wrong, no, um, no, but give me like star me from sort of Illinois.

Uh, I was, born in Illinois, given up for adoption at birth. Uh hu that’s right.

Luckily for me, I was adopted by two of the best parents that a kid could have. Both high school dropouts for different reasons. My dad was a plumber and uh, had to drop out of high school during the great depression. He was older when he adopted me, but, uh, to put food on the table, his dad was a plumber and said you gotta help us we’re having troubles. 

My mom dropped out of high school and married my dad. And so, you know, she was 17. And, uh, so they got married at 21 and 17 and were married for 66 years, had had a great relationship, but they couldn’t have kids, and so they had adopted my sister a couple of years before me. 

And, then they were, walking down the street and ran into the adoption person And basically, they ask how, how my sister was doing. My dad says, great. but she could use a little brother. And, uh, apparently got very upset. 

The Adoption person got very upset and said, do you know how lucky you are to have one, just, uh, you accept it. And So he did. And then a week later he got a call saying, you know, we have a boy If you want, So if he hadn’t been walking on this. Hadn’t met her at that time, you know, I’d be sitting somewhere else right now.

 So, you know, that was, that was the early, formation for me in as Decatur, Illinois, soybean capital of the world. I worked with my dad. I worked at a nuclear power plant, as a pipe fitter, I did do the typical shovel driveways, mow lawns, D tassel corn, worked at restaurant, worked in a supermarket, I had all you know, all kinds of odd jobs 

 you know, we define entrepreneurs, as check,

boom, boom, boom, 99% of the entrepreneurs are whoever is running the dry cleaners at the corner and and my dad, the plumber. those, you know, those aren’t tourists, aren’t going to make the money. and I’m an impact were backing.

But and Those are entrepreneurs Those are people that like, no, one’s paying them a check. So I, a lot of that. like I think what I do now was influenced by that even though I didn’t really realize it, going downstairs and my he’s like paying bills and stuff and it’s just, like, 

thought are going to work for on the 

and, and to both of your parents had dropped out of high school. And, um, how did you go from, what, what did the soybean capital 

of the world? to Harvard law school. 

Well, I don’t, uh, I think partially yeah, it was seeing my dad, my dad’s plumbing business was called a plumbing anytime, anywhere, which was repair business.

So two in the morning he he’d get a call and then we have to go, you know, unclog a toilet somewhere. They don’t call you when things are going well, so he, you know, he worked really hard, I think watching him work really hard. just, Uh, was a motivator, I think at least for me as an adopted kid, I just felt like I was given a gift.

Of of just life, you know, And I’m And for me, just like, you know, making the most life was really important. So, excuse me. So I think when I went to college, I went to Illinois. That was 45 minutes from, from home. That was the place to go. It was, in retrospect, in my background in grades, you know, like, I potentially could have gone to, to a different kind of school, but I loved Illinois university Illinois.

It was, uh, the only place I applied to and I got in. But once there, I really wanted to take advantage of the opportunity. I felt like. No. my, My parents had sacrificed to put me in the college, um, pay for. It Wasn’t a lot but pay for it and I want to make most of it. So I just, I worked harder than anyone. academically, I was, I was crazy. I mean, I was known to lead the, fraternity at 11 at night to go to the library when the parties were starting So, I just felt driven.

I wanted to get into the best law school I could get into. I got into Harvard. and so you know, it didn’t hurt. Probably my dad was a plumber and and you know, it was a good story. 

 I never thought I’d practice law. I was one of those kids that wanted to be a Senator, and really helped the most people. that I could and, to show how unjaded I was back then. I thought politicians were the ones that could actually help people. I still think that somewhere in there, but I really wanted to do that or get into business 

Do you have anything from your time at law school or being a lawyer that is applicable now in what you’re doing today?

Yeah, I mean, I think I practiced law for six years. I was at a wall street law firm that had an office in Los Angeles. I think working 80 to a hundred hour weeks for 50 weeks a year, maybe 52 weeks a year. We didn’t have a lot of time off. I think that the attention to detail the perseverance, the requirement to work hard. I think all that’s helpful in whatever you end up doing. I think there’s, Al there was a lot for me to overcome because as a lawyer, especially as a transactional lawyer, which I was doing mergers and acquisitions. You’re only really paid to think about the downside.

You know, what happens if the debt doesn’t get repaid on the LBO or what happens if this contract falls apart? or Whatever. So I think as a venture capitalist, maybe my first instincts of what happens to the things badly. and I think you have to overcome that, and I, I do a decent job of that. I think my partners do a much better job at that. I’ve always said, I don’t know if I would invest in any of us individually, but I would invest in us as a group because my what I call realism they call pessimism is overcome by their, uh, optimism.

And I think, uh, you know, you need to have a healthy dose of you know, pessimism of the intellect, optimism of the soul kind of thing. I’m still, I still struggle for me.

I still, I’m considered the, you know, the hardest sell at cross-cut, but it’s a role that I play and, and others. play play different roles and it’s worked for us. 

I didn’t know that you were the hardest sell. I liked that. actually I really liked the pessimism of the intellect, the optimism of soul, Steve, Rick. I like it. okay. So then you practice law for a while youdoing MNA and decided to start.

Cross-cut 

like most stories, the, It took a few more turns than that, but I ended up going to work for one of my clients, which was a small buyout shop of sorts. We were actually helping other MNA firms these loans. mid-market companies and we were raising debt for them, but we also started to look for companies ourselves.

We ended up buying Steinway piano company with, uh, with no money down and, and borrowed like 101% to, to, to buy it. Uh, we bought a company called Selmer, which makes bands and orchestra instruments in Elkhart, Indiana, but I ended up getting a call at the end, near the end of the two weeks there, from Eli Brode who is really Las original entrepreneur, he started two multi-billion dollar companies.

with The first one is now called KB homes. Home builder It was called Kaufman and Brode, but uh, that’s a multi-billion dollar exit for him. And then Southern America. 

And Eli’s name is on the Brode museum downtown and really all over town. He was a great role model for giving back and he really has civic responsibility, civic duty He felt it to give back to town. but um, not, easy guy to work with, but he was driven. He was, a great first, I guess, entrepreneur for me to sit across the table from him and really see how he operated 

I don’t think he was smarter than the rest of us. I don’t think he had more, uh, testicular Ford too than the rest of us, but I think he. was.

The combination of, taking big risks, seeing big tailwinds, and he’s willing to kind of put money out there. that’s what we started to do. And we looking at buying all these great companies like Transamerica and bear Stearns, and a lot of names that, were household names at the time.

 but I know in my heart, he was preparing the company for sale. And So the MNA job was, was nice, but I was looking for a little bit more So I basically put together plan to say, I think we should start investing in series B investments in Silicon valley.

I was not on the investing side And I wrote this memo and said, if we do one we should do 10. w you know, it’s going to be risky, all this stuff. But I, And I, I was basically just reading wired magazine.

I mean, I, I w I did not know anything about tech, I didn’t know anything about venture capital, I know anything about anything.

so with mark Hampson’s help.

And Jay Wintrop was the vice chairman kind of provided cover for us. I went out and started looking for deals in, in Silicon valley and, and started investing in funds. And when you invest in funds, you create friends and, and, that’s how I got started in venture. Our first investment did like 18 X and in nine months it was, it was crazy times.

And then I, left to join another firm in LA called Palomar ventures Was there for six years hired Brian Garrett. and he joined us as a associate became partner in like three years.

He and he, so he and I have worked together for 20 years, and is it good friend and colleague and,we ended up leaving Palomar to start cross cut. it was August of 2008, Uh, September of 2008 is when the world fell apart. So, you know, we had a $5 million first time fund, And, you know, we, we put that money out in 18 different different deals basically. None of those he’s going to raise money. In 2009, 2010 was tough. And I was trying to farm Brian out to other VC funds in town and no one was hiring.

And I was like, you know, we can’t continue on his cross cut, but things changed. And I think there are maybe four unicorns in that, fund. but It took us four years and w and Brian couldn’t find a home for Brian anywhere else.

And I didn’t know what else to do. And we ended up getting lucky enough to raise fund two and 2012, which is $15 million. Uh, Steve case of, AOL was the lead investor in that. and he certainly had a vision that’s come true today. 

technology and innovation was going to be happening outside of Silicon valley.

And he was looking to only invest in folks outside of self and valley. He now has rise to the rest. He Didn’t have that, then, but he that’s what he was looking to do. And we were the first investment he made And so he, led our second fund and in 2012, and we’ve been often into the races since then, 

Yeah. Now that you’re fun. Five. it’s kind of amazing. You started as a $5 million fund one. 

so let’s talk about fun five Do you still co-invest? Do you still like co-investors it’s a self-interested question.

Well, we loved him one 10, if anyone, so no question.

about that. Yeah, we, we still, we haven’t changed our model much. I,I mean, of the deals we do, we’re still syndicating where we’re hoping to syndicate. I’m still convinced that having more smart people around the table that care about your company is best way for entrepreneurs.

to go. And maybe I got a little, yeah. jaded if that’s the right word several years ago when I was an investor in a deal, but we were very small investor and there was a much bigger investor, a Midas touch, top 10 investor and stuff. And I would say the company he was not served well in that arrangement. It felt like the company was working for that VC fund.

And that’s true. If you’re a PE fund you’re a PE fund, you’re buying you own a hundred percent You don’t even Think about syndication, boom, you own it. You do work for them. I don’t think that’s the way VC is best done. And, I think when there’s an outsized owner in it, subtle, it’s not written in the documents It’s still a minority ownership, but like all the intention tends to go to one person.

And if that one person is not necessarily paying attention or isn’t maybe the right fit for that entrepreneur, right. I don’t think the company served well in that situation.

that’s interesting though, that notion that having maybe a couple different VCs sort of balances things a little bit, 

Oh many. I, I, I, many times I had played the role of jumping in front of a CEO.

Who’s about ready to shoot one of the VCs and say, Hey, w w let me run interference. here. speak VC, speak. I know what they’re saying. let me go, Sue this over a little bit. we keep each other, in check, and AMPA VC sitting around this, this drives me crazy, sitting around a board meeting.

He’s like, Hey, have you thought about XYZ sort of drop the turd in the Punchbowl and then leave the party.

 and then they leave and they haven’t really thought it through, and they don’t really care and they’re jumping their Tesla and driving out to play golf and and the CEO’s left to like, wait, what what’s do with this.

So I think, I think having more than one VC round table is actually good for. everybody. 

Yeah. That’s great. Um, what are some of the active discussions? What are you guys talking about with the, let’s say $30 million post $40 million post pre product companies that we’re seeing?

So uh, we’ve adapted, I think like a lot of people when times are like this and capital is flowing more freely, we’ll invest earlier. Uh, so we’re we’re still, we’re still trying to keep our pre money down. We’re not gonna, for the most part invest in a $40 million pre-seed pre-revenue, you know, pre second employee company, but there’s always exceptions.

 But still think it’s where you guys 10, 1 10 investors where we invest at the C level. We can at least somewhat influence the price. There’s only three things that affect IRR, beginning valuation, ending valuation, and time and The only thing we can really impact is the beginning valuation. So we are, valuation, sensitive, 

Um, what are you doing in your later stage rounds? Are you guys participating raising SPVs for a company that now is at a hundred million plus and you invested six months ago? 

Yeah. Uh, try 1,000,000,003 plus um, investment invest in nine months ago. Uh, no comment on that, but yeah, we, we, we have, um, we, we are offering up SPVs to our investors with sort of no, no promises on our side saying, look, the crazy markets, but this is top name brand funds investing, if you guys want a piece of it, great. we love the entrepreneur would love the country. we just don’t, you know, we, we can’t vouch for the price, but, uh, and we, so we’ve been doing this we’ve done three or four SPVs last month.

Yeah. Couple million dollar check from you 

guys. 

Yeah. anywhere from half a million to two, two and a half. 

yeah, no, it sounds like a good place to co-invest. Um, Can we talk about Picasso? is it public?

What was the post money? When you guys invested? 

I probably shouldn’t say too much on that, but we invested in, I think it was February of last year. I think the first dollar revenue may have been October of last year. And about six months after that we announced a raise at a billion dollars.

 Yeah. it’s uh, now look, you got a great management team there. They are poised to be a category killer in fractional home ownership. And it’s a pretty attractive model. and you can buy a second home or you can buy one eighth of a second home forone eighth, the price of, the entire home, have someone else manage it for you all. That’s great. You got the founder of Zillow, Spencer Rascoff as a, as a founding member of that of that company, executive chairman. it’s poised for great success. I’m just too old school to know sort of what the right valuation is on that. but, it’s been an, uh, popular among investors. 

yeah. Um, you’re the realistic one? So when you’re evaluating teams, Spencer’s an easy one, like known quantity, you know, what do you look for? What sort of questions are you asking? we’ve also taken a pretty broad approach on verticals. we have a satellite up in space right now. We women’s shoes, we have, spend management software. So I think part of that diversity desire comes from having been through a couple of down cycles and knowing that we can’t necessarily defend against the cataclysmic drop in equity, valuations, that that happens from time to time, but we can mitigate defects somewhat by having bets made in different areas and, hopefully space isn’t as correlated with women’s shoes as correlated with, you know, real estate.

fractional home 

Um, anything else you guys are doing?

you know, initiatives, I think you mentioned a few things you’re trying to be more proactive. Did you say 

Yeah, 

definitely try to be more proactive. We’re casting a wider net. We started in in cross cut five, a scout program As you know, this business is all top of funnel. I think we’re really, really good at, looking at deals and figuring out which ones are good ones, but we can’t do that.

unless we see them.

 And the scout program is a group of 13, 14 folks, on most of the entrepreneurs around the country that will add to our stable lot more pre-seed deals that we get 

some favorable look cause we put some money in early, but also geographic diversity.

And we invented nothing new. There were just other firms do Scouts. but We had not done it before. And we said, you know, how do we really charge up the engine a little bit?

we had the luxury in LA in 2008 to sit back and say, you know, everyone come knock on our door. It’s great. but things have gotten more competitive and, we need to stay on top of it, 

Hmm. the scalpel games.

Interesting. are you giving the Scouts money to invest sort of on behalf of CrossFit? Yeah, 

about 200,000 each or we will increase that if they need need more And we’re happy. We also uh, I tried to add a little diversity to our group, through the scout program.

and we’re also encouraging the Scouts too, go for it. I mean, don’t call me for everything. If you, guys liked this entrepreneur and you like it, that’s w we’re trying to get some uncorrelated returns. I don’t know if it’s going to work.

But I, but I really excited about the Scouts We also, so we’re giving them carry in. The deals they’re doing but we also, every deal they do, they take a little bit of it and throw it into a pot.

So they all share in each other’s things. 

Yeah. Yeah Um, anything else cross-cut wise? Um, A little bit more about you and Brian and Brett working together. Um, you know, how does the process work, uh, uh, do you guys need consensus to get stuff done or is it, you know, can you do whatever you want,

I was going to make a snarky comment, but I won’t. Uh, no, no.

Uh, so, uh, yeah, no, w we, I would say w when asked by potential investors in our fund I’d say it’s consensus. and then we put, we really do put a team effort on it, and all of us will be doing diligence on a deal. a person’s deal. We don’t track it that way. We don’t think about that way. It’s, our deal, uh, at cross-cut. And so it’s our deal in diligence too. we added a second meeting during the week. We used to just meet on Mondays. and now had suggested let’s have Thursday as just a deal meeting, the hot deal meeting, because we just, you know, Mondays weren’t enough.

And so, you know, in that Thursday meeting, if the company presents a Monday by Thursday, you better have the answers to the questions. and you know, let’s go, 

I wanted to re-listen to my show with Brian, you guys had just done some personality stuff and it was like, he’s a peacock and you’re Elian 

or 

I don’t remember though 

Yeah. Yeah. So we see, uh, uh, tiger now.

Um, 

you at 

no, w w w It was a different scale. but we, we uh do personality assessments, periodically we do offsites a couple of times a year, And that was really helpful to us. We all got along and we’re all nice guys and gals And we knew there are differences, but you know, who knew there was actually ways to define those differences and, put labels on them. And it was really helpful to me and find out that.

Brett Brian. And I, the three founders of, of CrossCap were all very different people, very different people. And, I just remember uh, you know, some of the, like, I’m a 10 out of 10 on details quantitative and Brett was like a one, but he, he was in the positive zone on, optimism positivity. And I was like, you know, it makes it a little tornado.

of whatever This is where you know, when Rick goes off, the rails. This is what’s triggering him. So, you know, you were different, but it’s like, oh yeah. will say they all that it made sense. I mean, this was 20 questions that we answered in 20 minutes. It creates this personality assessment. And I would’ve thought the person was in my, brain for the last three decades.

was fascinating, but understanding each other in that sense, and hasn’t made us better investors? I hope so, but it’s definitely made us appreciate each other more and have more fun doing what we do could, this is a, privilege of a job, this is especially when Things are going well, as they have been, this is one of the top jobs in the world. If you ask me, and this is what I would do. If I was retired, you know, just keep investing in helping entrepreneurs. 

Yeah. So let’s stay on this. And maybe even going back to where you started, which is recognizing the privilege and wind to make something of it.

I know you were one of the founders of pledge LA, tell me about how that came about and how that all started. 

Yeah. So the um, Annenberg foundation approached me a few years ago and said, we really want to try to figure out how to get this current crop of entrepreneurs to give back to the community like Eli Brode and that, generation did the older generation, that when they made money, they plowed it back into museums and zoos and whatever else, that’s how it started.

And I said, that’s great, but there’s. a more pressing issue in our community, which is just, diversity inclusion. I mean, we, we’re fighting the struggle right now in 

really kind of opened things up. and it’s top of mind Annenberg foundation has been absolutely incredible and they throw, talent and resources intelligence at anything they do, but they’d been the driver and they. 

lucky enough to help them, get other VCs involved.

So we have many VCs involved in, pledge LA and we have, uh, hundreds of tech companies involved in, in pledge. LA because We started off by just looking at BCS. And I said, look, we, you know, VCs are, are are changing, but it’s going to be slow to change. We don’t hire that many people. It’s harder to have an impact, although it’s important, it’s really important.

Um, but we also need to look at companies. And so we came up with the idea of a pledge. LA, were were companies pledged to, at least share, their, numbers with us. So we can at least begin to measure how diverse or not diverse LA is and how inclusive it is. And so that’s how it started. 

It’s evolved now into things like the internship program. I’m happy to be chair of that, part of the pledge LA right now.

And I’m a big fan of that because I’ve seen the impact that has and that’s tangible. That’s like we’re taking someone that, really wasn’t gonna have a chance to break into this industry, which is still small and closed, for the most part see it and understand it and get enthused about it.

 So, you know, we’re really happy with what has been doing I’m on the executive committee there.

and it’s A great group of folks, again? props go out to the Annenberg foundation they, they are the driving force. 

Yeah, that’s great. okay. We’re almost out of time. So Rick, you had told me, that one of the questions you’d like to ask the candidates is what do you do for fun or not the candidates when you’re talking to founders, 

I do. 

Um, so, so great. So we have to turn that around. do you do for fun? I have no idea. I don’t know what you do in your hobbies. 

uh, I, I’m going to stop asking that question That’s, that’s really, uh, I know it makes me feel like I’m not that fun. I have a lot of fun life. I don’t watch TV. um unless it’s the Dodgers.

well, almost all my free time these days is, Hank. My now seven month old golden retriever puppy. my kids were most of my time. Um, they’re they both are kind of often running. um, in college. and One just graduated. I like to exercise I love doing yoga. uh, love going to the mountains. there’s something very meditative about.

just getting back to nature. Um I could jump in the ocean.Awesome done. Well, Rick, I guess we’re running out of time.

Thanks so much for coming on the podcast and for being a pillar of the LA tech community.

 thank you for having me on.