Venture Capital Archives - Ascent Conference

Predicting Consumer Trends By Studying Global Culture

Marlon Nichols, Co-Founder & Managing Partner @ Cross; Martine Paris, Tech Reporter

Ascent Conference 2019

Martine Paris [00:00:06] Excited to be here with Marlon Nichols, Marlon is a venture capitalist and his firm has just merged. We’re here to talk about cross-cultural trends, but he’s also just had a merger with Adrian Fence’s venture capital firm. And a little bit, I guess I should introduce myself. I’m sorry. I’m Martine Paris. I’m a tech reporter. I write for a variety of outlets. I write for a fast company. And VentureBeat, I’m a contributor at Forbes and I also cover FinTech for Queens Asking the Block. I write about a lot of things. And then last week I was interviewing Steph Curry at Disrupt. So I get to do a lot of exciting things and I am very excited about speaking with Maalin because you have a special way that you invest. And so can you introduce your fun to the audience and tell them a little bit about how you incorporate cross-cultural trends into your investment thesis?

Marlon Nichols [00:01:08] Cool. So, hey, everyone, I’m Marlon. Pleasure to be here. Yeah, my I started a fund four and a half years ago called Cross-Cultural Ventures. Cross-Cultural Ventures is a fund that invested in seed stage tech and tech enabled companies with a thesis of cultural investing. And we define cultural investing as basically a look at pop culture under the guise that pop culture drives everything in our society. And so what we try to do is study human behaviors and figure out which of those behaviors are emerging and can become social norms or part of popular culture and then make investments in companies that are producing products or solutions that are poised to ride the waves of those emerging trends. And at the top of this year, we merged, as Martin was saying, with another L.A. and San Francisco based fund called M Ventures and rebranded our firm to make venture capital. And it’s a it’s an interesting endeavor because of the people that are involved. So along with with me, I have the fifth mayor of Washington, D.C., who also spent about four and a half years with Andreessen Horowitz as a special advisor to companies like Lyft and others navigating highly regulatory environments. We also have one of the top eight Hollywood agents ever and a guy named Charles King, who represented at one point Oprah Winfrey, Tyler Perry, Michael Michael B. Jordan, Ryan Coogler, Prince, et cetera. So it’s a it’s a very interesting and different team as it relates to to venture capital.

Martine Paris [00:02:59] Yeah. How exciting. And Adrian, he’s had his hand in investing in conversational A.I. Are you guys continuing with that as a theme, investing in A.I. or.

Marlon Nichols [00:03:11] Yeah, I mean, so A.I. is a technology. It’s not necessarily a behavioral theme. Yeah. So unless you count robots and their personality. Yeah. Or automation I guess would you know could, could, could, could be a theme or the future of work. So the future of work is definitely a place where we’re spending a lot of time and, and have made investments and I can play a big role there. One, for example, one of our investments is a company out of Maryland called Satellite that’s basically recruiting engineers, software engineers, not from the Stamford’s or the enmities of the world, but from community colleges and Craigslist. And they’re targeting people who have no experience coding. And what they’re doing is they’re giving them an idea of an aptitude test to determine whether or not they could be a great software engineers. And should they score high on those on those tests, they then train them for six months and then hire them, as you know, software consultants to Fortune 100 companies like Nike and et cetera. So, yeah, it’s going to be a big part of our world.

Martine Paris [00:04:28] Yeah, that’s a super hot trend. I mean, that’s triple by. So thing is that they can find talent anywhere. You don’t have to be from Stamford or be in San Francisco to become a coder and.

Marlon Nichols [00:04:37] talent is ubiquitous. Opportunity is not. And so that’s what this company is trying to change. Let’s make both of them ubiquitous.

Martine Paris [00:04:45] Fantastic. OK, well, share with us what you put out a report every quarter, is that right? On trends?

Marlon Nichols [00:04:50] We don’t really have a cadence. We do it when we kind of when we feel like you, OK, but yeah, we call them the state of technology and culture. And we’ve released three of them so far. The first one was. Kind of like an unconference, the unperfect parent. Right, so the idea that parents are not perfect, but they would like to be. And so how can technology help them in that in that journey? And out of that, we made investments in like a baby food company called Yummy, a health care digital health care company focused on prenatal and postpartum health called Mommy. And if you’re looking that up, it’s not like you think M.A HMV and then Wonder School, which is kind itself as the Airbnb of early childhood care. So just like Airbnb turned, help people turn their homes into hotel rooms, one to school is helping people turn their homes into daycare and preschool facilities. So that was one. The second one we we release was culturist currency. And that one was looking at the huge underserved black and brown communities that spend ridiculous amounts of of of capital on technology and new products, et cetera, but that have significant challenges and their own and have tremendous influence. By the way, when you think about pop popular culture. But I have a lot of challenges in those neighborhoods that haven’t been addressed. And so the thought behind that one was if you actually build solutions that fit with those challenges, if they’re spending capital or their their their money on things that aren’t necessary, imagine how much they’ll spend on the things that they actually need. And so, you know, culture is currency. And then the the most recent one we call the conscious consumer. And this is really about consumers and employees using their either their dollars or their, you know, their their attention to force bigger brands to do the things that they care about or pay attention to the social issues that they care about. And so the kind of the what we’re searching for, there are companies that can help brands and companies understand customer, consumer and employee sentiment before you lose hundreds of millions of dollars by being on the wrong side of, say, an immigration ban. So, yeah.

Martine Paris [00:07:40] Fantastic. All right. Well, a lot of people in the audience might be curious just to hear about and check size stage that you’re investing in and tell us a little bit about.

Marlon Nichols [00:07:52] Sure. What you guys are doing. Yeah. So we’re seed stage investors. And for seed stage these days means a lot of things to a lot of people. For us, what it means is that a company has built a product and they’re starting to get some feedback from the marketplace. That doesn’t mean that they’ve had a full launch. It could be a beta launch, you know, it could be a partial launch or whatever. But the audience that you are targeting as a customer is reacting to that. And so in addition to how, however we may feel about what you’re building, we’re getting some data back to support or to detract from what we what we think. And then our check size, typically half a million to one point five million and with a target ownership percentage of 10 percent.

Martine Paris [00:08:43] Wow. Nice. OK. And in terms of, you know, seeing traction in the marketplace and like, are you looking for a size of the installed customer base for that size check.

Marlon Nichols [00:08:58] So it depends. Right. Some some, some companies that metric that we’re going to look at is our sales. For others, it could be, you know, viewership and or retention of our viewers, et cetera. So it’s whatever whatever the key metric for that business is, that’s the thing that we’re going to have to look at. For instance, we one of our early investments is in a company that’s focused on mixed reality for the for the enterprise. Right. So new ways to do training, new ways to to to do manufacturing remotely troubleshooting remotely for, you know, companies like Lockheed Martin and Boeing and so on. So the so we wanted to make sure that those target companies were actually spending time with them, that they were going through pilot projects with them, that they were paying for those pilots, and that there was you know, there was a direct line or something that suggests if you. Do these things properly, then this will result in a bigger commercial contract, so that’s just one example.

Martine Paris [00:10:12] So making sure they have their relationships in place, not necessarily don’t then have to have the deals closed, but certainly that.

Marlon Nichols [00:10:19] The Joint Enterprise Company, you want to make sure that they do have relationships with the their prospective customers and that those relationships are growing and that the value proposition that they’re telling us, you know, is actually about the same value proposition that the prospective customer sees.

Martine Paris [00:10:38] Very cool. Are you are you leading rounds at that size? And then at what level of involvement do you like to take within the company? It sounds like you have a lot of talent on your team in terms of even getting brand integration or a celebrity or social media influence or integration into campaigns for these companies. Can you speak to a little bit about, you know, how you see yourself helping your portfolio companies?

Marlon Nichols [00:11:06] Yeah, I mean, so the thing our relationships are really, really key, right? You’d be pretty hard pressed to find another seed stage fund that has a robust, robust and deep relationships and media and entertainment in professional sports and government and municipalities, Fortune 100, 500 companies, et cetera. We bring all those things to bear when we’re working with with our with our portfolio. And then on top of that, one of my other partners was a stand in, you know, acting CFO and CEO and CFO for a number of of companies. You know, when he worked at two of the most prominent accelerators and in L.A., which was science and amplify. OK, so there’s also operational things. You know, I was an early employee at a software company, Help Scale. That company, took it to Europe and we sold it to SAP. So, like, there are very specific things in our background that we can we can bring to bear day to day. And then our network is unmatched.

Martine Paris [00:12:17] And you have there’s a whole bunch of really exciting funds that don’t like to lead, like, for instance, Steph Curry’s funds. He has C30. They only like to go with established partners. They don’t take a lead. Are you do you have like kind of like and they just have, like, their C30 summit? Right. A lot of the venture capital firms are building out both the media platform like you have with your your reports, as well as network effects like these summits are these conferences where they can also bring in other investors like staffs, funds or other funds. Are you guys doing something similar?

Marlon Nichols [00:12:53] We do two things. So I’m one of my partners. Charles runs a media company called Macro. They actually produce films and in series and four at Sundance every year. There’s it’s kind of a party, but you invite, you know, people from all all walks of life, different professions, and you bring them all into the same room and you watch the magic happen. We also do an event called the Culture House at South by Southwest.

Martine Paris [00:13:25] Oh,.

Marlon Nichols [00:13:26] Yeah,.

Martine Paris [00:13:26] I have to cover it this year, huh. Next year.

Marlon Nichols [00:13:29]  Ben. OK. yeah.

Martine Paris [00:13:32] I’m going to cover that. He sent me an invite. Yeah.

Marlon Nichols [00:13:36] So that one’s that one’s pretty cool because we, we integrate some content. So for instance, this year I interviewed T’ai his his business partner Jason and B, Michael Cox, which is one of the most successful producers in like history about the intersection of music technology and investing. And then the other kind of conversation was with Dylan Parnell, who is one of our CEOs. He runs a company called Play Verses, which is in the E sports space, just made a lot of news because he raised 96 million in thirteen months. And yeah. So.

Martine Paris [00:14:18] What’s the franchise really to do like Yeah.

Marlon Nichols [00:14:22] Well seems so, so it’s a lot of them. Yeah. Basically every, every important game and that’s out there now. Anthony Yeah. Targeted at high schools and amateurs. So we had a conversation about, about that, the formation of that company and where we see the EA Sports world going. But in addition to that, I mean, it’s a day long networking and event and party filled with all the people from those different groups that I mentioned. So great opportunity for startups to, you know, to meet potential partners and potential other investors.

Martine Paris [00:14:57] Yeah, I was going to ask you so about deal sourcing. How do you you know, how how are you finding your best deals? Are you affiliated with, like, YRC or any of the other? You mentioned two accelerators out of L.A. and tell us a little bit about your sourcing strategy.

Marlon Nichols [00:15:11] Yes. So the our best deals come from within our network. We’re a little bit different than most venture firms in the sense that we actually read and investigate at some level every single deal that sent in to us from our website. Not many venture firms can can, you know, do that. So if it’s so if it’s interesting and it fits what we’re doing, you will hear from us. Well, you’ll hear from us one way or the other in 14 days. There is not a good fit or we want to continue the conversation. Unfortunately, we haven’t sourced a great deal from that platform yet, but I’m hopeful that it will happen one of these days. But our best deals come from our network. The very best deals come from entrepreneurs that we’ve worked with in the past. So, you know, we just we just close a deal recently with a group that I had invested in their first company, Crosscourt, which got acquired by another one of our portfolio companies fare. And so they did their their earn out with fare and they left to start a new company, which is still in stealth mode. But we were one of the first calls that they made and we invested in that. Another example of that is we’re early investors in Thrive Market, which is like an online grocer, and Ganar Lovelace, who was one of the co-founders and co CEOs, left his his gave up his CEO role and created another company called Good Money, which is creating a new bank. So we’re in that one kind of like Time Square, and that’s different.

Martine Paris [00:16:51] A new bank.

Marlon Nichols [00:16:51] A new bank we’re going back to the old days where if you bank with them, you have ownership within the within the company. You own a portion of the bank. So everyone’s and everyone’s incentives are aligned. The union like a credit union. Kind of. Kind of. Yeah. Just taking it a step step further. And then they’re they’re entrepreneurs. The entrepreneurs have friends that are entrepreneurs and they all kind of roll together. And so they have a great experience with us. And, you know, a friend is is building a company. They’re going to communicate to their friend that we’re an investor, that they should they should speak to. So those are our top kind of sources for deals. Then there are accelerators and and other venture firms that we’ve worked with in the past and like working with. So so they’ll refer or refer things. You want to mention some of those. I mean, so Science Amplify Founders Fund, Andreessen Horowitz, G.V., which is Google Ventures. It is a lot of them. And yeah. So that’s that’s primarily where we get our deals from.

Martine Paris [00:18:00] OK, so two things. Tell us the URL that they should go to to to send their pitches in and how they can best contact you and and then also tell us what you’re looking for in the pitch. Like what? What are the three most important things that you’re looking for when they send it in?

Marlon Nichols [00:18:17] So we’re easy just Mack MASC, Venture Capital, Dotcom, and you can there’s on the contact page, there’s a form, you just fill it out, submit your deck and we’ll be with you most of the question.

Martine Paris [00:18:31] And what are the like the three top things that they should pay attention to when they send in their debt?

Marlon Nichols [00:18:35] Yeah, the other way to get in touch with me on Twitter. So Marlon’s see Nichols’ at Wannsee, Nuckols and I. Tend to respond to almost anyone that reaches out, but the things that matter for us, the market opportunity, so we’re looking for really huge markets, right? So multibillions trillion dollar markets. And that’s important because if you only get a certain percentage of that market, we want to know that you can still become a billion dollar business and just kind of, you know, digging into that a little bit deeper, you have some old or mature markets that aren’t that are huge, that aren’t necessarily growing anymore. We’re not so focused on those. We’re focused on really large markets that continue to grow year over year. Then it’s, you know, what’s novel about what you’re what you’re doing. How are you different from other solutions in the in the space? And can you can you defend that space, you know, far into the far into the future and then probably the most important things. Who are you and why? You know, why should we back you? What what’s unique, what makes you uniquely qualified, makes you uniquely qualified to go after this opportunity and build it out. That’s probably the number one thing along with the kind of the aptitude and, I don’t know, personality of the of the founder. So are you adaptable? You know, are you are you coachable? Do you listen to the marketplace? And as you listen to the marketplace, are you flexible enough to move where you see the marketplace moving to things like that?

Martine Paris [00:20:21] That’s really helpful. You know, you’re leading these rounds white and you’re investing at seed stage. What timeline are you looking for? For exit? You share with us some of your strategy and you that it could be like five to 15 years or whatever. But what do you like what is your sense when you go in?

Marlon Nichols [00:20:37] Yeah, it you know, it tends to be longer, right. Scott Cooper at Andreessen Horowitz said recently in his in his book, Like Lemons Ripen Early. Right. So we don’t we don’t necessarily want our portfolio companies to be exiting too quickly. You know, we were in the early investors and Gimblett media that sold to Spotify and that was a sizable exit for us. But had they had it been a little bit longer, it would have been an even larger exit. So I don’t know on we’re probably looking at, you know, for really a home run type exits, six, seven years, hopefully before ten years, because that’s when the fund expires. But what if.

Martine Paris [00:21:23] How large is the fund? Oh, okay.

Marlon Nichols [00:21:28] What I would say is that right? What I will say is we invest, we target to invest and about 40 companies, which is exactly what we did, and cross culture. And again, you can kind of do math, but it’s you know, the check sizes range from half a billion to one point five. And then we reserve anywhere between 20 and 30 percent to follow on in our top 25 percent of our investments.

Martine Paris [00:21:56] Well, it’s such an exciting time for your fund. Is there anything else? We’re at a time. Is there anything else you’d like to share with the audience?

Marlon Nichols [00:22:02] No. I mean, if you have questions, happy to take them, but. Yeah.

Martine Paris [00:22:05]  Great, and Marlin’s heading on to I think we have to go off stage. But we can we can we’re going to step off stage after and take questions. Marlon’s heading on to Web summit, so if anybody’s heading there, it’s next time you can catch him speaking? Speakers are good.

Marlon Nichols [00:22:20] Yeah.

Martine Paris [00:22:20] And thanks, everybody so much. Thank you.

 

 


Speakers

Sectors, Markets, and VC Landscape Across North America, Africa, Europe, and Asia

Alex Lazarow, Investment Director @ Cathay Innovation; Lylan Masterman, General Partner @ White Star Capital; Banafsheh Fathieh, Principal @ Naspers; Rebecca Szkutak, Reporter @ Venture Capital Journal

Ascent Conference 2019

Rebecca Szkutak [00:00:07] My name is Rebecca Szkutak and I am a reporter with the Venture Capital Journal for those who don’t know us. We are a trade finance publication focused on the VC market, sort of at the nexus of our LPs and GPS Me. Today, we’re going to be talking a little bit about sectors, markets in the VC landscape across many different regions such as Europe, Asia, Africa. I know from my personal background this is a really interesting topic for me because I actually used to cover hyper local markets within the US and going from a market like Boston to a market like Colorado. The differences there were vast. So thinking about blowing that up to the global scale, this is definitely an interesting topic and definitely there’s a lot of information here to go off of. So I thought it would be best for the panels to introduce themselves, so be if you want to get started.

Banafsheh Fathieh [00:01:01] Sure. Hi, my name is B Fathieh . I lead early stage investments for Process Ventures formerly known as Naspers Ventures. We are one of the largest tech investors in the world, a public company listed on the Euronext with roughly about one hundred thirty five dollars billion of market cap. I am responsible for checks between about a million dollars all the way up to about seventy five million dollars, which I realize is not early stage for, I guess by other definitions. So things square at least series A through but serious D companies. My mandate is global, so I cover, um, every bit of the globe, with the exception of India where we have a dedicated team.

Alex Lazarow [00:01:43] Good afternoon, I’m Alex Lazarow, I work with a fund called Cathay Innovation. Cathay’s the name of China and Markopoulos. It’s his idea of East meets West where 500 million euro fine Paris based. We’ve asked a third of it in Asia, out of Shanghai, Beijing. And we’re launching a Singapore office, a third party, Europe, out of Paris and Munich. And a third is this notion, Restoril, mostly North America, which we did out of San Francisco. We’re affiliated with private equity fund called Cathay Capital, which is about 300 management and eight offices around the world. About 40 percent of our capital comes from global corporates. So companies like Total Michelin, BNP Paribas, among others. We’re not a corporate fund, but we really think that value alignment is helpful as we look for companies and help scale them across geographies. And a big part of our of our model is this idea of looking for global category leaders and helping them scale across geographies. So excited about the discussion today.

Lylan Masterman [00:02:34] My name is Lylan Masterman, I’m with White Star Capital, I’m here in the New York office and we’re one of the most international firms at the relatively early stage. We lead and co-lead series, a series biz with offices in New York, Toronto, Montreal, London, Paris, Tokyo, Hong Kong. And so we invest internationally. We help our companies when it’s time, when it’s the correct time to scale internationally, to access capital internationally and to sometimes get acquired internationally.

Rebecca Szkutak [00:03:06] Well, I think it would be good to get started. I know, Lylan, you and I previously talked about how, despite some of these markets being vastly different, when you look at things such as currency, legal structure or just general business practices, that there are some areas of innovation that really do sort of catch on everywhere, almost like the home run idea. It works here. It kind of works everywhere. Everyone sees it as a potential opportunity. So sort of what industries and sectors have you seen that happen in or do you think that may happen in the future?

Lylan Masterman [00:03:38] Just yesterday, our company tIere out of Germany announced a 60 million dollar loan and it’s in the scooter space. Scooter is it’s one of those industries that has really succeeded internationally, not in Manhattan. And I think many of us are thankful that there aren’t scooters, the sidewalks here, but ultimately in many, many cities across the world, it is a helpful solution. And it’s a beautiful example, be it consumer, be it enterprise. First, you can have a product succeed across the world, either with one company or with multiple companies per geography.

Alex Lazarow [00:04:12] I might just add one additional thought to that, and I think Souters a great example around around the mobility spaces. I think one of the things that’s changed over the last decade is more and more ideas in two ways are one originating increasingly outside the valley and around the world, and two, I think are getting modified and improved over time. And so in the mobility space, I think ride sharing is an interesting example. You say, look, there’s a couple of the early companies that started in the US. Those models actually got adapted elsewhere in the world, I think of what Grabbe and Kojak are doing in Southeast Asia, which is a model that isn’t just about ride ride sharing. It’s also about it started off with food delivery, but also like massages and things like that. That model also borrowed from what was happening in China with with the super apps and the wallets. And we’re actually seeing that come back to the US. Uber actually just recently announced that they want to become a super app and have copied many of the features that are happening elsewhere. And so we’re seeing more and more of these ideas that are emanating from elsewhere and also improving as they get replicated and adapted in different ecosystems.

Rebecca Szkutak [00:05:21] Definitely and sort of following up on that, there are definitely some sectors that maybe really attractive in certain regions, but maybe not in others. What are those kind of industries and sectors you’re finding are particularly notable as far as opportunities go in one region and maybe some that are not as attractive when you go to a different region?

Banafsheh Fathieh [00:05:42] Sure. I’ll I’ll chime in here. So I think it’s one of the really interesting things that’s happened, especially in the emerging markets, which is sort of our bread and butter. Um, yeah. You’ve had this consolidation of consumer demand because it’s it’s becoming increasingly digitized with mobile phones. But the infrastructure layer is in a lot of these countries missing. So if you go to, say, Southeast Asia or if you go to India, there are some really novel ways that people are coming up with sort of e-commerce worlds or they’re coming up with really different logistic layers or different ways of effectively replicating what the West has taken two to three decades to lay down so decentralized logistics and decentralized or peer-to-peer forms of drop shipping or again, the rails for which you satisfy a lot of the consumer demand is vastly different. So in the emerging markets, again, you’re not going to have very sort of you’re not going to have a lot of income at risk rates. So you’re not going to have a FedEx or UPS that you’re competing with. You’re going to have a really interesting new models that, again, on the on the surface, the consumer demand, I think is fairly homogenous for some services like food delivery, persay or ecommerce. These things are fairly universal in their demand. But again, the rails look fantastically different in some of these shows versus, say, the US or the West.

Alex Lazarow [00:06:59] Yeah, I echo that a lot, we see the same thing, so as a firm, we look at themes globally, but we look very locally into how it’s adapted to one of our investments here in the US Bank of China Bank, which is a bank for the bank that works well, is kind of a digital on the app. We’ve in Africa, where we have a separate fund to be able to do a digital banking platform. You actually need the cash in, cash out network. So the solutions that work there and the same is true in Southeast Asia look very, very different. So it’s this combination of understanding what can work, what are the big trends, but also how how do they actually get put into place locally, given the given the reality, the ecosystem?

Lylan Masterman [00:07:38] Two answers to the first answer is, I don’t believe in rules against investing in companies of a certain geography. And so to use two large companies today as examples, Shopify and Spotify, Shopify, you wouldn’t have thought of Canada as a country to create a company that’s a backbone of commerce. Spotify. You wouldn’t have thought of the Nordics as a country to produce a great music platform. So I don’t believe in any rules against certain verticals. Answer no to five or six or seven years ago. I would answer that question, talking a lot about scalability and in how men in many geographies those cities did not have engineers who had previously worked out of Facebook, Google, Microsoft, et cetera, who knew how to scale software platforms. That’s not so much of an issue today, largely because the platforms allow for scalability much in a much easier way.

Rebecca Szkutak [00:08:31] Definitely, and that kind of leads into another question we are going to talk about regarding scaling and how scaling in these different markets is both different, but also the same. So if you guys want to talk a little bit about how you’re seeing these different trends and scaling across different markets.

Banafsheh Fathieh [00:08:51] It’s tough to answer that because it’s going to sound very handwaving, because it is very sort of Giovinco, I think in Asia where you’ll generally find is uh, uh, especially if you’re going after a platforms there, there is a dynamic of there are there are a handful of funders that get into a bit of a user acquisition war. So sometimes the stakes can be very high. It can be very capital intensive to acquire customers. So you’ll have your two or three category leaders that, um, you know, we saw this in food delivery. We’ve seen it time and time again and e-commerce. So, you know, it becomes a little bit costly to acquire customers because, again, it becomes a bit of a spending war as the scaling issues when it comes to customer customer acquisition in Asia are very different than what you’re going to find a lot of them or what you’re going to find in China, where you’re going to find in India. So it’s very tough to answer that without being very handwaving, because, again, there are massive nuances. I will layer on on top of that, that these geos don’t don’t share regulatory. Right. So there’s a lot of risk there in terms of how you scale a business on the consumer side, a little less so on the B2B side, a lot more so. So some of the regimes are not consistent. So you have to kind of layer that on as you’re thinking about sort of operate operationally, expanding. The last thing I will say is that the mistake a lot of people make is they simplify the world, right? So they’ll say Southeast Asia, Southeast Asia is not a country and each of them are very, very different. So do you go to Indonesia? You’re going to have a very, you know, diametrically different on the consumer side demand then you are going to have in Malaysia and Vietnam. And so, you know, each of these geos requires a very specific strategy. It’s just I would say there are certain areas where the parallels are a little bit more in sync with a lot. And there are a few markets where you can look at and say, OK, the strategy is going to be roughly the same. But, you know, India is very, very different than Indonesia. It’s very different than Malaysia. And, you know, these are countries that, you know, know, sets of populations actually share even a common language. Right. So localization becomes a huge issue. So lots and lots of challenges. I don’t know how to answer that question in a genuine way without going into the massive details of each year.

Alex Lazarow [00:11:12] I think the question is fascinating, and I agree with you, I think has a lot of nuances to it outside of work, I’ve been working on a book called Out Innovate How Global Entrepreneurs from Detroit are Reinventing the Rules of Silicon Valley. And it treats a little bit this question around. Look, everything we know about startup best practice is centered in a time and place, Silicon Valley and today. And I think increasingly we’re seeing entrepreneurs around the world reinventing startup best practices and meaningful ways. And one of these one of these is how do you actually build scalable companies and what are what are the approaches? I’ll mention two ideas that I think are interesting that are being demonstrated in a meaningful way around the world. One is in the U.S., companies typically build locally for the US market, start in one place, have one office. What we’re seeing around the world is actually companies are born global from the beginning and they’re building business models that can be replicated across different markets and geographies. They build that into the culture of their organization. They build into the product and they built it in the way they structure everything across the business. And I think that’s one. And I think the related point is actually, how do you scale teams? And one of the things that we’re seeing a lot of is the rise of distributed teams and it’s becoming in vogue in the valley. And certainly the conversation around Amazon and their headquarter to last year was a big discussion. But I think that misses the point that for a long time, startups outside the valley and around the world were by necessity tapping talent from everywhere and building it. And now and that’s ranges from just having multiple headquarters all the way to remote. But the best practice of that, I think, is actually already being built in places around the world that have had to do this for a long time.

Lylan Masterman [00:12:54] When you look at the need to internationalize, uh, for startups in various countries, there is a very strong correlation with the population or the GDP of the country. Right. So, uh, take a smaller countries like Canada, 10 percent the size of the US. They don’t have many startups that only focus on Canada. Move up a little bit in population France, it’s still hard to have a product only for France. It’s a good place to start. Then you move up higher up and you’re like Japan. A Japanese startup can really build a product for the Japanese market and scale it quite a bit before they need to go elsewhere, and the US is much bigger than that. So there’s a very strong correlation there. Then you have the companies that really choose the hyperscale. Uh, I slack right now, I believe, on one third of their revenues comes from outside the US. One of our companies from Paris, Miro’s the name of the company. They just recently raised the largest VC round in the history of France, 230 million all around. It’s a company that has over 150 employees in New York City as a Parisian company. So if a company’s not American or Chinese or one or two other countries and they want the hyperscale, then international scale is really the only way to go about it.

Rebecca Szkutak [00:14:09] Definitely, and I know, Alex, you bring up a good point regarding how entrepreneurship just looks different across the world, and I know you talked about it a little bit already, but maybe if you want to dove a little more into that as well as if any of you have any thoughts on that.

Banafsheh Fathieh [00:14:24] Yeah, sure looks very different. I am often. So we have portfolio companies all around the world. But I’ll share one one example. We backed a company recently, Lithuania, based in Eastern Europe. And I think one of the things that you find with places in the world where capital is scarce is just the amount, the sheer amount that that an entrepreneur can achieve with very little money. So I think that there is a level of creativity and capital scar’s environments with regards to bootstrapping that. I think it constantly surprises me. So, you know, you’ll have teams that are extremely capital efficient. You will have teams that have managed to find talent in places where you would argue that probably that talent is scarce as well. So I think, again, it’s a level of creativity that’s sometimes in a place where capital is very abundant. You don’t see as much because it’s need based. Right. They have to kind of be creative with what how they how they penetrate a market. They have to be creative with their hiring. They have to be creative with the way that they incentivize their teams. So I think that always sort of catches me by surprise. And it’s very as an investor, there’s a great surprise or you love to find those types of teams that have been able to bootstrap and and build a pretty incredible business. But again, this is another where the character characteristics are pretty different. But if I were to go by Geo, I think you in Southeast Asia, that scrappiness is still there, even though you’re starting to see a little bit more capital flow into the ecosystem. India recently has had sort of a lot of repeat entrepreneurs because of some early successes in the last decade. So you find a lot of sort of serial entrepreneurs are starting. Either they’re coming out of, let’s say, a Flipkart or some other success story. And they’re going on to start really great businesses, lots of capital in that ecosystem currently. So it remains to be seen what what they end up doing with that. LatAm has its struggles, and I think most of that is around sort of political and economic economic activity in the region. It’s tough to be a profitable business when your currency is devaluing two thirds over the course of a year or two. So you have a lot of teams that actually have achieved pretty great growth and success. But if when you currency adjusted, it’s tough to get over the hump. So you have entrepreneurs, again, that are getting creative actually with the way that they manage money. Right. So instead of, let’s say, keeping your money in the Argentine peso, you find creative ways to either do it in cryptocurrency or you start to build different kinds of businesses. So there is a lot of creativity around how to get around this economic issue that seems to be kind of plaguing the region a little bit. Um, that sort of again, I would say if I were to put geos and again be handwaving with the characteristics I see, but overarching, I would say, statement that I made, because I personally find that international teams tend to be, um, they tend to be able to build a lot more with the amount of money that you end up giving them vis a vis, let’s say, some places in the world where, again, capital tends to be pretty abundant.

Alex Lazarow [00:17:20] Yeah, I totally echo the perspective around the sustainability point. We we had a company in my my previous firm that was had a big chunk of their operations in Zambia. And, uh, because of a decrease in demand of copper, the Zambian kwacha actually plummeted by 70, 80 percent. So a profitable company, though, scaling really rapidly all of a sudden was a massive cash crunch. And so I think the dynamics of operating in markets are can’t be understated in a in a very generalized way with with a lot of nuance locally. That’s important. But actually, the dynamic you talked around, um, the bootstrapping piece, I think is really interesting. I think in the Valley we have the luxury of talking about things like scaling, which I think make a lot of sense for a very particular type of business and market when there’s a lot of capital. And I think the default that’s happening in a lot of other places is a different reality. And it’s one where there isn’t as much capital and people think about sustainability and they think about resiliency and survival much earlier in the journey than they might otherwise in the valley. And I actually think that’s something that that’s actually really important. Reminder, uh, is important lessons around the world. But I think it’s really important reminder for us now. We’re at a particular moment in the cycle where things are happening. But I remember the good times conversation and I actually think some of these lessons are really valuable. And I think this idea of like being very sustainable and resilient, um, can actually be a really important lesson for all of us.

Lylan Masterman [00:18:51] The number of countries that have a scarcity of capital is decreasing largely because of government intervention. So if you look at the government of South Korea, they’ve injected a lot of capital into VC firms to invest into more South Korean startups. The Canadian government has been doing the same for around a decade. The BP and France European Investment Fund across all of Europe. And there are many, many other jurisdictions that have similar programs. And so that changes the dynamic. Now, where it’s really beautiful is when you still have these scrappy entrepreneurs who are accustomed to doing things without much capital, but then they’re able to scale because capital is there when they prove things. Those are the companies that can really flourish from unexpected geographies.

Banafsheh Fathieh [00:19:33] And to just just, I guess, add on to that, something that’s very beautiful for for us is, you know, we’re seeing a widening of the base. So one of the issues we historically have seen in venture globally is that, you know, there just weren’t honestly that the deal count was very low. Right. So you would go to a guy and say, I’m going to go into Southeast Asia and great, your universe is 50 companies. And that that that wasn’t a very exciting funnel for most venture capitalists. But the dynamic that you just spoke about, government, whether it’s governments, whether it’s, you know, more people being sort of invested in B.C. generally because of some of the yield history, it’s creating a wider base. And so what’s happening is you’re having a few more companies be able to actually graduate past that, a series a series B hump and for, you know, growth investors like us, that that’s really exciting because for the first time you’re having, you know, at least a deal count that it can be exciting and the number of companies start to kind of warrant some real attention.

Rebecca Szkutak [00:20:34] And also, just as a note for the audience, I do have a couple of questions prepared, but if anyone in the audience does have a question, feel free to flag me down. Definitely always great to get up here, right here.

Audience [00:20:46] So you can share internationally from your perspective a combination of innovation, opportunity, market size. Where do you see maybe perhaps top three geographic.

Banafsheh Fathieh [00:21:02] Yes, I can tell you, we are very long India, that’s probably the first. And again, it’s not a big secret. We’ve invested quite a bit of money in the last I think we’re now around sort of the two to three billion dollar mark in the last couple of years. So the reasons we like India, you know, we view it as sort of China 10 years ago. And so if you kind of look at the demographics, you have a billion people in India, but you really have 50 million consumers. Right. So it’s a you know, the the the willingness to buy or the ability to buy is is limited, but it’s changing. And we’re finally kind of at an inflection point where we can see a real digitization of of the entire economy. And there’s like I said, one of the issues that historically was kind of present in some of these emerging markets was that there were just not enough entrepreneurs who had gone through scaling businesses. So there was a dearth of talent. And so what you’re seeing with India is you had sort of a first wave of platforms that emerged, let’s say, about five to 10 years ago. And those entrepreneurs are going on to build really exciting businesses. So, you know, we’ve invested very heavily in education in India. One of the I guess one of the wonderful stats, I guess, about India is that, you know, it has a massive access to education problem. And we think that that’s something that tech can solve. We have invested really heavily and social commerce platforms like Michaux, which enable women to be able to earn money through e-commerce platforms. So there’s there’s lots of really exciting things that are happening in India that make us very long on the go. Second for us to Southeast Asia, I think I’ve talked about this are really, really interesting things happening, whether it’s trends that are bleeding over from India or China. You’re seeing a lot of some of the same types of companies or themes be replicated by local entrepreneurs. So we broadly see a lot of sort of social e-commerce. This is not something that happens in the West very much. But there is lots of models like India and China that are really popularizing this concept of social commerce. So you have a lot of really interesting things happening in Southeast Asia as well. We’re really excited about, you know, some of the demo changes there, again, against Southeast Asia as a region. It is not a country. So there are there are some countries that we are more excited about versus others. So I would say those are probably the top two geos in terms of things that are front and center for us. Having said that, you know, process formerly known as Naspers, where in 90 countries so we’ve you know, our long term thesis has always been that we back local entrepreneurs and we think a lot of the things that we see around the world are things that can translate to other markets. And so we’re always looking for entrepreneurs are who are looking to solve local problems. And so we look at the macro, but it’s also about sort of finding the talent that ultimately is solving a real problem for their community.

Alex Lazarow [00:24:01] I echo, by the way, some of the geographic is a great example, by the way, of a company we were talking about earlier emanating in China is now actually the last couple of wiki classes, had replicators in Latin America and Africa, et cetera. And so this really interesting model of a company that scaled that really fast, Southeast Asia, for me personally, is also an area. I think that’s interesting because we’re seeing in a little bit of a it’s a little bit of a region where we’re seeing the models that have scaled in China intersecting with the models they’re scaling in the West and the biggest Chinese companies, investors investing in many of them, as well as a bunch of Western born entrepreneurs, et cetera. And so it’s kind of for me as an area of a really strong interest to see how how these models are colliding and how totally different business ideas are getting created and inspiring. So for me, that’s one region of interest.

Lylan Masterman [00:24:51] While I completely agree with those areas, there’s also a lot of capital from China and elsewhere getting infused. And sometimes we like to appreciate the countries where there is less competition, but still really great companies. Six years ago, we made Canada one of our three offices because we believed that there was great potential in Canada. Now in twenty nineteen, everyone says, of course, most VC firms out in New York do a trip a month up to Toronto. Waterloo, exactly. For that reason. A couple of years ago, we opened an office in France, in Paris, for the exact same reason, because we’re seeing extreme growth, will France be as big of a startup ecosystem as India just by population alone? I don’t think the arithmetic computes there, but it still creates an incredible opportunity for the entrepreneurs and for the investors to find truly global change in companies.

Rebecca Szkutak [00:25:41] OK, so I think that’s it for us on time, if anyone has any other questions, I’m sure the panelists would be happy to answer after we wrap up here. But if you guys want to join me and thanking the panelists for their time.

 


Speakers

New Models for Venture Investing: Staying Private Longer

Jordan Nof, Managing Partner @ Tusk Ventures; Chindeau Enekwe, CEO & Managing Director @ Affiniti; Jordan French, Executive Editor & Co-Founder @ Grit Daily

Ascent Conference 2019

Jordan French [00:00:09] Chindeau at the syndicate. One thing I want to start with and and explain is if you could sort of unpack the life cycle of how startups think about capital markets, ultimately, they’re looking for an exit. Ultimately, that’s profitability. But there’s a lot of things that they want to put in place before they’re in a position to take it. Could you just walk us through foundationally how you think about that and how you advise, especially those that are getting ready to do that?

Chindeau Enekwe [00:00:38] If they’re getting ready? So, hi, everyone. First off, like that. So I think what I would like to say first is like the default of the default version of business is to be private. Right. So once you start accepting investors’ capital, you have a new stake, a new stakeholder that you want to return capital to. So once you start doing that, you should think how you’re going to possibly return that capital either through dividends or actually an exit opportunity, M&A or IPO. So one of the things I like to start off with a founder and talk about is how would that even be possible when you’re raising capital and how much of the business you’re giving up and versus I mean, there’s always this discussion about valuation when you’re investing. And it’s really a discussion, from my standpoint, when I talk to a founder is how much of the business will you own ultimately at exit? So how valuable will it be for you? And then how valuable does it need to be for me to make that investment? So how do you need to grow whether you really signing yourself up for once, you once you were to take on some capital. So it’s really thinking through that process at the start of taking capital from others.

Jordan French [00:01:49] Certainly. And just like, you know, you’re advising startups to he spoke of valuation. One thing they’re going to have a big impact on valuation for any startup is the regulatory environment. In fact, it can in some cases bring it to zero. One thing that I wanted for you to impact, though, for us is there are many sort of strata to to the regulatory environment. I was hoping you could share with the audience sort of where you sit, especially as it relates to, for example, municipal, state and federal regulatory schemes.

Jordan Nof [00:02:20] Yeah, so so I’m one of two managing partners that tells venture partners. So we are an early stage consumer focused fund that is investing in companies operating in highly regulated markets. The key differentiator for us is that what we bring to the table to help us get access to and to win deals is in addition to the table stakes platform that most people offer. We also provide communications, political and regulatory support to companies that as they begin to scale, that becomes more of a prevalent issue. But that’s particularly on the state and the local level. So ridesharing, for example, or scooters are or something where there’s a there is no regulatory framework that exists or helping them proactively kind of go and interact at the state level to to get favorable frameworks in place.

Jordan French [00:03:11] Sure. And just to touch on that, though, a little bit more interstate commerce law. That body law is just just pervasive. It’s reached seemingly every aspect of our lives. Even this conference would evoke some of the body of interstate commerce law. Why choose to play in the municipal and state sandbox and for large part to sort of beat it back, to not be concerned so much at the federal level?

Jordan Nof [00:03:39] Well, So for private companies, we need results much faster, especially in the venture lifecycle, and getting results at the state and local level is much quicker than federal.

Jordan French [00:03:48] And why and why, why is that the case?

Jordan Nof [00:03:51] Just I mean, let’s look at the federal government right now. It’s it’s not really the easiest to get anything done. It’s just also the lifecycle of the approvals that you need is generally not one decision maker and it’s usually kind of oversight committees that you have to go back and forth between. So it’s definitely a longer cycle for sure.

Jordan French [00:04:11] And Chindeau, just to draw some more contrast, you’re in Washington, D.C., naturally, rather than in our minds. That is where most of the federal government Nuttal sits. Why focus on the federal angle?

Chindeau Enekwe [00:04:27] I think the reason why we do that is because, like the way he views the way a lot of founders also view D.C. is like a black box, like how do you figure it out? And when a founder has that moment, that’s when we find ourselves to be valuable. We don’t find ourselves to be valuable at the state and local level because that requires relationships, history, things that we don’t bring to the table. So when the founder has the challenge of understanding which oversight committee regulates their regulator and how can they translate that to understanding, then all those parties to understand? And why the regulation from 30 years ago doesn’t apply to the new technology that they want to apply to it. That takes a conversation that most of the the regulators don’t really have an interest to, you know, be well versed in. I mean, they had trouble thinking about, you know, how to regulate Facebook. Right. So it’s really helping both parties have an understanding or a conversation that they want to have with each other and, you know, sort of doing that by introducing them to the parties that know them, know the regulators well, or do the oversight committees as well and can. That’s what we’re brought in for.

Jordan French [00:05:45] Certainly. And one thing that’s on everyone’s mind, the audience, is they want to know, you know, how are you different from lobbyists because you’re not lobbyists. What role do you play?

Chindeau Enekwe [00:05:59] I think it’s the same as any venture capital fund manager would play, like you’re not there to do the job of the founder. You’re not there to have the conversations that the founders and the best place are positioned to have or and nor am I in the place to have the conversations that the regulator or someone in government should have. I’m there to help introduce them to the parties that might have those relationships or can help them unpack the the relationships or the conversations and strategies that they need to have, like plain English. When you want to create a strategy as to how am I going to talk to someone, I’m not going to write the strategy. That’s a lobbyist. I will help you introduce you to the people that can help you do it. Just like I wouldn’t be your lawyer. I would help you meet the lawyers you need to meet.

Jordan French [00:06:49] Certainly in Jordan. Earlier, you said on this note, look at at the federal government, it begs the question, why should either of you even dabble in highly regulated industries at all from an investment perspective when there are plenty of startups out there that aren’t so heavily influenced by by regulators.

Jordan Nof [00:07:10] From from our perspective, that that’s the reason why we want to go after companies that are in highly regulated markets. We think that it’s a it’s a barrier that’s artificially there, that if you have a deep understanding or access to people that do understand the specific risks that may pertain to the business or ones that that actually don’t, it can make you a much better investor than just passively saying, yeah, there could be some regulatory risk that could negatively affect the deal.

Jordan French [00:07:38] Certainly. And just to walk through some mechanics. So we’re all with you on what’s actually going on. You mentioned one of the more popular one way you got into the business was on ridesharing. Right investment. But then more recently, electric scooters are.

Jordan Nof [00:07:54] So I mean, that’s a good kind of where where the business kind of you can kind of go to that case. So we were early investors in Bird. So whenever there were 68 scooters and five people working out of the Santa Monica, we work. That’s whenever we invested because we knew that if they became relevant, no state or city government would ever know what to do with this. How would you regulate it? And really, the notion is that we’re investing before before any sort of there’s no cease and desist letter. There’s no get these out of San Francisco. Like, that’s that’s what we come in and invest ahead of time. And that’s why how we’re getting access to deals because of that. So we’re helping them grow and launching those 100 markets after they hit that growth, that growth.

Jordan French [00:08:38] Certainly. And on the note of growth, there seem to be two species. And this is not on all of our minds of how startups can approach perhaps highly regulated, regulated environments. And one might be with introducing scooters into a new city. One is the one being compliant. The rules are what they are. And if we can enter, we just don’t enter the others, the rebel, and just show up in mass and dump everything on the street. Ideally, have consumers galvanized around your product and then demand that it’s that they have it. What generally is your advice on approach to take or even perhaps give some commentary on those two approaches?

Chindeau Enekwe [00:09:16] My view when I speak to founders as to how they should like go when the rules of the road are what they are, is basically follow the rules as much as possible. And depending on you have to understand where you are, what your potential risks are. Right. When you’re putting, let’s say, a whole bunch of scooters in Santa Monica, there’s there’s a difference then, you know, speaking cavalierly when you have a public offering in the works, there’s a difference because of what you how you can be penalized. Right. And what it can ultimately do to the potential to your company and the outcomes. So that’s really my I mean, I can’t make the decision for them. But my whole advice is if you understand what the cost benefit analysis is and you choose to make that choice, especially after if I were to give you money, then that’s a whole different thing. But before I’m not going to before I we’ve already invested or we are considering investment the way that you make your decisions and our what you’re going to have to explain to your investors. So making sure that you have a reasonable way to explain to your existing stakeholders, your future stakeholders why you might have made the decision is really what my advice is, is really kind of based on.

Jordan French [00:10:37] And are there any any situations that you could share now where that rebellious approach is warranted?

Chindeau Enekwe [00:10:49] What I would say is more I can give a broader example of I often get to advise companies that are approaching the cannabis. We have not invested in cannabis, the cannabis market. But when founders talk to me about their business in the in that space, I often tell them, you know, especially about the way that they can deal with the banking regulations in that space. It’s you know, you don’t want to be on the wrong side of the banking regulators or the banks. Right. So I generally just give advice based on how how people penalize you and where you will be after that and and how that would affect the remainder of your business. So I generally that’s how I kind of house my advice of when things go wrong, how wrong can they go and where would you be at that point?

Jordan French [00:11:40] Certainly. And and you just said you don’t want to be on the wrong side of banks or maybe against them, just to paraphrase. How does that bode? Perhaps, Jordan, if you want answers, how does that bode for companies that offer a cryptocurrency or otherwise operate? And the block chain space is this space that you entirely avoid because of that reason?

Chindeau Enekwe [00:12:01] Well, it’s kind of like cannabis and block chain for me. They’re very interesting. Or cryptocurrency rather than but they’re very interesting. I would love for them to work at scale. And it just there’s a whole bunch of skepticism of if it works at scale and what happens ultimately, you know, three or four years down the road, whereas, you know, in the immediacy, it is kind of attractive and exciting. But I feel like people who made the decision to invest in companies that chose those paths are right now like two years ago. It would have been great and people felt great about making those decisions. But now just the people who hesitated feel like they’re they feel like they made the right decision. So I’m generally er on the side of, you know, how am I going to feel about this four years down the road when I have to raise capital from new investors. And those failures happened some hills. I’m not willing to die on some I am. And you know, the other ones I, I sort of just walk the line.

Jordan French [00:12:57] And Jordan, Chindeau just mentioned raising capital. Certainly as it relates to regulatory risk. One particular bucket of that risk comes with potentially preparing for an IPO, and that’s one and and and offering shares to the public. A litany or menu of regulations and rules apply. The S.E.C. governs much of that. If you could share some of your some of your advice that you give startups that are preparing or considering that option.

Jordan Nof [00:13:31] So, I mean, as far as it goes with I mean, that’s that’s pretty far down the line from whatever whenever I’m investing, that’s really not, you know, thinking about an IPO is the that’s just very, very far down the down the road. Whenever I’m writing a check at a series A, I’m more thinking, how do we get this to 10, 20 million dollars in revenue? But I think that it just, generally speaking, advises that, you know, you’re you’re not going to be able to you’re not going to be able to be really cute with your accounting. Like a lot of you can see sometimes great fundraisers that can go out and raise a series A in a really tight process, let’s say two weeks. And it’s a completely different fundraising process than raising your CRTC. That’s a you know, you cannot you cannot create your own LTV, you know, definition. You have to basically adhere to what are common, generally accepted accounting principles, which is what an S1 is trying to translate.

Jordan French [00:14:27] Certainly just just bucketing all of this to write in all of our minds. We’re hearing what you’re saying. And we’re also seeing the headlines right in the headline that accompanies some of this year’s IPOs, the share prices that are lower, perhaps when when they initially offered and in some cases like we were entirely filled IPO. So it begs the question perhaps, why should we consider offering shares to the public at all, given this is a mess?

Jordan Nof [00:14:58] Well, I mean, the ultimate reason is to raise capital. So, I mean, you have you have all the companies that you’re that you’re bringing up, actually, they did go through or trying to go through an IPO process, and that’s to raise additional proceeds for for the company itself, also to drive liquidity to venture investors and other investors that have been in these companies for quite some time. So I think that it’s you know, most companies have been staying private longer, more value accretion as occurred during the private stages. If you look at historically, companies were going public whenever, you know, they were much younger and hadn’t really realized their full potential in terms of total market cap. And there was a lot of upside still remaining for the public markets right now that we’re seeing, you know, the total top out of enterprise value, kind of that’s pretty close to their last private market valuations. So I think that that’s kind of the bridge there between the time and the total value creation occurred. But with that being said, the pricing discrepancy that’s like that’s polarizing headlines is the fact that people think that money’s being left on the table when the fact of the matter is, everybody knows that the an IPO is going to be priced below what you need. You need to create a compelling case for the public markets to want to invest in a company that is newly listed to the exchange.

Jordan French [00:16:23] Yeah, certainly. Just hold that thought really quick. Some housekeeping for a set of you. Just give us, like, the five minute signal. I want to make sure we leave some time for Q&A. You’re five perfect and then so Chindeau then to turn the tables a bit, you wonder from a retail investor standpoint if because companies are are do the perhaps regulatory costs and other costs staying private longer if they should be even considering investing in these IPOs at all? From your standpoint?

Chindeau Enekwe [00:16:55] I guess this is where I think, you know, everyone knows what we’re really talking. We’re talking about the we works. We’re talking about Uber. We’re talking about the recent major kind of stumbles to the market that have happened. I think what we really need to be clear about is the way that these companies have gone private has been because of like asset dislocations, like the new fact that there’s been hundreds of billions of dollars sunk into the market by new mega funds like. So when the retail investors come into the market, they are actually not taking the upside. Like Jordan just said, they’re not taking the same upside as a face, not even the Facebook we’re talking about. Microsoft went public at a 500 million dollar valuation. Now it’s one of the most is, you know, worth close to a trillion dollars. And then the same thing happened with AOL. There was a seven like also to 200 and was twenty four thousand percent return from when the IPO to when it was ultimately sold to AOL Faurisson or. Yeah, all those things. But the difference I think that’s happening now is, you know, not that the business models don’t make profit when they go to IPO. A lot of companies weren’t making profit. It’s just that the fundamental unit economics are different. And I think one of the bigger examples has been we were going to market with some funny accounting principles around community adjusted profitability. But what I think that ultimately shows is that founder friendly, late stage mega funds have not pushed back on the corporate governance principles, which would have demanded to generate some, you know, especially around accounting, like the basic the basic economic units of business. So for retail investors, just being true to understanding the basic economic units of business, you’re going to be fine. If finding a company that is true, that that’s growing but uses a uses new money to just purchase new customers, but it’s profitable at its basic level. I don’t think retail investors are going to be disappointed with that. But what I think they’re going to be disappointed with is that the upside that they would have traditionally got or what they traditionally expect isn’t isn’t so much there anymore. There’s not the traditional idea of growth stock from the 90s when the 90s and the tech boom happened. But there are some growth stocks that have nothing to do with technology that are still hot and that they can invest in, you know, if they were in not Pizza Hut, but.

Jordan Nof [00:19:33] Was a pizza?

Chindeau Enekwe [00:19:34] No, it’s Domino’s. They would have Domino’s Monster Energy. They would have had the best time of their lives for the past five years. So, you know, it’s the same kind of.

Jordan French [00:19:42] Turning into a stock panel for four half half a minute there. But you touched on accountability. You said it. And Jordan also brought into this conversation governance controls. So I want to do that right before we go into Q&A, Will, I want to be able to field one or two questions. And because of the unique position that you sit in. Right. As sort of these regulatory facing voices, you’re facing regulators, you’re facing investors and the sort of founders themselves. Is there something missing within the regulatory framework that you’d like to see, or is there too much perhaps, and it should be peeled back to let something else come in? Where are we on that balance?

Chindeau Enekwe [00:20:21] I think we’re at a funny place where our typical retail investor, when they want to invest in private market opportunities, they’re highly regulated. You know, there’s all these risk D now there’s reggae crowdfunding, there’s all these barriers to getting you in and then you have to be. So the companies have to start when it comes to crowdfunding. So very small investment amounts, but when it becomes the very large private market investment amounts, the sort of similar governance that you would require of a smaller company raising a crowdfunding you don’t have, there’s not there it’s based on these supposedly sophisticated investors should be making sophisticated decisions, but they’re doing it ultimately with our money, our pension money, our long term savings, and they are making their judgment calls on their own. So I think there is something because it’s relatively new, it’s only been for the past four to five years that there’s been this large amount of money in the private market. And then when you look at it from the standpoint of the trillion dollar, 80 trillion dollars of capital out there, it’s not that much capital. But in terms of how much value is being created there, it is a lot of value for a lot of for a very small amount of people. I think that there’s going to be an adjustment eventually when the political tides turn, that addresses it somewhat, but not now. But for retail investors, it’s just to be very discerning. In the typical way of how you look at any business is how you should look at an IPO.

Jordan French [00:21:48] Certainly. And hearing that you’re both in in deep. It sounds like also just rationalize or rather to to put a pin on it. Companies are staying private longer, rationally to capture more value, not leave money on the table that they were perhaps in past decades. I’m going to turn to Q&A if you just raise your hand. We definitely have time for, I think, one maybe two questions. Two questions. Great. So just raise your hand. I’ll I’ll be walking Mike, and come to you. Just raise your hand in the air. If you have questions for Chinedu and Jordan, I’ll come right to you and just say your name.

Audience [00:22:25] Thank you very much. Jordan, I just have a quick question with regards to the title, The Talk Staying Private Longer on what’s your respective relationships are with firms these days considering things like, you know, maybe an exit path isn’t necessarily an IPO because of some of the recent debacles or, you know, potentially the acquisition play, which we’ve seen maybe get a little bit overcrowded in terms of, you know, coming in at these moments and, you know, keeping these companies private. Are you guys doing more work, you would say, with PE firms when it comes to exits? Just curious.

Jordan Nof [00:22:54] You know, I think there’s some skepticism on it. Yeah, definitely some interest, you know, of coming downstream into the later stage rounds of financing. Something that I would say, at least in my experience, is that people remain skeptical on is that, you know, if you look at the business model of venture and of private equity, they are literally the exact opposite. Like we are optimizing for the outliers, whereas private equity wants to mitigate against those. So, you know, one zero in my portfolio does not you know, it should match every every deal matters, but it’s not going to wipe away the Kerry for my entire fund, whereas that’s not the case on the private equity side. So one notion that brings skepticism to investors that are already on the table from the venture side, is that what happens if this deal, you know, if it starts to not look like it’s going to return it to X? You know, private equity investors, notoriously, they just want their money back. And so their ability to force a sale, that would be just, you know, a one X for them. Whereas, you know, that’s that’s taking another turn off of my fund. So because as I’ve already been marked up, this is already a late stage deal. So I think that that’s one skepticism. But they are definitely getting more active and it’s another way to stay private longer.

Jordan French [00:24:14] Any idea to that Chindeau?

Chindeau Enekwe [00:24:15] Not much, but what I would say is if you’re I mean, it’s not really the conversation is different. If you’re doing a trade sale or that type of sale, you’re talking to a sophisticated private equity buyer. And in my experience, those conversations don’t yield the type of results that either party really wants. So, yeah.

Jordan French [00:24:41] It looks like that’s all the time that we have a big round of applause to very busy man. Jordan, of Tusk Ventures and Chindeau Enekwe.

 


Speakers

Negotiating a Win Win Deal in Every Term Sheet

Paul Hsiao, General Partner @ Canvas Ventures; Julie Lein, Managing Partner @ Urban Innovation Fund; Emily McCormick, Reporter @ Yahoo Finance

Ascent Conference 2019

Emily McCormick [00:00:04] So let’s just start high level here. You have a deal on the table. It’s time to iron out a term sheet, or is it because, Julie, one of the things that you’ve mentioned is that maybe not every company is actually in a place where a term sheet makes the most sense.

Julie Lein [00:00:19] Yeah. Hey, everyone, it’s great to be here. And it really interesting topic. So my name is Julie. I’m the co-founder and managing partner of the Urban Innovation Fund. We invest in early stage precede in seed stage startups that are shaping the future of cities. So in areas like transportation, real estate, tech, the future of work, and the reason that I ask the question whether every deal needs a term sheet is at the early stage. You don’t always need a term sheet. In fact, you could set your own terms and do it through a safer note. So that’s what I was throwing out there.

Emily McCormick [00:00:50] One of the things I want to ask about just piggybacking off of that with a safe note, though, when you’re kicking that can down the curb and you’re sort of pushing off that valuation that’s being made by a lead investor, is that actually going to cause issues for a company down the line since that is, of course, one of the trade offs with the safe note?

Julie Lein [00:01:06] I think it’s now so pervasive in the early stage financing landscape that I think many investors have a preference to price it just so you know where you stand. But it’s now so commonplace and especially with post money caps, safes, where you actually know what the dilution is or at least have a stronger sense of what the delusion is. I don’t think it creates as much of a problem. And plus it’s a lot cheaper for early stage companies and faster. So I think that’s why a lot of startups have moved toward the safe or convertible note model at the early stage

Paul Hsiao [00:01:39] Emily, I would just say two things. So I think the two issues we’ve seen with the converse over the years, we had one company that had about five million dollars raised through convertible notes.

Julie Lein [00:01:51] One hundred and five?

Paul Hsiao [00:01:53] Yeah.

Julie Lein [00:01:53] Oh, my God.

Paul Hsiao [00:01:54] And so that particular one took it to. And could a lot I mean, it was hard to convert into equity, so that’s sort of one thing to encourage you to do that high quality problem. Nevertheless, I would say the other thing that we typically see the founders don’t recognize to convert is the ultimate solution that you you sort of have to sort of go through when you get to the equity realm because everything’s a price ceiling and you just you forget how much dilution you’re taking. So that would be a very typical gotcha. I do agree with you here that if you’re sort of raising below a million or to convert, as far as you know, I think Fenwick and a few others have, you know, this was a product of Y and they’ve done a good job. But if you’re really raising more than two million, I think this is to your benefit to get actually a price from Pigott as well as Susta terms as some of the conditions very clean going forward for us.

Julie Lein [00:02:52] I definitely agree. And one thing that I would just throw out there for consideration is a lot of companies have started doing cascading caps so they’ll raise notes or safes and they’ll, you know, try to incentivize folks to get in earlier by doing the first half million at one cap than the next one, another cap. And I think that’s where you can get into a lot of problems around dilution and not knowing exactly where you stand. I think that the attempts to put out a post money save or post money cap save has helped with the situation somewhat. But I agree this idea of just doing a lot of notes or saves and piling it on without recognizing what the dilution is, I think is not beneficial to anyone around the cap table.

Emily McCormick [00:03:32] Sticking with that topic, how much dilution is too much? And I know that’s going to vary between rounds between the size of the company was between the size of the amount raised. And how do you factor in just this notion of the option pool being able to incentivize new employees to come to the table? How do you fit all those pieces together? He will start with you on this one.

Paul Hsiao [00:03:50] Yeah, I mean, look, when you get a term shell, I would just say, having been in intrapreneurs see twice now, you take a deep breath and say, thank God someone’s going to fund my business. Right. So let’s just start with that first. It is hard to raise capital out there, right? I mean, a lot of people try roughly only 7000 companies get venture back in over a year. So I would sort of pat yourself on the back a little bit on that. I think the question about dilution to your question, Emily, is so much of it is actually about supply demand that if you have a lot of demand and you can actually drive the dilution to your advantage, this is a really subtle point. That is a nonevent, just like 15 years now is always about if a lot of people want to get an extra float and you demand is double or triple that, naturally the your primary price goes up. It’s as simple as that. And so let’s do something. Remember, when you get to before you get a term sheet, most of the work is about driving the process so that you could have multiple terms. She o at the same time, not sequentially. And that was sort of best determined other than on the dilution. I mean sort of the rule of thumb, 20 percent, 30 percent sort of star sort of goes up on there.

Emily McCormick [00:05:08] Julie, do you have anything to add to that?

Julie Lein [00:05:10] Yeah, I would just say that. So where we invested the preceding seed, I would say that seed is less of a stage and more of a continuum. Now, TechCrunch said that over the last year, the average startup raises about five point six million before a series, and that’s rarely in one round. But, you know, just pause to think about that. That’s nearly six million dollars before you go on to raise a series, which is a lot of money and frankly, a lot more than a typical seed round. And what we’re starting to see is that, you know, a company may get started, they might bootstrap, raise some friends and family and maybe some angel funding. Then they’ll do a precede, which is typically less than one point five million nowadays. And typically the dilution is fairly low. But, you know, you’re giving up some percentage then they might do, you know, a more typical seed round, which is now one to three million, although, you know, frankly, they’ve gone up in size and that’s usually where we’re seeing somewhere between twenty and thirty three percent overall dilution. And then they might do a seed to a post seed mango seed or whatever you want to call it. But, you know, there’s more and more of these rounds that are, you know, essentially trying to build themselves as a discount into the series. And so when you add on all of those kind of interim rounds, you may be giving up quite a bit of your company. And especially if you have done it in the form of convertible notes or saves, you may not have a strong understanding. So make sure you do work with your lawyers to really understand what you’re giving up and that you’re pricing each round accordingly. And frankly, the benchmarks have gone up. You know, I understand why startups are raising more capital before the series because it used to be that if you had a million dollars in recurring revenue, that was a really nice threshold for a series. And I do think that the benchmarks continue to. Higher and higher, and so it’s appropriate to capitalize yourself more so so that you’re more attractive for a serious investor.

Emily McCormick [00:07:06] When we think about valuation, and especially a lot of these companies have been making news recently, just these overexuberant valuations that perhaps started in the early stages of these companies, they just continue to have these up rounds. Are we seeing that more anti dilution protections are in place? Because at the same time, we do have quite a number of unicorns in recent years that have undergone down rounds, have had to have these investor protection. So what has been the trend there?

Paul Hsiao [00:07:31] You know, I think the institution has always been there pretty much every term sheet and is sort of they call it a sort of average weighted institution delusion and is a fancy way of saying there’s a simple mathematical formula if it’s at a lower price, you were existing and thus the investors coming in are compensated for sort of the risk to took. So I think the high prices that you’re referring to, when they raise money at a lower price, you know, the what people are negotiating, perhaps you might be alluding to is the liquidation of funds. When there’s an exit, that’s where is beginning to kick in in a higher price rounds. But I think in the early stage of assuming folks in the room are sort of still in the early phase, see, a would be those things are those liquidation preference haven’t quite kicked in, whereas it was very prevalent back in the 08 03 timeframe.

Julie Lein [00:08:24] Yeah, we don’t tend to see it or do it at this early stage.

Emily McCormick [00:08:27] And Julie, when we look at some of the term sheets that you’ve been part of, the negotiations and deals would have been some of the major sticking points.

Julie Lein [00:08:35] Yeah, I mean, I think for founders, the big thing everyone always focuses on, obviously, is valuation, and that makes a lot of sense for your business because you don’t want to give up a ton of your business, especially too early on. I think that one of the common stumbles that founders have is they oftentimes maximize just for valuation, which again, understandable as a founder, but something that you need to think through carefully because you don’t want to create such a high threshold for your next financing round that you’re getting yourself in trouble. And so, you know, for a long time, I think when it comes to and seed precede, we generally think of it as a sub five million dollar valuation seed. We think of it as a sub 10 million dollar valuation. There are definitely a lot of circles where people try to raise that much higher valuations than that. And I think that’s fine. As long as you understand the risk calculation, which is for your next round of financing, if you’re going to raise at a higher valuation round, you actually need to do enough to prove that you merit that 20 million, 30 million dollar valuation. And I just think that becomes a lot harder when you’re early stage and you’ve essentially given yourself a year, year and a half to do it, which is, you know, typically what happens between funding rounds. So just something that I think founders should be cognizant of, which is, of course, go out there, maximize your valuation to the point that you think is fair, but just recognize that it may have implications down the line that you want to think through.

Emily McCormick [00:10:00] Paul, Anything to add to that agree valuation is the biggest sticking point or what have been the other friction points in some of these negotiations?

Paul Hsiao [00:10:07] Yeah, it tends to be an emotional journey where once you raise money the first time you get a term sheet, you’re like, wow, I have to ask for permission for pretty much everything. Right. Money at remember, this is my company. Why are you telling me what to do? So that usually starts there. And then you get over that and then you sort of everyone focus on the details. So some of the protective provisions or what the options for the premium, I think ultimately what you really want to do is figure it out. I mean, you know, who’s giving you the terms sheet? Assuming the person is joining the board, I would really call his or her CEOs and founders that that person has worked with, especially in the ones that have gone sideways, because by and large, people, when it go sideways, a lot of people don’t go back to the legal docs. The behaviors, what they have done before are very consistent. That will give you a really good feel for what you know, everyone goes through bombs. And so seeing how that board member reacts to your shareholder reacts is really, really good, especially with your investor. And so that’s sort of my recommendation. Everyone, you know, I’ve done a lot of times she’s now a villain, goes through a different everyone sort of gets fixated on one other issue. But the really, really smart ones or experienced ones would sort of want to talk to the folks I’ve worked with in the past. And I highly recommend a just a really good practice.

Emily McCormick [00:11:33] Looking big picture, Where are we right now on the continuum between being founder, first, founder friendly and really protecting the interest of the venture capitalist? Have we seen any shift in where we lie on that spectrum?

Paul Hsiao [00:11:47] I think the power shifted to the other side, I would say, what would you say? You probably started about 10 years ago and it has accelerated over the last two years. I think the market on the early stage saw it on the terms are fairly stable. There’s not there’s really not a lot and there’s really not a lot to negotiate here if you just sort of go into Dongfeng work, work, don’t know a good one. One of the this stuff is fairly standard. So there’s not a lot I think there’s a momentum question whether the the velocity of the series crunch is there and then we’re seeing more sort of investment, sort of fund raising takes longer now.

Julie Lein [00:12:27] Yeah, I definitely agree. And I would say at the early stage, the dynamic is definitely a founder friendly one, because, you know, when we make evaluations at the early stage, we want to work with a team. A lot of it is about evaluating the team and making sure that this is a long term partnership that we want to have with the founders that we meet. What I would say is happening in the news now with we work in Uber and some of these others, we’ve obviously had these very publicized, you know, founder run companies that once they started coming up closer to IPO stage, they’ve had a lot of resistance around their founders. And frankly, that hasn’t trickled to my world because we’re too busy wanting to partner with founders to really think about that. I do think that this opens up a more existential question about board governance at the later stage and what you want your founders to get away with. But I do think at the early stage, you know, for you guys, as you think about partnership, I think that there are a lot of ways to run a really streamlined fundraising process, a lot of which has to do with, you know, the partners that you want and making sure that it can go smoothly enough. And frankly, I do think that there is a series, a crunch. I think they said something like it was less than eight percent of companies that received some form of seed funding actually made it to the series, which is obviously very low. And so making sure that you, one, give yourself enough runway that you’re not back out there fundraising, you know, four months later, I see that happen way too frequently. And I think you get investor fatigue and investor burnout as a result and to just making sure that you can do the process really, you know, quickly by doing things like if you’re going to raise a small amount of funding, you know, do it on a safer note, set some terms that seem reasonable to investors and really try to make the process as streamlined as possible. I mean, I think for us, of course, we would love to price it if it’s an appropriately large round. But I do think that there are just faster ways to get it done for early stage founders.

Paul Hsiao [00:14:33] And we’ve got maybe just curiosity. How many people have raised a bunch of money already? Just raise your hands. OK, how many you want to raise money? Got it. OK, thank you.

Emily McCormick [00:14:45] And some of the names that you threw out, the Uber, is the list that we work, names that might be familiar to all of us. Was that symptomatic of a problem in venture capital? And some of the trends that you’ve seen? There is an issue with the founders, the investment banks. Once you get to that point of exit, can you just describe a little bit of what we’ve been seeing in this IPO market this year?

Julie Lein [00:15:06] I think that what we’re seeing is a exuberance that was met with a lot of skepticism, especially for companies that frankly were really high growth but hadn’t found their way to profitability. And so, you know, where I sit in the capital SAC, which is really early stage finding those founders that have a, you know, kind of transformational idea, it doesn’t impact us as much because we are ultimately looking for that growth and momentum. And, you know, really, I would say maniacally tenacious founders that just will stop at nothing to make sure that their business is successful. But I think what happens is along the way, you set up procedures and protocols. So I would say most early stage founders that I see resist having a board until at least they’ve raised enough late stage seed capital or series where they formalize a governance board. But thinking through those things early and often and making sure that you actually do have processes in place to have a well functioning board, avoid conflicts of interests. Think about, you know, having a successful process for each of the subsequent fundraising rounds, especially your IPO. I think those are all things that are helpful and maybe there is just too much exuberance along the way to curtail some of those instincts.

Emily McCormick [00:16:23] Paul, thoughts on this year’s IPO market so far and what we’ve been seeing, especially on the valuation side, especially on where these stocks, many of them trading under their IPO pricing and just seeing those lower valuations?

Paul Hsiao [00:16:33] Yeah, I mean, I think for us, we manage about four hundred seventy five million dollars. We invest primarily in Soozie. We do a little bit of B, a little C, and over the years we’ve been fortunate to help create sort of six of these billion plus value companies, a couple of them more than four billion. Our view on the New York market is actually pretty exciting. We saw data when when IPO that’s been a phenomenal company that the founders of Bill would use very little capital. You know, Mongo DB is done a really heck of a job over the last couple of years. And then you think about peloton, you think about all the other consumer names. Etsy has done a great job here. So I think the New York Taxin for those of you who are building tech companies, New York is actually, from our perspective, is a really healthy ecosystem. They are, you know, some of these names that have had to raise a lot of money, the sort of talk of the town. I would just say that a lot of really good role models here in New York as well. And I that’s where we’re spending a lot of time working with these aspirational Shaam deep domain funders that want to build annexion companies.

Emily McCormick [00:17:38] And bring it back to this term sheet conversation. Then what do you think was put in place to provide for that success?

Julie Lein [00:17:47] I think a board is one of those things where I mean, maybe we haven’t touched on it enough, but having a board, in my experience, has been a really good thing. And I say that not just as an investor, but you do inevitably have ups and downs. And the best functioning boards are the ones that you can turn to during especially some of the rough moments to figure out a really good strategy. So we’ve had a lot of boards that we’ve been on, whether we started at the seed or whether they decided to form one later. I think that it really helps the founders, especially when you’re going through turbulent times and especially when you need some capital and you really need believers who have been there early on. Because, you know, if your business isn’t doing the projections that you had expected and you need kind of cash lifeline, guess where the best place to find it is. Insiders who get it, who believe in it, who think that you guys just needed a little bit more time and runway to really prove it out. And I’ve seen time and again that insider capital can make a really big difference in bridging some of those key moments and opportunities when you’re having downturns. So I would just say having a really strong board and leveraging your board, I think is underrated and has yielded some great outcomes in my experience.

Paul Hsiao [00:19:00] What a great question. I would say to the company, you build a company, we build the people you have on the bus with you. So where we tend to see a small sort of is smaller on the option. Pol. Sci. in New York, where it’s just you want to hold on for more, which is OK, but just think about the equity that requires to truly recruit a great team with you to build the company. And so that is that was sort of the foundation for years to come. If you could have amazing people around the table with you.

Emily McCormick [00:19:38] When we just look at processes, how much of the information, the deals, everything laid out in the term sheet actually gets finalized in those legal contracts. So, I mean, this kind of goes back to that first question of how necessary is the term sheet? How much of that becomes more binding?

Paul Hsiao [00:19:55] I would say about 90 percent. Now, some people have gone to the oversimplified one pager, you know, this a fluctuation between a one page and five is all trying to communicate the same. I think for those of you who haven’t picked up on doing a commercial here, wrote a really good book, you should just sort of pick up a book on how to sort of read the terms of what is one page of six page one page. It tends to create more problems down the road because there’s just a lot of things not truly floorshow. It looks simple on the way in, but actually creates more legal fees down the road, but otherwise usually is about 90 percent. For us.

Emily McCormick [00:20:30] It’s about right. Would you say that that’s about the right proportion?

Julie Lein [00:20:33] Yeah.

Emily McCormick [00:20:34] How about transference?

Julie Lein [00:20:35] Yeah, I think that’s right. I mean, I guess I would say at the early stage what we see is, you know, either founders who come up with their own terms and they basically shop it around to investors and say, hey, join the save for no at, you know, a four million dollar valuation cap. We’re trying to raise five hundred K come on board or don’t come on board, basically. Or you can come to investors saying, hey, I have a term sheet from X firm and you know, it’s a price down. Here’s the valuation, here’s all the terms, you know, get on board. And I do think that there’s some momentum that’s created by actually having that term sheet and saying, you know what, a sophisticated investor came out. They put out terms, they’re taking governance role. You know, they’re just a level of sophistication that and frankly, it gives you confidence that somebody is really holding the hand of the company. But I think, again, you could get it done either way at the early stage.

Emily McCormick [00:21:27] How much negotiation is too much negotiation? Because you probably don’t want to accept every term as it’s laid out in the initial version, but you probably don’t want to contest everything either. So what is that right balance?

Paul Hsiao [00:21:39] Well, you have to do a deal that you are happy with, and this is where advice and sort of what your understanding of the market really matters. We have seen entrepreneurs get bent out of shape because his friend says something to him and it just got stuck in the head. And then years down the road, we laugh about it because it’s like a lot mean advice, which is terrible. So the negotiation usually kicks in when someone else’s voices in your own head. And so I would just sort of advise when you get advice from others, talk to funders will raise money, not those who have read TechCrunch or articles or hearsay. Everyone is an expert in this field, especially when it comes to terms. I would just highly encourage you to really understand nuance, because to negotiate this is you negotiate roughly 15 things all in balance here and don’t let one thing weight the others.

Julie Lein [00:22:46] Yeah, I would say, look, there are times where people are really passionate about certain elements and, you know, whether it be around compensation or the way that, you know, vesting works or, you know, there are certain things that you can get kind of hung up on. But at the end of the day, to Paul’s suggestion, you know, just keep in mind the fact that both sides want to do the deal. You know, the fact that a VC came to you and said, we want to partner with you, that’s not a light thing. I mean, that is a very long term relationship. It could be 10 years, maybe even longer. Of course, nobody wants it that way. But, you know, it can be a very long term thing. And so just keeping in mind that both sides want to come to a reasonable outcome, and that means that there will be compromise on both sides. But ultimately, it’s a it’s a really great thing and hopefully a very positive partnership for the long term.

Paul Hsiao [00:23:36] It’s a hard thing to do because in the capital, I’ve been there as well. It’s one thing to remember you cannot fire your shareholders or board members. So just remember that pick, you know, pick your shareholders carefully.

Emily McCormick [00:23:49] And maybe if you could each kind of go back to one of the actual experiences that you’ve had with a specific company. Just to put this in perspective for the audience, you know, what was maybe an instance where there was this hurdle, there was this friction point in how were you able to negotiate that and find a middle ground?

Paul Hsiao [00:24:05] I would say we recently created a company and, you know, the sort of a disagreement to Julie’s point of evaluation. Right. And the sort of the benign aspro was maybe. Three million dollars, which in early stages could be a lot, and how we got there was effectively would just say, look, we know this is market, your friend sort of disagree here are sort of disguised examples of all the dilutions stuff folks take after raising X dollars in a similar space. So in that case, it turned out to be easier to resolve because it wasn’t just sort of an opinion thing that you could actually and then did and you had to sort of think about whether that was sort of what he was willing to take or what he wanted to continue to sort of effectively raise and trying to get a better price. And so that in that particular case, we were able to just generate a market data to resolve them.

Emily McCormick [00:25:08] Julie, I’ll give you the final word to you.

Julie Lein [00:25:10] I would say one of the things that we see very commonly is, again, when founders are maximizing for valuation, they’ll come to us and, you know, they might be pretty early on in their product kind of development in sales. And then they’ll come in and say, hey, I want to raise a series A, you know, I’m raising 10 million bucks at a twenty five million free money. And I’ll say, OK, that’s not my stage. You know, we invest a precision seed and for where you are is a company. I you know, this isn’t just me being biased, but I’m trying to be genuine. You know, you don’t have that much in sales. I think you should be thinking about a seed round and, you know, the company will go off, you know, pitch a bunch of Ceruzzi investors and then they’ll come back six months later, you know, saying, oh, we decided to change tactics. We’re raising a seed now. It’s two to three million. And at that point, I mean, it happens quite frequently. And I think you lose a lot of credibility in the eyes of the investors, because to me, I say, OK, I appreciate the fact that you wanted to build a big company and you wanted to bring in more capital. But were you on appealing to serious investors? Will you be appealing, you know, if you go back out 12 months later? And so I just think that being thoughtful about both the size of the raise as well as the valuation for where you are as a business is really important because, you know, you kind of have one chance to really put yourself out there and give people a first impression. And you don’t want to come across as somebody who, you know, just kind of misestimated the scope of what you can and cannot raise.

Emily McCormick [00:26:38] Amazing. Julie Lein, Paul Hsiao, thank you so much for joining me. I’m Emily McCormick. Thank you all.

Paul Hsiao [00:26:43] Thank you.

Julie Lein [00:26:44] Thanks, Emily.

 


Speakers

How to Diversify Your Portfolio with Diversity

Elizabeth Edwards, General Partner @ H Venture Partners; Zavain Dar, Partner @ Lux Capital; Sutian Dong, General Partner @ Females Founder Fund; Laura Chau, Principal @ Canaan Partners

Ascent Conference 2019

Elizabeth Edwards [00:00:07] My name is Elizabeth Edwards, I’m the general partner of H Venture Partners, we are a consumer focused fund. We invest all over North America and seed through growth, equity and all the major consumer categories. So I like to say, if you can find the category at a mass retailer like a target, it’s probably a category that we invest in. But a lot of our brands are digitally native and they end up and retailers like Target, Whole Foods, Nordstrom or Stand Alone retail. So I just want to open up our talk with a little bit of context. And I thought it was so timely because I was in the airport on my way over here. And I’ll just show you the covers of Entrepreneur magazine and Karlie Kloss code with classI, the founder and also a very prolific angel investor here in New York is on the cover. And then ink, we have Audrey Gelman, who is the founder of The Wing, which is a coworking space focused on women. And then we have Fast Company and Whitney Wolfe Hurd, who’s the CEO of Tumblr, the dating app. So there’s a theme here, which is that it’s a great time to be a female and diverse founder, but there’s so much work to do. And I want to just give some context around that work. So whether you look at the U.N. study or Helena Morrises, 30 percent club or categories, pipeline equity estimates right now are that it’ll take about 100 to 200 years to reach gender parity, which seems to me like a long time to wait a Korean pitch. But only about two percent of venture dollars go to female founders. And according to Forbes, only about five percent of venture decision makers are women. Credit Suisse tells us that there’s a lot of money left on the table because adding one woman to an all male corporate board increases performance by twenty six percent. First round capital tells us that of their portfolio companies having at least one female founder on the team, that means that those companies are outperforming the rest of their portfolio by 63 percent. And when we talk about racial and ethnic diversity, according to McKinsey and Fairview Capital, there is a linear relationship between financial performance and diversity on the management team. So for every 10 percent increase in racial and ethnic diversity on the senior executive team, earnings rise by one percent. So there is, I think, a compelling business case that we can talk about here today about why diversity matters. And I’m so excited for our panelists to do so. So they’re going to tell you just a little bit about themselves and their firm, what they invest in, so you can hit them up later. And also, I’ve asked them to share a couple of companies that they’re invested in that you may have heard of. And then one fun fact, which is what you’re first paying gig was.

Zavain Dar [00:03:20] So I take it off, OK, get the one guy leading that off, I’m Zavain Dar, I’m a partner at Lux Capital. We’re based in Menlo Park in New York. I spent time in San Francisco and New York. I teach at Stanford, of course, on machine learning and philosophy. A few companies of note of ours, one of whom was just acquired by Facebook two weeks ago, control labs. I just learned right now sitting on the boyfriend was the chief strategy officer. Josh, their small world, it’s a very small world. Another one we sold earlier this year, orris for upwards of six billion to JMJ, a surgical robotics company. Our bread and butter is deep tech. So that’s EHI block chain robotic space, autonomous cars, a good amount of biotech, a pretty broad gauntlett, but really probably stay away from consumer mobile or low hanging kind of tech enterprise. SAS. We just raised two new funds about a month ago, so five hundred million early stage fund and then a five hundred and fifty million growth stage fund and fun fact about me. Anything. First job, first job, first paying gig was in high school, knocking door to door over the summer, selling solar panels. So learn salesmanship early.

Sutian Dong [00:04:38] Awesome, well, I’m so, so excited to be here and thanks, guys, for for choosing to spend your time in this panel. My name’s Sutian Dong. I was most recently a GP at Female Founders Fund. Female Founders Fund is the preeminent fund for early stage female founders based here in New York. It was founded in 2014 with the thesis that the world is changing. Very simple, right. And that the face of entrepreneurship, if you think about it today, is going to looks very different than what it did 10, 20 years years ago. And it will continue to evolve 10, 20, 30 years from now. And we were set up in 2014 with this belief that there was an absolute return opportunity by investing in a portfolio of solely female founded companies. Some of the names that you may recognize in this portfolio are companies like Rent the Runway, Zola Talla, Mavin Clinic costar Freney, Astrology and astronauts out there and a host of other early stage companies across both consumer and enterprise with the again aligning characteristic that all of them are female founded. I left Female Founders Fund full time. Let’s see, this was only two months ago to start a new project that I’m excited to share more about in in twenty twenty. But it’s safe to say that I will be doubling down on this focus in diversity by funding not just the companies and founders, but also the voices and funders in this space. Let’s see one fun fact about me, my first job or my first moneymaking opportunity was in elementary school when I would convince my parents to go to Sam’s Club and buy me those bulk packs of candies and then repackage them in a very, you know, not probably health conscious way in these little Ziploc bags and go around school, try to sell these to my friends, which was popular until my teachers found out.

Laura Chau [00:06:40] Hi, my name is Laura Chau. I am a principal at Canaan Partners, which is an early stage fund. We’ve been around for about 32 years, have five million assets under management and are currently investing in our out of our 11th Fund, which is an 800 million dollar vehicle. Some of the companies in our portfolio that you may have heard of are companies like the real real instr Cataldo Bird Roe Help. And we are a pretty diverse fund in a number of ways. We invest in both biotech and technology, so both consumer and enterprise on the tech side. And then in terms of our partnership, 40 percent of our investors, even at the GP level, are women and about 25 percent of our or 40 percent of our investors also are either immigrants or first generation. So around the table, we really talk about diversity, even among our investors. That is having a huge trickle down effect in terms of what we invest in and the types of conversations that we have a fun fact around. My first paying gig when I was 11 or 12, I also went door to door selling things, but it was Popery. I started a potpourri business and sold popery out of a red wagon knocking door to door. It was actually a pretty good business.

Elizabeth Edwards [00:07:59] That’s awesome. Well, thank you guys so much for sharing that. So shooting at Female Founders Fund, I’d love for you to share and also as leader of Global Women and VC, that’s also a really great platform for for female investors. I’d love for you to discuss the challenges that you’ve seen for women raising capital at the earliest stages.

Sutian Dong [00:08:24] That’s that’s a great, great starting question. So, you know, I think Inventure, when you invest it, it’s both in art, in a science, in the earlier you invest in a company’s life stage, the more of an art it is. And with that comes less a fewer numbers. Right. And more and more intuition or pattern matching or seeing something in an entrepreneur that compels you to as an investor, to make not just a financial commitment, but a commitment to work with that founder in that company for the next seven to ten plus years until the business exits. And I think one of the challenges historically for female entrepreneurs is that, you know, honestly, there weren’t that many women on the other side of the table. And as a consequence, they had a harder time raising capital because not only were the businesses and the the the industries, they were operating in slightly different, slightly foreign to some of the men across the table. But because women tend to and again, speaking generalizations, women can pitch differently and share their ideas differently. And if you’re an investor and you’re taking 20 minutes to make a decision, not if you want to invest in that company, but if you want to take another meeting to get to know that founder in that business better. The female founded companies we found often fell off the pipeline earlier so that they just didn’t reach the final decision point. That being said, the number of female founded companies that I’ve seen has ballooned, just exponentially grown from 2014 when Female Founders Fund was established to now. And that’s just not in the number of companies that have been started, but also in the companies that have raised not just seed funding, but series A, series B and Series C, and I think an ongoing challenge and an ongoing, you know, point of of discussion among founders and funders is, well, how do you continue supporting these opportunities? There is no dearth in this current market. There’s no dearth of early stage capital. And there’s many people who want to support female founders and honestly diverse founders who see the world a little bit differently. But the question is, will one who is going to find and what firms are going to continue funding these companies as they scale? And to what are the opportunities for funders to raise more capital, to invest more money in these companies? So it’s not just a problem that originates from the companies side, but it has also affected the thinking for VCs around how they finance their own business.

Elizabeth Edwards [00:11:04] That’s great, so Zavain you pointed out that you’re the only dude up here, but your mom has a Ph.D. in feminist studies, I read in your bio, I thought that was so interesting. So you probably have a leg up on the research, I would imagine. I would love for you to discuss how you’ve seen diverse teams succeed and why you think diversity in those management teams is so important.

Zavain Dar [00:11:31] It’s a good question. So my mom actually has a piece in feminist ideas, but before that she had a masters in computer science, in undergrad math at Cal. And I remember spending as she was a single mom raising my sister. I mean, I remember spending nights in the computer science department with her during her masters and even even noticing back then she had to leave computer science because it was so male dominated and just kind of like the cultural and the kind of work expectations on her as mom being in the lab, you know, until 2:00 or 3:00 a.m. working on problem sets, which is something that I guess as a single dude or even as maybe a single woman. But once you have a family, particularly, women tend to get the burden of the familiar expectations on them just having to get kind of whittled out and actually moving to the social sciences. So it’s been something that’s been, you know, top of mind, very, very close to home, no pun intended for a long time at Lux in Canada. Even as I think about my portfolio companies and boards, I was reading a stat recently. I think male CEOs tend to be more honest and more accountable if there is at least one woman in the room. And I don’t think that’s one of the stats. Yeah, I just I just saw that maybe on Twitter this weekend. But it’s interesting thing to note, and certainly I know that even at Lux we we had a for the last four or five years now, we’ve had a female partner on our team. And I think that’s increased kind of the level of candor and kind of intellectual integrity that that we hold ourselves to, which is important. It’s not just kind of superficial. And certainly I think like, you know, like race, religion, gender, sexuality, all of these things kind of play play big things. But where we invest, which is deep tech, the best companies tend to have kind of intersectional backgrounds of founders. So, you know, it might have some mad scientist from computer scientists, some kind of, you know, molecular biologist and maybe some business person that’s having diversity from from kind of both an intellectual background, a background of perspectives, a background of experiences or varied experiences. And all of those tend to be important. So, you know, I can ramble on and on. I think there’s truth for for both. One, the quote unquote superficial, because, again, we are, you know, a collection of our experiences. And superficially, we’re all very differently based on kind of our outward appearance. And that tends to affect how we think and act and and speak and how we feel comfortable talking. The other is, of course, actually the kind of cognitive diversity that’s kind of fundamental ground truth. So we look for both and I think they’re both important.

Elizabeth Edwards [00:14:00] Yeah, I love for folks that are investing in deep tech when I see, like biologists and, you know, I teams, right? I actually started in the computer science lab at University of Michigan trying to figure out how human beings make decisions. And we were actually working a lot, you know, with biologists right at the time. So, um, really. So, Laura, you spent a lot of time in consumer as well. And we know that there are a lot of female founders and consumers, about 85 percent of consumer purchasing is done by women. Talk about some of the women that you’ve invested in and just what compelled you about them.

Laura Chau [00:14:42] Yeah, when it comes to venture, I think typically it’s all about pattern matching. Right. You’re looking for companies that fit a certain profile or founders who maybe hearken back to past success. And I think that’s a huge pitfall when it comes to investing, especially when you’re putting diversity as a part of that category, because a lot of female founders don’t necessarily fit that stereotype of wearing a hoodie at Stanford or having founded multiple companies before. So you really have to rethink what the criteria is that you’re looking for and essentially take it down to the ultimate characteristics or first principles of what you think are important in a founder. A couple of the founders from kanon that I think are fantastic. One is a portfolio company that I share with Sutian, a company called Khodary, which has two female founders. And I think you mentioned only about two percent of venture capital dollars go to fully female founders teams, but they were repeat entrepreneurs. So they hadn’t been CEOs or executives before, but they had been on a founding team of Daily Harvest in New York and previously before that at Birchbox. So they’d really shown that they had the ability to work at early stage companies. They knew how to hustle. They knew how to operate and execute. And when it came down to what I was looking for, individuals with a huge amount of hustle, with a vision, with deep understanding and expertize in the space that they were going after and a hunger. And I think they hit all of those characteristics. And even though they hadn’t been founders before and maybe didn’t look like the typical Stanford hoodie wearing student, I felt very compelled to invest in them. Another example is a company called Quiana, which is a women’s apparel and accessories brand. Again, a female founded company, two women and the CEO, Carla was an immigrant from Ecuador, had a very traditional path through Goldman and had been at Brown before that, but was a very timid founder in many ways. I think compared to some of the founders that you see that are very aggressive and paint this huge vision, she was much more conservative in her approach and it took a little bit of a kind of understanding her and realizing that she had a different way of presenting her company and maybe didn’t throw the huge pie in the sky vision out that some other founders might when they’re initially pitching, but had really strong bones and foundation to what she was doing. And it’s a fantastic company. You can go see their store down in Soho and multiple locations around the U.S.

Elizabeth Edwards [00:17:23] I remember Sarah and London when they were at Daily Harvest. And even then I think it was probably one of the best models that I’ve ever seen because London owned the model. And even now, like, just if you have a chance to check out Khodary, it’s the only way that you should be buying your party supplies. So I want to I want to just really, like, humanize this issue as investors, because I think we’ve all been in situations where we’ve had that moment where we’ve realized just how important diversity is and making investment decisions and in building great companies. And so I asked each of you to think of a situation a moment when you really realized that and just, you know, what happened.

Zavain Dar [00:18:19] I don’t know if there’s a single moment I’ll it’s top of mind, because it literally just happened this morning. We were in a meeting and of course, the locks on Mondays, we have kind of external teams come in and present to us. We had on entrepeneur come in and he was actually quoting Steve Jobs autobiography and saying he really loved one particular quote, which was, you know, the best way to invent the future, the best way to know the future is to invent it yourself or something along those lines. And then he kind of chuckled out loud to himself and said, you know, it’s hilarious. Like, you know, me and all my guy friends, we love that book. We like love jobs. And my wife and, you know, all of our female friends, they’re all like, he’s such a douche. And and I think my partners and I all we kind of paused for a second because it was it was doing this kind of, in his view, like this. Imagine being a female on his team. It’s like the gender expectations of of, you know, even even that kind of generalization in like, you know, and not having almost dehumanizing himself and belittling his wife and women broadly. So I think I think it happens even like, you know, of course, we’re two or three years now into the meta era and it’s still so tacit and pervasive and kind of present in all of our conversations. And it’s easy. It’s still easy to, like, laugh it off, but it’s still everywhere. And so, you know, I kind of made a mental note of that. And I was like, it’s interesting because I’m speaking on this panel in a few hours. But, you know, it still happens all the time.

Sutian Dong [00:19:51] How many of you in the room have heard of this company called Izola? So for those of you who have it, if you go to a wedding at some point in the next several years, I would put money on the likelihood that you will use Zola to buy something off of the couples registry. So Zola’s in New York based company. They are a wedding company that caters to millennial couples. Their first product in the market was a universal wedding registry, which sounds very simple. But if you’ve ever gone through Bloomingdale’s on a Sunday with your clicker or Crate and Barrel and click, click, click, click stuff for your wedding registry, ZOA eliminates the need to do that and also allows couples to add anything they want to their registry as across the Internet. So literally anything in the world, which is pretty cool. And Zola has been around. I think they were founded in 2000 and 12 or 13. And they so they’ve been around in the ecosystem for a while and now they’ve raised us. The last round was over 100 hundred million dollars. And so they’re a real company that has made an incredible impact in New York and beyond. The founder is a woman. And when we saw the company, that Female Founders Fund, they were out pitching an idea that was that had a little bit of traction and had a there there, but was not yet the the the presence it is in the ecosystem today. And when we saw the business, my partner and you and I were like, wow, this is incredible. Weddings are a multimillion billion dollar industry that really hasn’t seen any kind of innovation since Registry’s sort of went online. And if you think about all of the spend that happens in the space and all the consideration, why isn’t there a company that creates a more modern experience that can own the end to end experience for couples like. Oh, so it is probably that company. We’re going to do it. All right. That’s an oversimplification of our investment process, of course. But I want you to consider that and take the converse, which I think a lot of less diverse firms express, which was they looked at that company and they said, yeah, a lot of people get married, but a lot of people get married once. Right. So what’s the what’s the recurrence in the space? Right. What’s LTV here? And and how do you build a big business? Let’s look at all the other businesses in this space and use a historical context to project out future outcomes. And I think that’s where the flaw is, right? Where when you don’t have a diversity of thought around the table, you use you use proxies that don’t actually hold true in the real world. And so, you know, from 2013 or was a 2014 when we invested to nouse or has done some incredible things and again, become the predominant wedding company in in the space. And that was a very different that was a very different view that we took that ended up being a really good bet and unorthodox but relative to other investors.

Laura Chau [00:22:57] I will also point to one of our portfolio companies, which is the real real if you’re unfamiliar with the real real, it is an online luxury consignment platform where you can confine your used or potentially new luxury items. So clothing, handbags, accessories, art, jewelry and consignment onto a secondary market. The real real takes all of that inventory. They authenticate everything and then they sell it and they have massive amounts of data to understand how to move all of that product. Very, very quickly to company, actually, iPod earlier this year. But when Julie Wainwright, the CEO, went out to raise capital early on, she initially was pitching a number of male investors. And the response that she continually got was either they didn’t understand the business and said, why would someone want to buy used shoes from someone else? That doesn’t seem realistic. Or they would say, oh, let me go home and ask my wife and see if this is a real thing. And I think oftentimes investors get caught up in the biases of their own experience. And when you have an investor base that is primarily male or primarily, you know, a single demographic, you end up missing out on a lot of these opportunities that might be obvious to other people. And so Julia said multiple times that she didn’t have success finding an investor who understood her business or believed in the vision until she met with Cain. And I met with a female partner. And now, again, the company had a fantastic IPO earlier this year. I think there are dozens of other investors kind of have their tail between their legs and have the real real on their entire portfolio. But it’s a great example. And it was something that really struck me of recognizing not only do we need a a more diverse investor base, but also there’s huge upside and huge opportunity in investing in diverse entrepreneurs and also, you know, categories that often are for a different consumer set. The other thing I’ll add with Julie is that, you know, she was a repeat CEO. She had been CEO seven or eight times by that point. She’d previously been the CEO of a public company and she still had not much trouble raising money.

Elizabeth Edwards [00:25:18] And oh my God, I see that all the time. So one of our company’s previous portfolio, pelletized, it’s actually mostly male founding team, but they’re like target, target, like the eye. A customer was a new mom that made over one hundred thousand in income because she’s the one that’s having trouble going to the gym. Right. She’s got young kids at home. She can’t go anywhere. They pitch to a thousand angel investors and early stage funds in order to raise the first 20 million. We’re like the last two million in there. And it was really hard. It was a slog like how do you tell that story and say, like, this is a real problem. Another kind of interesting one. I was talking to some other investors in the consumer space and we’re talking about incontinence and incontinence is kind of an interesting category, because if you look at Japan and actually the U.S. is pretty close to this, the sale of adult diapers is going to eclipse the sale of baby diapers. Are it already does in countries like Japan where you have more older folks there. But that’s not the only story around incontinence. So is talking to this investor and he was looking at a deal on incontinence. He goes, yeah, it’s incredible because like what we’re finding is that these millennial women are buying it for their parents. And I don’t know if there are any women in the room, but I’ve had kids, but I’m like, really? Are you serious right now? No, no, they’re not. They’re not I’m not buying incontinence products from my mom. My mom can get online. Trust me. She buys plenty of things online. Millennial women also have issues with incontinence, which is why you have companies like Thinks an icon and like massive, massive companies that are selling incontinence products to women who have recently had a child, because that’s actually a big part of the market. And so what it really highlighted was, you know, why on this investing team, but probably also on lots of different founding teams, if you’re not really, really willing to get in there and address what the consumer pain point is and really know your consumer, if you don’t have those people on your team, you need to do a whole lot of insight work. So I think there are a lot of blind spots, so we can probably go on and on forever talking about. But one last quick question. So we have a long way to go. And seeing parity and venture capital, what do you think needs to happen in order to accelerate progress?

Laura Chau [00:27:59] I can go first. It’s a huge question, and I think there’s so many things that need to happen and are in the process of happening. First, I think we need to start at the top in terms of diversifying the investor base, which I mentioned, because I think, again, so much of that capital can trickle down. I think identifying ways to democratize access, both in terms of access to capital, access to introductions, access to community, I think a huge amount of building up kind of a an ecosystem where women or minorities or underrepresented groups can become successful, find capital or even just find the right connection to another entrepreneur who can help them out means that we need to figure out ways to build that community early on.

Sutian Dong [00:28:46] If I were to double click on one thing, it would be more more diverse. Funder’s right. So to get more diversity into Founders’ who look a little bit different, you need to have more people who see those opportunities without needing to do the depth of industry research because they natively understand those problems.

Zavain Dar [00:29:08] 100 percent agree with everything that you guys both mentioned. The only thing I’d add is just guys and kind of guy only rooms, which unfortunately still happens a lot in venture and tech and finance. And all that stuff is holding each other accountable. And again, I think about the example from earlier today. We’re down to kind of gave our guys will be guys haha joke. And in so many ways that kind of you know, it normalizes a lot of the horrible behavior that that’s happened in the last decades and business. So holding each other accountable I think will hopefully never change in the Vasseur kind of capacity.

Man in the background [00:29:41] And our time is up. Our next speakers are ready.

Elizabeth Edwards [00:29:43] Let’s give our Panelists and big round of applause. Thank you guys so much.

 

 


Speakers

The Art of Valuation

Sanjit Dang, Chairman & Co-Founder @ U First Capital; Jordan French, Executive Editor & Co-Founder @ Grit Daily
Ascent Conference 2019

Jordan French [00:00:06] For those who don’t know him, Principal, you first capital founded it, he was formerly at Intel Capital, making a lot of investments. He’s had an exit every single year, 50 50 million is what he’s managing under a family of funds that just some foundation. I do want to jump right in. Sanjid, because valuation is a hot topic right now. We just saw a debacle where we work. We saw some other issues in public markets. But I want to ask you this sort of quintessential question so people can understand how do you invest?

Sanjit Dang [00:00:43] First of all, thank you very much to the U.S. team for inviting me here, and thank you very much, Jordan, for all your hard work as well. Thank you. You know, it’s a big question. How do you invest? But I’ll try to distill it down to four factors that I always look for. And I have also refined some of these factors over the years through my investing career. One is the team. Second is the market. And more importantly, not just a market size, but market timing. Why now? Number three, is the product market fit? And then number four is how well can they execute which kind of ties to the team? And I can go into more details, but those are really the top factors that I look at when I am investing in a company.

Jordan French [00:01:35] And before this, before we hopped up on stage, we talked about what you call the learning curve. There’s one of those that is most often what investors get wrong.

Sanjit Dang [00:01:48] You know, most investors I’m talking of companies when they are raising money at a private stage. So when they are raising money from private investors, they are pitching here. It is the team. Look at the domain expertize blah, blah, blah, looks all great. It is a market I’m going after. Here is a product I’m going to build. Everything looks great. A lot of the investors invest, but two or three years later, they figured out the market timing was not right. In fact, I would say that most companies fail not because they had a bad team or a bad product. But they were either too early or too late to the market. And that that has been a big learning for me as well. Why now is the biggest question that you as an entrepreneur need to answer, not just for the investor or more for yourself. Why are you building this now as an example, if somebody pitches and says, hey, health care system is broken in the US. Oh, great. I didn’t know this, no one heard about it, and the drugs are expensive. There’s no cure for cancer. All right, great. I never knew about it. But why is the health care market ready to adopt a new cancer solution now versus two years from now? That’s the question precisely that you need to answer as an entrepreneur when you are even starting a company. Before you when you pitched to the private investor.

Jordan French [00:03:25] Certainly, and you mentioned teams earlier, I want to set that aside for for just a minute and come right back to that. But this still begs the question, how how do these investors know? And so we’re all curious, how do we know that it’s the right timing? Is there a certain rubric perhaps that you use?

Sanjit Dang [00:03:40] So one of the things I always do is to check for the timing. We as investors keep a good network of buyers. So let’s say if you are an enterprise solution and Iot solutions, you’re likely selling to the CIO of I don’t know about this Cisco or if it’s a retail company, CIO of Macy’s, etc. So we keep a good network of those. So when you are pitching to us as part of my exercise diligence exercise, I will send you to three CEOs in my network. And it’s a win win win, you get a potential customer or a partner, the CEO gets to see a new piece of technology. Coming up, I get the CEO’s feedback and the CEO is not going to bullshit me and say, hey, oh, this is all great. No, I get red and green, but. So what I’m looking for at that time is more like a survey answer from multiple CEOs here, multiple CEOs. Hey, is this something that I’m ready to adopt and pay for now? Well, yeah, it’s great. Nice team, nice technology. Building a great new community solution for the storage world. Awesome. But I’ll think about it next year. And the other subplot to keep in mind is because you are selling typically to especially for B2B companies, you’re selling to corporations. Corporations have spending predefine for the year budgetary line items. So you have to start thinking about which line item. Am I going to be part of? If you cannot map yourself to that to a line item or more on their financial spending forecast, you’re not going to get the money,.

Jordan French [00:05:33] Certainly. And I want to I want to drill down on your example some more, because so far in this scenario, we have an intro to three Sexo is probably Osseo in this scenario. What is the condition that must be met, though, after that introduction in order for you to invest?

Sanjit Dang [00:05:50] So I would like to hear from them that No. One, this is of extremely high interest and they are putting a team, their internal team, to take next steps, number one. Number two, are they ready to start a pilot? A page pilot. Today. So they are great, let’s chat in six months or a year. I’m looking for those signals and sometimes the product is not built or is not ready for adoption, that’s fine. But the CIO will give me the signal of hey. If this was a product, here’s what I am ready to declare today for the pilot, because I really need it.

Jordan French [00:06:28] So in therapy it is back to you. Money has to change hands.

Sanjit Dang [00:06:32] Money has to change hands. And as a company, if you are not getting paid even only on small amounts, 20 50 K, if you’re not getting paid, you should ask yourself, why am I doing this? Right, then you are not creating enough value and it all ties back into finally into your valuations, you’ll not be happy about the valuations because you never got paid enough for the customer. It’s all tied together.

Jordan French [00:07:00] Sounds like there should be a salesperson on the team or some capacity for speaking of teams. We did set that aside. I want to bring that back front and center and explore that to it’s not just enough, like you said earlier, to have the right product market fit and it sounds like induce what amounts to a sale. Who should be doing that? What are the characteristics of that team that should put that into play.

Sanjit Dang [00:07:23] At an initial stage of a private company? It’s more about the founders is as even as the founders becoming the salesmen themselves, because the founders themselves don’t know exactly whether this product is going to sell verbatim or do I have to modify the product. So it’s best if the founding team is also doing the initial sales and it’s not really sales at that time. It’s almost like market validation. And then they can take that feedback and iterate on the product as well. So initially, I’m not looking for a Rockstar sales guy. I’m looking for somebody who can actually articulate. To the customer, what they are doing exactly, and I look for that articulation in my meetings with the team as well. A lot of the times I actually, in pictures some entrepreneurs have pitched to me over the years, 10 minutes into the presentation, I shut down the projector. And if I don’t shut down the projector, that’s a bad sign for you as an entrepreneur, which means I’m not interested in your company. Ten minutes into the meeting. If I’m really interested in the company 10 minutes into the meeting, I’m going to shut down the projector and start doing a whiteboard session with you. And that’s part of my team diligence because I’m less interested in precancer beautiful marketing pitch deck. Prepared by somebody else for you, I’m more interested in what is in your mind, are you crystal clear about the problem? Can you articulate it well, if you can’t articulate it to me as an investor, how will you articulate it to a future employee or a customer? So that’s part of the team d’elegance.

Jordan French [00:09:08] We can feel ourselves in that room, in that pitch, Sangeet, we’re all sweating. You asked him a specific question, though. You turn off the projector and you ask.

Sanjit Dang [00:09:18] I basically ask them here, give me down to. A pinpointed level, what you are doing and why and why now? There is nothing that you can’t answer in 10 words at that time if you are really clear about what you are trying to do, if you cannot answer. I used to have a manager. I learned it from a manager back then. My first job, I would walk into the manager’s office and she would say, N-word, Sanjit. So I actually imbibed it from her. So I use it for entrepreneurs. So I said on the projector and I say 10 words. And most of the time, the entrepreneurs are struggling, which, first of all, to say and that time you get to know and to be honest, I’m not trying to pull them down or anything. I’m trying to, to some extent, help them also articulate very clearly what they are doing and why.

Jordan French [00:10:14] 10 words being a super key nugget. We also had an earlier nugget on UN sales, just to reiterate that if you get the intro, better make a sale. Always generates money, is not is not following up move or just just a little bit because I want to layer down one trench, early stage, it sounds like, because there’s not a lot to go on. It’s a relatively narrow range seed and a can you share how investors should be thinking about what that range should be early on from a valuation standpoint?

Sanjit Dang [00:10:42] So valuations, you know, at an early stage seed series’s stage, you are really pitching to the investors heart. Once you get to Series B and beyond your pitching to the investors brain. That’s a key difference. You have to keep in mind when you are pitching to investors, depending upon the stage at seed series, if you don’t have revenue, you likely don’t even have a product built. So we can’t apply numbers, revenue multiples, etc., or receive any of those methods. We typically give you a valuation within a within a market, within a generally accepted range where the market and for seed stage valuations, it is between five to 10 million dollars of free money valuation in Silicon Valley. It does vary outside the US. It does vary to it’s lower. And even in the East Coast, I’ve seen. But typically it’s in that band and it’s more an art than science. Once you start getting to see this B and beyond, then you have revenue. We’re going to start applying multiples. For a fast company, maybe seven to 10, multiple, maybe higher, if you are growing faster. So the question comes down to is what stage you are at? And people worry a lot about valuations, which I understand why, but I think if they’re worried more about their customer attraction, valuations will follow.

Jordan French [00:12:13] And it sounds like for early stage, five to 10 million is really not that big of a bandwidth as perhaps I’ll articulate from what you said earlier. If it goes to a billion, that doesn’t matter. And if it goes to zero,.

Sanjit Dang [00:12:24] It doesn’t matter either. So if you become a unicorn getting to over a billion dollars in valuation, your seed stage valuation is irrelevant at that point.

Jordan French [00:12:33] And you mentioned a multiple use it, for example, for Satz companies, seven to 10. Where does that come from?

Sanjit Dang [00:12:41] So if you look at most using SAS, an example as an example, you can apply this to other sectors, real estate etc as well. If you look at the market multiples of publicly traded companies and private companies, you will typically find that all within a particular market, the generally accepted range and for size company that comes out to be seven to 10x of the revenue of the recurring revenue, I should say. If you want to go above that. That means you better show higher growth rate compared to those multiples. If you are not able to commando’s multiples in the market, that means you are not able to grow as fast as those multiples. Those those companies in that multiple band. So it’s not really rocket science, especially at this busy state. Now, if you get multiple investors vying for your company, then you know that’s a different story. Valuations can go pretty illogical.

Jordan French [00:13:41] Sure. And you mentioned revenues. That’s what these multiples are tied to. But we all know from retail investing, certainly from Wall Street profits are what matter. They’re focused on PE ratios, earnings, earnings calls each quarter. How do we square those two? Whereas a VC might be interested in revenues and what might come later down the road from from institutional and retail, the Wall Street level, which are interested in earnings and our profit.

Sanjit Dang [00:14:07] So. At the end of the day, it is irrespective of what Wall Street expects you to do, you should always march towards profitability or at least have a plan towards profitability. Every investor we see or the Wall Street investors will expect you to have that plan now we seize. Are more about helping the company grow. So they are forgiving about profitability because they believe the company is still in that sales learning curve or even product learning curve, that there will be inefficiencies, that that will hinder the path to profitability. But once you get past that stage, you have a sales execution engine in place. You know exactly what sells. You don’t have to spend sales dollars on trying out things. And because of that, you also have already had product feedback in terms of what product is selling. So your product execution engine is very streamlined as well, so that at that stage you better have either achieved profitability or B or have a path, a clear path towards profitability in the near term. Now, Wall Street investors are brutal about it and they should be. Because that’s why you started a company. If you started a company to run to generate 10 dollars of revenue and 15 dollars of expenses, why do it? Look at we look Aruba, look at, etc, etc., you could question that.

Jordan French [00:15:42] And let’s set aside those again for for just just a moment, because you mentioned a a pathway and there’s an obvious one we haven’t mentioned yet. One obvious endgame is to seek public markets through an IPO or equivalent. The other is to exit on the enterprise side. How should we be thinking about acquisitions? Or maybe best question is essentially what is in enterprise investors minds? Are they more focused on revenue or profitability?

Sanjit Dang [00:16:12] Typically, when a company like or using Oracle as an example, since there’s a logo here, a company like Oracle, etc., when they are looking to buy a startup, they are less excited about the revenue. The revenues, the startup’s revenue is not going to move the needle for the big companies revenue. They are more interested in the IP, the technology that you’ve have built. They are more interested in the team that you put together, hiring the right team with the right domain, expertize with the right learnings and the journey that you have gone through. That’s very valuable. So they are more interested in those things and then the potential disruption that this can generate for the big company in the next few years rather than the revenue today. So they are more forgiving in terms of profitability. They will look at revenue and they will they will give you a valuation based on your current revenue or the next year’s next 12 months projected revenue. And again, they will apply the market multiple to here is a market multiple as your revenue is a valuation I’ll give you now, then it’s from that point on, it’s a negotiation game, but that’s what they will aim for. And at that point, if you don’t like it, you don’t take it. Now Wall Street is brutal about show me the profitability for me.

Jordan French [00:17:33] And that’s a great Segway for what you brought up earlier. And I think I did way earlier, which was we work and we’ll talk about it one second. I just want to mention to the U.S. team, just just give us a flag for around the five minute mark. I do want to go to Q&A and make sure we have time for that. We have five now. Awesome. Perfect. So we’ll jump into it and then I’ll pop down there unless we can get a walking mike. But I want to ask what happened with the we work valuation. We started at forty seven billion. That was they were in a road show just to sort of peel the curtain back behind the scenes. And then again, for those who don’t know that got that got moved to around 20 billion. And now now we’re speaking of of at least from media bankruptcy. Can you unpack that for us?

Sanjit Dang [00:18:19] How many people here on real estate? So since a lot of you own real estate, would you buy real estate portfolio that is valued at 30 to 40 times your current revenue?

Jordan French [00:18:38] It was that a rhetorical question I’m going to answer now? It’s a collective probably no.

Sanjit Dang [00:18:44] We work was valued, like John said, at forty seven billion in January, twenty nineteen. Their revenue in twenty eighteen was one point eight billion, something like that.

Jordan French [00:18:54] But why?

Sanjit Dang [00:18:56] The reason for that is that was led by an investor called Softbank. That round was led by an investor called Softbank that has raised one hundred billion dollar fund and they have to deploy at least three hundred million in every deal. And there are only a handful of private companies. It’s a private fund. So they can apply, they can invest in Apple and Netflix, et cetera. Right. So there are only only very few fast growing private companies at that valuation that can take 300 million, 500 million or even a billion dollars of investment. We will happen to be one of them. And kudos to the CEO at that time for selling a good story to the investors. So he was able to get forty seven billion valuation and the management team and the Softbank team investment team, but all blindsided by what? The Wall Street would value this company ad, which should have been 10 billion,.

Jordan French [00:20:00] But but Softbank, they can’t be this inexperienced.

Sanjit Dang [00:20:05] They are very experienced people.

Jordan French [00:20:06] How could they get this so wrong?

Sanjit Dang [00:20:08] But the problem is they all get into this power of disruption. Most companies raise money at high valuation not because of the revenue they are actually, but because of the projection they are showing in five years. And if an investor buys into that, valuations today will go crazy.

Jordan French [00:20:29] And then it certainly begs the question because this sounds like a certain myopic on valuation early one decider as to what that number is.

Sanjit Dang [00:20:37] In a private round What typically happens is that when you’re raising, let’s say, ACTC around as an example, there is typically one lead investor. That lead investor means that investor is deciding the valuation and putting your sheets together. Every other investor has to buy into that term sheet. If you don’t like it, don’t invest.

Man speaking in the backgorund [00:20:56] And down to 30 seconds.

Sanjit Dang [00:20:57] Yeah, but there is one investor deciding the valuation.

Jordan French [00:21:02] Yeah. And that sounds like it can be a problem not just for employees, founders and other investors, but for that investor themselves that’s in permanent impairment of capital. We’ve time for one really quick question. I’m going to pop down here because I have a microphone to hand it to you. Would you say your name?

Audience [00:21:16]  walk us through the early part of the valuation methodology for weeks when you said to sell CDs or or C, the investment that how do you think about it? That I’ll give one million at five million plus money valuation. But then what is the math behind it in terms of the exit will happen and how many years S.A.M. will be the value of the exit and then discounted back? I need to make 10x my money. What is the math that you apply?

Sanjit Dang [00:21:42] Typically at seed you will get a valuation of five to 10 million series A. Fifteen to twenty five million, so it is B, if you are growing nicely, 40 to 60 million and hopefully 100 million after that, from an investor standpoint, they are all hoping that you become the next billion dollar company for them. So not just Tenex, they’re hoping for 40, 50. It doesn’t happen obviously all the times, but that’s what they’re hoping for. So that’s a valuation range. And I’m giving you the numbers from what is typical in Silicon Valley and to a great extent in the East Coast as well.

Jordan French [00:22:22] Sanjit, we’re just getting started first. Thanks for your question. We’re out of time. Everyone give a big round of applause for your expert. You first capital. Thanks so much. We could go another hour with this one. I’m Jordan friend, GritDaily News. Until next time.

 

 


Speakers

Why New York and Other Non Bay Area Cities are Primed to Take Over the Startup & Venture Scene

Sydney Thomas @ Precursor Ventures, Peter Boyce @ General Catalyst, Rob Pegoraro @ Freelance, and Allison Williams @ Newark Venture Partners

Startup Grad School Stage
Ascent Conference 2020

Allison Williams [00:00:00] Eco-System and what we say it MBP is. Thank you, Newark, for allowing us to kind of by being outside of New York, it allows us to think about investing differently. And we we make our own rules. And a role that we’ve had since the day the firm was founded is that there are great entrepreneurs everywhere. You don’t have to be in one of the hub cities or to be a really excellent founder. So from the beginning of our fund, we really have had a strong outbound marketing effort. We do a lot of reach out to founders. A lot of that’s through email, cold calling. And sometimes it is when we find a great entrepreneur actually educating them on the venture ecosystem and showing to them, showing them the opportunity. And many times we were the first VC capital into the company and we’re really proud of that. And we have a very are we invest in firms all over the country, all over the world. We want to be one of the top seed funds in the world. And we know we need to invest in founders everywhere in order to do that. And some of our best investments are in places that are really considered out of the ordinary. And it’s proven our original thesis is true, that there are great founders of the world.

Rob Pegoraro [00:01:24] I grew up in New Jersey, I am not unfamiliar with the notion that New Yorkers regard the Hudson River as a very, very wide body of water. It’s an ocean.

Allison Williams [00:01:33] Yeah.

Rob Pegoraro [00:01:34] Peter or Sydney. Who would like to.

Peter Boyce [00:01:39] I’ll hop in for a minute, you know, we our firm is founded in Boston, you know, and so, you know, kind of that we can talk about that kind of incredible ecosystem of founder talent and how that’s evolved over the last few years. So I think it’s kind of been in our fund’s DNA, that part of why we have multiple offices. We’ve been doing partnership meetings over Zoome, you know what I mean, for a very long time. Right. And so so I think that’s one. So it’s, I think structural to our firm. And I think the second piece is a number of our portfolio companies have had either satellite offices in addition to their existing headquarters, wherever they may be based, and also just fully distributed teams. And so, you know, we’re investors and companies like get lab and remote dotcom and others kind of prior to the last six, seven months. And so I think it’s been interesting and exciting to hear the way founders of basically kind of been invited into this notion that, oh, by the way, now that we are not thinking about geographic barriers in the way that we were, we can actually make that engineering higher in Bogota, Colombia. We can make that higher in Austin, Texas. We can put someone into business and in Charleston, South Carolina. And so I think that the rise in the merits of distributed teams, I think it’s also something that’s just been kind of amplified in this moment, but it was something that was preexisting. So it’s really just accelerated.

Sydney Thomas [00:03:01] I would I think the thing I have to add is, you know, we had been investing in companies that we thought we haven’t met before. I think, though, that where we’re still finding it difficult is, you know, I just got off a call with somebody in Minneapolis yesterday whose company I really love, but we had no luck, no type of connection to him. And so we didn’t have any other founders who were in Minneapolis. We didn’t have any other investors who we knew who are in Minneapolis. We I’ve only been to Minneapolis once. And so I think like four founders who are building in places that are so far removed from anybody at a firm. I do think that’s still a structural challenge because for us, what we want to make sure to is that once we invest in the company, that because we don’t do traditional background checks, we think those are kind of just what’s the point, people? It doesn’t really show us that much, frankly. And so what we were what we’re still trying to figure out is how do we make investments sight unseen with people who have that removed from us? I mean, we’ve made investments in other founders who we’ve never met, but who may be a founder in our portfolio or maybe an investor who we know knew. And so that kind of like bird, I guess, like. Two to three people removed, but never like five, six person that lived in that, I think is where where the chasm is that we’re still looking at. We’re still trying to figure out how we how we close it.

Rob Pegoraro [00:04:38] If it makes you feel any better, I have not been in Minneapolis either. I do feel bad about that. Any city that has given the world, both Prince and the Replacements, clearly some place I need to check out at some point. So I’ll try to get to it. Twin Cities next question I have may upset my Bay Area in-laws a little bit, but what is actually so bad? They they usually have pleasant weather. The skies have been kind of orange lately. It’s a nice place to live. Bagel supply is not quite as good here. What are the competitive disadvantages that we think other cities can take advantage of because they have something different to offer? US one on one certainly comes to mind. I hate that highway.

Peter Boyce [00:05:22] Totally. You know, look, I think there are two things that I think are interesting, maybe compliments to the way folks are thinking about company building right now. And I think I think it’s, you know, ends up being anchored in just the ways in which, you know, personal and professional, everything’s kind of gotten blended. I think one is the you know, is the cost of living, you know? I mean, like, I think there are some toggles on that front or just, you know, the set of lifestyle factors that I think everyone is trying to integrate right now, whether that’s space in your home to help educate your child, you know, so that’s the priorities that you can get that done. I mean, like in Wyoming or wherever you want to go as opposed to where you may have been before. So I think that’s one which is just the cost of living calculus, which I think is really important. And then I think second is, you know, there is this notion around, I think, proximity and access to diversity in industries that you want to have a relationship with that I think are interesting right now. Right. And so, look, I think that’s one of the things that’s been so powerful, the company building in New York, which is you’ve got you know, if you were interested in building at these intersections, which I think, you know, so many great technology companies do, whether it’s education, fashion, financial services, places like New York and kind of offering you that talent, offer you those commercial relationships. And so I think in areas where, you know, beyond just beyond kind of engineering talent, beyond software, but how that remix intersects with some of these other industries I think is getting kind of, you know, kind of uncoupled right now, becoming much more available. And I think that’s one of the things that’s gotten us always excited about as New York is an ecosystem because you have so many of those industries here.

Rob Pegoraro [00:07:05] We want to make a case for particular cities, I know Alison does, as where startup types and investors should be taking a look at where maybe they had overlooked before.

Sydney Thomas [00:07:22] I think, you know. I’ve gotten really excited about Austin. I know that’s actually not actually even like weird to say anymore, actually think Austin is becoming one of those other ecosystems that is just as built, just as built as the, I’d say, some of the ecosystems outside of San Francisco. So like in Oakland, I would say that Austin feels like Oakland to me. I also obviously keep for Oakland. I think it’s just a really amazing city with a lot of talent. And, you know, we’ve also done investments in Baltimore, we’ve done investments in Florida. And so I think what’s been so interesting to see is how different I think ecosystems, particularly under the pandemic kind of to Peter’s point, because they’re surrounded by different industries, they are sometimes getting some really exciting tailwinds from kind of like this all e-learning stuff. So the investment, for example, in Florida was a is a tech company and they are just booming right now.

Rob Pegoraro [00:08:39] Where In Florida.

Sydney Thomas [00:08:40] They are in oh, my gosh. It’s not it’s not like a Miami or Fort Lauderdale. So that’s why I can’t.

Rob Pegoraro [00:08:46] Orlando?

Sydney Thomas [00:08:47] Its not even Orlando. It’s a tiny town. But there’s but what they’ve been able to do is take advantage of because they’re kind of a small fish and also a small pond. But then Florida itself is a larger pond. They’re the only folks within maybe 50 hundred miles from these huge universities that are looking for support with their e-learning programs. And so I think that has been really interesting to see there two.

Allison Williams [00:09:18] So my answer to this question is a bit obvious, I think, but, you know, Newark, New Jersey is an amazing city and we feel that it offers many advantages to our founders. I mean, for one, cost of living is is much better than what you find in Manhattan, where else? Only an 18 minute train ride from New York City. And then I want to also mention that there’s actually incredible corporate space in Newark. It’s kind of a little bit of a hidden secret. And it’s because of these corporates that New York venture partners exist and where we have one hundred million dollars under management and we’re mostly funded by corporates based in Newark Audible and our W.J. being two of them. But a variety of others you find on our website and across our LPs, we actually have five hundred mentors who have volunteered their time to support our founders. So it’s a bit of this big fish in small pond. You get a lot of attention and there’s so many resources that are provided to our founders and they’ve added has added a lot of value to our portfolio. The thing I’ll add to that is, you know, we don’t mandate that our companies are based in Newark. We expose our founders to Newark, and we hope that they see the benefits and perhaps some amount of their team based in the city and out of our portfolio of eighty six. Thirteen of our companies are based in New York and we think that that’s great. I think with covid, it kind of has made that question a little bit of a moot point. And I think that’s really interesting. So, you know, a founder can be based wherever and, you know, it just it’s less of a topic, I think, today because of covid. And I think that’s that’s really interesting. And I’m curious to see how that changes the venture portfolio makeup going forward.

Rob Pegoraro [00:11:05] I will put in one personal plug for Newark. When you get out of Newark, Penn Station, walk into the Ironbound neighborhood, go to the Portuguese bakery, is going to pass the not so good. So, Peter, what’s your nomination?

Peter Boyce [00:11:17] You know, it’s interesting. Look, I go down to Austin for board meetings, for our voices. We got great companies there. So I love that. You know, we were investors in jet dotcom. You know, you can create a few billion dollars of enterprise value in New Jersey. So I miss going to those board meetings in Hoboken. So we love both of those cities. We’ve been so unbound in our evolution as a firm precede through late stage financing across verticals and across geographies. Now, you know, if I would say that we’ve been really excited to see talent, I mean, across the country, you know, and honestly across the globe, you know, I mean, that would be maybe part of my answer here, too, which is just, you know, if I if I look at the roster of companies that we’re spending time with, I mean, they are you know, they are in definitely in Oakland. I would agree. You know, we’ve been seeing definitely interesting talent in Florida. And my little brother lives in Orlando, so I wouldn’t mind being on the board there to see him. That would be fine. Toronto has been really interesting as well. There’s a good community. There were investors in a company called Flash Food that scaling really, really well there. You know, I also think that, you know, I think we’re in the early innings of seeing what the next cluster is going to become. I’ve been really intrigued by what’s going on in the Carolinas, you know what I mean? Like, I think that it’s not getting talked about a lot. I mean, but it’s like so I’m excited about that. I think Atlanta, you know what I mean, already has an existing thriving ecosystem. You’ve got companies that have scaled there. So you’re going to have talent that’s going to be able to recycle. You’re going to have angel investor community. So I think Atlanta is going to get enhanced. But but if I’m being honest, I mean, we’re just we totally kind of uncoupled our lens and our aperture. And I look at my calendar. Look, it’s it’s this is the most varied and diverse ever. And it’s it’s so exciting to not I mean, in a way, exciting, maybe not too exciting. There’s no there are no travel budgets, you know. I mean, there’s a calendar, right. Like I mean, there’s there’s none of that. So you can basically take the pitch from the entrepreneur that’s in DC or Virginia and that’s what’s taking place.

Rob Pegoraro [00:13:34] Yeah. Toronto is definitely interesting case to watch because I’ve heard people there say we have an advantage because we don’t have U.S. immigration policy. So the people you won’t give visas to, we tell them to come here. Ivan Watson is not about.

Peter Boyce [00:13:48] Yeah its a whole lot more story. So true.

Rob Pegoraro [00:13:53] so Sydney’s comment about the start up in a small town in Florida, is there a reason that cities have to win this? Because in theory, any place, as long as you have a fast broadband, no data cap, it could be small towns wherever, where I guess you maybe can focus a little more. Is this automatically something where a city still has a built in advantage?

Sydney Thomas [00:14:19] Oh, that’s a really good question. I think it’s one that I think about often and I’d say kind of like taking out kind of the founder or like investor. It’s just when I talk to my friends who are talking about where they’re going to live, all of their questions are around. You know, is this just a blip? Is this is is are things going to go just back to back to what they were like maybe like a year, I guess six months ago, nine months ago? I don’t even know how long in maybe another year or two. And so should I take the big leap of buying a house in maybe Wyoming or Minneapolis or, you know, a small town in in North Carolina when like maybe in two years I’ll just be on the plane again to San Francisco or just be on the plane again to Atlanta. And I think that’s kind of what we’re all in right now. There’s not really we can’t as much as we’re trying to we don’t really know, you know, the future. That’s why this stuff is so. But you don’t really know what the heck is going to happen in the future. You just kind of make guesses and make your best hypothesis. And so I think that’s the eternal question. But I think regardless of whether or not somebody from Oakland moves to West Virginia, which is where my mom is from, I still want to find other communities in West Virginia of people who are interested in building tech companies, who are interested in getting some sort of support from technologies that could help them switch jobs for maybe they were a coal miner and they lost their job. They need to figure out how to get how to get trained on each back. Like those are communities that I am deeply interested in, regardless of whether or not, you know, like my best friend who moved to Oakland decides to move to West Virginia.

Peter Boyce [00:16:19] Yeah, my quick thoughts. I spent time with a early stage New York founder this morning, we were talking about how invigorating it feels to be here in New York because there is this sense of kind of mission and alignment and togetherness, you know what I mean? That we feel. So I’m really excited about that. What that’s going to hold for for all of us on this call. You know, one of the things that the way that I think about that question, Rob, is every town in every community is going to be a software community that is the world that we are heading in. It’s not it’s not going to go in any other direction over time, like in twenty one hundred, you know what I mean? Like, every city is going to be a technology city. So I think it has to do with just like the time and the acceleration. And that’s what density affords. Right. And I think what we’re talking about in a way is that San Francisco has 20 plus years of density kind of ahead of where New York is in any of the other cities that we’re talking about. So I think it’s almost like just where are these cities in these communities, like on the timeline in a way, and just realizing that we’re all heading in. What’s super clear, though, is we’re all heading in one direction, you know what I mean, which is software is our universe that we live and operate in. And so so I think it’s just almost just like a matter of time and how quickly these cities in these communities evolve. But I would say you I think wherever you’re choosing, you know what I mean, to be in business today, I think it’s kind of been proven that you can do really great business. I mean, from wherever you may be sitting in the world, whether you’re sitting on the beach in Mexico, you know what I mean? Which is something we can talk about how fantastic Mexico is and like how great the engineering talent is there. Or, I mean, whether you’re in Virginia or New Jersey or anywhere. So I think it’s just a matter of just time and speed and density.

Rob Pegoraro [00:18:10] So as a Virginian, I have to ask I’m speaking to you from Arlington, where, of course, we have we’ve placed a large civic bet on Amazon HQ, too, in the hope that not just will have a lot of jobs created by Amazon, but all the companies that will rise up around it except Amazon types will start their own startups to have a sense of, you know, have we have we spent our money wisely in our civic capital?

Sydney Thomas [00:18:40] That’s a hard question, maybe Alison or Peter can answer it because New York was the one who decided not to

Allison Williams [00:18:47] Yeah, no I think I think it’s really wise. In fact, Newark was really trying to get the second headquarters in the city of Newark, which we felt made a lot of sense for for many reasons. And you see, with with covid, it’s just it’s accelerated the growth of Amazon. And we’re seeing we had we had been investing in the theme of the death of brick and mortar and the rise of e-commerce and the technologies that power that. And it has been an acceleration of that trend. So, I mean, I think having Amazon or Amazon headquarters is great will bring a lot of jobs and create an ecosystem around it. You know, and it’s unknown about the future, too, you know, as things things open up, you know, geography will mean more. So, you know, I think it’s kind of a little bit of unknown time right now. Yeah. It’s great for someone to move to wherever and work remotely with their team. But, you know, there is a benefit of being close to your team and communicating face to face. I know new venture partners. You know, we miss working in the same space together and there is some benefit there. So, yeah, I think it’s obviously a huge win for you guys and it’s very exciting.

Rob Pegoraro [00:20:02] So last question I have here policy, are there any policy moves we should steal from California? The one I’m thinking of is they don’t hold non compete clauses enforceable. Anything else we should steal from our friends in the Golden State.

Sydney Thomas [00:20:18] OK, well, there’s one that’s not a California local issue, but this is I think it just actually is getting overturned today where insurers are no longer going to support telehealth, essentially like appointments. And so you can’t use copay for telehealth equipment. So if you’re if you’re communicating with the doctor, I’m in Oakland and I’m communicating with the doctor who is not licensed in California. They’re licensed in Virginia or New Jersey or somewhere else. Previously, there is a law that actually would not count that doctors visit. Like I actually need to meet with a doctor who is licensed in California for it to get kind of like credit to my insurance. And that’s currently, you know, that was completely dismantled at the beginning of covid. And now we’re seeing it kind of like go back to previous to what was said previously. And that scares me because I think that was ridiculous. I should be able to talk to any doctor and they all went to the same schools. My dad is a doctor. He went to school in Colorado and now he practices in San Diego. But he why does it matter? Why can’t he why can’t he practice on patients who are in Colorado? And so that’s one of the things that I think is really silly. And we’ll just continue to erode access to health care.

Rob Pegoraro [00:21:44] That sounds like a good thing to fix. Hopefully we can come back next year and talk about how all of our cities are doing that much better as startup hubs. Thanks, everybody, for watching.

Allison Williams [00:21:55] Thank you.

Peter Boyce [00:21:57] Thanks again for having us.


Speakers

How to Raise a Seed Round in Silicon Valley

Elizabeth Yin, General Partner @ Hustle Fund Management

Startup Grad School Stage
Ascent Conference 2020

[00:00:02] All right, I will go ahead and get started. Hi, everyone, I’m Elizabeth Yin, and I’m going to talk more about 20 minutes on how to raise a seed round in Silicon Valley. And I think even if you’re not raising exactly a seed round, if you’re raising a precede a pre-K or even a serious day, I think a lot of this talk will be applicable to you. And I think even if you’re not in Silicon Valley but have always aspired to raise from investors in Silicon Valley or thereabouts, this will also be applicable to you. So I’ll go ahead and get started. And I aim to talk for about 20 minutes. So I’ll give you guys a few extra minutes to spare.

[00:00:43] So let’s get going.

[00:00:46] So first, a quick bit about myself, like, why am I even qualified to give this talk? I previously was an entrepreneur. I ran an advertising technology company for many years, and I started that actually during the the financial crisis in late 2008. I left my cushy job at Google to do that. I had no idea what I was doing and I could not raise any money. It was a horrible time, but that turned out to be a good thing because it really forced me to learn how to build a business. And I ended up eventually raising money, but only a few years later and then sold that company in twenty fourteen. And I’ve been an early stage investor ever since then. So for the last six years or so, I now run a VC fund called Hussle Fund. I started this with two friends of mine almost exactly three years ago, and we invest in what I call precede companies and we’ll talk about what that means. And then in a past life, I also previously was a partner at Five Hundred Startups where I helped hundreds of companies with their raises. So I’ve seen a lot both on the doing side, actually building my own startup and raising money, as well as helping a number of companies raise money over the years, either through an accelerator or through now my fund. So first off, let’s set some definitions, and I think actually this is even one of the biggest sticking points. A couple of years ago, a friend of mine who’s actually a very successful serial entrepreneur who’s had two large exits and he was going back to out to the market to raise money for his third startup.

[00:02:20] And he he was actually having a problem raising money, which is quite unusual for successful entrepreneurs. I mean, he’s not particularly famous, but he had these two successful exits and had made a bunch of people money. And those people did put in money. But he was he was trying to raise more money from others and he was struggling. And so he came to me and he said, you know, I just really don’t understand why I’m having this problem. And I and I got more information from him. And it turned out he was raising or he was attempting to raise money from a number of folks who had now raised so much money for their VC firms that they were now doing series and beyond deals.

[00:03:02] And they had kept telling him, well, actually, you’re just way too early. Like our average check size now is ten million dollars and you just have an idea. So he just couldn’t wrap his head around, like, what’s going on? Like they put in my first 50 K and now they’re telling me I’m too early. I don’t get it. And and the reason is this. It’s this slide. Exactly. Which is a lot has happened in the fundraising landscape over the years. In fact, when you think about it, if we go way back into even the 90s when I was, you know, not even actually investing or working back it in the first round that people raise was a series. And now very often the first round people raise a precede round. And then there’s the seed and then there’s the post seed or the pre and then the eight. And so just the nomenclature has changed so much and knowing where you fit in is really important. Are you a precede stage or you seed?

[00:03:58] Are you a post, are you a and then a defining sort of the bumpurs of what makes or series or what makes for a seed company is also really important because three years ago when we didn’t have all these different stages and there was a seed and series, you know, the benchmark for being able to raise a series was much lower than it is today. And so just understanding all of that is really important. So what is going on here? Well, let’s just dig into it. I roughly define the stages here, and this applies this year in twenty twenty, but it may not apply next year like we may see changes next year. But roughly speaking, what we see here is precede is idea stage. Like you just thought of the idea to you have some B one of your products, maybe you have a few customers, but fairly negligible interaction. And roughly speaking, where do you raise money for this stage? Well, it’s friends and family angels precede funds and you can kind of see some of the details of what I’ve just stayed here if you want to read in more detail on the slide. The next stage seed, which used to cover idea stages but no longer does really does have a bit of attraction bar. And that is you have you have generated some level of revenue and that generated some level of revenue that’s actually fairly significant, like maybe ten thousand dollars or twenty thousand dollars per month. And so you can see here you actually done something, not just build a product or thought of an idea, but you’ve also started getting some serious customers. And then lastly, I would say posted is actually where the old series was like I would say a series of benchmarks in our two million run rate and above I had to put a number on it. So posted is certainly a million above, maybe even less than a million run rate and above. So these are the rough areas. Now, of course, there are some caveats here. If you are a notable founder, most of the time you can skip Prexy and just go right to seed or maybe even proceed. And if you are not a notable founder or you’re coming from a geography where there are not many investors or whatever it is, the same may apply where you may have traction for seed, but you may be seeing valuations of precede as an example, like in a geography where there are not that many investors and you’re trying to raise money locally, etc..

[00:06:28] So so there are certainly caveats here. But roughly speaking, these are the general constraints. And I would say especially for this conference in this audience where I imagine a lot of you are B2B, SACE entrepreneurs, this definitely applies a little bit more in a cookie cutter way than other companies where there’s a lot more variation around business models. I think B2B is something that people generally understand. There’s some level of repeatability, some level of consistency of how much you’re making per per customer per month and some level of benchmarks around what good retention and up sales look like. So that’s why these roughly apply, I think, to this audience.

[00:07:09] All right, so now I understand that you know who to go to, like, it’s really important that you’re going to the right investors and you’re able to do that. Now, what do you do? Well, I think it’s really important to actually have a strong fundraising plan. And most founders say, well, I’ve got a plan, I’m going to raise a million dollars or whatever, but that’s not really a plan. And what I mean by that.

[00:07:29] Well, I think, first of all, it’s important to have many plans. You don’t have to go crazy and have nine plans. But I would have at least two, maybe even three plans. And one of those plans might be, what if I cannot raise any money at all or what happens if I don’t raise any money at all? Like I’m already going into this talk with the assumption that you’re thinking about raising money, but you should probably even just take a look at what happens if I don’t raise money. There are many alternative financing sources that we’re not going to go into in this talk that you can access today, especially if you’re in seed and you have some level of funding or some level of revenue. So, for example, revenue based financing models, you know, we add wholesale funding, certainly have a separate revenue based financing fund. And if you email me later, I’m happy to put you in touch with that fund manager. And we strictly invest out of that fund just based on your revenues and essentially as an entrepreneur friendly loan. And so if you already have some level repeatability around your customer acquisition, maybe you don’t need to raise equity money at all. And there certainly many others who do something similar type is an example that doesn’t specifically force ask companies. You have earnest capital and NBC who are also doing financing models that are very similar, clear bank, lighter capital. So you have a lot of different options these days besides VC money and and maybe raising money is just not actually even the best thing for your company. Why take the dilution? So that’s that’s plan number one. Plan number two is OK, well, let’s have a rich plan and let’s have sort of a little bit more of a realistic plan.

[00:09:02] So let’s say for hypothetical reasons, your your realistic plan is, OK, let’s raise five hundred to seven hundred fifty K and most founders say, OK, I’m raising X to have a runway of 18 months or 24 months. That is not a good way to think about things. And investors are not looking to invest in your company so that you’ll survive for the next two years. Investors want to know what is it that you think you can achieve with this money? Now, of course, they’re not going to hold you to it. You know, who knows what happens in the next two years? Things never go according to plan anyway. But if you have some assumptions around what you can do with the money and assuming that everything goes well, what can that money get you? So as you can see here, the wrong way to think about things is, hey, we we want to raise for 18 months of runway the right way to think about things as well. Based on what we’ve been getting from our ad spend or whatever customer acquisition channel you’re using, we put a dollar in and we get a dollar and fifty out within a day. Then we rinse and repeat and if we have half a million dollars to do it, then actually, you know, thinking that through we will be at five hundred K run rate by June.

[00:10:20] So being able to paint a picture like that, it doesn’t mean draw out a whole financial model, but being able to paint a picture like that is the type of thing that investors like to see. They like to know that your money is going to be put towards growth. And I understand that a lot of people are going to be using their fundraising dollars towards things like engineering and design, but to the extent that you can paint the picture of your money is actually going to be used not just for product development, but also for growing your business the better.

[00:10:53] And that will make that easier. It is a real clear case as to why you need to raise money now, and that will help you with some putting some pressure or urgency on investors. I think the other thing I would consider in coming up with your fundraising plans is to add some buffer as well. As I kind of alluded to, things never really go to plan. And so if you have some to offer on there, there’s a just in case scenario. So if let’s say it will, we can, in a great scenario, raise two hundred fifty K to get to half a million run rate by next June. Well why don’t we double that number and say we’re raising five hundred K to get to that. So that that’s an example of that and digging into that a bit more. You know, I think when you have, when you set out these two plans, regardless of whether they precede seed or perceived, you’re automatically making some assumptions.

[00:11:44] And these assumptions probably won’t hold that scale. But that is how to kind of backtrack into these two plans. So let’s say in our realistic plan, we’re raising half a million. Well, the way that you would actually come up with a half a million in the first place is let’s say that our acquisition numbers right now are ten dollars acquisition on Facebook ads that we have a two month payback period. We’ve kind of run the numbers there.

[00:12:10] If we raise X, then we can get to Y by June. And we’re not talking about long term estimations of projections. We’re talking about maybe a year out or so. Five year projections make no sense to me. But you are not raising for five years in most cases. I think, you know, from the pitches I hear people are raising for one to two years. So you should be able to make some of these assumptions when you think about the amount you want to raise. Now, what do you do if you’re a pre-season? You don’t actually have these numbers? Well, this is where actually I think it is very important. Even if you’re a PC, even if you don’t have a product that you do need to do some testing and that testing can be based on sales. So can you spend some money or even use organic customer, not organic, but like free concert and marketing methods to to generate leads? Maybe it’s to assign a page, like a waiting list page and then you can make some estimations around. Well, you know, we think that X number X percentage of people will convert. So you start to do something. And a lot of people say to me, well, I don’t have any money to do any marketing. Well, guess what? There are a lot of free ad credits or coupons out there floating around. You can snag one of those, get two or three bucks in credits and try it out and send people to a landing page to either sign up for free or even prepay for your product, even if you don’t have a product ready. And so these are the kinds of things I would start to do even before you have a product. These numbers, like I said, are not going to be accurate by any means. But I think these are the kinds of things that you will use in your argument to explain to an investor like, hey, these are my assumptions, they will likely change. But if all of these things go in this way, we will be able to generate X by June, and that is why we are raising Y. So that’s the kind of argument you’re going to make and that makes you sound like you’ve really put some thought into it. All right, so you’ve done that, you’ve given a thought, you have you’ve kind of mapped out what an ideal scenario looks like. Again, not five year projections. Anybody who asks you for five year projections, I would highly recommend you push back on it. I’ve worked with so many founders over the years, hundreds of founders over the years. And I have never I have never had a single founder who has submitted five year projections ever get funding. And I think the problem is that it’s a it’s a Goldilocks and the three Bears problem. You’re either too hot or you’re too cold. Either your assumptions, like people think your projections are just overly unrealistic or you’re not ambitious enough. So I’ve just never seen people win on that. But I do think one year projections, if investors ask, is fair game, and that basically is an exercise in how would you use the money, what are the levers of the business? And if X event happens, then what what does that lead to? So, so but you should do that exercise for yourself, even if you are not submitting one year projections to investors. There are a lot of investors these days that precede and see to do not ask for projections. We do not ask for projections. But my hope is that a founder, if a founder has been thoughtful enough that he or she would have done that themselves and at least at a rough level. OK, so moving on from that now, how do you actually put this all to use while. Let’s stop for a moment, know, I think as a founder, when I was a founder, I was I was I was always annoyed by why is it that investors take so long? Just everything. They just take so long and and this doesn’t fully answer it. But now that I’m an investor. I understand some of the mentality a lot better, and here here’s an important thing about that mentality, which is let’s just take a step back. It is always if you know, you can get into a deal tomorrow at the same valuation as today, you it is always better to wait. Like, let’s just stop and think about that for a moment. If we are all investors and somebody give you a choice of do you want to invest in this company at this valuation today or do you want to wait for information and make that decision with all the same parameters tomorrow? And the answer is always, wait, there’s no loss in waiting and then extrapolate that out another day. OK, do you want to do that? Do you want to wait another day? The answer’s always yes, and this is why then fundraising processes can be dragged out. OK, but what changes that situation? Well, what changes that situation is if the opportunity is no longer available or seemingly no longer available tomorrow, then that’s a different problem. And investors have to make a decision as to whether they want to write the check today or take the chance or the gamble that they may not be able to write the check tomorrow. And that is what you need to create. You need to create that situation as an entrepreneur. And so this is why it’s very important to create this urgency. Well, how do you create urgency when you don’t have it in the beginning and nobody’s investing in the beginning end?

[00:17:36] And really, what the way to do that is to generate lots of meetings. So you need to get in front of lots of investors, pitch a lot of investors around the same time, closely packed together, so that when you can credibly say to an investor, well, I don’t know when I’m going to close, but I’m going into five second meetings next week and things seem to be moving along quite quickly with the other people.

[00:17:58] And then you go into those meetings and say the same thing and that moves everybody along. And so that means that it is your job to create you’re missing out. And that also means that in order to tackle these meetings in fundraising is a full time job.

[00:18:14] So what are the steps to do it?

[00:18:17] Well, here are the steps, basically, one, make a long list of investors and by long, I mean long like it could it should be at least a hundred angels and funds. And you may not get through it all, but you should at least have all of that ready to go. Secondly, you should be able to get in touch with those people and get meetings with those people. OK, there are a number of ways to do that. One is you can get warm introductions and good warm introductions to get our other founders who have been backed by those investors. Second best would be other investors or other people who know them, but the best people to get introductions from our other founders of theirs because they generally like their founders and they picked. If you have if you’re not able to get a warm introduction and warm introductions, also take a long time to get. I would also call the email in parallel and never hurts to call email. There are certainly some investors who do not invest based on cold emails, but a lot of investors do. These days, 15 percent of the deals that we do are often cold. We don’t know these people. And so it never hurts to try to do both. It only adds to the support level of you, like where if you pull the email them and then the investors like all get around to that email and they kind of never do. And then somebody warm emails them. That’s great. Nobody ever thinks, oh, gosh, that person so annoying because they got somebody to warm introduce that that never happens. So don’t be shy of having multiple entry points into an investor, but it takes time because you have to do that with all people. And then once you get in touch with all these people, then I would start to book out meetings three weeks in advance. Nobody’s going to meet with you tomorrow. Everyone’s calendars are really busy, so.

[00:20:06] And you want to pack them all in. Ideally, you want to start packing them in when people are free and you have a lot of flexibility and schedules.

[00:20:13] So three weeks in advance, pack in the meetings, get them all sort of back to back these days during covid on Zoome, it’s really easy to do back to back meetings right before you had to drive all around town and you needed to have like an hour just in case things ran over, you ran to traffic or whatever. These days you can actually kind of pack them back to back and it doesn’t even matter the geography. Obviously, I would impact them so tightly together, but. And you would you should have some time before. But the ideal scenario is that you’re actually doing four to five meetings every day, every day. So in a given week then for that very first week where you’re packing your meetings, you’re talking about doing at least 20 meetings and then to start to go through your list of one hundred, then you pack it in for the next week and the next week.

[00:20:56] So you should have packed weeks for at least two weeks, if not all the way through a full month. That is a full time job.

[00:21:03] And then finally, as you go into these meetings and you start to take them, you start to pressure investors saying, hey, we’re going into a lot of meetings with other investors, that’s basically say you don’t need to say, oh, please don’t say who investors may like to collude or whatever it is they do. But just say that we’re going into a lot of meetings, that we’re pretty busy meeting with other investors.

[00:21:24] So we just want to know where we stand and always constantly find the next step and then go into the next meeting and just herd everybody along together.

[00:21:33] So that’s why talk finished in twenty one minutes.

[00:21:37] We have unfortunately no chance for Q&A, but I am happy to answer questions. This is my email address, Elizabeth at Hussle Fund, not VXI. Feel free to email me. Like I said, I do read called emails and actually when called emails do not go to my spam.

[00:21:54] I do respond to everybody. It may not be immediately, but I do try to respond to everybody who writes in my work email certainly within a few days. So feel free to email me can be about anything and it doesn’t have to be about pitching hustle. But of course, if you want to, you can email me about that as well.

[00:22:11] We invest in precede software companies and if you you know, if you fit that stage like we we would absolutely love to take a look. All right. Well, thank you so much for having me. And I hope you guys have a good rest of your day.


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