197. The DNA of Startup Success (John Vrionis)

197. The DNA of Startup Success (John Vrionis)
Download_v2
Nick Moran Angel List

John Vrionis of Unusual Ventures joins Nick to discuss The DNA of Startup Success. In this episode, we cover:

  • Backstory/path to venture.
  • Talk about your experience at Lightspeed and your decision to leave.
  • Where/when did you first meet Jyoti Bansal, the founder, AppDynamics?
  • What’s unusual about what you do?
  • ‘Unusual Academy’ and ‘Get Ahead Platform’ — what are they and what’s the difference?
  • You’ve spoken about your team at Unusual being focused on redesign the early-stage VC market and giving founders a distinct advantage. What about your approach gives founders a distinct advantage?
  • You’ve spoken about founder focus on “How it works” vs. “Why it matters” — what’s the disconnect you’ve observed with early-stage founders?
  • You’ve covered your own experience of learning through suffering — is that also a quality/characteristic you look for in founders?
  • Arrogance vs. Humility — have you invested in founders displaying these traits? What’s been your experience?
  • 3 must-haves that you look for in a new investment?
  • If there’s one common theme in failed investments — what is it?
  • Is there anything unusual about your approach to sourcing? If so, what is it?
  • What are some best practices for founders when picking a VC?
  • Over the past year or so the percentage of total VC dollars invested in early-stage deals fell to the lowest levels the industry has seen in five years. Why do you think this is the case?
  • You’ve talked a lot about the seed funding gap and challenges to get to Series A. I’d love to get your thoughts on what’s required to raise an A?
  • Do you focus on product-market-fit prior to the A round — if so, how do you define it?
  • What’s the problem with Sovereign Wealth in Silicon Valley?
  • Do you have specific examples of unintended consequences or challenges with certain types of LPs behind a VC fund?
  • Re. founders — You’ve said that “the biggest mistake you can make is taking an investment from a mega-fund” Why?
  • How has the early-stage venture landscape shifted from previous years? What do you expect to see in the future?

Guest Links:

Key Takeaways:

  1. John made the decision to leave Lightspeed because he felt the industry had changed tremendously over the last decade and founders weren’t getting the help they needed at the hardest stage, which is in the first two years.
  2. He and Jyoti Bansal shared this belief and felt there was a big opportunity in the space and ecosystem, therefore they teamed up to start Unusual Ventures.
  3. John and Jyoti make a complimentary team because you get the experienced investor/mentor/advisor turned VC from John and the very successful entrepreneur with an understanding of how to build a startup from scratch with Jyoti. 
  4. The key to being exceptional in this business is focusing on one specific niche and giving it your all. At Unusual, their focus is on providing founders with stage-specific help during the most difficult and crucial early years. 
  5. It’s all about financing the company to the next fate. It’s not a linear function in terms of value creation for startups, it’s very much a step function, where in order to reach the next step up, you must hit certain milestones. “Getting 80% of the way to the moon doesn’t get you anything.”
  6. Before writing a check, John first defines the goals of the money to make sure the company has meaningfully de-risked itself and therefore can raise money at a higher valuation before the next round. 
  7. There’s a fine balance between taking enough capital to reach critical milestones and raising too much money because often that can lead to bad habits. “Innovation comes from constraints…” therefore you don’t want founders to overly dilute themselves.
  8. The primary metrics that John uses to indicate product-market fit are first, having evangelical users, that are very much in need of what you’re selling and second, users that are so delighted with the product that they’re spreading the word and organically creating new customers. 
  9. John’s three “must-haves” before writing a check: 1. The team is a group of hardworking people with integrity and a passion for their idea that they believe can truly make the world better. 2. Timing. Is the timing right? What has changed on a macro level to make now the perfect time? And 3. The ability to raise venture capital. As a VC, we have to believe that the market has the potential to be huge and that there’s a real growth rate at the company that can take advantage of it. 
  10. A common theme John has observed in failed investments is incorrectly judging the motives of those very first customers.
  11. Founders want to believe that what they’re building is the antidote for everybody’s pain. Sometimes they believe it so much, they fail to ask the right questions or really listen to feedback in a way that would help them make decisions, which often leads to building something that people weren’t truly desperate for. 
  12. Unusual Academy was created to provide a time-efficient way for founders to learn from “master practitioners” or people who are exceptional in their craft. They go through a series of workshops to learn how to overcome the 7 most common challenges a seed-stage founder typically faces and then how to apply it in their company. 
  13. When a company becomes a part of the Unusual portfolio, they also gain access to the Get Ahead Platform. Through the platform, they hire the best salesperson, marketing person, and recruiter to join the founder’s team. 
  14. Mega funds are great for series A-C stages however, the biggest mistake founders can make at the seed stage is taking an investment from a mega fund. 

Transcribed with AI:

0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran, and this is the full ratchet

0:22
Welcome back to TFR. John Vrionis of unusual ventures joins us today to discuss the DNA of startup success. We cover items including founders that are too focused on the how instead of the why the role that suffering plays in success, arrogance versus humility, the three must haves for every investment Jon’s thoughts on timing, the common reason why startups fail requirements for raising a Series A in late 2019 Why seed funding is dropping the impact of late stage mega funds. And finally, why LP makeup for a fund is critical for founders to understand. Quickly I want to give a shout out and congrats to Kevin for shet Tarik alo brewery and Victor cush of the team at fair market for closing their $11 million series A led by insight partners. It was a competitive round with a number of tier one VCs vying to lead and we were excited when they selected insight. This was the first investment for new stack fund one when we invested in their precede in May of 2018. And they have quickly grown into one of the if not the hottest procurement SAS startups in the country. I just had a chance to catch up with Tarik in Chicago yesterday, and he was generous enough to speak to our team about the key factors to early stage growth and raising capital. Congrats again to fair market. Also before we jump into the episode, I want to mention that new stack is hiring an analyst with a target start date of summer 2020. This is an entry level position but provides access to all aspects of running a venture firm deal flow capital raising portfolio management, marketing and branding and fund strategy. We’re not shy about giving ownership to young, smart, tenacious, resourceful individuals that want to build a career in venture. All of the folks on our team own deal flow from the first look until close. If this sounds like a fit for someone in your network, please encourage them to visit New stack.vc where they can find our careers page and apply. With that. Let’s jump into the interview with John Brianna’s of unusual ventures.

John Riona is joins us today from Menlo Park. John is the managing partner at unusual ventures. Unusual is a Silicon Valley based venture firm with investments in harness baller TV, Haven and Arctic wolf among others. Prior to unusual, John was a GP at lightspeed Venture Partners for 12 years, where he invested in several successful companies including mule soft Nimble storage, data stacks and app dynamics. He’s number 63 on the Forbes Midas list of top investors of 2019. John, welcome to the program.

3:10
Nick, thanks for having me.

3:12
Great. Let’s start out with your backstory. Can you kind of walk us through maybe some of your educational experience and then the path to venture

3:22
is happy to do it. Not that exciting, but I’m from fairly rural Georgia originally ended up going to Harvard. My mom likes to say they needed one person from Georgia that year. So it worked out well for me. I ended up playing soccer there. And for a couple years afterwards, I tried I tried to make it but wasn’t good enough. And I ended up in Chicago to get a master’s in computer science, and spent time working for a corporate venture firm at the time. I lived through the.com crash there and came to California in 2001 to work for a startup and then went to Stanford for Business School. After business school i i worked almost 12 years at lightspeed. And then last January, so January 2018, Jyoti Bonzo, and I who was the founder of AppDynamics, we started unusual ventures together.

4:15
Got it. So what prompted the decision to leave Lightspeed

4:18
it was a great experience when I joined it was, you know, less than 10 people. And when I left, it was probably north of 100 Something with offices in India and Israel and China. You know, we went from a $480 million fund to many funds and multiple billions under management. But my real passion has always been investing in, you know, entrepreneurs working with founders at the very beginning, you know, in the, what people now call the seed stage, back in 2006, there was no such thing it was called angel investing. And it was where I had the most fun and, frankly, the most success, but I felt like the industry had changed. changed tremendously over the last decade. And founders weren’t getting the help that they needed at the hardest stage, which is in those first two years. And that was largely because the funds had gotten so big, they really couldn’t focus on investments where they were writing single digit million dollar check. And so Jody, from the entrepreneur side felt that very much, and teamed up to start unusual, because we felt there was a big opportunity in the space and ecosystem. When

5:31
and where did you and Joe T, first meet?

5:34
Oh, we met, I want to say probably in 2008, we were introduced through mutual friends. At the time I was, I was researching how virtualization was going to be disruptive to all aspects of, you know, datacenter technologies. And so Jyothi was an architect at a company called Wiley that had been acquired by CAA. And we got to talking about how the monitoring space was going to be different, because of how people were now building applications and using virtualization, I was new to venture, you know, he had never been an entrepreneur before. We’ve talked about this big whitespace and an opportunity. And we’re kind of finishing each other sentences. And so, long story short, it led to an investment in AppDynamics.

6:24
So you were you were new at lightspeed at the time. So was this, like, an associate or principal role that you had when you made the investment in AppDynamics?

6:36
Right, I was, I was technically a senior associate, you know, right out of business school. And, you know, frankly, a bit unsure of myself, if I wanted to long term be a venture capitalist investor, or, you know, work in startups from an operating perspective. And the job seemed very appealing, I had a chance to meet a lot of people that were technical and product visionaries and talk to them about the space. They were in, you know, opportunities in the future. And so, I was very lucky, right, in that I met Jody, who’s unbelievably talented. I tell him all the time, he spoiled me. And that was my role to go out and talk to folks about these new spaces and, you know, find investments for the firm.

7:21
And what are the two of you, you know, why do you make a complementary team?

7:25
That’s a good question, Nick. I mean, what we bring to the table is kind of two sides of the same coin. Right? You know, we were investing in founders who are just like Jyoti was product, visionary technologists, often with a very interesting insight about why the world needs a new product in a particular space. From his side, he’s built the company from scratch, you know, to well north of 1000 employees and ultimately sold it for $3.7 billion. So the operator in him the experience, you know, he can be very helpful. And it’s super passionate about helping founders, particularly at the seed stage. You know, in my case, I, you know, over 12 years, I looked at hundreds and hundreds of companies invested in many dozen, and I’ve had a chance to see founders go through different choices, strategy, hiring, you know, and really be a mentor and advisor to coach to try to help them have the most successful path. And so they kind of get the, the old guy now VC, and the very successful entrepreneur. So when we invest, they get both of us.

8:34
It’s a good balance. So I’ve got a number of interns working for me at the moment, many of which would love to be in the industry. One such individual has gotten a lot of feedback recently from from San Francisco VCs that he needs operating experience, you know, he needs to go found his own startup or he needs to move to SF and join a tech startup. If my research is correct, you are not a startup founder yourself. But it sounds like you and Jyoti together probably make a pretty good team. Absolutely.

9:05
In the sense that I did the first time I found it anything. It was unusual ventures a year and a half ago. Yeah, I guess you do have a startup, right? Yes, venture capital is just a business like any other business. So, you know, I too, was washing dishes and figuring out where to find a place for rent to rent and hiring people. So yes, but I did work at a couple startups before I got into venture. You know, I hear that, that thought a lot that you have to be an operator. I’m not. I don’t agree with it. I think we all see the world from where we sit. There’s a lot of good ways to be a good investor, particularly in venture capital and history would suggest there’s no formula. I mean, some some of the best venture investors of all time, were not operators. You know, Peter Fenton from benchmark microgrids. Right. He was a journalist at one point, right? Some of them have, right, but it’s all about empathy. It’s all about him. To see really putting yourself in the founders shoes, understanding, you know what they’re going through, and then you know, caring very much about helping them. I think that’s what makes a good DC. And so you don’t, I don’t think anyone background is the only way to be good at that.

10:16
So, you know, in light of helping entrepreneurs, there’s some differing opinions on how to do so. We just had Scott Cooper on the show from Andreessen, he talked about, you know, their expansive platform, we’ve had a number of folks on the program that are specialists, they help in one particular area, let’s say it’s customer development, sales training, could be on the fundraising side, it could be on the talent side, What’s your philosophy? And how do you get involved in help out founders?

10:44
So this has been, you know, learning by experience for me, I look at the industry today. And I see, you know, there’s more active venture firms, there’s more money available, and I think ever before. And so it’s not that money is what entrepreneurs are, earliest investors are differentiating themselves by. So Jody, and I looked very hard at this when we started unusual. And you’re right, there’s kind of a specialist model. And then there’s the some people call it multi stage or stage agnostic platform. You know, our view is to be world class and anything Next, you have to focus. Yeah, I think of yourself right. As you mentor entrepreneurs, what’s one of the things you always tell them? Yes, yes, that’s great. But you have to focus you have you have to focus. Right. And all

11:30
the time is Warren Buffett and Bill Gates, you know, quote, the two of them were asked that question, you know, what’s the key defining thing that led to your success? And they both answered in lockstep focus? Yeah,

11:42
I mean, so this whole notion that you can do every stage? Well, personally, I think it’s marketing. I think it’s just marketing. And it’s justification for the large amount of fees, that these enormous platforms, you know, are extracting at the moment. If you look at music, if you look at art, if you look at Sports, medicine, right? To be very, very exceptional, you have to focus, right, you don’t want the same doctor who does heart surgery, also delivering your baby, right? It doesn’t, it just doesn’t make sense to me or to Jyoti. And so, increasingly, as the funds got bigger over the last decade, they’re too smart to say, hey, we don’t do feed, right, they don’t want to give up that level, you know, that top of the funnel kind of deal flow. But if they’re really honest, I think they’ll tell you, when you have a billion dollars to invest, it doesn’t make a lot of sense, as a fiduciary, right, as a responsible investor, to spend as much time with a $5 million investment as you would one of your $50 million investments. And then from the founder side, each stage of the journey, each leg is very different in terms of the challenges, and therefore the help that you need. So what you’re trying to do in the first two years, is very different than what you’re doing and years two to five. So we love injuries, and we love the innovation they brought to the industry 10 years ago, and if you look at their model, and all the services they provide, personally, you know, and Jody would echo with this, we think it’s terrific. But it’s optimized for what founders need in the growth phase, not in the idea to early traction phase, right? We write we built unusual with services that help you with the problems, the challenges of that phase, hiring those first 10 engineers, it’s hard selling those first five customers, it’s really hard. Yeah, telling your story, right? Like, not how it works, but why it matters. These are all the things that you have to do and years 01 And two, right? And that’s very different than being introduced to CIOs or C level executives, right? That’s not what founders need. And so Jodi, and I, you know, he lived it, right? And he said, Hey, founders need more help, more stage specific help. And so for us to be a Olympic level, that’s the thing we joke or world class. That’s all we’re gonna do. We’re gonna focus on helping founders in those early years. And that’s what unusual was all about.

14:12
I love it. I love it. We preach this on internally here at New sag all the time with the team. It’s all about focus. We have a very sort of gritty, gritty, hard working hustle mentality. So these points really resonate with me. But So to clarify for the audience a bit. Can you talk just briefly about the stage sector focus sort of checks us for unusual ventures?

14:35
You know, the labels are confusing. These days. Right? I’d be curious, your take on this right. Is it seed? Is it is it series A Is it small a, we were joking last week with the TechCrunch folks about soil, soil rounds sort of precede and hard for us to you know, I don’t know exactly how to I think it’s confusing for us. It’s confusing for founders. We just think of As you know, when you have an idea, right for us, no idea is too early. We’re trying to help people go from that concept or even prototype, maybe early traction in some cases, to obvious product market fit. And so that’s, we think of it that way, the obvious line in startups is pre product market fit, and post product market fit. Yep. And it almost seems like the financing round labels are actually confusing. But we think of ourselves as pre Product Market Fit investors and wanting to help founders get through that, that phase. So we’ll invest anywhere from 250k, on the small end to high single digit millions, when you just depends on the business model, and what the company is in need of the most in frankly, it’s all about financing the company to the next phase. Yep. Right, Nick, I’m sure you’ve learned that the new stack, right like the it’s not a linear function in terms of value creation, for startups, it’s very much a step function, you have to hit certain milestones, and then there’s a meaningful step up. So I joke with our team getting 80% of the way to the moon, it doesn’t get you anything, you got to get out, you got to get all the way there. So we define the goals on this money to make sure the company has meaningfully de risked itself. And therefore it can raise money at a higher valuation for you to again, gotta

16:23
connect the capital with milestones, I think that might be one of the biggest mistakes I’ve seen across, you know, an array of different high quality founders, high quality opportunities that, for whatever reason, don’t understand the step function, or don’t set out the right milestones early. And don’t connect sort of the capital raises to that and find themselves in a, you know, a seed funding gap or series, a crunch, or whatever you may call it.

16:52
Yeah, I mean, you’ve probably seen seed extensions become a popular thing, a lot of times founders, they’re optimized for dilution. And I, of course, we understand that. But at the same time, if you, you know, if you don’t take enough capital to get to those critical milestones, you know, you’re obviously your valuation hasn’t increased at all, in some would argue has actually gone down, because you showed poor judgment, you didn’t actually raise enough money to get to the right place. Or conversely, you don’t want to raise too much money, because then you get, I think, companies can have bad habits. You know, innovation comes from constraints. We’ve seen that a lot. And obviously, you don’t want the founders over to lead dilute themselves. But it’s a fine balance.

17:32
You’d mentioned product market fit that being the goal is your thought that that should be achieved before the the series A and maybe we’re will define the Series A round is 2020 to $35 million pre, you know, achieving that that product market fit prior to closing that round?

17:51
I’d be curious what you think, but that’s been my experience, certainly in the last five years, series A’s these days require proof. It’s no longer conceptual investing, right? These are traction metrics that the investors are holding founders accountable to, which demands that you’ve demonstrated product market fit. So the classic series A’s today in enterprise software, our core team, GA product, and a million dollars of bookings are or arr. Yep, that, to me means that they found a way to early signs of product market fit. And that’s what you know, triggers a Series A these days, which is why the series A’s are now on average 15, you know, 20 25 million in some cases, the funds got bigger. people’s risk appetite went down whether they said it openly or not, because they’re now writing much bigger checks. It used to be that a $5 million series day look, if you got it wrong, it wasn’t the end of the world. 15 or 20 million, that’s a much bigger thing to swallow in terms of a last piece of investors. And most funds have shifted, wanting to see more proof, which is why there’s been an opportunity now in the seed market that’s really opened up.

19:08
What about a situation so I actually I just had a founder in yesterday from from Florida. She flew in, we had a nice three hour working session, but she has three large customers. One is a large tech company. One is a large bank, and one is military customer. The decision makers are different sales cycles are different. The basket size, you know, the average account value is different for each of them. Even the ROI you know this. This is an enterprise SaaS offering that has three different major advantages and she’s had all three, you know, with each of the different customer sets. So how do you look at a company that has shown meaningful traction? They’ve shown some sales velocity, but you know, they’re, they’re offering is kind of appealing to a broad set. verticals? Maybe a lack of focus there? You know, there’s there’s not that indication that they can just rinse repeat their way to 10 million plus of ARR.

20:09
What advice did you give her?

20:11
The advice I gave her was that I said you should do one or two things. If you feel like you know what your beachhead segment is now, the combination of your product, your application and your customer segment, and you know, where you’re going to get the most progress fastest, and have you know, meaningful traction, then define the beachhead now, and let’s get after it. If you feel like you’re still at the hypothesis stage, and across all three of those, you don’t know which one is best, then let’s set up a timeline by which we can test this hypothesis and look at the different markets and make a decision. But either way, at the end of this, I felt like a decision should be made. And then one of those markets should be focused on. And

20:53
so you’re driving her to what focus?

20:59
Did we talk about this before?

21:03
So I think that’s that’s really sage advice, right? And so here’s the thing. So often, technical innovations are horizontally applicable. So yes, it does work in multiple markets. And so founders will often come in with, yeah, I have three or four different verticals. They may even have three or four different sides of customers, small, medium, large, extra large. And there’s nothing wrong with that. But the challenge is to go to market, right to hire salespeople to hire marketing people, in pointing them at one thing is how they’re successful. Right? You can’t come to the website and have it be NyQuil, sniffling, sniffling, coughing, aching stuff, that doesn’t work for a startup, right? You’ve got to have something very specific thing with the salespeople, what kind of sale? Is it? To what kind of customer who is your user and buyer? And again, it’s not that it’s, it’s not applicable? It’s just that from a focus standpoint, a startup has to do that, because you are resource constrained. And so your guidance to her is it, look, you got these three, that’s terrific. But you got to go pick one, because you got to go get those first 1020 Customers raise more money live to fight on. And eventually, you’ll go on to other verticals. But founders, this is one of the number one reasons founders fail, because they’re usually product, technical people, they don’t like to give up, Nick, on. These are the verticals, you know, they have to see that it’s not about giving it up indefinitely. But what’s best for the company for the startup is to pick one. So the joke we make an unusual is startups in the seed stage. It’s not physics hard. It’s dieting hard. Meaning you have to be very disciplined. And that’s tricky. Well,

22:51
in your example, is really appropriate. Because as I was walking through this with her yesterday, I said, I have observed some founders achieving some measure of success, albeit with very little capital efficiency, one in particular, that is selling into consumers. He’s selling a similar product with similar technology in the enterprise. And he’s actually got a government offering as well. And it’s a really compelling product that has tons of capability. But I’ve seen his team evolve into three different teams. You know, his, his organization has sort of dedicated engineers, you know, around the the enterprise offering, and the UX for it, and the sales for it. And he’s got a team, you know, marketing folks and other engineers that are optimizing around the consumer offering. He’s developing a new team around the government. And I don’t think that was his original intent. He thought he could do everything with one team. But when you’re resource constrained, as you mentioned, it’s it’s just really hard to do at all and do it? Well. Yeah,

23:55
I would say it’s actually impossible, you end up with 80% of what everybody needs. And the team in every way is stretched thin, to your point, even engineering, right? Because every vertical market, it has some idiosyncrasies in terms of what you need to build, how you need to tell the story in how you need to sell. And so if you’re stretching the company across more than one, and you’re only a 10, or 20 person company in the first place, because that’s all the capital you have, you end up with, you know, sort of mile wide inch deep offering. And that’s a lesson learned. I mean, I have lived through that mistake before. It’s one of the things we try to work really hard on with with founders when we invest.

24:36
John, are there some objective items or, or metrics that indicate product market fit for you?

24:44
And the easiest one, Nick is evangelical users. Right? NPS if you don’t have Well, yeah. Or you can so easy with social media these days or meetups? Right, it’s, you know, number one, if you’re starting a company, you got to make sure are that you know who your desperate user is, right? Because if someone’s not desperate, they’re not going to buy from a startup. It’s too, it’s too risky, right? You might as well go with something that’s more trustworthy. So you don’t get fired, that’s good. But you’ve got to find someone who’s really desperate. And if they’re desperate, that means they’ll use the product, even if it’s buggy, right? Even if it’s, there’s aspects of it that are probably a bit embarrassing, that’s okay, because they’re so in need, of what you’re selling of what you have. And so by talking to just a handful of users, you will quickly see if they desperate for what you are offering and be they’re delighted with what you, you know, what you provided to them. So much so that they’re telling other people about it. Right? There’s, you know, ways to measure that. But it’s also an intuitive thing, right? So people like to look at a million dollars of bookings or 10 reference customers or in consumer world, you know, 1000s of users growing at some, some rate 20% month over month, or engagement, right, like, people have tried to quantify it. But I think at the early stage, you know, if you’re waiting for all the data, to give me your judgment, that’s not really judgment at all. Right, you do have to have some intuitive sense of why something’s working and for who,

26:22
but love it. Let’s go back to when you’re making a decision to invest. So, you know, this, in some cases, you mentioned, this could be really early stage, this could be, you know, at the hypothesis sort of phase, are there any must haves that, that you need to see before you’re going to kind of check?

26:41
Yeah, there’s, you know, there’s a few, right, it starts with the people, it always is about the people, right? Are they high integrity, they have a history of showing that they’re honest, you know, very hard working, because, look, startups are hard, right? You know, many are called few are chosen kind of thing. So they have to, you know, have demonstrated that. And then is the insight authentic, right? Did it come from experience? Yep. People who just just want to start a company because it’s glamorous, or they saw Silicon Valley or want to make money, that doesn’t get you through the inevitable trust, right? So the idea has to be born out of experience. And they, there’s so much passion, they can’t sleep at night, practically. Because they so much want the world to be better. And they have this idea about how to do it. So that’s number one. Number two, is, is the timing. Right? Right. Is it now that it makes sense to start a company in the space? You know, we joke, it’s the disruption in the Force? Right? What, what has changed on a macro level? That makes the timing perfect? Because, you know, starting a company, you know, being too early is the same as being wrong. So timing has to be right, if you’re too late. The same is true, right? The parade’s already too far ahead, you’ll never catch it. But if you’re too early, then you’ll run out of money before you have any proof. And you’ve got to you’ve got to build the company in these stages, right, because you’re raising money in stages to. And then last, you know, this is the thing that I think is most misunderstood by a lot of founders is to raise venture capital, we have to believe that the opportunity to create a business with hundreds of millions of revenue, because that’s the business we’re in, right, it’s all about mega homerun not just home runs, but actually mega home run. Yeah, so we have to believe that the mark, that doesn’t mean the market is big today. But it means that we believe it will be and there’s a real growth rate that the company can take advantage. So it’s those three things.

28:40
And, you know, on the on the timing point, how does one assess if the timing is right, you know, in light of some earlier comments, we were talking about sort of these desperate customers or your innovators, early adopters, they may or may not be representative of sort of the majority of the market. And often the startups aren’t going to be promoting their offerings to kind of that majority market group for maybe more than five years from when you launch. So how do you frame up the timing and, and assess whether the timing is right.

29:16
I think this is the hardest part. And the reality is it’s it’s a bit of intuition and a ton of research. So, yes, if you’re investing in what I would call the take a normal distribution curve, right? If you’re investing in the mainstream, it’s too late right certainly at his proceed investors. So, we like to understand the early adopters and why like why they had to have this or why this idea the minimum is very compelling to them. So we spend a lot of time talking to people who are early adopters, you know, particular industries. It turns out these are mostly high margin industries, like technology or in media. They tend to be early adopters, right? They have extra cash to invest in the future and trying to Two things. And so we spend a lot of time with these folks understanding what their critical issues are. You know, one of the key advantages of unusual is actually that Jody is building a company called harness today. So he’s not just an investor who’s recalling kind of the days of building AppDynamics, a decade ago, the problems he’s solving today are the same ones that founders and their products are trying to solve. So we’re very up to speed on kind of the current state of things, and the current problems that people have. And so we triangulate, we talked to CIOs, we talked to CISOs. We talked to the leaders of engineering, we talk to developers, we’re always trying to understand kind of at the early adopter phase, what’s out there? What are their burning problems? And so when comes, someone comes in and pitches you an idea next? We tried to be very prepared, right? They’re not educating us on why this is a problem, and why why there’s a need for a solution. We tried to be a step ahead of that and be very somatic. And so that’s, that’s just the way, I’ve certainly always tried to do the job. And that’s how we do it at unusual.

31:04
I think it was Steve Blank on the program that said, you know, staying close to customers, if you do it really well, you end up looking like a blur to the competition, you know, the more CISOs or CIOs or whoever your customer set is that you’re engaged with on a regular basis, probably the more more likely it is you’re going to understand their needs. How about things that don’t work out? Is there a common theme in failed investments that you’ve observed? John?

31:32
Yeah, this might be a little counterintuitive, right. So I used to hear largely because of Steve Blank, or even lean startup, you know, Eric Ries that stay close to the customer. You know, you got to talk to 50 to 100 customers. That’s how you’ll figure out what to build. Right? And then there’s, you know, obviously, the Henry Ford quote about well, customers will tell you to build a faster horse. Right? Yeah, right. You also have to be a visionary. So there’s right there’s this balance, like kind of chicken and egg, right. So the thing that surprised me, and it’s been, you know, real learning is, if I think back to all the companies and and there are a lot that I have seen fail over the years, I can honestly tell you, Nick, very few, if any, failed, because they didn’t talk to 50 or 100 customers. But that’s not the that’s not what causes them to fail. Because in the fail was that they talked to those customers, and they couldn’t discern between who was desperate. And who was just intellectually curious. That takes judgment, right? Founders want to believe that what they’re building is the antidote for everybody’s pain. And sometimes they believe it so much, they actually don’t really ask the right questions, they don’t really listen to the feedback in a way that would help them make decisions. And so so often, they build something that people weren’t really desperate for. But just, it was a nice to have. So they went through the whole process that’s prescribed in the lean startup or in Four Steps to the Epiphany, you know, those books, but it was the it was the judgment around knowing where there was real pain. And where it was, Oh, that was great. Let’s keep talking. Very interesting. Right? So it’s such a subtle thing, but it can make all the difference. It does make all the difference between success and failure ultimately,

33:22
is listening a skill that you try and assess for when you’re working with founders.

33:28
We ask them point blank, like, are you coachable? Do you have the humility, to learn to listen, you know, it’s, it’s 80% dogmatic and 20%, pragmatic, right? Nobody hits the bull’s eye with their idea right out of the gate? Impossible. So you have to have a vision, but then you have to adjust incrementally to what the markets telling you. That’s the hard part. It’s a seed phase. So we really do get a sense of that throughout the pitch process. And it’s talking to founders about their ideas.

34:01
What do you think are maybe best practices on the founder side when they’re selecting a VC?

34:09
I mean, number one is references. Yep. You know, you got to talk to people about what it was really like both into good and not, didn’t work out. So well. case about how it was to engage, you know, with this investor, how active were they? Right, you know, if you’re really looking for help, you know, the VCs are incredibly good salespeople. You even know this, Nick, they’re, they’re articulate, typically, they’re very smart. Typically, I mean, not always, right. But, but they’re good at telling, you know, telling you why they’re gonna be helpful and when they’re ready. They’re amazing. Yeah, it’s amazing, right? Go to Demo Day these days. Flooded with a room. You know, right. Like every single industry, doctors, lawyers, you name it like counting. There’s a normal distribution curve. Right. There are some investors who are in the one It’s just the reality, right and right, something as serious as this, you don’t want the average, you don’t want your heart surgeon to be average, you shouldn’t want your VC to be average, either good you want, the better, you want the best. This is life or death for you and your company. So you got to do your homework, right? Call around, see how much they help see what they’re like, spend time with them. I think these rushed investments, you know, it just doesn’t make any sense to me. Right? It’s harder to get an investor off your cap table than it is probably to get divorced, you know, from a marriage. So why do people go so fast?

35:37
Yeah, references are key, that’s this founder yesterday asked me, you know, for references, and I give her a list. And she said, Well, which ones and I said, any of them reach out to anybody on that list? I don’t care who and she’s like, okay,

35:50
good for you, Nick. Yeah, I mean, that’s how it should be.

35:53
Well, hopefully, you know, hopefully, the feedback is positive. But I feel like, feel like we’re in good shape at this point. So let’s talk a bit more about unusual, we kind of jumped into a variety of of good topics here. But tell me about this academy that you run as well as the get ahead platform, you know, what are those and what’s the difference between the two.

36:16
So unusual Academy is something that we think is a very time efficient way for founders to learn from essentially what we call master practitioners, people who are exceptional in their craft. And so we took the seven most difficult challenges that a seed stage founder has to overcome, both in a, you know, an enterprise oriented business and a consumer oriented business. And we went and got the best people we knew in Silicon Valley and actually beyond, to come and talk about a very specific case, you know, that they were they overcame that, that obstacle, right, they learned that superpower. And that’s part of the workshops that we do. And then the other part of the workshops are to take the process that they followed, and apply it to the company that you’re working on as a founder. And then you have to teach your decisions to the rest of your, your group. It’s a small group. So it’s very much a See One, Do one teach one kind of approach. You know, I think we learned in life through suffering at the Catholic in me, I guess. And you got to learn these things by doing. And by, you know, really pushing yourself. Yeah. But you also need to learn from very credible people who have been there and done it before, and who are also good at explaining what they did. Right? Sometimes you get, you know, amazing people. And they’re like, Well, how do you? How do you throw it 99, like, I don’t know, I just kind of take my arm, that’s not going to help a founder, right? You, you have to take the material and really break it down for them in a way that they can absorb and then apply and digest. And so we do

37:51
that. That’s like a series of workshops or lectures on.

37:55
Right, it’s available to 20 or 30. founding teams per year. So it has to be small, Nick, because our personal belief is this kind of teaching this kind of help. It doesn’t scale. Venture capital does not scale, I believe that through and through. Every founders journey is unique, it’s bespoke. So should that feedback and help this idea that you can peanut butter startup held to 200 founders at a time, I find it a bit nonsense, right? Because everybody’s journey is different. So it’s not meant to scale right? And then so we customize it. And then the gap platform, or the thing we call the get ahead platform got God created that, you know, he said, If I’m the seed stage founder, what do I need the most help with? So we don’t just give advice like we actually do with the companies. So we hired the best salesperson, the best marketing person and the best technical recruiter, because we think those are the things that you need the most help with as a founder, and they become a part of your team. So when we make a full investment, and they become a full portfolio company, we make the Godhead platform available to those founders.

39:01
And the unusual Academy is that open to non portfolio companies, you mentioned 20 to 30 a year, I can’t imagine you’re you’re investing at that pace.

39:11
That’s correct. So we run an application process, we just finished one. And so we’re starting our third, we call it the gamma cohort, this fall, and there’ll be about 17 founders, seven consumer 10 enterprise teams that participate in it. And so we don’t necessarily invest in those companies that we want them to come and experience the academy to, to feel what it’s like to work with us. And then some of them actually become portfolio companies after the fact.

39:37
If I’m a founder, what, what’s my profile? You know, if I’m considering applying for unusual sort of what stage and what team size and level of progress?

39:50
Yeah, we have people that are when they apply, they haven’t even left your job yet. It’s the sole founder or two founders working together on an idea and they want to come and learn About finding product market fit, hiring your first 10 people and setting your culture, early fundraising. How do you sell, right? Get going. So they want to come learn from Andy Rackleff. Right, the founder of benchmark, the CEO of Wealthfront. They want to learn from Adam Grant, right? Who wrote give and take wrote originals, right? They want to learn from Joe T, he comes in, he talks about the early days of harness and AppDynamics. And it’s very hands on, right. It’s very small, like little tables working for our sessions. And so it’s usually people in the idea stage, or maybe they’re six or 12 months down the road. And they’re realizing that some of this stuff is just really hard. And so maybe they raise from five or 10 Angels, a lot of that going around these days. Right, big syndicates. The problem with that is nobody has enough of a vested interest to really help the founders. A lot of the seed stage strategy is spray and pray. Right? It’s, it’s playing roulette. Yep. Which is great for the firm’s because business model, right, they get they get all they need is one that works. And they’re talking about it at their cocktail parties. But what about all the founders who need actual help? That model doesn’t work? Well, so that, you know, they often apply to the academy, and they’ve raised some quality folks, but they’re just not getting enough help. real help. You’re getting advice, but no one’s rolling up their sleeves, you know, getting in the foxhole with them. And that’s that’s our model. Love it.

41:21
And is it like an accelerator? Is there an equity exchange in an investment?

41:27
No, no, no, not at all. I mean, you come and do the academy? That’s, I mean, I don’t I think those accelerator programs, frankly, take a too big of a tax on the really good companies. Right? They give up way too much of their company than they should. Now it’s a good business model. Right? If you do hundreds of companies a year and you own 7% of all of them. I mean, you don’t you don’t really care, most of them don’t work. We just have a totally different approach. Right? It’s like, no, we want to care. This doesn’t scale. We work with a select few. And we dive in more deeply. And it’s not an indictment of anyone else’s model. I want to be clear, it’s just, we don’t think it’s, it’s the best one. Not, it’s not what’s best for founders. And that was our promise, when we started unusual, we would always put the founders first. What do they need most? That is at the center of the ethos of unusual?

42:13
Yeah, I mean, I’ve, I’ve debated at length on accelerators with with a variety of folks. And we’ve had some really good ones on the program, you know, David Cohen, from TechStars. And in David Brown, and, you know, I was talking to a couple years ago with an angel about Paul Graham and yc. And they do amazing things there. But the angel was telling me, you know, you shouldn’t be price sensitive, because Paul Graham says, regardless of the company, you know, you should you should invest, regardless of the valuation, it’s more about getting in. And, you know, I was kinda like, well, this is also the guy that has invested in hundreds of companies at very, very low valuations getting 7% equity. Are you going to listen to what he says? Are you going to look at what he does?

42:57
I think it’s a very good one. Y Combinator has a very good business model. I’m not as convinced that as it’s grown, it’s actually what’s best for certain founders.

43:11
Well, I love this unusual Academy concept. And actually, we just did a little angel round into a space tech company. And you know, I’d love to send it your way. The founders is very special. But yeah, let’s let’s transition on talk a bit about the state of the seed market. You know, I’ve noticed over the past year or so the percentage of VC dollars is declining quite a bit at the early stages, I think is the lowest level, or it’s at the lowest levels that the industry has seen in the past five years. Why do you think this is the case? John?

43:41
Well, I mean, I think a couple of reasons. One is companies have stayed private longer, that you can make a lot of money as an investor doing growth stage investing, right is those gains that used to happen in the public market, because companies went public after your seven or your eight, they’re now being pushed off your 1011 12. And we’re talking about hundreds of millions, or billions in some cases of value creation that happens in that window. And so, you know, investors, look, there’s two kinds of VCs at heart, right? There’s a private company investors, and then there’s the company builders. So if your bias and and I’m not saying one’s better than the other, I’m just saying you have to be clear about that. Right. And so, private company investors are money managers, that’s their job. And so if you can make a multiple on a 50, or $100 million check, and that’s what gets you out of bed in the morning. That’s the opportunity. So I think the focus has really shifted, because that’s what’s changed in the in sort of the macro ecosystem of private companies. The second thing is interest rates have been really low for the last, you know, couple of decades. And so, you know, investors have flooded to VC funds, which is part of the reason they’ve become so big in terms of assets under management. And so when you have all those assets under management, look, you’re Not gonna raise a billion dollars and write $205 million check? No, right? It’s not gonna, it doesn’t make sense. So they have to write bigger checks, which causes them to focus again on later stage companies, because they don’t want to take as much risk. But those bigger checks. Yeah, later the seed market has changed dramatically as a result of those two things.

45:21
urgency to deploy lots of capital, right, as these funds get bigger and bigger, they gotta mandate they gotta, they gotta deploy it. And they have their deployment periods. And to your point, you know, the, the motivations can shift. I’m not saying in all cases they do, but they certainly can shift to, you know, Aum and management fees instead of carry.

45:42
I mean, look at hopefully, the VCs are so aligned with founders, and when the founders when the VCs when, but you do have to scratch your head a little bit, you know, if a VC fund makes a 2%, or two and a half percent annual management fee, they collect that for 10 years, on a billion or billions of dollars. You can do the math, right? Whether the investments work out well or not, the VCs are gonna, they’re gonna do very well.

46:06
Yeah, you know, you’ve said in the past that the biggest mistake founder can make is taking an investment from a mega fund. Why?

46:13
at the seed stage? Oh, right. It’s what we’re talking about right. Now, I think there’s mega funds are great. For the next phase for actually, for multiple stages, Series A, B, C, it’s actually there’s huge advantages to that, right, they can invest through multiple rounds. They’re consistent, you know, they, they know the company? Well, I think it’s great for founders. I’m just saying specifically at the seed stage, sure, where your energies are not aligned, right, because they can’t spend a bunch of time with you, when you need the most help. We also think it’s the hardest phase. So back to our specialization thread, right? Like, take a VC, who I know that the self serving, but it doesn’t have to be us, but take a VC who’s very focused on helping you with the seed phase, then all those mega funds will be waiting for you hit hit your traction milestone, and you can have a nice competitive process.

47:09
Right, right. Well, while we’re talking about VCs in these funds, how about some thoughts on the LP side? Do you have any examples of unintended consequences or challenges that, you know, certain types of LPs behind a VC fund can can present? Yeah, I mean, this

47:25
was a hot topic last year, right, that we were on the record about regarding, you know, number one, there’s, at a minimum, there should be more transparency? Yep. Right. And we should all know, as founders, who the VCs are taking money from and who I’m making money for. It’s unfortunately not transparent. And we think there should be more of that. Now, secondarily, there were some questions about large sovereign wealth. And, you know, I think some investors with maybe some would argue questionable human rights stances and things like that. I’d rather people can make up their own mind that that gets into politics and religion, you know, that’s, that’s not for us to weigh in on. But at a minimum, the transparency should be there so that founders should ask, Hey, where does your money come from? Like, who am I, who we all working for? Because as a founder, you should care? Yeah. Yeah. I don’t know. Do you have a point of view on that? I’d be curious what you think?

48:21
I’m not far. I mean, I’ve got 40 LPs, but no squeaky wheels, really good sort of supportive folks. But most of these are family offices, high net worth, I haven’t gotten far along enough yet to have my own experience with how that can affect either, you know, my own portfolio companies, or, let’s say one of my portfolio companies raises capital from from somebody that has taken on LP money from spurious sources. So I don’t have personal experience. So it’s hard for me to win.

48:51
Yeah, I mean, we, we were in the fortunate position that we when we started unusual, because of our track records. We could be, be choosy, I recognize that. And, for us, it mattered, right? We wanted to work for children’s hospitals, research foundations, nonprofit endowments, you know, we deliberately went after some of the historically black colleges United Negro College Fund. And everybody unusual, even our in our founders care very much about this. You know, if you come to the office, you’ll see the pictures of the hospitals and the pennants from the schools, and we want to drive wealth creation back to causes that matter. Sure. It’s one of the things we hope we put pressure on the industry to do more of that.

49:32
Certainly from that standpoint, I couldn’t agree more. John, if we could cover any topic here on the program, What topic do you think should be addressed? And who would you like to hear speak about it?

49:42
You know, I think it would be very interesting to talk to founders who are multiple repeat founders, about just what’s just what’s changed in the last 510 years. I mean, it’s so different, right? The funding environment, the selling environment, right? The hiring environment. You know, I think for your users, your listeners, right, like just saying, you know, hearing that firsthand perspective talking about it, I’m a huge student of startups, like, I think it’s part of the best one of the best parts of the job. And so I would, you know, I would encourage you to think about founders who can who have that kind of perspective, and it’s hard because a lot of them, if they’re successful, they don’t do it, they don’t do something else. There’s no repeat act. It’s a little bit of a plug, but I would definitely give, you know, I would encourage you to have Jyoti Fonzo on the program, because I think he’s going to be the only, you know, question mark, but I can’t think of many founders and enterprise or enterprise technology, who’s gonna have like, two, maybe three, you know, multibillion dollar company. And so he’s building harness now. And I think his perspective on just starting a company A decade ago, and building one now would be really valuable. Love it.

50:50
John, what’s the one thing you know, you need to get better at

50:55
balance? Next? That’s all well, you know, like, my dad got sick. When I was a kid, we got to a mess. I swore when I do did this job. I would not. Not, you know, miss out on my kids. I’m with my wife. Right? These things, you know, my face, these things are so important to me. So it’s an all in Job, right? This idea that you could have lived a balanced life as a VC is, is nonsense, right? It’s like an Olympian telling you, hey, I need to be more balanced. Like, no, that’s, that’s the deal, right? Like, it’s a hard all in job. And at the same time, you can never lose sight of like what matters most, which is the people you love and who love you and your life. So I just always need to like, make sure that that’s the center, and I’m doing the best I can.

51:41
What investor has influenced you most? Oh, that’s an

51:45
easy one. Andy Rackleff. I am so blessed to have you been my wife. You know, he, he was my teacher back at Stanford Business School in 2004. And is the founder of benchmark is the founder and CEO of Wealthfront. You know, as a true teacher, and like just amazing human. He’s, he’s, he’s changed my life for the better in so many ways.

52:03
And finally, John, what’s the best way for listeners to connect with you?

52:08
unusual.vc And check us out.

52:11
There you go. He is John Fiona’s John. This is probably the most fun conversation podcast. regular conversation aside, probably the most fun conversation I’ve had in this year. I really enjoyed it. I’m glad you got some Chicago ties. I hope you’re paying me when you’re in town and can’t wait for the next one. All

52:30
right, brother. Thanks, Nick. Really appreciate you having me.

52:37
That will wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet.net And until next time, remember to over prepare, choose carefully and invest confidently thanks for joining us