207. Breaking Convention, Hitting The Fundraise Wall & Why Deep-tech Is Not More Capital Intensive Than Software (Ryan Gembala)

207. Breaking Convention, Hitting The Fundraise Wall & Why Deep-tech Is Not More Capital Intensive Than Software (Ryan Gembala)
Nick Moran Angel List

Ryan Gembala of Pathbreaker Ventures joins Nick to discuss Breaking Convention, Hitting The Fundraise Wall & Why Deep-tech Is Not More Capital Intensive Than Software. In this episode, we cover:

  • Backstory/Path to Venture
  • Talk about your time at Facebook and working in M&A.
  • What’s the thesis at Pathbreaker?
  • How do you define pre-seed?
  • Most of your dealflow inbound or outbound?
  • Quote from the website: “We don’t believe all great companies, nor all phenomenal investments, look the same early on. So we are flexible, realistic, and patient – solving for supporting the founders best-suited for tackling the most meaningful problems.” I’m curious, what are the must-haves that cut across all investments that you do?  
  • You’ve said to me that hardware isn’t more capital intensive than software.  As a hardware investor myself, that was refreshing to hear but I’m sure there are many founders and investors that would strongly disagree.  Why is not more capital intensive?
  • Do you think the time horizon to exit is longer?
  • We’ve all been in this situation where founders hit a wall — they’re running out of money, having a hard time telling your story, investors aren’t pulling the trigger to invest, there are team challenges, maybe trouble converting from pilots to licenses… Give us examples of how you dig in and help when it gets tough.
  • We’ve seen some recent failures or, at least, setbacks in the automation/robotics space.  High profile companies like Zume pizza and CafeX have had significant challenges… what’s your take on where these companies went wrong?
  • What’s your POV on robotics investing and the types of opportunities that are going to be successful?
  • Just speaking to Kane Hsieh at Root about the effect of automation, robotics on jobs… what’s your stance on the impact of these technologies on employment?
  • You’ve had a number of Series A’s just here in the past couple of weeks… seems like every time we connect you are dealing w/ a number of up-rounds at A and B.  Clearly something is working so congrats on the early success.  Talk to me a bit about how hard it is to raise a Series A?
  • Different types of companies have to achieve different milestones/benchmarks to raise and A but have you seen any common traction levels or standards to successfully close an A round?
  • For founders that are considering M&A and maybe some options are emerging for exit… what advice would you have?

Guest Links:

Key Takeaways:

  1. Two important pieces of the startup life cycle are, building funding and achieving liquidity. Ryan states that 90% of the liquidity piece happens through M&A.
  2. During his time working in M&A at Facebook, Ryan got a chance to work on the Oculus acquisition, helped lead deals and secure product design in terms of function. He also spent a lot of time thinking and learning about the future of AI, machine learning, computer vision, VR, AR, etc.
  3. We’re living in a period of human history, unlike anything that the world has seen before. We now have a collection of technologies that historically were not possible because of the lack of data, infrastructure and components at a price that made sense.
  4. At Pathbreaker, they look for highly specialized people that are experts in their field, dedicated to solving really challenging problems. People that are trying to swing really big, and create an impact across future generations.
  5. The most challenging or even narrowly defined problems that exist today, with the ability to change the way the world works, tend to attract the most talented people.
  6. At Pathbreaker, they typically invest early, in the pre-seed or seed stages, and believe that great companies can be built anywhere.
  7. It doesn’t have to be a robotics or AI company for Pathbreaker to get involved. Startups that are world-class at what they do, with a product that’s an order of magnitude differentiated and better than what exists today, are the types of companies that truly excite them.
  8. The one commonality that cuts across every company in the Pathbreaker portfolio is a depth and obsession with the relationship between the people and the problem they’re going to solve.
  9. Ryan believes that hardware isn’t necessarily more capital intensive than software. What he’s seen is non-diluted means of capital will start to emerge. Whether it’s venture debt or more traditional types of debt, because you have enterprise customer contracts and also collateral that starts to unlock non-dilutive mechanisms of funding.
  10. Ryan advises founders to not spend any time thinking about acquirers, instead focus on creating differentiated value both in your team and your products. With that, options will emerge over time, sometimes even sooner than later.
  11. Often, if a company struggles in what seems like a great market, there can be any number of things that went wrong such as, lack of enough customer discovery, execution challenges, black swans, or interpersonal dynamics.
  12. In 2019 Pathbreaker had 12 portfolio companies that raised their Series A’s and B’s. So far in 2020, they’ve had 5 companies that are either close or have signed terms sheets for Series A.
  13. When things get tough, what founders really appreciate is calm, encouragement and conviction. Just reminding founders that it’s okay for part of their story to include some incredibly hard times and every massive company that you read about in the news, went through something similar.

Transcribed with AI:

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

Welcome back to TFR today Ryan Gembala joins us Ryan is the founder and managing partner at PATH breaker ventures which invests in early stage companies building unique technology and IP in emerging areas of computing. In today’s interview, we discuss Ryan’s work in m&a at Facebook. The unique approach at PATH breaker, the must haves that Ryan is looking for in investments, why hardware is not more capital intensive than software. His take on high profile setbacks in the automation space, the current challenges to raising a Series A in 2020. The common benchmarks required for companies to raise in a round how Ryan digs in with companies when it really gets tough. And we finish up with some advice that Ryan has for founders. Here’s the interview with Ryan gimble of path breaker ventures.

Ryan Gemballa joins us today from San Francisco. Ryan is the Founder and Managing Partner of path breaker ventures path breaker is a Silicon Valley based venture firm with investments in diligent robotics apprenti just acquired by McDonald’s and edify among others. Ryan began his career as a social entrepreneur bootstrapping and CO founding hero for children. The first nonprofit focused on quality of life care for children affected by HIV and AIDS. Prior to path breaker, Ryan served as the corporate development deal lead at Facebook, where he was involved in the acquisitions of Oculus private Corp live rail t han lacks in nimble VR. Additionally, he worked in investing and operating roles at Azure capital and was VP of Business Development and partnerships at tele Ryan. Welcome to the program.

Thanks for having me, Nick.

That was a mouthful. So give us your version, you know, what’s the backstory and path to venture?

Sure, I’ve always been a builder and started building with a mission in mind, I’ve always been interested in those that have managed to make the world dramatically better in their time that they’re here. And for me that started in in undergrad, I was involved in a nonprofit that did international work exchange, I worked abroad in Spain and Italy, was really interested in foreign language and ended up taking that entrepreneurial experience. And it gave me confidence to be a social entrepreneur out of undergrad, I teamed up with a co founder and we decided to take some international volunteer work that we had done abroad, and channel those learnings into building a nonprofit. We grew up in Atlanta, Georgia. And we moved back in I’m back home with mom and dad drove my 89 Buick and started a nonprofit called Kiva for children. And it was bootstrapped. We started with zero, we built it over the course of five years full time, built into a million in revenue, a staff of 10 and went to the private sector and raise capital to identify and shape and create programs that would connect volunteers from the community, with children infected and affected by HIV, and give them tools and a set of experiences that could help kids and adolescents and young adults deal with the emotional, social, educational, financial challenges that HIV and AIDS creates or worsens in their lives. And that experience was tremendously impactful on me, and I think got a lot of people that got involved. And we you know, from a business perspective, it it showed me how powerful the relationship between capital and ideas is. And this notion that through the course of relationship building, or people connecting with a mission and a strategy, we could raise up 10,000 or $100,000 that would literally change the lives of hundreds of kids. So I wanted to understand that piece of startup creation and building from a more quantitative and analytical perspective. And so I went from hero to business school, and went to the University of Chicago Booth School of Business to, you know, entirely focus on learning the other side, sort of the next side of their capital, the company creation equation, if you will, in venture capital, and that was my chance to really dive deep. And I spent two years in business school, learning as much as I could about venture capital studying under great professors like Steve Kaplan and Scott Meadow, who showed both sort of operating and research lenses of venture and got a chance to do some hands on venture and apprentice. This in start learning seed investing while I was in school. And that was with an angel network called Hyde Park angels that you I think know in Chicago Oh, yeah, very well, that was really my foot in the door and venture, it was, you know, a chance to model term sheets and build cap tables in a very safe environment and work across, you know, 4050 different angel investors and sort of take my operating background and merge it with this lens of why companies could get funded and what attributes investors are trying to find. And that turned into a sort of a good story to tell to Silicon Valley venture firms. I landed an internship out here with now a 20 year old venture firm called Azure capital. And that went well into a full time role. And that’s what moves me West. I’d never been to the Bay Area until Business School. And a year after visiting for the first time, we moved here full time, and I’ve been here now going on, going on 10 years. Very

good. Yeah, we know, we know the Booth School. Well, we’ve got some interns from booth, you know, you should try and get back for the New Venture Challenge the NVC, there’s a lot of good, good early stage startups coming through that program.

Absolutely. So I’ll be back actually, for my 10 year, business school reunion this spring. So

there you go. Right. So hero for children was that international or domestic? focused

in Atlanta originally, and then we now serve kids, six or seven cities across and six or seven states outside of Georgia. So we operate a cam still on the board going on 17 years now of continuous operations, and some great college students that are involved at the University of Georgia and Georgia Tech. And we bring kids together through mentoring programs, quality of life, and life skills programs year round, and we operate the only camp for kids affected by HIV in the southeast called Camp High five.

Wow, awesome. So Ryan, were there any similarities are on the fundraising side in the nonprofit spaces, as you’ve witnessed or experienced in venture?

For sure, I think, you know, as I was raising money for here, I got to interact and raise money from venture capitalists and in tech ventures, and that was really my first exposure to the word. And one of my mentors sort of guided me toward venture and said, Look, you you’ve been raising money and matching with, you know, a business and very specific business goals in the context of nonprofit. But that’s not that dissimilar from what a venture capitalist does. And so I think that that’s definitely true that my comfort with fundraising certainly shows up as we work with founders that we support. And we’ll dig in and make lots of intros. And we’ll see that is where VCs can really help a lot, especially first time founders that may maybe have built products and run large teams at large public companies, or been in academia building, cutting edge research, but haven’t ever put those together in the form of a startup and need some assistance in both relationships and process. So I do think that early education in fundraising on the ground helps in how we partner with founders, it gives me a lot of, I think, empathy, for how difficult that process is, certainly, as a GP now, you know, you have exposure to the fundraising side as well. But when you’ve got, as a startup, you’ve got customers, you’ve got lots of employees, lots of lots of people, depending on you. It’s a heavy load to come out and just pound up and down San Francisco or, or Sand Hill Road, raising capital, it takes its toll. So I think we definitely have helped our founders raise fine their series A leads, find their seed leads, stepped up when things get tough, and they need some additional capital or need to be creative on how they raise capital. And I haven’t thought about it this way before. But I do think probably that early education in the ups and downs of fundraising is has helped.

Awesome. So I used to work in m&a, I worked for a conglomerate called Danaher, before I got into venture investing. And I know there’s there’s only so much that can be said about, you know, the details of of deals and whatnot that you worked on. But can you talk a bit about your time at Facebook, working in m&a? Sure,

sure. So I moved to Silicon Valley in September 2010. And spent three and a half years doing series AMD venture capital investing for coal, natural capital. And part of that time was operating in the portfolio. And so after nonprofit entrepreneurship, and business school doing seed investing, I had a chance to hit the ground running and source a lot of deals, work with a lot of great founders and put capital work and then jump into the portfolio and operate closer to product and engineering, and had been building relationships with large public tech companies and soon to be public companies. And Facebook was I was one of those companies that, you know, there were a lot of great people going there that I had gotten a chance to meet. And we’ve always been really passionate about Facebook’s mission of connecting, making the world more open and connected. I do believe that’s, that’s ultimately a very positive thing. When I had done two stints in portfolio companies and done some investing in Azure, the opportunity emerged to sort of step outside the umbrella of the firm and join the corporate development team at Facebook as a deal late. And that was a part of the spectrum of this process. That is fascinating. It’s, it’s, I think, the most opaque the way I think about the this lifecycle is building funding, achieving liquidity and the liquidity piece 90% of it happens through m&a. And yet, you know, for a lot of very good reasons, it’s, it’s not super clear why certain acquisitions happen and why others that might seem obvious don’t. And so that interest in the role coupled with being very passionate about Facebook’s mission led me to join and I spent time in a role that’s a very horizontal roll in court, I don’t know, certain companies cut those different ways. But you know, here in the Valley, it’s not uncommon for deal leads on a corporate development team to work across a variety of product and engineering organizations within a company and the needs, you know, throttle up and down over time. And it’s a role that requires a lot of listening, and analysis, and at times, deal execution. But most of it is spending, you’re getting a sense for an understanding the company’s strategy, spending time with product and engineering organizations listening to their goals and roadmaps. And then trying to build a landscape to understand who might be working on these areas in the context or the startup or academia, and seeing if, you know, there may be some synergies to explore that, ultimately, you know, can be surfaced through opportunities, perhaps can be surfaced through a build by partner analysis, where you might evaluate a variety of startups and then sort of also evaluate the cost and time to build internally or to partner to achieve a similar objective. And that was a great deal of the work and fascinating to get a sense of both sort of Facebook’s view of the future relative to what entrepreneurs thought the future should look like. And then certain acquisitions, I got a chance to work on included, Oculus, spent some time on the library on acquisition and help lead deals in security and product design. In terms of function, you know that there was a period of time in 2014 2015, where Facebook and others were really starting to invest in learn more about emerging areas of computer science. So I spent a lot of my time thinking about and learning about what could be possible with AI and machine learning, computer vision and VR, AR, etc. Awesome.

Yeah. So quickly, can you touch on the the thesis at PATH breaker?

Sure, path breaker. You know, I think the fundamental belief of the firm of why I thought the time was right to go start this firm in this way, is that we’re I believe we’re living in a period of human history, unlike anything that the world has seen before. There are a collection of technologies that historically were not possible. They were science fiction, because there was a lack of data and compute, and infrastructure and components at a price that made sense that you could then take into products that it historically it wasn’t possible. But over the past two, three decades, the sedimentary layers were laid to unlock a lot of these technologies. So you know, internet connectivity in the 90s, smartphone, and in the late 2000s, and early teens, really drove supply chains and component costs way down, compute way up and data exploded. And so these areas like artificial intelligence, robotics, computer vision sensors, VR, AR, could escape the lab, if you will, and could be productized to solve real business problems. So the thesis is a path breaker was to find highly specialized people that were experts in their field, whether it’s you building something at a large company, or or at a university that had a very specific product thesis, for integrating those technologies to solve a really challenging problem, whether that was in the enterprise or the consumer, I’m agnostic, but we’re, we’re looking for people that are trying to swing really big, not building incrementally valuable things, but if they’re successful, they’ll be impactful across future generations.

I love it. I often find myself Have cringing when I hear other investors say, oh, though, that problem is too hard. Those are the things that I I’m just drawn to, like, the harder the problem, the better just give me, you know, give me a world class team working on it, because those are going to be the most transformational technologies. And I would imagine, you know, great returns will accrue to the investor as well, if, if those are figured out. Now, of course, the failure rates might be, might be higher, or, or might not be higher and really difficult problems, you know, if you’re, if you’re really supporting the best people, you know, to go after those and figure them out.

I completely agree with you, I think, you know, it’s, it’s really interesting, if you talk to engineers, and they’re evaluating, you know, going to work for a phenomenal public company like Google, Apple, Amazon, Facebook, and they’re considering joining a startup difficulty of problem that they would get to work on is a key criteria. Right? founders, you know, in startups at the earliest days, you know, they’re, they’re tackling some robotic implementation, or they’re thinking about Opto, electronic computing, or DNA storage and compute, you know, these are step function changes in the way the world will work. And even if it’s, you know, a more narrowly defined problem that exists today, like auto stocks on shelves, or inefficiencies in farming, or some supply system, you know, those those intellectual problems, the harder they are, you know, I have found that they tend to attract really, really talented people.

It’s an amazing insight. I mean, it’s so true to like, I think about the the most ambitious startups that we’re working in, they just seem like amazing talent, engineers, BD, you know, customer success, you name it, but amazing talent is just drawn to them. So and then, you know, stage checks as geo focus for you guys.

Sure, I believe great companies can be built anywhere and won’t necessarily look the same way when they come into my office, or we get a chance to meet them. So I maintain flexibility. But at the same time, we know we’re looking for So writing a 250 to $500,000 Check initially, very happy to be first money and don’t have to be we’re focused on deep technology implementations and or deep people. So doesn’t have to be a robotics or AI company for us to get involved. You know, if you’re world class at what you do, and your product is an order of magnitude differentiated and better than what exists today, you know, those are products and the types of companies that will get us excited. So you know, the terms move around and what they mean, but precede and seed is the stage that probably most aptly described when we invest.

You know, I came across this quote on your website, it states we don’t believe all great companies, nor all phenomenal investments look the same early on. So we’re flexible, realistic, impatient, solving for supporting the founders best suited for tackling the most meaningful problems. I’m curious, are there some commonalities that cut across all your investments? Or are there any must haves that, you know, you look for that have to be present for you to really engage? I

think commonalities would the one common thing you’d see across every portfolio company is this depth and obsession in the relationship between the people and the problem, they’re going to solve a company like locks for example, that Excel lead, they’re a and they announced a large series B last year, we invested at the seed in 2016. And this team is a video engineering team that’s building a set of video engineering tools. And they have lived in breed video video engineering API’s transcoding services, data services for their entire lives, they built a company called Zencoder, which was acquired by bright Cove, they spent years at Bright Cove rising to directors and VP level, and then left to build essentially a video specific AWS, if you will, over time. And you’re talking to John and the MCSE. Team, it’s just so clear that if anyone is going to solve this problem, it’s going to be them. They understand it in great depth. They can therefore establish a lot of trust with potential customers, they when they’re pitching great engineers, leaving YouTube or Facebook or other other places are just great people work from wherever they come. Immediately, you can see that this is a special team that is going to be able to tackle these really hard problems that is common. Superhuman is the same way we were an early investor in superhuman batch back in March of 2016. And Rahul and team have been in email and messaging and plugins for their whole careers. Role started reporting which was beautiful One plugin that surfaced a bunch of great content when you were sending an email and was acquired by LinkedIn was focused on email products and communication tools at LinkedIn and decided to take a swing at solving building the world’s fastest email tool for professionals and power email users. You know, not not necessarily robotic or AI implementations are what we look for, we look for, you know, just depth of person that’s going after something that might to others might either seem like a niche and really hard or a massive problem, and really hard. What would

you say most of your deal flow is inbound or outbound.

I was looking at this data about half of our deal, the investments that we did across 35 investments were from other VCs. And I thought this is interesting. It’s about half of those were VCs that were investing in the deal, and introduced us to take a look at, I think they thought we could be a value added longer term partner for the company. And then the other half were VCs saying, you know, this isn’t a great fit for us. But we thought you might like it, maybe it’s hardware, maybe it’s too early. You know, the other half were deals that we did, but you know, building our own conviction, not necessarily piggybacking off of a round that was coming together. Some cases will lead those rounds and find investors to help founders streamline that process and complete the round. The other 40% of deals that we did were, you know, I would say sort of in this individual category, whether it’s founders and portfolio companies, or angel investors, LPs in the fund. And then the last 10% were accelerators, YC hacks, alchemist. I think we’re the three accelerators from which we invested. Cool. Outbound, I curious how you think about this. But, you know, one of the things I want to do more of is outbound deal flow. I think we, we know what we’re looking for. And you know, now that we’ve been in market for a few years, and I’ve had some great companies that we’ve been we’ve been able to work with, I think there’s there’s an opportunity to do more outbound. But what about you? How do you guys have this inbound versus outbound? Similar,

right, so the outbound part of our business we refer to as hunting, it’s less developed, right, we have a few strategies in place, we have a very lean team here. So we’ll get internship help. So like some booth MBAs will come in and one of our last one, Stefano, he put together an outbound hunting strategy and developed some deal flow inroads to some new markets for us, which was great, but we have not been as proactive there as we we should be. So you know, as I look across the portfolio, I think 80% Plus has been inbound related. So that’s a mix of, you know, you get deals from VCs, you get founders that reach out directly, because they’re listening to the show, or, you know, investors in the audience that are aware of startups in their region in their area, you know, we get a lot of inbound. So sorting through that has been the focus, at least, up until 2020. Interesting. So, Ryan, you know, you’ve, you’ve said to me that hardware isn’t more capital intensive and software. You know, I haven’t heard that before from another investor, like a lot of people complain about hardware in the capital intensity of it. I’ve had some notable VCs tell me, you know, years ago, this is many years ago, but tell me don’t invest in hardware, Nick, they’re all gonna go to zero. Of course, like, you know, my two lead horses in the portfolio right now are both hardware investments that have grown quite large. But, you know, it was refreshing to hear you say it, and I’m sure there are many founders and investors that would, you know, strongly disagree with your position. But why do you think it doesn’t have to be more capital intensive?

Yeah, a couple couple reasons. I think, first of all, what is capital intensity? So if it’s defined by amount of capital that a startup raises or quote, unquote, needs to raise? Gosh, there are lots of examples of software companies raising hundreds of millions of dollars in order to see scale or arguably take take scale and take market share. At the same time, you see hardware companies doing that, and then you see all flavors. So I think it really depends on time horizon and sector. My lens when I say that is I’m specifically thinking about robotics and enterprise robotics companies. So, you know, the seed rounds of today are typically somewhere between two and $5 million, at least out here in San Francisco and Silicon Valley, precedes being you know, from a few 100k, sort of to the one and one and a half million dollar range. And you can build first versions of enterprise robotics companies, you can build a batch of 10 to 15 to 20 robots to Depending on what they’re doing with arrays of that size, typically with an enterprise robot, you are informing its development closely with a customer. And you’re doing a lot of customer discovery. And so you’re building something for which there is a clear business problem. And you’re sort of doing it closely with the user, the end result ends up being, you know, a very high ROI, on the product itself, and payback period, because component costs and design tools and prototyping tools evolve to become more ubiquitous, and a lot cheaper use, you know, you can build a great piece of robotic enterprise hardware for, you know, between the range of a cost of a laptop to, you know, a small car on up to an expensive car. And from an ACV perspective, you know, the, the other side of that is, you know, 25k to 100k, per robot, type of ACV. And on. So, you know, you can, you can start generating revenue fairly quickly, you can do this with somewhere, but, you know, south of $5 million, which would keep you in that seat raise, and then what, what happens is, because you end up with, you know, now a lot of these deals are being structured as sort of robotics as a surface service deal. So is sort of the RAS acronym, if you will derive from SAP and it’s similar to SAS and, and what we’ve seen is non diluted means of capital will start to emerge. So whether it’s venture debt on up to more traditional types of debt, because you have Enterprise customer contracts, and also collateral. So you can start to unlock non dilutive mechanisms of funding that, you know, from a dilution standpoint as an investor can be sort of contributed to this, this idea that perhaps, you know, hardware companies don’t need to raise as much money as people historically thought, right? Do

you think that the time horizon to exit is longer for the type of companies that you invest in?

It’s a good question. You know, my my time and corp dev m&a, has taught me that it’s, it’s impossible to predict.

Oculus was what two years,

Oculus was about two to three years, you know, Facebook was not a likely acquire on paper for oculus at the time. And so you know, I’ve learned to and will guide founders this way is to really not spend any time thinking about acquires and for who might be the acquirer for your business, just focus on creating differentiated value, both in your team and your products, your IP, customers, data, etc. And if you do that options will emerge over time. Sometimes those options emerge early, Donald’s acquired one of our portfolio companies, apprentice a as they were building a conversational AI to automate interactions in the drive thru, which is where about 65% of QSR, quick service restaurant sales occurs, and customer partner relationship turned into more strategic conversations that resulted in an acquisition in about two and a half years, which was fast. So I don’t think it necessarily, you know, hardware or software dictates time horizon, the stars really have to align, you know, for an m&a event to occur more so on the side of the acquirer than on the startup. So in the, in the interim, in order to building optionality, you should just focus, in my opinion, focus on getting great people on your team solving those business problems and getting as much scale and traction as you can.

I was just talking to Kane Shay over at root about this. But we’ve seen some recent failures, or maybe not failures, but some setbacks in the automation and the robotics space. There’s been some high profile ones like zoom pizza and cafe x, what’s your take on where these companies went wrong?

Yeah, it’s, you know, it’s so hard. I I’m not an investor in those companies. So I don’t really know I believe in the, in the sectors. unambiguously, I think the macro micro trends around labor, absolutely point to tremendous opportunities to use automation and personalization in the value chain of food. So we’ve been really active in food, I think, made seven or eight investments, you know, from hardware or software. And so I think the, you know, the sector that they picked is fantastic. You know, it could be that the companies are just in periods of transition, right. So, there was a great blog post recently, maybe it was simile shot hastag. But some of our blog posts about startups are zigzags, not straight lines. And this is the key you know, that there have been lots of periods of transition in companies that we now think of as massive successes. So Netflix, you know, is had to navigate shipping DVDs and raising very few people wanted to invest in that Netflix early in their time as a company, Salesforce went through a big sort of uphill battle, both with fundraising and finding our way. So, you know, I don’t want to count zoom or cafe X out, I think they’re, they’re great, really interesting product companies and some really talented people. Often, you know, if a company does struggle in their integrate what seems like a great market, it’s, it’s perhaps not enough customer discovery, you know, execution challenges, Black Swans, interpersonal dynamics, it can be any number of things. Yeah. So that’s my view on it.

You know, Ryan, you’ve had a number of series A’s, you know, here in the past month, it seems like every, every time we connect here, you’re dealing with a lot of up rounds. So clearly something is working a path breaker, and I’m so happy for you. And you’re such a generous guy in general, that it’s, it’s, it’s really good to see that the thesis working, talk to me a bit about, you know, how hard it is for your portfolio companies to reach that Series A round, you know, that’s kind of like a major milestone for a lot of us, early stage investors pre seed and seed. Talk to me a bit about that reaching reaching the a round. Yeah,

we had 12 companies in 2019, raised series A’s and B’s Wow. And then we’ve had five so far this year already either closed or signed term sheets for series, as I said, this, it’s been exciting, you know, to sort of plant these seeds, if you will, and then see the company’s really grow into their thesis, just great execution on their part. But the bar is certainly higher, I think in for a couple of reasons, one, cheque sizes have gone up. So, you know, series A’s range from $5 million to $25 million, you know, the largest exercise, as you might expect, I think the bar goes up. Another dynamic here is that venture investors only do one and a half deals a year. And at the series A and B stage and some do more. But for their as firms have gotten bigger, they hire more partners and partners specialize. And if you’re investing over a three year fun cycle of deployment, you know, across the 10 partners, each partner does three deals, 30 portfolio companies, that’s a partner per deal per year. And so, you know, if a founder is going on to raise money, they’re one company of maybe 400, that the VC will meet that year, 1000, they’ll sort of tacitly look at. And so the bar is incredibly high. I think in that world, VCs want to make, you know, their investment in a company that looks like it’s going to work. And it’s, it looks like a sure thing well, and so they’ll they can afford to be patient at the series A and B and wait until the you know, the attributes come together in a way that matches what they’re looking for, to then pull the trigger and step up and lead they’re they’re big A or B. So I think those two dynamics are contributing to the bar being being pretty high to raise an ARB. Now,

you know, I’ve been in this situation, I imagine you have as well. But you know, founders had a wall, they’re running out of money, having a hard time telling the story. investors aren’t aren’t pulling the trigger. Maybe there’s some team challenges, maybe there’s challenges, you know, converting POCs, or pilots to licenses, give us some examples about how you have worked with and in digging in and help the portfolio companies when when it gets tough.

You know, I think my experience here helps in terms of having been an operator and a founder or living at home mom and dad to series A and B investor to you know, one of a handful of people doing acquisitions at Facebook, I’ve seen the cycle play out and the ups and downs. And so I’m a pretty steady person. And I think when things get hard, that what founders really appreciate is calm and encouragement, and sort of the ability to connect the dots and have the conviction to say it’s tough now. But every massive company that we read about in the news or as public stock, you can buy it at some point they went through something similar. And that’s absolutely true, unambiguously. So

multiple times, probably. Absolutely.

And so the I think reminding founders that it’s okay, that part of their story includes some incredibly hard times, and giving them sort of the freedom, the encouragement to to be okay with that. These are people that have typically won all their life. And so they’re not used to they’re not used to getting a bunch of nose 30 people telling them no, yeah, they don’t care company or their idea. They don’t have enough traction. I mean, yeah, it’s really tough, right? When an investor says no, it generally means there’s something is not enough. And that’s a hard concept. So what do I What do I do? I think, you know, I’m really encouraged and supported the founders that no one know or 30 knows doesn’t mean this is bad. And so we have a, I think, a great network of investors that we work with, and people that trust our lens. And when things get tough, I clear my calendar. And we’ll, you know, open up the spreadsheet of everyone that we like to work with. And we’ll make lots of intros. So, you know, to give you an example, that has happened across multiple portfolio companies, but this process is I’m sure you’ll relate, you know, a company goes out to raise a Series A, and there’s lots of interests, you know, they’re getting lots of great meetings, but nobody ultimately sticks their neck out to pull the trigger and lead the round. One company in particular was a month away from running out of capital, multiple companies in my portfolio have been months away from running out of capital. And, you know, in deep tech in these cutting edge areas of computer science, I think that’s not uncommon. And so, you know, clearing my calendar, I spent a week making 30 Very warm introductions, very personalized, introducing small funds, angels going to lunches, coffees, drinks, dinners with potential investors to follow up, we were able to quickly raise half a million dollars to let the company accelerate into this round. And they went from being, you know, a couple of weeks away from running out of money to being massively oversubscribed on a really large seed round that ultimately 16 months later became a massively oversubscribed series a nice, Andre is over $20 million, and is in a really great spot.

I’m curious, have you found any commonalities in like traction levels or milestones or benchmarks to successfully close that a round?

Yeah, I think this is such a hard question. You know, founders are trying to ask, and lots of data points, lots of opinions here. I don’t think there’s a set of criteria that unlocked today, it’s YC, just today published a guide to Series A, they have a series a program, and I was flipping through it. And I think they make this point nicely, which is it can be story or traction. And often, stories without traction can raise day. But traction without a story is harder. And I think that’s I think that’s very much true. You know, the types of founders we work with often have solved a really hard problem. Technically, they’ve made phenomenal progress on both an absolute and relative basis, building a robot that serves food without any human intervention, or detecting falls and eldercare without any human intervention, incredible technology. And yet, when they go out to raise, they’ll have these traction questions and then story questions. And I think that ultimately, you’re matching a one to $3 million ARR with a story of how that becomes a 500 million in ARR, that will likely get you your series A done, but a million to 3 million ARR with a story that goes to six to 10 to 15. Without sort of that compelling, overarching this is how we’re going to dominate the world. That’s that’s a lot harder series A to raise. The difference might seem subtle, but it often takes a lot of effort for companies to get comfortable talking in terms of global success, and hundreds of millions of dollars in revenue when they’re, they might be at one today. Interesting.

Any advice for founders that are considering m&a? And maybe, you know, for founders that have some options and are kind of approaching exit? Do you have any thoughts?

You know, I think they’re historically their advice has, I’ve heard advice given to founders that it’s important to avoid talking to corp dev and to play coy, and you don’t want to sell and that’s, that’s sort of the position you want to take to generate options. And I frankly, I think that’s bad advice. I think if you think about corporate development, and doing an acquisition, making an acquisition from a large public company, or any company is a risky endeavor, as you know, right, that it takes a lot of political capital to execute an acquisition internally, it’s expensive. The data around success rates of acquisitions, you know, isn’t great. And so if you combine all of those dynamics with a founding team that is being difficult to work with, and harder to get information from, you know, that that makes a deal much harder to execute. So what I advise founders to think about is to be collaborative, and focus on trying to understand if you’re aligned with a potential acquirer have a strategic discussions with them about what are they trying to build? How is that unique or different relative to what you’re trying to build? Could the combination of what you’re doing unlock extraordinary value together be the type of person that they They could see working in their company, a combative, coy individual might, you know, there’s there’s room for some of that in the in the depths of negotiation, for sure. But you know, when you’re in that initial phase of trying to generate options, it’s really important to be sort of seen as someone that would be great to work with. If you’re viewed that way, you’ll lower I think, the risk of a deal internally, which will likely help present an option. I think, you know, tactically, this is something, you know, we frankly, can bring the help with and bring an understanding to the process. We do this for our founders, if they’re presented with this option of acquisitions, but I would recommend working with just one or two people in your cap table, and keeping the fact that you’re having conversations about m&a Quiet, it’s very easy for leaks to, frankly, kill a deal. So ideally, you know, you have someone on your cap table, who has been a deal leading corporate development before that can be useful. But to sort of keep it tight, and be really open and collaborative without disclosing your secret sauce, or, you know, giving you giving your codebase over for review. I don’t recommend that. But if the acquisition happens, you’re going to be working together as the next chapter in your story for four years, let’s say. So it’s really important to see, to try to understand it beyond the monetary side of the acquisition, which your investors might be pushing you to mostly focus on, I think it’s important for founders to really evaluate, you know, are they going to achieve their objective content context of an acquisition, because it’s, well, you know, this is term, when I, when I joined the corp dev side, I learned that this term exit was actually problematic. So, you know, if founders start thinking about an acquisition as an exit, it can be, you know, it’s not an exit for the founders, right? The founders are now going to work inside the new acquire for the next, you know, three to two to four years, let’s say sometime. So it’s liquidity, for sure. But it’s an exit for your investors. But it’s really just a continuation, hopefully, of what you’ve been working on. Now with a lot more resources and a larger team. And, you know, the weight of a larger company behind you to help make it happen.

Recently, at an early stage founder that’s developing some really novel deep tech in this space, and two CEOs of Fortune 100, companies reached out to him directly, and asked for a meeting. It was a good sign. But both CEOs in the first meeting asked, you know, can you share your IP portfolio and all your, you know, patent applications? Unfortunately, the founder had, you know, the sense not to, but it was like, No, we’re not going to do that at this stage. But happy to keep keep chat with you guys.

Yeah, and that’s, you know, props to the founder for, for standing strong there, I think it can be if the founder is in a strong position, and there was a lot of cash on the balance sheet. And, you know, it can be easier to say something like that, it’s when you know, that perhaps the team is interested in an acquisition, where they’re more open to sharing these things. And then, you know, it can sometimes it can be not super helpful to share a lot of information early on, but every every deal, every potential opportunity has to be considered, I think, on a case by case basis, because the dynamics change. Yeah,

we’re way too early for all that. But hopefully, you know, hopefully, in the next couple of years,

I will say if you’ve got CEOs reaching out to your founder and talking about m&a Already, yeah, that’s, to me that says, hyper differentiation and technology of strategic value.

Yeah, I mean, we’re, we’re super excited. We’re super excited about the, the IP they’ve developed, and just the team behind it is amazing.

Like, we need to share some deal flow.

Ryan, what resource you know, can be a book blog article, a tool, you know, but what resource Have you found really valuable that you’d recommend the listeners?

Yeah, you know, anything that Marc Andreessen writes, I think is important to listen to. He’s such a historian of what has happened in technology, drawing parallels between lessons learned, you know, he sets on Facebook for Mark has an incredible wealth of resources and the organization that he and Ben are building, you know, now their reach is incredible. And so the content that they’re collectively producing, I think is really different and insightful. earnings calls is another one. For me. I listen to a lot of earnings calls. I think it’s one of the best ways, you know, to get a sense for what Jeff Bezos and Mark Zuckerberg and others are thinking about and the q&a sections and particularly, I think you can get a sense for where priorities are and things that are happening internally that you don’t necessarily get in other prepared types of statements.

Awesome. Brian, what do you know you need to get better at?

Well, the joke answer is sleeping.

So I have your Do you have your ring

No, no, I don’t like we have little boys still a boys that are five and two, and my wife keeps telling me I need to sleep more. You know, I always answered that, you know, if you had a superpower this sort of icebreaker question, my superpower would be that I would need to sleep anymore. But I think I, you know from a professional answer would be probably doing more outbound marketing and PR and outreach to founders now that we have, you know, I think, a great network of founders that can talk about how we’ve been helpful in our portfolio that we could do start doing some more outreach and be a little bit more aggressive about, you know, finding companies,

you and me both. And then finally, what’s the best way for listeners to connect with you love

connecting with people on LinkedIn, I still think it’s a great tool, and the messaging function has gotten pretty good. And then Ryan at Patrick ribisi.com. Ryan,

this is this is a real pleasure. I mean, the first time we connected I really enjoyed it. And I think there’s a lot of opportunity to work together. And thanks so much for just being super candid and sharing your thoughts. Hey, thank

you, Nick. This is awesome. Thanks a lot.

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