218. Crisis Coverage w/ Richard Kerby – Tactical Advice for Raising VC Fund 1, Why Not to “Raise the Bar,” and a Framework for Startups Adjusting to COVID-19

218. Crisis Coverage w/ Richard Kerby - Tactical Advice for Raising VC Fund 1, Why Not to "Raise the Bar," and a Framework for Startups Adjusting to COVID-19
Nick Moran Angel List

Richard Kerby of Equal Ventures joins Nick on a special Crisis Coverage installment to discuss the Tactical Advice for Raising VC Fund 1, Why Not to “Raise the Bar,” and a Framework for Startups Adjusting to COVID-19. In this episode, we cover:

  • Walk us through your background and path to Venrock
  • Why’d you leave to launch Equal?
  • You, Rick and the team just launched a $56 million Fund 1 at Equal Ventures in February…congrats on the final close! Tell us a bit about your thesis and how you differentiate?
  • You invest in retail, insurance, supply chain and the care economy. From afar those seem unrelated – how’d you arrive at those four categories… is there a common thread?
  • What is the best tactical advice you’d give to someone raising a fund?
  • What’s the biggest mistake you made during the raise process that prospective fund managers should do their best to avoid making?
  • So you’re early in the fund cycle w/ multiple years of initial check deployment in front of you… has the deployment strategy changed at all given the current environment?
  • Many investors are talking about and tweeting about “raising the bar” for investments… due to the pandemic and recession. Are you “raising the bar” at Equal?
  • Many famous investors opine on the importance of market size when making investments. What’s your position on market size and how does one estimate an accurate market size in categories that have not yet been created?
  • You recently published your framework for COVID-19 Scenario Planning on Medium. Walk us through this framework and how it’s applied.
  • What impacts has the virus had on your incubation arm at Equal?
  • Do you see this being a permanent change in incubators once this passes?
  • Diversity in venture is terrible… what is Stealth Mode and how are you trying to improve diversity?

Guest Links:

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.

Richard Kirby joins us today from New York City. Richard is co founder and general partner at equal ventures. Prior to equal ventures, Richard led seed and series A investments for Venrock. He is also the founder of stealth mode, a community of more than 1500 African American founders, operators and investors. Richard, great to chat again, welcome to the show.

Nick, thanks for having me.

Yeah. So tell us about your background. You know, what was the story that took you to Venrock? Yeah,

so I grew up in New York originally decided to go to Georgetown for undergrad and coming out of there, my first job out of college, that Credit Suisse, and so join a group there focused on investment banking, and about say, you know, a year into that, realize that I was less interested in the public markets and, and kind of, you know, making pitch books and, you know, modeling all day long. And so I thought, you know, let me try and think the way I prefer doing and, for me, I realized that I was passionate about technology, as well as passionate about investing. And so I thought the best way to go and marry those two passions would be trying to find a path into venture capital. And so to kind of get there, as you know, and then Wilson, who was in the show, it’s quite difficult to kind of find a career path into venture. Yes. And so what I did was I was keeping track of any companies raising capital, and so much thought coming out was raising capital, I thought was particularly interesting, I would try and figure out who the partner that that deal was the fund and say, hey, you know, shoot them an email. So hey, Nick, I stay invested in, you know, ABC Company, we’ll have to discuss the rationale behind that investment. And I’d say 95%, the time I got no responses, but occasionally got a couple investors to say, Hey, happy to check for 20 minutes. And, you know, one of those firms that responded was IVP institutional Venture Partners, it’s a later stage fund the Bay Area, as you know, you could think of them as writing, you know, called $50 million investments into liquid companies, that funds gotten bigger, so I’m sure their cheque size is even larger now. But you had a great time there. And, you know, I was fortunate enough to work in our investments in companies like Dropbox and weed medics and Shazam, and Yaks and a few others, that was a lot of fun. And some of my first foray into venture. And with that enabled me to do was realized that I was passionate on venture want to pursue it as a long term career. But I was less excited about the later stages. And so for me, I want to go further earlier stage. And the reason for me there was wanting to get closer to founders. And that meant spending more time with them. Gaynor said how they operate learning from them, as well as always trying to find ways to be helpful to them. And so I thought that minute Gordon Miller stage and with that went ahead and joined vendor lock. And so as you just you know, my intro Venrock focuses on leading series A’s and seed investors for companies. It’s early stages. And that’s where the next of my career was.

Awesome. Yeah, we just had some ash dash on the program from IVP. And he talked through a lot of awesome, yeah, he’s the man he rocks, he definitely was very candid and transparent. And give us a lot of the detail on you know, how things work at IVP.

Ya know, Smash is awesome. And was it has been a great mentor of mine throughout my career from ADP and onward. And so, I’ve always enjoyed my chat just to ash.

So, Richard, why did you know why we’ve a great role at Venrock. I mean, you’re leading seed series A deals you said you want to do early stage, you’re doing it? Yeah. Why do you lead to launch equal?

Yeah, I think a couple of reasons. I think that the primary one is though, you know, got the itch to go your stage. Yeah, bedrock does do see investments, but the vast majority they do is series A and occasionally Series B investing. And so for me, it was wanting to kind of focus exclusively on leading and CO leading seed rounds. And then you know, being able to kind of, you know, find a partner that you trust and believe in and that you think, you know, have a short vision of how the world should look adventure and how one should approach the market. Then I think as well you know, anyone who’s you know, more junior in a firm, you think you’re probably better than you actually are, and you want to go ahead and put your own shingle up and you think you can go do that. So some of that has to be in your head at some point or else you’d never go do that I think and then you also having the belief that LPS will resonate with you in your strategy and vision. Awesome.

Yeah. So the to Richards here, you know, Richard Kirby and and Rick Zula. Of course, how did you guys come together? And then, you know, congrats on the close of fun one you closed 56 million, just here in February. We’d like to hear a bit about you know, the thesis and how you guys different Yeah, sure.

So, Rick and I met, I say about like, six years ago via another investor that we knew, we thought that, you know, we’d probably get along and have a lot of things in common and so met several, several years ago, and then, you know, up until equal, had spent most of our interactions, you know, just trading notes on, you know, a number of deals that we’re looking at together and trying to find opportunities to work together, and kind of, you know, see how the other person thinks. And yeah, as you mentioned, you know, fortunately, that culminated in US raising the $56 million fund that we announced in February, but actually had close the capital previously. As we kind of think about equal, we focus on leading and CO leading seed rounds. So for us, that means we’re generally investing on average, a million half dollars into a two to $4 million seed round. And we focused on investing in startups that are deploying technology into legacy markets. And, you know, we think historically, venture was about investing in the development of technology. So you know, the building blocks of tech infrastructure, whether that was cloud computing, open source software, the advent of API’s, and when evaluating, you know, technology in the development stage, I think it’s really, really important to underwrite the ability for the technical team to build, you know, the typical components of that ticket product. Whereas in the deployment of technology, we think it’s, you know, taking all those building blocks and employing them into, you know, any sector category that has not yet become tech enabled. And in that scenario, it’s less about understanding if the team can build a technically complex problem or product, and more about understanding their how they understand their category, their sector, the pain points of their category, and why their solution is uniquely positioned to solve that pain point. And so it’s much more understanding the teams, no knowledge of the market, rather than their knowledge of how to technically go

build a product. Got it. Good. So you, you guys are more on on the the Tech Tech enabled side of things, then you look for established sectors that have building blocks in place, and then people, you know, employing tech enabled solutions to deploy those building blocks in a more effective way.

Yeah, I think that’s right. So for us, we look at established categories, you know, to name a couple examples, you know, insurance, logistics, retail, childcare, and the elder care market are some categories, we have spent more time than others recently. And for us, those are categories that we might call antiquated. But they also are very, very large categories where we think technology has yet to make them more efficient. And so when we come across founders that are taking that approach of, Hey, I see this great opportunity in category, you know, things function quite well in this market. But if I can increase efficiency, both the incumbents can gain value from it. And so can I and so that’s, you know, a pitch that really resonates well with us. Is

that the common thread then across those, those different sectors that you guys focus on? I mean, you know, I see on paper care, economies supply chain insurance, you know, some retail, those seem disconnected to me. But it sounds like there is a common thread, which, you know, those are legacy industries that have not had sort of the technology, their own technology sort of revolution. Yeah,

I think that’s right. I think, you know, we think there are many categories that are worth pursuing through our lens of legacy markets. Those I mentioned are a few of the initial sectors that we’ve kind of piqued our interest. We’ve spent time the first year the fund anything, as you mentioned, the common thread amongst all those that they’re very older categories, established markets, large categories that have been largely untapped by technology. I think, you know, we could probably rattle off the two of us that are 10, or 20 categories that fit that mold. Yep. We just haven’t spent as much time in those categories yet. But I’m sure we’ll sort of tackle more categories in the future, the firm.

So you just close the fund, right? 56 million. I was out in New York City a little over a month ago, had a chance to chat with you about it. Congrats again. And thanks for you know, hosting a really valuable event. And it was an event where we talked about many of the issues of you know, how you raise capital, how do you launch an emerging fund? I’d like to hear from you like very specifically, what’s what’s the best tactical advice that you would give to someone who’s raising a fund?

Yeah. As you heard that event, it’s very, very challenging raising a first time fund for anyone, no matter what your experience or background may be. And so I think there aren’t enough Best Practices shared. And so I was glad that we can share them in an environment in a private setting. But here as well, I think the most important thing to think about when raising a fund is to target investors that are a fit for your strategy. And be sure to ask LPS upfront what they’re looking for. So you can get a sense of if this will be a fit for you or waste your time. Because for us, we definitely spent a lot of time and wastes a lot of time with LPS that we’re never going to invest in our fund, because they either don’t invest in first time funds don’t want to invest in a fund that space in New York don’t like seed. I mean, there are a million reasons for an LP to say no, but You know, like, investors in the venture side, we want to see what’s the market, right. And so, you know, you may take some meetings with folks that you, you know, want to live with the category, but you know, it’s still not a fit for you. And so it’s super important as we tell our founders, to qualify investors before talking to them. You know, I think that’s super important for anyone who’s raising a first time fund to do that, too. And, and we definitely struggle with that when we were first coming out of the gate, because, you know, it’s harder as a fund, you’re trying to find capital, wherever you can find it. And so you’re like, you know, I’ll go talk to Nick, I’ll talk to anyone to kind of see if I can get a check. But oftentimes, exactly, exactly. But oftentimes, that can be always time. And so in a world where it’s already hard enough, it don’t make any harder than it needs to be. Why do you think

LPs, you know, spend their time on funds that they’re never going to deploy capital in?

Yeah, I think I think LPS want to see what’s evolving in the market. And so, you know, I think LPG only have like buckets, right? You got a late stage, but I guess it’s higher up you have, you know, private equity as a whole as a bucket. Amongst that you’ve got your PE firms, your venture, amongst venture, you have late stage, you’ve got what’s called mid stage of the series, B’s area, and early might be Series A, and maybe some seed for you. And so, you know, as an LP and have a creasey bucket, but it’s a new kind of asset classes adventure. And so you want to kind of explore what that means. And you want to be talking to the GPS, those funds are starting these precede funds, because it may be a category you want to invest in the future. And doing away with, with, let’s say, Nick, right now, hopefully, it gives you a leg up when you’re ready to make that commitment to that fund, as opposed to it being you know, a shotgun wedding, you mean it for the first time he’s on fun three, and you’re trying to kind of make a decision in a tight timeframe?

Right, right. Just out of curiosity, is that something you usually vet for at meeting one? So you get on a call with an LP and start asking some questions about their preference for, you know, do you invest in emerging managers do invest in, you know, to GP funds, for instance, you and Rick, do you invest in seed seed stage focus funds? Or is that something you tried to prequalify? You know, even prior to taking,

I’d say, it’s a mix of both for us on the first dimension, we definitely try and pre qualified before meeting. And so usually, when we’re an LP, it’s via some introduction, and so we’ll say, hey, you know, Nick, let’s say, should we go ahead and use this guy, you know, what sequence is he in, has he invested in NEC forever? Has she liked funds based in New York, and all those things in advance? And so hopefully, you know, our introduction can kind of get ticked those boxes off for us. But once we’re in the meeting, we definitely are asking a few questions up front. And usually, we spend the first five minutes of meeting the LP, really understanding their motivation. And so some of the things that we might ask them are, you know, broad questions like, how do you think about venture, and then if they start talking about a lot of funds that don’t sound anything like your fund, chances are, they probably aren’t killing it in a timely manner to invest in your particular fund. You know, if they’ve been deploying lots of capital into seed stage, and they can list off so like, you know, 15, or 20, funds are in thing before, you know, you don’t know what the allocation or budget is for any particular LP. So you want to ask, you know, what’s their target, you know, collective ownership within venture within seed itself, that they’re targeting, to see if there’s actually room for you in that capacity? And so some of those are the questions that we asked them last, we asked, you know, what are the measures that you’re actually in? So that we can get a sense of, you know, is there a fit for us in your portfolio? And then more importantly, who are the GPS, we should go ask them by you. Because, you know, we want to make sure that we’re also admitting LPS that we think are going to be good partners to us. And so they are in our, our friends as funds, we can go and ask them and say, Hey, what do you think about, you know, someone says, LP, you know, Are they helpful? Are they friendly? And all these other things you want to try and figure out? did?

Did any LPS ask? And, of course, we don’t have to get into specific folks. But did any LPS ask for special privilege privileges? You know, part of the management company, part of the GP? Custom carry, you know, for them specifically, maybe tied to like a large anchor check. Did you get any of that?

Yeah, we did get that. We had that fairly early on in our process, you know, there was a potential LP that wanted to put a meaningful size check in with that, you know, get preferential treatment on our carry, and a potential reduction in their fees. We thought about it, we thought you know, it is a big check. Fundraising is hard. This could maybe catapult us to you know, finish our fundraise much faster. And so we did there before you know, making any real decision was talking to folks that we knew to have done before and so we talked to GPS got their opinion. And then we talked to actually other perspective LPS that we were quite a pitch down the road or hadn’t pitching to kind of get their sense of, hey, if a manager took a deal like this, and then came to you, you know, does that change your your viewpoints on them as a manager? And does that increase decrease? Or makes no change in your ability to go and invest alongside them? Good? Yeah, you know, I’d say for the vast majority of folks that we asked the LP side, their answer was, they would make them less likely to invest. And so that ultimately led us to say, we shouldn’t take this deal, we should continue on the potentially harder track of, you know, plugging away, trying to get everyone to agree on the same terms without anyone getting preferential treatment. And that’s what we ultimately did, but delicately enticing, when, particularly if you’re you’ve been out fundraising for a year, you’re struggling to make progress, let’s say, and this could be a really a real jolt to your fundraiser, I could see being very enticing as well.

It’s enticing. Yeah, for sure. What’s maybe the biggest mistake that you made during the race process that you’d call out to prospective fund managers that, you know, they could avoid making themselves?

Yeah, I think it was, we just walked through, which is, you know, pre qualify and qualify, and that first meeting, is, that’s really going to be a lifesaver for you, because there’s endless amounts of people who are wealthy individuals, elements, and lots of family offices, you know, plenty of institutions, but you know, who’s the right one for you and your team, your strategies is quite important. And then I guess the other piece of advice I’d add there, too, is be persistent, because LPS will definitely go ghost on you. And that sometimes that means they don’t want to talk to you, and they think you’re, you’re not allowed them or your your, your pitch is up, differentiate, or they don’t believe in you. But sometimes it means they’re busy. And, and so that’s the case, if you can be persistent, share updates with LPS throughout your fundraising process, whether it’s new investments, a microphone, coming your portfolio, or just you know, progress in your fundraise, because all of that can keep you them engaged, they see that you’re hungry, that you’re making progress, that your fund is not on paper anymore, whether it’s a real entity or real fund. And that allows them to kind of get to conviction on their end. And so they were LPS that are now in our fund that I had emailed three times over three months and got no responses. And the fourth time got a response, they began to be engaged, and then they eventually closed. And so they think that persistence is important. And the other thing I’d say to you is that I think managers tend to make mistake on enjoy. First time ever do is waiting too long to do a first close. Because you know, the the first close enables you to start making investments and then start to prove out what you your strategy is. And that quote, can give you the potential LP a body of work to say, Okay, I know what equal is now I get it, it was hard to tell via the, the, the PowerPoint, the pitch, but now I’m starting to see the deals they’re getting into, who are the CO investors that are confident co investing alongside equal, if you get a market in that capacity, it’s great to and who the ones that want to invest beyond them. And all those things are very, very important factors in getting an LP to commit just as it might be for a G GP to invest in a founder. Seeing those progress after me that founder for the first time really gets folks to get to conviction when they might have otherwise.

Yeah, it’s so funny. And in a bit strange when you’re managing your your CRM of LP targets. And you’re trying to keep updates of like conversion rates, like alright, this one feels like it’s 5% or 10%, because I haven’t heard from them and, you know, two months, and then all of a sudden, these these targets that you think are super low potential, they reengage in. And I think you’re exactly right, people get busy, people get distracted. We all go through ebbs and flows. And it may not necessarily be a reflection of their likelihood that they’ll invest. It could just be timing.

Yeah, I think the I’ll give the answer the other way too, which is that the the folks that you think are 95% in 0%. And two, we definitely had those that I mean, weren’t and we’re not different from other managers where there’s, you know, folks that you got folks who, you know, commit verbally that don’t end up closing. People who commit you know, via email who don’t end up closing. Yeah. And so you got folks that you think on the finish line that don’t make it and you got folks that you think are, you know, 2% chances that end up becoming meaningful LPS too. And so it’s I won’t call it a crapshoot, but it’s really hard to pinpoint where each LP is on your canola called sales pipeline. And the the qualification phases is, you know, pretty subjective.

At what level Did you do a first close?

So we did a first close at I want to say nine or 10 million bucks somewhere. Oh, wow. Oh, Good. That’s great. Yeah. And then we made a, we made a first investment shortly thereafter. And then that, fortunately for us that that first investment was marked up pretty quickly by a fund that’s well respected by LPs. And so once again, trends show future LPs, a couple proof points and that get folks, you know, more excited, I think, you know, when folks are thinking about investing at the early stage, that stage being seed stage, they may also be really interested in getting in these larger brand name funds that we all know the names of, and those funds are probably very successful, and they have their pick of the litter of who they can have as LPs. And so it may be hard for you as a new LP to get exposure to that fund. But if you’re seeing a early stage manager, invest in a company, and those companies consistently can hopefully get marked up or get investment from those funds that you want to get into. That’s like a backdoor way for that LP to have exposure in a very small way. But then less exposure to the kind of, you know, more brand name, asset class and venture that they want to get. Interesting.

So everyone’s favorite topic right now. COVID-19. We, we have to, we have to talk about it a bit here. So we’re, we’re over a month into sort of this, this crisis breaking and in the pandemic. You guys are early in your fund cycle, right, multiple years of initial check deployment in front of you. Has the deployment strategy changed at all, given the the environment? Yeah,

I’d say hasn’t changed yet. For us, I think, you know, we’re definitely in different times today. But we’re still pretty new into those times. And I think we’re all still evaluating what that means for us going forward. So, you know, generally we’re targeting four to six investments per year as a firm. So our deployment pace is fairly deliberate to begin with. And so we don’t anticipate that change to occur with this current environment. You know, we know great companies are built in bull and bear markets. Now with that said, you know, we do forces investments a year doesn’t mean we’re going to do one every single quarter, maybe it means to to slow. And then we see a ramp up in q3, and q4. But Eric, in general, for us, we’re still kind of aiming to hit that four to six lessons per year, we’ve done two so far in 2020. So we’re pretty much on pace. And our plan is to continue that, but not to continue to because we want to but continue, because we think they’re gonna be opportunities out there that we want to get invest and be very excited to do so. But you know, if things change we see, man, we’re just not seeing really high quality deal flow that that we think, is a reflection of the deals we want to be in. We are not pressured by any needs to kind of ramp up our pace, continue our pace in that capacity.

So 46, or was a four to eight deals a year four to six, four to six, four to six. Yeah, right. So that’s two, three per partner, right, you and Rick, are you guys each running your own deal flow and then sort of coming together at the decision point to talk about them? And is it? Is it fairly democratic or unanimous? Or are you both kind of looking at deals at the same time at every stage of the funnel? And, you know, how do you guys collaborate as a team?

Yes, it’s a it’s a mix of both. You know, early on, though, that we are, you know, doing in meetings with with the founder together, but may not necessarily be at that first meeting, obviously, you want to make sure you can gain efficiencies. And so for meeting the founder for the first meeting every single time, you’re probably not being as efficient with one side as you can be. But you know, it’s rare that we’ll have, you know, three meetings in a row with a co founder, I just want to, and sweet involve the other person, you know, pretty fairly on quickly in the process, because we know that, you know, venture is a competitive game. And if you, if you don’t have enough seats on the table, that are getting exposed to a deal, it’s gonna be hard for you to move in a timely fashion to win the opportunities in front of you. And so we collaborate very closely on opportunities together, obviously, there’s always a point person on a particular deal. But we want to make it so that, you know, God forbid, something happens to me that Rick knows exactly what’s going on with all the companies on point on and you could just like your I can be replaced, like that, like very, very simple, seamlessly. And that’s the kind of relationship that we’re hoping to having as a firm, so that, you know, our founders can think of it as not a richer Rick deal, but an equal deal. And so they can get exposure to the entire partnership. And know that, you know, there’s areas where I can be helpful where it can’t and vice versa. And so you’re not just getting one person, but you’re getting the entirety of the firm, hopefully, and, and because of the lean nature of our team. That’s easiest for us to do, because there aren’t that many faces for the founder to remember. Not that many emails for them or not even that many names, and we both have the same first name. So it’s pretty simple for the founders in that capacity.

Right? I’ve been there. We’ve got a team of eight at the moment. And we all work on deals. And so sometimes, sometimes I feel for the founders, their head could be spinning with, you know, the range of different new stack people that they’re interacting with. So We might have to tighten that up. But, you know, Richard, I’ve been seeing like a lot of investors talk now in tweet about raising the bar adjusting process getting much more selective with investments, due to, you know, this pandemic and the recession. Are you guys raising the bar equal?

Yes. And I’ll give you my answer. I’m sure Rick may have a different answer here on this one. But, you know, my belief is the bar should always be high for any investor. So I don’t personally believe in the need the need to raise the bar. But I do think that bear markets allow for more time due diligence on investments. And so I think it’s actually a positive for both founders and investors on the investor side, we get to better understand the business. So we spend more time understand their category, their approach, and the team itself. And I think the founder gets more time to understand if you know, this investor is a good fit for them for their team, for their business and can be helpful. And so I think the extension of the time to compute you might get longer, but I don’t necessarily think that the bar should be raised now. If there are, if you’re affirm, and you’ve got, you know, I’d say, you know, different size deal structures and different mandates for that, I understand why you might need to raise the bar there. So let’s say I’m a multistage firm. And for me, you know, on a seed deal, I only need to see, to my partners to see the deal, rather than all five of us, you might want to elevate that to be all five, given the environment going forward, I get that. But here at equal, we’ve generally are running the same size check, targeting the same size ownership in every single deal. And so there isn’t much room for us to kind of, you know, readjust the bar up and down at any given timeframe.

Right. I mean, if, if you’re investing in your professional in the business, you should have conviction and everything you’re investing in, right, regardless of circumstances. Now, circumstances might change, certain criteria that have to be evaluated, of course, but the bar and the level of conviction, I couldn’t agree with you more, I don’t think that that should change, everyone should be 100%, all in before they cut a check. Otherwise, you’re just getting off on the wrong foot in the relationship with the founders. If you’re not

think that’s right. I think, you know, every, every firm, and every neutral investor has their own lens that they use to evaluate a deal. And so my guess is even in the recession period, that lens will change very much for any individual. But what might change is the categories that they get excited about. And so maybe now as a result, the COVID there are some sectors that you know, that you’re like, I can’t touch that sector right now. This is just not for me. And there may be other sectors are like, You know what, I’m more enamored by this. Now I can see the viability in this category. I think that’s where we’ll see more change, rather than, let’s say, having to raise the bar or change your investment lens or investment criteria.

Yeah, so speaking of investment lens, and criteria, like, we all have different things we look for different must have different, nice to have. And there are two very distinct philosophies in this business. There’s kind of the team philosophy, there’s the market philosophy. I think a lot of us like to say that we invest in both, but you know, you’ve got your your Don Valentine’s and your Marc Andreessen is out there that prioritize market over everything. Right. They opine on the importance of market size when making investments. And then you’ve got like, I was reading Jason Lemkin, and this is a very loose paraphrase, but he said something to the effect of show me a clear path to 4 million of ARR. And I can show you a path to 100 million arr. So, you know, he in another way, I read that as you know, if you can develop a strong beachhead in a strong position within a sector, there should be a lot more opportunities that that you can go after from from that launch point. So you know, what’s your take on market size? And, you know, how do you even estimate an accurate market size? In many categories that have not even been created yet? You know, at the the early seed stage that you’re investing? Yeah, no, I

think market sizing is actually a quite difficult thing to do correctly, I think it’s really hard to accurately say, you know, this market is a $10 billion market, 100 billion dollar market for any given category. And I think more specifically, the future market size that’s many years out, is also easy to hard to predict. And I think that’s really important, because we think about getting the Quiddity or an exiting an investment at the seed stage, we’re not doing it anytime soon, you’re doing it, you know, 678 10 years out from that, that initial investment. And so what you really want to know is what’s that market gonna look like a decade from now? And that’s really hard to do. And I think what happens there is that because it’s so hard, people aren’t necessarily doing that. And then people are overestimating, you know, the market size of an opportunity today and under estimating the market growth or miss categorizing a company’s you know, true market potential. when they’re making that valuation in that net due diligence process, if you looked at Uber, and tried to value the size of the black car market, you’d likely pass on making that investment because that’s Flexi come market isn’t that large market, if you tried to go, and when I was at IVP, we did two, and I can get into that at some point in time. But, you know, similarly, if you tried to back the number of people willing to allow someone to stay in their homes, whether people like to stay in some else’s home, you would have passed on Airbnb, because there’s you couldn’t do the math to make it work that this could be a large opportunity figure for that land. And so I think a lot of investment gets over over index on market size, and under index on market growth or future market dynamics. Because those are really hard to predict that ultimately, will lead you to understand what will happen to a particular category and how that will impact your your visibility to investing.

Do you attempt to estimate that?

We definitely tried to do it. But I think, you know, I would actually say my partner, Rick is better at doing that than I am from a market analysis standpoint. But I think at the end of the day, we’re trying to think through is it’s more around less on size, and more about the dynamics of the market. So if you think a market will become and look like X, Y, or Z, are you building the product for that end goal, rather than today’s market, and we’re looking for folks to build for, you know, as you know, it’s like Wayne Gretzky quote of you know, you skate where the puck is going to be. So we’re hoping that we’re hoping that the other company is building their product for that future and state. Because clearly, if you if you you know, even when you were, when you talk to Travis back then when you were at p, you know, he was raising the series B, when we talked to him, he was clearly skating where the puck was going here, here’s your point is, I’m gonna have everyone be a driver, right now, this is not just black cars only. But you have to then believe that too, right? And it’s a leap to make that point in time. And if you’re not sticking that lens, it’s really good. It’s really good, difficult for you to get conviction in the market opportunity in that capacity. And so I think it’s, I think people make a lot of mistakes when trying to evaluate market and then over indexing on the market as a reason to say yes or no on investment.

So do you lean on the founders, then to help you understand, you know, where the puck is going and how a market will evolve? Or are you and Rick doing your own market scenario planning and saying, you know, for the care economy, or for supply chain or for retail, you know, here’s how we think this market may evolve over the next five to 10 years. Yeah, it’s

a mix of both. And we like it to be like a healthy back and forth between the founder and us as a team. Because you know, we have our opinion, we’ve been researching your space beforehand, we think, you know, the market will look like X, Y, or Z. But also, as a founder, you’re doing it day in and day out. And so you should have a more intimate viewpoint on the opportunity. And our viewpoint is okay, on day one, I’ll be line for line pretty good, that’s a good spot to be in, like we’re not, we want to understand, you know, where we’re wrong, where you’re right, or vice versa. And that means do more homework on our end, or it means edits. And it means talking to folks in our networks that we know that Katherine way better than we do. And so we’re trying to validate these hypotheses with the actual income with the executives at the larger companies that category to get their viewpoints on where they think the markets going to help us understand if we should be, you know, making investment, a company that we think has the right vision for the future. And so it’s always a mix of us doing our own work, as well as working with the founders to understand how they think the markets gonna evolve. Because if you can get right and how the market will evolve. That’s where you can really get some great returns for your LPs and your founders. And everyone involved.

Yep. So while we’re talking about scenario planning, in contingency planning, you guys published this framework for COVID-19. On medium. It was sort of a tool and a framework for startups. Right? How, how should startups respond to the impending crisis in the recession? across different scenarios? So can you can you give us kind of the broad strokes on on the framework? Sure. Yeah.

I mean, the broad strokes for us was, you know, for the for this scenario of COVID-19, it’s generally for our founders, then being very early stage, the first time that they’re ever experiencing, you know, in a recession or just like, you know, a destruction there category. And so, you know, think it’s easy for a founder to say, hey, alright, let me go find my game plan. But in reality, there shouldn’t be a game plan. There should be options involved and because you have no idea what’s coming next you don’t know if COVID-19 is a one week blip one month, one year, six months. And so our viewpoint there was let’s speak with our founders together and figure out you know, how would you plan your business based on a variety of scenarios, scenarios of how This recession will impact your business. And so it’s really meant to be a forward looking exercise to discuss the impact of the crisis, you know, today in the future and in a variety of different scenarios. And so and they were meant to be seen as both categorical. So, you know, what’s the impact on your sector, across these different dimensions and even scenarios, as well as what does that impact mean to your business from a hiring, revenue, burn perspective, and if you can lay out them in like, you know, a scenario planning of three to four or five scenarios, it’s you can make much more clear path forward for you and your company. You know, it’s easy, I think, for anyone, when you know, time has come about to operate from a place of fear, because you know, your hair’s on fire, maybe you’re running out of cash you’re planning to raise in three months, and now that plan is gone. And instead of like, you know, having your hair on fire, take a deep breath, relax. Think about the various scenarios here, ask for advice, whether it be your investors, your employees, your advisors, even family and friends, because that will help you kind of complex them realize that, you know, the world’s not ending, and there’s actually a viable path for you here going forward. And you’ve got to think with that pathway B, and it can do for the company. So is it if I’m

the founder of my managing my cash, cash position, of course, I’m seeing how this environment is affecting top line, bottom line, variety of different factors. And then you’ve kind of got a matrix of sort, so that the founder can say, Oh, if you know, cash position drops here, then I should be doing X, X and Y.

Yeah, it’s a matrix of sorts. So we’ve got, you know, you can think of it as like an Excel table with three columns on the top, each, you know, different impacts. And so, you know, a one a two month shutdown, a two to four month shutdown, a secret squirrel been shut down? And what’s that impact on your revenue, your runway, head counts, you know, operations total, and then the higher level impacts on your sector. And you know, the necessary steps that must be taken based on those scenarios. Does that mean that fundraising gets pushed out further? Does that mean we need to have a hiring freeze? Does that mean that we need to layoff people unfortunately, and, and then, you know, what are the longer term impacts for the sector? And so is your sector negatively impaired for a decade? Does this actually improve your sector? Actually, you know, we’re using zoom right here, right? So does this improve the category, the viability of your business, it could perhaps, and or maybe it’s a neutral impact for your company, it’s more like a temporary blip. All those things are put in one easy format. That way, it’s easy for you to kind of understand what you need to worry about and what you don’t have to and easy for you to kind of share that with folks that you want their opinion on, because it’s too it’s too hard for someone to come in blind, and give you feedback on your business when everything’s scattered around.

So, Richard, diversity and venture is terrible. You know, I was speaking with Frederick Grosset. He’s at storm ventures professionally, he has also launched black VC. And we were talking through some of his efforts and some of their initiatives a few months ago, I know that you’re involved in have been a founder with stealth mode. Tell, tell me in the audience a bit about how you’re prying? How you’re trying to improve diversity via this effort.

I think you’re right, you know, diversity in venture and tech broadly is abysmal. But awards would I guess? And, you know, fortunately, there are a number of people initiatives looking to improve on the lack of diversity in veterans. And probably, you mentioned, obviously, Frederick and black VC, they did a great job trying to promote African Americans within the venture capital community, with mentorship, you know, access to opportunity and so forth, which is fantastic. And, and there are a couple others as well that I work with, right know about as well. You know, you mentioned self motivation that I co founded with Charles Hudson, and it’s a, you know, a community for African Americans and tech. So across the Bay Area in New York, we have over 1500 members that are comprised of African American founders, operators, investors, and every functional area of a tech company and the venture capital industry. And you could think of it as like an offline online community that, you know, possesses mechanisms to enhance everyone’s ability for more access to the community, asking questions, hiring, raising capital, anything that we would need to support an ecosystem is involved in South Node in itself. But the other things that are the programs and issues I’ve seen work quite well as well. And so there’s also Hadiya, Majeed runs a program called HBCU. That BC, so it’s a fellowship for students at HBCUs that trains and educates them in the world of venture capital. On the female front, there’s always which promotes women in venture and in tech broadly. And I guess the last answer that’s probably worth mentioning is one of our LPs. Malcolm Robinson runs a pro Again, we educate students across HBCUs across the country about the career path of venture, and then places them as interns and venture funds over the summer. And Eagle ventures participates that as well. And so we’ve got an intern to join us, I guess probably June, July. It looks like it might be more remote than in person, but we’ll see.

Yeah, we’ll get to it actually four interns right now, a couple MBAs and a couple undergrads, and it’s very different and creative doing this remote onboarding. And I’ve never even met two of these folks in person ever. Only over zoom.

Yeah, no, it’s interesting, too, because we made our first hire of someone that we’ve never met before, equal. And so we, you know, we started this kind of, like, you know, hiring process in, I guess, must be like, February, obviously, it takes a long time to find someone that you want to bring on for a full time position and ended up you know, kind of culminating a week or two ago, and we’re like, man, we just hired somebody you’ve never met before. And so it’s definitely a new experience for us. But depending on how long you know, stickups goes on in place, how long ago was an issue for, you know, we may have to also think about, you know, investing in founders before. And so that’s a new experience for many investors definitely asked for an equal. And so we’re trying to think through, you know, what are the ways in which you can evaluate that because it’s easier to kind of mask, deficiencies via phone, not as hard via video, but still possible, in person is really hard to do. And so that’s why that in person touches it was important for us. But if we have to find ways to without,

yeah, what are what are some ideas for that, right, you’re, there’s there’s a few different layers. Here, there’s a variety of things that you’re trying to evaluate professionally, in on the business front, when you’re meeting with founders. And it certainly helps to be in person and to gauge body language and eye contact and things of that nature. And then there’s this whole other component, which is, you know, the intangibles, and breaking through the wall of investor founder and just trying to socialize a bit, maybe have dinner with the founders before you invest. Maybe you create, you know, more. More of a partnership that way and a collaboration, you get to know them as people, that’s going to be very different, I won’t claim that it’s harder, but it’s definitely going to be a lot different over zoom. I heard cash, I can’t remember the investor. But an investor yesterday mentioned that he did a, he did like a yoga class or something with a founder for 45. It’s just just to try to figure out a way to connect on a different level. So I don’t know, do you guys have any thoughts or ideas for you know, how you’re going to be able to get to conviction and make decisions without meeting people in person?

Yeah, I mean, we don’t have the right answer for yet, for sure. I think we’ve kind of come through and Iran is just more more sessions. And so you want to spend more time on video than you do in person. And also making sure that you can meet more of the team, you know, if people could give you a virtual tour of their office, you know, I know that you and I are both big college basketball fans. And, you know, this guy is COVID-19, you know, came down and also not only destroyed March Madness, but destroyed the recruitment for high school athletes going into colleges. And so now, you know, we’ve seen, you know, high school students getting virtual tours of the, the Athletic Stadium, the gym, the lockers, room, and so forth, well, we’ll probably need to do some of that to, you know, a virtual tour of the team, the office, making sure a team actually exists in office actually exists somewhere. And, you know, I think it’s just going to be more and more sessions to get more comfortable at somebody rather than you could in an in person session. Or if like, you know, someone is three blocks in your office in New York to be able to walk over those things are hard to do in a scenario where we’re all in our homes. And so our viewpoint is it there’ll be trial by air, and we’re ready to go try.

Yeah, one of our internal metrics here is to try and get faster and faster with making decisions and getting answers to founders, you know, we’re trying to get better at that, and to not string these things along along longer. And of course, this is working against that. So I’m having to tell founders, you know, we want to be quicker, but we’re probably going to be slower now. Because it’s just gonna take more meetings and more time, and we can’t get that same level of comfort without more touch points. Yeah,

I think that’s right. I think, you know, on the founder side, what can be helpful on there and it’s just, you know, having more prepared and so if you’ve got you know, more whether it’s your deck your if you are, you know, actually market financials, all these things, but if you just have more detail on your business on your market, you know, the investor is going to make an investment demo on you. And so, the more you can help that person fill out their their memo, the hard liquor, they’re gonna get to conviction also, the higher like they’re gonna do it faster in a time Do you prefer? And so I think, you know, this time period may allow founders to think more about their business themselves and actually be better at pitching their business because it’s gonna be hard to, to convey it via video, you know, when I was at Venrock, you know, we had offices in Palo Alto, New York and in Boston. And so at any given time, a founder was pitching to two other offices over video. Oh, we had there we called. Yeah, we had there, we called the video discount. because invariably, you know, whoever was in the room with the founder thought about did a great job card was on video was like, No, I don’t know that Nick guy did come across compelling to me, you know, if you didn’t really answer the question on market size, or go to market we’re going to be, and so it’s really hard to, you know, jump to the screen and get someone excited by something via video, as it is in person, they can see your excitement and passion for it. And that’s it, you know, we have to get used to. That’s super

interesting, though, that the video call investors were more bearish than the in person. That’s really good to know, huh? Yeah. I guess if you get a super positive sign over video, then that’s, that’s good.

That’s right. That’s right. Well, I think fortunately for us, it is over video right now. But we’re on good together. And so it’s a level playing field rather than having someone in person and over video. And so yeah, we’ll we’ll see how it plays out.

Richard, if we could cover any any topic here on the program? What topic do you think we should address? And who would you like to hear speak about?

Um, yeah, I think one person be great to have on metric has been on and I know, You’ve done a lot of podcasts now and haven’t been able to catch up to all of them, Nick. But I would say Brian Roberts, from veteran, I think, you know, health care is increasingly becoming a focus area for founders and investors. It’s very, very complicated, heavily regulated industry. And Brian has very unique and opinion insights and viewpoints on the sector and deciem sector. And then people would think we would benefit from hearing his viewpoints about healthcare, how to invest the early stages, and so forth. He’s also incubated business before and so he’s just got a like a breadth of knowledge across a variety of aspects within venture healthcare investing that I think people definitely doing stories. Love

it. Yeah, we’ve had Brian Asher, but not Brian Roberts. So we’ll have to do that. Richard was one thing, you know, you need to get better at

everything. I mean, I’m definitely thankful for the experiences that gotten in my venture career. But I think I’m a long way from from being any semblance of perfect. And I think there are plenty of things to work on. And my My hope is to continue working on getting better in every facet of my career. And so everyone’s got their superpowers, but I’m trying to find some ways to get more superpowers.

And then finally, Richard, what’s the best way for listeners to connect with you?

Yeah, so on Twitter, you can find me at Kirby. It’s at K er b y, or via email. You know, we easily share email just Kirby at equals VC and so I’m finding my inbox becomes inundated as well.

Richard, always a pleasure. Congrats again on the funds. For you and me both. I’m hoping that this pandemic finishes up so that we can get back to our jobs and get back to college basketball. I

couldn’t agree more. Thanks for having me on. All right, take care.

That we’ll 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 competently. Thanks for joining us