241. Finding Markets with Long-Term Tailwinds; Macro Impacts on Venture; and Robust vs. Fragile Data (Niki Pezeshki)

241. Finding Markets with Long-Term Tailwinds; Macro Impacts on Venture; and Robust vs. Fragile Data (Niki Pezeshki)
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Niki Pezeshki of Felicis Ventures joins Nick to discuss Finding Markets with Long-Term Tailwinds; Macro Impacts on Venture; and Robust vs. Fragile Data. In this episode, we cover:

  • Background and path to venture.
  • Thesis at Felicis and your focus there?
  • How has the pandemic affected your approach to investment?
  • You’ve mentioned that you look for market tailwinds, especially tailwinds that will be lasting. Right now, we’re seeing a number of shifts that will have lasting effects — which are you watching most closely?
  • Why do you think the public markets have, largely, stayed high during a very large health and economic crisis?
  • Can you give us an overview on your three-part investing framework for making investment decisions?
  • Where do you look for these large shifts, creating opportunity — aside from Mary Meeker’s report?
  • How do you make sure you are current on-trend instead of getting anchored on data that’s old or fragile?
  • What are you looking for in the business model that indicates to you that it is not only the correct approach but can lead to transformational changes in the industry?
  • In which types of businesses do you like to see product-focused founders versus marketing-focused founders, is there a heuristic or systematic way that you think about this?
  • You mentioned that business is a formula and that it’s clear early on whether it’s going to work or not — can you give us an example of the formula?
  • What’s your approach to coaching and advising founders?  There’s this fine line between being overbearing w/ advice and not providing enough insight in an area that could derail a company.  How do you strike the balance?
  • What keeps you up at night… the ones you invested in that you shouldn’t have or the ones you didn’t invest in that you wished you had?
  • 3 Data points: Let’s say that you have a consumer SaaS company that is doing 300K in ARR, growing 20%  MoM and that’s all you currently know about the company.
    • Which 3 data points do you ask for and why?

Guest Links:

Transcribed with AI

Intro 0:02
welcome to the podcast about venture capital, where investors and founders alike can learn how VCs make decisions and reach conviction. Your host is Nick Moran, and this is the full ratchet.

Nick Moran 0:19
Niki Pezeshki joins us today from San Francisco. Nikki is a partner at Felicis ventures where he has invested in companies including guild education, trusted health guidelines do not pay and Cleo. Prior to joining Felicis. In 2016, Nikki worked at Summit partners and Vista Equity Partners. Nikki, welcome to the show.

Niki Pezeshki 0:36
Thank you. Thank you for having me. Absolutely.

Nick Moran 0:39
And congratulations on the newborn. That’s so exciting. Thanks.

Niki Pezeshki 0:42
Yeah, she’s our little Corona baby born March 19, the same week as shelter in place. So it’s been a lot of fun having her around while we’re, while we’re working from home and figuring out how to, you know, live the right way during this crazy time.

Nick Moran 0:57
That’s tough. That’s really tough. My toddler is three. And that’s been difficult enough, because my wife works full time. But but also, you know, what a great, exciting time for you and your family. For sure. But yeah, can you tell us a bit about your background and your path to venture? I know you’ve worked for for multiple firms before felices would like to hear a bit about that?

Niki Pezeshki 1:18
Yeah, sure. So, um, you know, just starting my career, like, my goal from day one in college has always been to get was always to get on the buy side. It’s just something that I’ve always thought was super fun investing. And, you know, finding really interesting companies that you can get, before everyone else figures out that they’re also really interesting companies has just been something that I’ve had a lifelong passion for, you know, from middle school, when I would invest in, you know, McDonald’s stock and talk to my dad about what stocks to buy to, you know, being part of multiple investment clubs at USC. For me, it was always kind of like, how can I get to the buy side as fast as possible? For it, it didn’t really matter if it was venture or private equity or public markets I just wanted to invest in so my first job out of undergrad was at this Equity Partners, which is an enterprise software focused, private equity firm, I was there for about three years in Austin, Texas, had an incredible experience, but wanted to move to the West Coast. I’m from Los Angeles, my wife is from Hong Kong. And we both thought it would be better to come out to the bay, or somewhere in California and be closer to home for both of us. So moved out here, I actually worked for a place called the climate Corporation, which is an agriculture technology company that was backed by Felicis ventures at the time, worked there for about a year had a little bit of operating experience and realize you know what, actually really want to be on the buy side again. And so I went and worked for summit partners was there for a year, learn how to, you know, do some hardcore outbound sourcing, get in front of founders how to ask the right question and get to the bottom of the story within a 30 minute, two hour long call filter through a bunch of companies and, and basically like really honed in, you know, just how to kind of create your own deal flow in your own pipeline, which has been really good for my career. About a year in to summit, the team at Felicis randomly reached out to me through a mutual connection, and we got a coffee and at the time, it was you know, I had no interest in in venture, I hadn’t even thought about it, to be honest, I kind of want to go back into PE but they made a really good pitch. They were like, Hey, we’re for partners, right now we need a junior person to come join us and, you know, go out and source a bunch of deals for us go out and just find new exciting investment opportunities. You know, it’s a totally generalist firm, we don’t have that many people, there’s a lot of opportunity to kind of rise through the ranks here. And, you know, you can just basically go chase, whatever excites you. And that that was really appealing to me, you know, having been at Vista where it was like just enterprise software and, and Summit, which was like very much outbound sourcing oriented. This was kind of like a melding of the two, but also had a lot more like free range to roam and go find amazing companies that I was excited about. So I joined Felicis, about four, four years ago today. And it’s been a really fun ride started as a senior associate and have been fortunate enough to work with some awesome companies and continue working with my awesome team at Felicis.

Nick Moran 4:15
That’s, that’s great. That’s great. I’ve got a couple associates at the firm that are are doing some hardcore sourcing themselves right now. Any tips on sourcing techniques or tricks or, you know, things from the old toolkit that would be helpful to my guys or anyone in the audience?

Niki Pezeshki 4:34
Um, you know, they’re, you know, unfortunately, like, the best advice I can give is to just, you just gotta keep pounding the pavement and keep on on working hard and you’re going to kiss what they say kiss a lot of frogs, which is like a lot of companies that might not be the best fit for you. But I think you know, the best is to just use each one of those calls and each one of those opportunities to talk to a founder as a learning opportunity and just get close. Sure, to the right answer, right? So you’d be like, Oh, this company might not work out because like, this is the issue that they’re facing. Okay? Well, if that’s the issue, then the next time I’m going to talk to another company, I’m going to be looking for like a company that has solved X problem that I’ve talked to in the past and realized that that wasn’t working. And so I think you can just instead of just like checking the box, and just kind of moving on after each one, try to take each one as a learning opportunity and get closer to the right answer.

Nick Moran 5:26
That’s great. That’s great. I love it. So we have had Eitan, on the show. So we’ve heard a bit about us. And yeah, it was great. I mean, he is he, he is one of the best, I think the secret is out on that and everyone knows it now. But my goodness, the things that you guys are doing a fleeces are just incredible, but remind us what the thesis is, and also your focus.

Niki Pezeshki 5:50
Sure, so if for anyone that didn’t listen to that podcast, so Felicis, right now we’re investing out of a $500 million fund. You can come from like, pretty humble beginnings, like I didn’t was just investing his own money at first, and then our first fund was $40 million. And that was purely just pre seed and seed where we were mainly following on participating in rounds. So the fund has come a long way, in 10 years, the first institutional fund was in 2010. So you know, going from 40 to 510 years is not easy, but it’s coincided with a couple of things. One is, you know, we’ve added more people to the investment team. So the amount of like dollars invested per investment team member and partner hasn’t changed all that much, maybe a little bit, you know, the average series A Series B, etcetera, size has gone up. So in order to continue competing, you need to have a larger fund in order to compete. And then, you know, we found ourselves in a lot of situation where we, we’ve made some good bets, and we want to continue putting more money into the companies maybe owning more upfront, given, we think that we might be able to spot some good opportunities early on in the past, where we would get lower ownership, now we’re going to try to increase ownership there. And so that that is the reason for the larger fund. And then, you know, the broad thesis is, it sounds silly, but like, we’re total generalists, and we don’t let arbitrary things get in our way of finding the best company. So, you know, when it comes to ownership percentage, I think we’re significantly more flexible than the average investment firm. And you know, for a founder that is going out to raise around and they’re like, hey, you know, our existing investor wants to, like CO lead this round, or do super pro rata, a lot of other funds would say, well, then, you know, this is not the right round for us. For us, we say, this is the founder that we’re super excited about a market that we’re excited about in a company that we’re excited about, know, if we can own a percentage of an amazing business, you know, we’re not going to get 20%, but it’s fine, you know, that 8% If it becomes as amazing as we think it’s going to be still going to be a really good returner for our fund. And that’s, that’s one of the ways that we differentiate is kind of like going in the founder and saying, Hey, like, what we’re really excited about you what is the deal, that would be delightful for you. And that turns the tables a lot for founders and helps us win a lot of deals. And then the second thing is, I would say just like, kind of like being there for our founders, we’ve always want to have success with empathy and understand kind of like what our founders are going through. And part of the ways that we do that, you know, in concrete terms is one, we always vote our shares with the founders. So when we invest in the business, we only get economics rights, and we give all the voting rights back to the founders that basically makes the founders feel like we’re on their side, and they can be a lot more open with us. And then the other thing we do and this was a recent more recent announcement for us, we invest 1% of non dilutive capital, towards founder development. So, you know, if we invest $10 million in the company, that founder will get $100,000, no questions asked, and out of our management fees, and that will go to whatever they want, whether it’s, you know, therapy, executive coaching, basically, anything that will help that founder become a better leader of that company. And for us, like, that’s a no brainer, right? I mean, if for 1%, of, of, of our investment, if we can help that founder become a better leader, we think that that will return a lot more money to our fund down the road. And so that’s just to give you a sense of kind of like the things that we do around founders success and a little bit about how we structure deals and get into some of the best companies. And then we tie that all together with, you know, I would say, just like a very generalist approach and a very honest, open debate internally that keeps us sharp and make sure we’re always pursuing the right, right companies.

Nick Moran 9:27
Is there a set of leadership coaches or, you know, career coaches or counselors or folks that you can connect those founders to?

Niki Pezeshki 9:39
Yes, so the way that usually happens is we have internally what we call a founder success function. So there’s two people on our founders success team, and they are the liaisons between our founders and like a network of executive coaches that we work with also like a lot of times founders have their own it And you know, for the most part, what we found is like, the reason that we implemented that program in the first place was because we would do NPS surveys and try to get feedback from our founders on what was important to them and what they were struggling with. And a lot of them are like, hey, like, you know, we’re struggling with, you know, becoming better leaders. You know, as our company grows, like, how do you handle 100 person organization, we’ve never dealt with that. There’s no classes in school that teaches you that, but at the same time, like, we’re a startup, that is cash strapped, and we feel bad as founders spending, you know, $20,000 $30,000, whatever the cost is to become to start to adapt and become a better leader of 100 person organization. And we said, Okay, well, well, the problem is like, you really want that, but you feel bad about spending it. Why don’t we just kind of like being be the middleman here and actually just spend that money for you. So you go and get the help that you need.

Nick Moran 10:53
So Nikki, I want to talk a bit about the pandemic situation. And I know that you, you know, you’ve talked about in the past about how you look for market tailwinds, I think as many do, especially those that will be lasting, right and not fleeting. Right now, we’re seeing a number of shifts that will have lasting effects. Conceivably, and which, which ones are you watching most closely?

Niki Pezeshki 11:17
Yeah, it’s a good question. I mean, I think COVID is, has just turned everything upside down in so many ways. And it’s been so fascinating. And for us as VCs, I think you need to separate things that are going to be like fat and hot over the next, you know, 612 to 12 months, two years, however long COVID is gonna last versus things that will structurally change the way that we do business and the way that we kind of like, go about this life. And, and that’s the hard part, right? It’s like, hey, how long will this last and then be, you know, assuming, eventually ends, what behaviors will become normalized to this thing? And what will what will just go back to being what will just go back to pre COVID? Right? So you know, for example, you know, one of the things that you might think about is like, okay, like people cooking at home, like cooking at home has become a much more popular thing, are people going to once COVID ends, and people can go back to restaurants, what will happen to the percentage of home cooked meals, you know, in my opinion, I don’t know, like, I think in general, people didn’t like to get home and be before COVID Not because they weren’t good chefs, but because, you know, it really is not super fun to to wash your dishes. And it’s, you know, not fun to go to the grocery store. And it takes a long time, and you finish your food in five minutes. And the prep and the cleaning took an hour. And so you know, you you’d rather just go to a restaurant and, you know, have an amazing meal in a social setting with other people. And so, you know, that’s one where I look at them. Like, I think people go back to eating at restaurants like pretty quickly when they can, you know, I think a fascinating one. And a lot of these are like, pretty obvious. I don’t think any of these are like super groundbreaking or anything. But you know, I think in general, you know, folks, like video conferencing, I think that is a behavior this year to see, I think there’s a lot of companies that that just had way too many in person meetings that were just very unnecessary and took up a lot of time, and people are realizing that they can be almost as effective over a video call. You know, I think in home care, especially like, like, within healthcare is going to be a very long lasting trend as people are like, you know, what, if, during COVID, I realized as a doctor that I could treat my patients well inside of their house, or at least, like the opportunity that was there to do that maybe we didn’t have the right tools or the infrastructure to be able to do it. But like, we think that even post COVID Like we can help patients in the house, I think that’s going to be a pretty big trend. So, you know, for the most part, you know, call me crazy, but I think almost, I would say most things are gonna go back to normal, but there’s there will certainly be trends that are long lasting. And it’s really hard as a as someone in venture to, to kind of know, how you should be investing. When when you really don’t know what’s gonna go back to be normal and what’s not what is gonna go back to normal and what’s not. And that’s, and that’s what I try to spend a lot of my day on is trying to think about that kind of stuff. Sure.

Nick Moran 14:21
Part of the part of the job, right. So you know, Nikki, I know that you you follow macroeconomics closely, and you’ve I assume you’ve been watching the public markets, which have largely stayed up during this pretty significant health and economic crisis. What Why do you think the public markets have not corrected significantly down yet?

Niki Pezeshki 14:47
Yeah, so again, I would say probably nothing groundbreaking here. But in general, when you have interest rates that are as low as they are right now and so much government stimulus being pumped into the economy A lot of folks are using that are using the stock market as a way to find yield. And so they’re investing in the stock market. You know, I would say also, you know, there’s some companies that have been helped by COVID. And some companies that have been hurt. And so, you know, in general, instead of everything going down, I think what you’re just seeing is like a shift of money from companies that have been hurt by COVID, to the companies that have been helped by COVID. And in general, like, instead of money being taken out of the market, it’s just shifting. And then I’d say, you know, in general, like when you have so much money coming into the system, and so, so demand increases, and the number of public companies has essentially stayed constant, right? So supply is constant, when demand increases, and supply is constant, like you have an increase in prices, let’s just, that’s just natural micro economics right there. And as simple as that sounds, I think that’s what’s happening. You know, if all of a sudden, like, we were able to, to x, the number of public companies that were out there, I think asset prices would be about the same. But if there’s only a certain number of good companies out there that the public investor can purchase, they’re gonna go after that small set of public companies with a lot more money. And that’s why price increases.

Nick Moran 16:17
So, you know, I want to talk about, I think a good place to start would actually be talking about sort of your investment framework. And you’ve, you’ve got this awesome three part framework that you’ve used, it’s, it’s funny enough, it’s actually remarkably similar to one that I use back my days doing m&a for a company called Danaher, but no dinner? Yeah. Would you mind walking us through the the three parts to your framework and how you think about making investment decisions?

Niki Pezeshki 16:45
Yeah, sure that, that sounds good. So So what I’d say is, and the reason that I even have a framework in the first place is because, you know, if you’re a generalist, in venture, like your head can go all over the place. And it can just be really hard to know where to spend your time, you know, when you are seeing a pitch for a seed stage company that is like trying to do like asteroid mining, and then like, you have a series B company that’s selling like, real estate, enterprise, SAS, and then you have like, a series a company doing, like a consumer, you know, consumer network, like a consumer social network, like, if you’re, if you don’t have a framework, you can just give me like, how should they be spending my time, there’s so many shining objects around you that like, you need to have like something that grounds you, and something that helps you be like, Okay, I’m going to pass on this before I take a meeting, or like, If this sounds interesting, and I’m going to pursue this, or else, you’re just shooting from the hip, and you’re just gonna go nuts. So right. So the way that I think about my framework is it’s three parts, and it almost always starts with the market for me. And, you know, it’s not just about market size, like, I think anybody can be like, Yeah, this is like insurance is a large market, you know, or x is a small market, like, that’s not that hard to do. I think what’s more important is, is just identifying a why now, in a market that will essentially enable a startup to kind of like, right at the tailwinds of that market. So, you know, that could be anything from like demographic shifts, a shift in the technology, infrastructure, changes in consumer sentiment, like regulatory changes, um, basically, like, what you’re what I’m looking for is like, okay, there’s supply and demand is out of equilibrium. And I think like, the market will shift that will put supply demand back in equilibrium. And I am looking for those markets where like that clear why now is there you know, if, if there is no why now, then, like, I don’t really know why there there’s an opportunity for that startup in the first place. So that means like, the incumbents probably have a stranglehold on that market, the market is operating in equilibrium. And there’s probably not that much room for a startup to come and shake things up. And so yeah, that that, that’s my job. My job is to be like, Okay, I think something is changing here. There’s a clear why now. And now I’m like, intrigued, and I’m going to continue digging in here. Because the next part of the framework is okay, now that I think that there’s a why now and a clear market. Tillman here. I’m not the smart. I’m like, I don’t have a crystal ball. I don’t exactly know, you know, like, I’m not the first one to know that a why now is happening in the market. I’m maybe in the top 25%, maybe in the top 50%. But what I can know is like, once I identify the market, Tillman, it’s like, okay, what is a unique business model or a unique strategy to actually go and take advantage that Mark tiller? So like, what you can basically say is like, okay, there’s been I know that there’s a tailwind happening here. And there has been multiple companies that have kind of like, come in and tried to take advantage of this tailwind, and a lot of them have hit. A lot of them have not succeeded or succeeded, but like have not become like super amazing return companies. You have to kind of ask yourself, like, why is that? What did they do wrong? And like, what is this company that I’m talking to right now? Like what is unique and differentiated about their approach that can that will enable them to to separate from the pack and become like the standout company that rides this market tailwind. So, you know, like maybe all of the companies that have come before this company have been very, you know, one time revenue. And this company is doing a subscription bundle, maybe, you know, all the companies that have come before them have tried to go direct to consumer when, you know, the right distribution channel was like to go through their employer, you know, maybe all the companies before them were like trying to maximize gross margin, and then this company is like, you know what, like, we’re actually going to lower gross margin here get to scale. And then once we’re at scale, we can add on all of these services, and then have like really high gross margins. So there’s always like different strategies to go about chasing a market tailwind, and I just want to find like, something that’s fresh and unique. And that that will really get me excited about that company’s opportunity. And then the last one, in the framework is, is around the founder, in general is the founder comes to me and has totally nailed number one, and is totally nailed number two. I’m pretty excited about that founder already. But what will take me over the edge is if that founder, you know, has what I call founder market fit, like they were born to start not born, but like based on everything that they’ve done in their career and what they’re very passionate about. They’re like the exact person that should be starting that company. And if I can find, you know, that market tailwind, an amazing like product or or business model that is going after them Marketo and then a founder that is uniquely qualified to execute that business model or strategy in that market tailwind, like I’m all in so. So it’s pretty simple. And you know, again, nothing groundbreaking, but it just basically kind of like gives me good blinders. And lets me focus my time and know where I should be, where I should be like, do a quick pass or where I should dig in a little bit more, or are

Nick Moran 21:47
there places that you go to with regards to number one on the market tailwinds, right, you’re looking for drivers, you’re looking for exogenous factors, you’re looking for general trends, whether they be sentiment or technology, or otherwise, but are there places you go to finds data like aside from Merrymakers report, you know, where are some places where you can find those tailwinds?

Niki Pezeshki 22:11
Yeah, um, you know, I generally don’t like to read, I tried to read more like broad, macro, broad, like business type of articles, I’m in not articles, but like magazines and books. And so, you know, like, I pull up the Wall Street Journal, every day, I subscribe to that Atlantic, I subscribe to The Economist. And when that when those magazines, you know, come to my house, like that night is my reading night, like, I am sitting there, and I’m finishing that magazine from front to back, like within one sitting. And, you know, they’re, they’re the Atlantic or the economist, like maybe like, let’s, let’s just use electric scooters, for example. Like in 2018, maybe they would have had like one or two articles about electric scooters. But like, they definitely weren’t all talking about that one fat, right? Whereas if you were like in Silicon Valley, like that is literally all you’re hearing about is like bird lime, bird lime. And so reading some stuff that is a little bit more generalized, and not for VCs has helped me kind of like, understand these, these larger market trends and, and maybe focus in areas like health care, or like employee employer relations, that maybe some other VCs aren’t spending as much time in because they’re focused more on, you know, like crypto or electric, electric scooters or autonomous vehicles. And that’s generally not where I’m going to be spending most of my time.

Nick Moran 23:44
How do you make sure that what you’re reading is, you know, currently on trend, right? Instead of, maybe it’s stale, or maybe you’re getting on date getting anchored on data, that’s, that’s a little older, or it’s fragile. You know, how do you make sure that you’re on kind of that, that cutting edge of what’s on trend?

Niki Pezeshki 24:06
Yeah, again, the thing is, I don’t always have to be cutting edge. It I know, like, I’m not, I’m not only focused on enterprise SAS, I’m not only focused on micro mobility, I’m not only focused on payments, I know a little bit about all of those markets enough to be dangerous. And so knowing that and accepting that I’m never going to be like the first one identify a trend really helps me out because I can say look, this trend is like here to stay. This trend is creating some sort of like supply demand imbalance. And my job then is to go and talk to a bunch of companies in that space and try to find the right business model that takes advantage of that trend. If I go out there and I see oh man there’s a clear why now here but like look, there’s like already a company in this space that is kind of like the no brainer winner. And there’s like raised a bunch of Money and like people got to it before me, hallelujah, like, I’m just gonna move on, the amazing thing about venture is that there’s so many cool opportunities out there, that, you know, if I miss something, I can kick myself a little bit. And I do just so I remember the pain, so I don’t. So I remember how it felt. But, you know, I can move on pretty fast and just move on to the next trend, there’s so much going on around us, there’s so many trends that are happening that, you know, as long as I’m in the top 25% of a, you know, 100 200 300 different themes and trends that are going on around me, I’m confident that I’ll be able to pick some unique business models in them. Well,

Nick Moran 25:38
best of luck Nikki, reading that economist cover to cover with the three month old at home?

Niki Pezeshki 25:45
Well, yeah, she started sleeping a little bit now like, so I have, you know, a couple hours here and there. Good, good. You know, I

Nick Moran 25:52
just got off the phone earlier today with an entrepreneur spent about an hour discussing business models. You know, he he has a business model in place, which is, you know, a recurring subscription software fee on a monthly basis. He’s hearing from a huge contingent of customers that they can’t do that because the nature of their business is more project oriented. And so they’d rather pay more for like a metered service model, you know, how much use they get out of the park product they pay for it. So aligning on the best business model for both the market for VCs for the company is is a tricky one, right? How do we how do you, you know, attempt to find that right business model, you talked about business model and go to market a bit? And point number two, but how do you lock in on what is the appropriate business model that can help lead to fast scale and sort of transformational changes within the industry?

Niki Pezeshki 26:47
Yeah, that’s a that’s a great question. Because it’s, it’s so important to find that, you know, there’s, there’s businesses that I that I meet with on a regular basis that well, my general framework on business is that it’s a formula. And it’s just like, you know, there’s just a bunch of puzzle pieces that need to kind of be like, put together in a perfect way to create a beautiful picture. And the pieces of the puzzle are essentially like the various stakeholders that are involved in that company’s business. So it’s like your customers, your vendors, your employees, your investors, like, there’s all these people that need to be happy with what your company is offering. And so what I like to typically look at for a company is are they creating what I call a win win win situation. So, you know, by that company existing, are, they essentially like creating a situation where all of their stakeholders are feeling like they’re benefiting by this company existing and like, no one is getting screwed. And, in my opinion, like when, when I can find that, like, that’s what really gets me excited. And it’s very rare, it is very rare, usually, like business starts, and you know, you’re selling, you have like a marketplace, but like one side of the marketplace is like, actually kind of, you know, their life is getting worse because your business started. And you know, you can focus on the other side of the marketplace. But as long as the one side of the marketplace that pissed about your existence is not happy, like you’re gonna just have a thorn in your side the entire time. And, you know, there’s no hard and fast rules, but the closer I can get to business, where where they create a win win win situation, the more I get excited, because that company will be propelled to success by all of the people that are rooting for them, which, which is great. Would

Nick Moran 28:35
you rather see a customer set have to adapt to a new business model? And maybe there’s some learning and pain in that process? Or would you rather a company, adopt a business model that’s more comfortable for maybe the customer set and more transactable and easily able to get fast traction, but it’s maybe, you know, a trickier business model to manage over time.

Niki Pezeshki 29:02
I mean, it’s getting, we’re getting a little bit detailed here. So it’s kind of like hard to say in the abstract. You know, in general, I think that you need to bring something to the table, where the when the customer hears what you’re doing, like, for example, what you said earlier was really good example, like, if you’re trying to sell a subscription to someone where it’s really like Not a subscription, like they’re not going to be using it on a regular basis. I’ve seen so many companies try to sell subscription to people that shouldn’t be being sold a subscription to, you know, and that’s that, like, if you have really high churn, like that’s one of the reasons like you’re trying to sell a subscription product to someone that doesn’t need a subscription product. So the churn, you would have made a lot more money as a business if you just didn’t sell that as a subscription and just increase the price of that one time payment and just been okay with that. And you know, maybe like add another couple additional servers This is on top of that, try to maximize Mize the LTV from that one payment, or that one customer interaction, as opposed to, you know, charging a 10th as much, and then going like three months of subscription, and then basically like losing customer, you essentially got 30% of the amount of revenue that you were gonna get. And then it’s also looks really bad because you have like pretty low churn, I mean, pretty high churn. So I mean to, to answer your question, you know, I’m looking for a company that is basically creating the right business model for the product they’re selling, and is maximizing the lifetime value that they’re getting for that customer relative to the amount of money that it costs them to acquire that customer.

Nick Moran 30:39
Well, while we’re staying in the abstract and finding general heuristics that apply to half everything, I got another one for you. So and what Sure, sure hit me in what types of businesses do you like to see product focus founders, versus, you know, growth hacking or marketing focus founders? You know, is there a heuristic or some sort of systematic way that you think about that?

Niki Pezeshki 31:05
Honestly, there, I would say, I haven’t been in the game long enough to really have a strong opinion on this question. You know, in general, because I don’t have a product and engineering background, it’s, it historically has been harder for me to get more conviction from a product focus founder, where like, the differentiation in their company is like, how amazing their product is. If that amazing product is not tied to some very unique and interesting business model, some very unique and interesting, you know, distribution channel that maybe they figured out that no one else has figured out, maybe some something around, like how it creates network effects, and maybe other people aren’t, like really understanding yet. Like, it’s really hard for me, as someone who has more of a finance and business background to, you know, be all in on like product and engineering focus founders.

Nick Moran 32:06
You mentioned earlier that business is a formula. And it’s in, it’s clear early on, you know, whether it’s going to work out or not, can you give us an example of, you know, this formula?

Niki Pezeshki 32:19
Um, yeah, I mean, at the end of the day, like, it’s simply how much money comes into your business, and how much money goes out of your business, and you want more money to come in and goes out. And, you know, for a lot for a lot of startups, at least to start, you know, they’re spending a lot on r&d, and they’re spending a lot on like sales and marketing. And so for, for the most part, like, a startup is not going to have more money coming in and going out. But you know, as you look at the unit of the customer or the transaction, ideally, you would want more money coming in and going out by a significant margin. And you want that to be repeatable, and you want that to have room for expansion. And, you know, if it doesn’t have room for expansion, what do you want to see is the gap between how much money is coming in and going out is so large, to start that even as more competition comes, and that margin might decrease a little bit, that company still has so much margin for error that they can ride that and ideally, crush the competition as they continue to grow. So you might have a strategy of like having super low gross margins to start just to get scale, but like, you really need to prove that like, over time, as you scale, there’s going to be some kind of switch that turns on whether it’s, you know, you walk up one side of the marketplace and get pricing power, or whatever it is, that’s going to enable you to have to have a win I’ve called Simply put, like a good business. And, you know, I think a lot of people forget that. And it’s pretty easy, I think early on to tell at least for like 80 to 90% of companies like, hey, like this is a formula that that’s probably just like not going to work, or is going to work. And, you know, I think that’s where I try to keep sharpening my thought process and how I look at businesses and try to really get to conviction on that early because if you can’t get to conviction early on whether this formula is going to work or not, then either you’re gonna make like no investments, because like, you can’t get to conviction on anything or like, if you if you don’t figure out the right formula there and you keep on making investments in companies that that aren’t going to be able to figure out this equation, like you’re just going to make that investment. So I think that’s a pretty key part of investing, especially early on,

Nick Moran 34:32
what is a good unit economics heuristic, you know, what, what sort of LTV to CAC ratio, are you looking at and saying, Ooh, this looks healthy, you know on paper.

Niki Pezeshki 34:43
Um, you know, there’s a lot of different industries and every industry has a different formula that that matters to them you know, for like some companies you know, that are doing like enterprise sales or, versus like SMB sales, one might be like a three to one. One might be a five to one because there’s just more risk associated, you know, with with some types of sales than others. And so there’s really no like one number, what I’d say is, you know, the, the more LTV you get from an individual customer or an individual transaction, the more leeway you will have to spend on customer acquisition, and the more leeway, you will have to basically be able to drop your prices in order to keep that customer. So so I wouldn’t say it’s like an absolute number, because there’s so much variability across different industries. But you know, like, I would just say, the more it is, and the less you are relying on, this is also really important, the less you are relying on that customer being with you for a very long time, the better it is. So if you’re like, oh, this company’s LTV CAC is like four to one. And we’re also assuming that this customer stays with us for like, eight years, like, that’s probably not great, right? Because no one can can identify whether that customer is actually going to stay with you for eight years, what would be really good as if you’re like, hey, this is four to one in like, the first six months like that is that is amazing. And you know what, if that customer leaves you after six months, it’s all good, like you already made four to four times your money on that one customer and you know, it’d be great to keep them and take that to seven 110 to one over the next one to two years. But because you had such a big gap between LTV and CAC, at the very beginning, it gives you a lot more leeway. Now more competitors are gonna come to the market, you might have to start spending on more CAC, you might have to drop your prices. But if you went from four to 123, to one that’s much better than going from like two to one to one to one, right. So bigger is better.

Nick Moran 36:38
You know, when you’re working with founders, you know, post investment, what’s your approach to coaching and advising, you know, I’ve found there’s kind of a fine line between, you know, you don’t want to be the overbearing advice giver. But you also don’t want to, you know, share, you don’t want to withhold insights that could really be, you know, beneficial to the founder and their business. So, you know, how do you think about that? And how do you strike that balance?

Niki Pezeshki 37:06
Yeah, definitely. So this one has been a particularly challenging question for me, especially because I haven’t really had too much operating experience, and I’ve never started a company. So a lot of the perspective that I bring to the businesses that I invest in is the perspective is one of two things. One, it’s, you know, I’ve seen this play out at many other different companies that I’ve worked with. And so based on what I’ve seen, I can also help you. And then the other thing is, I understand the, the financing markets significantly better, probably than you knew, because that’s what I do all day is, you know, I know evaluations are I know, like what other investors are looking for in terms of milestones, I know how to, you know, do financial modeling, probably better than many founders. And so, you know, my job is one to be like, Hey, these are a lot of the things that I’ve seen out there that are relevant to you, based on other companies that I invested in, and then hey, my job is, I believe in your vision, I think you’re an amazing founder that can go and build this awesome company, the only thing that’s stopping you is, you know, making sure you have enough cash in the bank to go hire the right people and to continue executing on this vision that you have. And so like, how can we work together, to essentially, always make sure that you have the cash that you need, and like part of that is, you know, planning cash really well, making sure you’re staying on top of it, making sure you know, when you have get down to a certain amount of runway that you are starting to think about fundraising. And then also it’s like, you know, when you’re going to be at that point that you started need to start thinking about fundraising, what are the milestones that you need to be at in order to raise a good round, that won’t dilute you too much, put more money in your bank account, so that you continue hiring employees and continue going after that vision. So, you know, when I when I have conviction that you know, on those two points of like, things that I’ve seen in other businesses, and then things that I know about the financing markets, when I have like conviction on those two areas, I’m pretty, I wouldn’t push it with my founders, but I definitely make sure my opinion is heard. You know, if it’s like a if it’s like a product and engineering question, and the founders, like, hey, like, can we do like a product session or something like that, you know, I’ll do my best to help. But I also go into it and being like, Hey, I just want you to know, like, I’m not like the product investor that you might want to have on your cap table. And if that’s who you want on your capital cap table, maybe like in the next round, when we’re looking for a new investor like that is something that we can gear your fundraising to, if it’s, you know, all else equal the same valuation on the table, same round size, and then you’re debating between taking this one new fund versus another fund or this one partner versus this other partner. Let’s go with the partner that you want to that will bring a unique skill to the team or to the board that you want. So that’s how I typically manage it. But again, it’s not easy like sometimes I get nervous and I’m like nudging A little too hard. Sometimes I worry that maybe I’m not nudging enough. And it’s a constant battle inside my head, I’m knowing what is the what is the right way to approach it?

Nick Moran 40:09
What keeps you up at night, you know, the ones that you invested in, that you shouldn’t have, or the ones that you didn’t invest in that you wish you had?

Niki Pezeshki 40:20
I did a little bit of both, but probably the ones that I did invest in that I shouldn’t have me to. Because I go back and I’m like, man, you know, what, what, why did I? Why did I do that? Um, that was not very smart. What did I believe that that that didn’t go out, turn right. And, and, you know, I’ve always had the belief that like, you need to kind of like, put yourself down when you make a mistake in order to really remember the pain and to kind of next time you’re in that situation, and you’re like, I remember how much that hurt. And I’m not going to make that same mistake. Because if you just kind of like don’t learn from your mistakes, and don’t kind of kick yourself a little bit, you’re just going to keep on making the same mistakes. And like, I’m just trying to continue to like sharpen my mind continuing to, like, kick myself when I make mistakes, so that I that I make less of them in the future. And then, you know, the deals that I didn’t do that ended up going out and doing big things, you know, it’s just really hard in this business to get too worried about those, thankfully, I don’t have a ton of those. Yet, you know, I’ve only been doing this for four years. And so far, you know, I haven’t missed like the next, like Facebook or Uber or anything like that. But it’s definitely going to come, it’s definitely going to really hurt, I’m not looking forward to it. My perspective on it is, you know, you just got to keep learning from your mistakes. And there’s so many companies out there. And there’s so many different forks in the road moments for all of these companies that that you just need to keep focusing on making your own like framework and investment process better and good things will come.

Nick Moran 41:57
Alright, so quick segment here, this is a hypothetical, I’m going to give you a hypothetical situation and in you’ve got to ask for three specific data points, based on the situation. So let’s say that you have a consumer SAS company that comes to you, they’re doing 300k In ARR, they’re growing 20%, month over month over month. And that’s all the data you have about the company. Which three data points you asked for and why

Niki Pezeshki 42:28
there’s assuming and know what the company does.

Nick Moran 42:31
Yes, let’s assume you know, the one liner.

Niki Pezeshki 42:34
Okay, that sounds good. You know, so 300k, grand 20%. First, I would want to know how much they’ve raised, you know, if they’ve raised $20 million to get to 300k. That’s not as exciting if they were bootstrapped, or just like reasonable time friends and family round. That is more exciting. Second, I would, I would try to figure out what the retention is, you know, if they’re keeping 100% of their customers, that means that they’re probably working on something pretty special. And you know, you don’t have to worry about a leaky bucket, all you really have to worry about is continuing getting more customers as opposed to you know, that like 80% churn after like six months, you’re like, wow, something, even they got to 300 Caviar, which is great, but they’ve probably lost like many, many millions of ARR. And every time they add a new customer, it’s a bit they’re basically going to leave. So what’s the point? And then No, on the third? Um, you know, again, this is me going. I mean, maybe you would ask around how much it costs to acquire that customer. Because I think that’s pretty important, and tried to really kind of like hone in on the LTV CAC formula and see if there’s a lot of leeway there to either lower LTV or increase CAC in the future and still have a really good business.

Nick Moran 43:49
Awesome. Nikki, what resources have you found particularly valuable that you would recommend to listeners?

Niki Pezeshki 43:59
Um, you know, again, because I’m so market focused, and because I’m just like, so fascinated by what’s happening in the economy, and I just want to kind of always be up to date with, you know, politics, macro economics, the world, the way that the business and the markets are moving all the time. I think, you know, reading the economist every week has been really good for me, especially giving that like, big, like international perspective. I love that Atlantic I think, you know, they write some of the most thought provoking articles out there. You know, I’m pretty maniacal about reading the Wall Street Journal multiple times per day. And, you know, just try to have a lot of conversations with with interesting people and try to learn from everybody that you talk to and understand their perspective and hopefully, again, you can you can take in all this information that’s coming in around you and don’t let it just pass you by but but really tried to soak it up and try to learn from it so that you know when the amazing investment opportunity comes and hits you in the face, you know that you can, you should run with Have it.

Nick Moran 45:00
Nikki, what do you know, you need to get better at.

Niki Pezeshki 45:05
Um, it’s just so many things I, you know, I think I just need to constantly be learning and not give up. I think it’s easy in this business, like, you make a couple of good investments or whatever. And you’d be like, oh, like I know what I’m doing. But like, really, you don’t know what you’re doing. And while you think you’re good, like there’s a lot of other people that also think that they’re good, that are constantly improving to and constantly chasing the best founders and the best opportunities. And so like, you really can’t take a step back. Like you really need to always be acting like you’re day one. You need to always have like the hustle and the grind mentality. And as long as you have that you’re open and you’re learning. You shouldn’t be good. So that’s the biggest thing. And then really understanding constantly, like making sure that you are understanding your biases and the way that you think, is just so important in this industry. You know, there’s so many different shiny objects coming at you. There’s so many different companies that you know, another investor says, Hey, you gotta meet this company. They’re so great, or, Oh, my God, like this company, you know, is, is like super hot, and you just need to like, take a step back. You need to like, think about what matters to you. You need to make sure you’re like sticking your framework and not letting your biases like make your lizard brain go crazy.

Nick Moran 46:23
Well, good. And then Nikki was a fine. Finally, what’s the best way for listeners to to connect with you?

Niki Pezeshki 46:30
Just shoot me an email nikki@fleeces.com And I Aki at F D Li cis.com

Nick Moran 46:37
Well, Nikki, this has been a real pleasure. I always enjoy your your comments and your material. And I’m really glad we had a chance to connect here and and go a bit deeper.

Niki Pezeshki 46:48
Awesome. Thanks, Nick. Appreciate it.

Nick Moran 46:55
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 in 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