247. Leaving Kleiner Perkins to Start Defy Partners, The State of Venture in the Bay Area, and Maintaining a Beginner’s Mind (Trae Vassallo)

Full Ratchet Trae Vassallo

Trae Vassallo of Defy Partners joins Nick to discuss Leaving Kleiner Perkins to Start Defy Partners, The State of Venture in the Bay Area, and Maintaining a Beginner’s Mind. In this episode, we cover:

  • Can you talk about your transition from Kleiner Perkins?
  • How tough was that decision to make?
  • What was it like to work with John Doerr?
  • What’s the thesis at Defy Partners?
  • When you began Defy you chose not to look at San Francisco. Can you talk about why that is?
    • How do you think this plays out? What will tech and venture in the Bay Area look like a few years from now, when COVID is behind us?
    • Any stats on flight of talent form Bay area to other cities/regions?
  • What changes have you observed in venture/tech that this crisis has either caused or accelerated?
  • You’ve been a founder and can relate w/ the folks you’re working with. How do you try and keep that beginner’s mindset as you gain more experience and get further away from your founder journey?
  • What are some the biggest mistakes you see founders making when pitching investors?
  • What tips can you give founders around building relationships as well as pitching in a completely virtual environment?
  • You experienced a severe personal experience… near death situation a few years ago. How has that changed you as a person and as an investor?
  • 3 data points…
    • Let’s say you’re approached to invest in a consumer hardtech startup.
    • The startup is doing $1.5M ARR
    • It’s growing at 15% MoM
    • And LTV:CAC is 4:1
    • Catch is, you can only ask 3 questions for 3 specific data points, in order to make your decision. What three questions do you ask?

Guest Links:

Key Takeaways:

  1. It’s crucial to understand what the correct objectives and key results are when building a business. Alignment and communication on what matters and measuring the right things are foundational.
  2. Venture Capital is a services industry. VCs are in service to the entrepreneur, and it’s important to remember that they are doing all the hard work and that this is the entrepreneur’s life and dream.
  3. Defy Partners is a generalist firm investing in both consumer and enterprise. They see lots of parallels to consumer investing in enterprise and vice versa. Whether it’s building out viral loops or key infrastructure, the line between consumer and enterprise is beginning to blur.
  4. When companies have to go through budget cuts and hard times, they sometimes unlock incredible productivity. In situations with excess, resources can unintentionally be spent in areas that aren’t actually contributing. In some ways a couple steps back can help reset priorities.
  5. Companies under duress can also undergo a renewed focus on product. If buyers aren’t there and customers aren’t calling, it forces teams to think harder about their product. Is there a way to make margins better? To make products self service?
  6. Metrics like capital efficiency should be measured against the market the company is disrupting. If operating in HardTech, the rewards may justify some of the capital efficiency risks involved.
  7. Defy Partners has a Sage Program that brings in active CEOs, investors and operators to help with their portfolio. Defy’s sages are like venture partners with a twist; they all have active roles outside of Defy and are thus in the flow of their domain and close to the ground.
  8. In order to keep a beginner’s mindset, Trae enjoys testing and beta-ing products. Approachability and authenticity are crucial when speaking to founders about their business. Understanding their language and their product, helps give context when evaluating a company.
  9. When pitching a company, one of the keys is to make it memorable. Establishing a personal and emotional connection helps your audience remember.
  10. One of the other keys is to nail the ‘Why you?’ and the ‘Why now?’ question. What is the authentic story of what led you to this point, and why is now the right time? Understand that no idea is new. Why will your team win? What is now possible that makes this opportunity so attractive?
  11. During a pitch, rather than explaining and going deep on a technology, demo it. If a picture is worth a thousand words, a demo is worth a million.
  12. It’s no longer enough to just have strong technology. Technology has been democratized, so it is no longer enough. A product needs to have crystal clear value to the end user and needs to prove that it’s solving the problem in the most elegant and efficient way possible.
  13. If at all possible, Trae prefers to have a safe meeting with the founders before investing. Pre-COVID, Defy would go into the founder’s office for the partner meeting. By watching the team interact with each other and by seeing the founder in their own domain, Defy is able to really understand the team.
  14. The best investors unlock a founder’s potential. They ask good questions, apply pressure and encouragement where needed and support them throughout their journey.
  15. Trae practices ruthless prioritization. As a VC there are always a million things that she should be doing and at times, it can be tough to determine what really moves the needle. And not just in work. It’s equally as important to spend time on things outside of work to build balance.

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 0:20
Trae Vassallo joins us today from the Bay Area. She is co founder and managing director at defy partners. She also co hosts equity Summit, an annual event that brings together 2 trillion of AUM for relationship building and authentic conversation between leading LPs and women GPS. Prior to defy Trey was a GP at Kleiner Perkins and before that co founded good technology. across her investing career she’s invested in companies including nest drop cam Opower Euro molecule vers elevate security and Arriva. Trey, welcome to the show.

Trae Vassallo 0:52
Thanks for having me on.

Nick Moran 0:54
Okay, so that was kind of a mouthful. Can you tell us your own personal story and background to Vc?

Trae Vassallo 0:59
Sure, no, this is actually kind of a fun story, because I never had any plan of being in venture. In fact, I had no idea what venture even was, I grew up in rural Minnesota, you know, kind of knew that I liked problem solving, knew that I wanted to get out. And I applied, unfortunately, got into Stanford and arrived, you know, sight unseen onto campus thinking that Man, I sure won the lottery, because this place is amazing. And, you know, Stanford’s is an incredible place, I opted to study mechanical engineering, because for me, it was all about creative problem solving. And I got exposed to, you know, amazing companies like IDEO, which I ended up working at coming straight out of Stanford. And, yeah, I mean, I was able to take, you know, my robotics kind of focus, I did a bachelor’s and a master’s. And, you know, I knew a lot of people went straight into business, and kind of use that as sort of the liberal arts, so to speak of, you know, today, and I kind of wanted to scratch that itch, and actually understand what it meant to ship and build a product. And so I was fortunate that I got to meet these incredible idea, folks. And at the time, and this is back in the 90s, you know, they were sort of the place for building breakthrough products, consumer products. And so while there, you know, I got to work on a number of cool and inspiring things like, you know, I got to work for BMW not to go to Munich. But the coolest thing, and most transformative for me was, this little company called Palm computing was the first startup that I’d ever run into. And it was the first company that had a female CEO, Donna Dubinsky, and she just kind of blew my mind, she was so inspiring. And I realized that, you know, while I loved helping innovate on products, and I got to help design and ship, the palm five, which was incredibly cool and iconic, the ability to build a company from scratch, sort of up leveling it from product to company, to me sort of became that next really cool thing that I wanted to learn how to do. And, and that inspired me to go apply to business school. At the time, that kind of felt like the only way to break out and see what this entrepreneurship thing was all about. And I got lucky. And Stanford let me back in. And so I went, went down the street. And my whole goal was to understand the language of business and hopefully figure out how to become an entrepreneur. And, you know, I was super lucky. And that one of the other things I was working on was coming out of my shell, you know, I was the stereotypical nerdy, kind of quiet engineer. And I knew that that wasn’t going to fly, kind of in the business world. And so one day on campus, I saw John Doerr getting a newspaper, and I was like, Oh, my God here is like the iconic tech figure, I have to go talk to this guy. And so I mustered up every ounce of courage that I had. And I walked over and I’m, you know, figuring out my brain, what to ask him, you know, as I’m walking over, and, you know, and I basically just said, you know, so exciting to meet you. I, you know, I just finished shipping, helping ship this incredibly iconic product that poem five. And turns out, you know, he had backed down, he knew this team well, so we had an immediate connection. And I asked him, I said, Hey, I really want to build on that experience, but I want to do it in an entrepreneurial way. Do you know of any groups of people working on something that, you know, is sort of focused on taking these handhelds and actually connecting them to the internet? And, you know, he said, Actually, I do. There’s, there’s a team that’s thinking about starting a company, let me connect you and it was sort of the, you know, the stars aligned for me and fortunately, you know, John followed up I met with this team that was, you know, about to start a company and I’d be came the third co founder of good technology, which, you know, I co founded in March of 2000. And my senior year in my second year of business school, and right before the great crash there, and you know, and it was an awesome experience that basically got me to have a front row seat to what it was like to start a company, build a company ship a product. And, and, you know, that run was fantastic. We ended up selling good to, to Motorola for $500 million. And, you know, we weathered the storm, it was a rocky one. But I learned a ton and coming out of that. I remember, I had another meeting with John and that there’s a theme here, you know, he was like, What are you going to do next tray, and I said, you know, I don’t know, but I’m sure I’d figure it out if I were working with you. And I sort of just kind of talked my way into an entrepreneur in residence role, awesome. Which was kind of funny. And, and so my initial, you know, role at Kleiner was had nothing to do with investing. It has everything to do with I love being an entrepreneur, I love building things, I just need a platform to figure out what was next. And it was tough. It was 2002 when I was doing this, and so the, you know, the market wasn’t great. And I also had a nine month old baby. And so that lasted for a little while. And, and then finally, I was like, you know, I have to support my family. I had a husband and business school at the time. And so I got a job offer from Apple to work on the iPad, and went back to the KP folks and said, You know, I have to get a real job. So I’m gonna, I’m gonna go work for Apple and, and they said, Actually, we’d love it. If you stayed. You know, we think you could really help us out. And, and so that was my entry into the business, which was totally right place, right time. And me kind of being open minded and, and have the mind to that. Let’s give this a try. Because I love building and problem solving. But I also love meeting and talking with all these amazing entrepreneurs that this firm gets to the chance to see. And so it ended up being a just an incredible, incredible opportunity.

Nick Moran 7:14
That’s amazing. When did John, leave the firm or retire? Oh,

Trae Vassallo 7:20
goodness, you know, I haven’t obviously, I left Kleiner in 2014. And so I know that he transitioned to Chairman kind of pulled me leaving.

Nick Moran 7:29
Got it. Okay, so you had many years then learning from him? Or working with him? I

Trae Vassallo 7:34
did. So yeah, I mean, I was at Kleiner for 11 years. And so I always say that, you know, is an incredible experience, I got to join the firm in 2003. This is pre Google going public, I think, if I remember right, John was on the board of both Google and Amazon, which is kind of crazy to think that that’s the case. And we had these, you know, this amazing group of partners around the table that we’re all very different buyers isn’t you know, has an incredible track record and experience in life science, Kevin Compton, who I adore, and consider a mentor, you know, did Citrix and you know, a bunch of other you know, really interesting companies Vinod touch line who I got to work with on security a fair amount. They all were very different. And they were all very big thinkers and and the firm was, you know, at the top of their, you know, their brand at the time and so it really was a phenomenal time to sort of see the inner workings and to be able to learn from some really, you know, inspiring people well,

Nick Moran 8:35
I want to talk about defy I feel like the book that I’m I’m most often recommend, there’s there’s a handful, but the book I most often recommend entrepreneurs is measure what matters by John Doerr. Yeah, yeah, any, like fun stories or any, like key lessons learned in your time there from him?

Trae Vassallo 8:53
Well, there’s so many and I do think John has had an obsession with objectives and key results, you know, from the moment I got there, and and I do think that, you know, communication and alignment around communication is everything and its core and it is something that, you know, as I’ve grown in my career, how you coach CEOs into building their executive teams, you know, that is the foundation so I absolutely, you know, tote couldn’t agree with that more. I think the other thing that the John really instilled in me and you could see it is that he really does an amazing job of connecting with entrepreneurs and listening and hearing them and kind of pulling out the right insights and and synthesizing things in a way that’s incredibly inspiring, but also very, you know, he could get to the heart of what the key issues were, you know, you wouldn’t get distracted by the minutia. It was this is the one thing that’s going to kill you, how do we figure out how to solve this problem? And so, I really appreciated that insight as well as, you know, an acknowledgement that we’re service industry, you know, Being a venture capitalist it were in service to the entrepreneur. And so there is very much a reverence to the fact that they’re the folks who are doing all the hard work. You know, it wasn’t about deals it was about this is someone’s hopes and dreams. This is an investment in a partnership. And I always really took that with me as something that was super important.

Nick Moran 10:21
That’s amazing. So tell us a little bit about Defy. So you, you left Kleiner, you launched the FBI, you know, tell us that that story?

Trae Vassallo 10:30
Yeah, well, so I left Kleiner in 2014. And the firm was really changing and getting big, and taking on, you know, a lot more capital. And it was just really clear that it was time for me to go and be more entrepreneurial again. And so the, you know, the, the thing that became obvious to me was that early stage entrepreneurs would go out to fundraise, and they would hear you’re too early or too early from what were supposed to be venture capital firms. But what was happening is these bigger firms like Kleiner was, we’re just raising more and more money, and it became easier for me to write $20 million checks than $5 million checks. And it also turns out that the part that I love, and you know, now my partner Neil sichere, loves it was this early messy stage of building these businesses of, you know, figuring out and really dialing in product market fit so that you can step on the gas and scale up on go to market and, and so that’s where as a product person and someone who shipped products, I love that part of the journey and that uncertainty and so, so leaving KP, you know, was obviously a huge jump for me. And, and also, I would say a really grounding one because it was, it wasn’t good for me to like have to be stripped of what was this incredible brand, the big pocket book and figure out, okay, why do people want to work with me? What is my value and, and it was interesting, because when I left, I found myself actually busier than ever. And that because I had had friends reaching out he Trey, we want your help on this, we need your experience on this. And so I found that incredibly confidence building that, okay, it isn’t just the brand or the money that I actually have some unique skills to bring in that gave me the confidence to seek out a partner. And actually go be an entrepreneur, again, I’ve built a firm that allowed me to continue what I love doing, which is early stage investing. And so our thesis at defy is really building, you know, a full full venture firm philosophy meaning, you know, we can we write checks, we reserve we get on boards, but we’re focused on the early stage. So, you know, we want to get in at these messy early stages, not just growth, but really helping you formalize management teams, build out your board, figure out how to build and communicate on a team setting up your OKRs and then dealing with all of the fumbles that you’re going to have on dialing in that product market fit. So so that was kind of the basic thesis, we closed fund one in 2017 of 151 million, and then closed fun to at 262 million last year. Neil and I have since added on a third partner Brian Rothenberg, who, who’s an operator, Neil spent 11 years general catalyst while I spent 11 years at Kleiner. And so while we both had a lot of investing experience, our operating skills and networks were frankly, you know, getting weaker. And so we wanted to bring in someone who had, you know, relevant recent operating experience, and Brian was initially hired as the head of growth at Eventbrite when it was a small private company, and then was their leading marketing all the way up through IPO. And so he brings a wealth of experience on things like customer acquisition and viral growth loops, and you know, all the ins and outs of how you scale customer acquisition and in these, you know, this era, where things are only getting more complex. Good,

Nick Moran 14:10
good. So, so back on the thesis, you know, what, what is the cheque size? And how do you define early stage? Is that, is that pre a, is that a is that A and B?

Trae Vassallo 14:20
Yeah, no. So, early stage means a lot of different things. We will invest super early, all the way through to the occasional B, I would say our sweet spot tends to be kind of that three to 5 million, but sometimes will stretch a little higher and sometimes will will stretch a little low or, you know, I think in the end, we do care about concentration. So one thing we aren’t is a seed fund that sprinkles a lot of checks. Ultimately, we want to have a handful of companies that we spend a lot of time on. And so for that, you know, we’re going to own 15 to 25% of these companies for the most part and really collaborate As with the entrepreneurs and building those businesses, another important thing and this was a key part of our thesis is that when we looked at other firms that looked kind of like us, whether it’s wing or COSTA No, or unusual, a lot of them started with a very specific thesis around enterprise, for example, and, you know, both of us had had experience in investing in consumer and media and kind of across the board when you look at our histories, and so we actually went into this saying, No, you know, we’re gonna be a generalist firm. And we actually think there are a lot of advantages to being able to understand, you know, how you build, you know, the right kind of viral loops and consumer, because a lot of that actually applies to how you do, you know, enterprise investing, and, you know, the best enterprise, you know, kind of back ends, you know, how you’re building out and key infrastructure for those companies also applies to consumer. And so this notion that somehow there’s a stark line between the two, you know, we think that that line is blurring. And, and so when you look at some of the companies in our portfolio, you do see that there are definitely companies that, you know, cross, cross blend those lines, and, and in places where I think there are, you know, where we really stand out, because we, we can understand a media company, and yet we can also understand, you know, one of our lasting investments was a robotics company, and our network is set up to be able to help us do that.

Nick Moran 16:32
What would you say is the defining thing about the firm that may be most different, or most differentiated from, you know, the crowd that you just mentioned?

Trae Vassallo 16:43
Yeah, well, I’d say, one thing is, you know, just the maniacal focus on the early stage. So, you know, we both came from really great firms that, you know, are multistage firms. And part of the thesis is that we want to make it really easy for entrepreneurs to know what they’re getting when they come to us, you know, they’re not, we’re not balancing looking at them versus writing a 20 or $50 million, check into another company, all we’re doing is looking at the early stage, and, and we’re also not going to say, hey, we’ll pass this time, but maybe we’ll invest later, which was another, I think, thing that we see with a lot of these multi stage firms, we have to make that hard decision upfront. And so I do think that is, you know, something that was really important to us. So keeping the firm kind of focused and right sized, right. So, you know, we, if you have a billion dollars, you’re gonna want to put that money to work. And you can’t necessarily invest that $4 million at a time. So really, constructing the firm in a way where we’re incentivized to continue to focus on this early stage is important. And then the other key is that you know, how we build out the team really matters. And, and, you know, when you’re in a big multistage firm, you can have a lot of people, we’re trying to figure out how to build a small and mighty and highly leveraged team. And, and I’d say, a good example of one of the things that we do to try to augment the fact that we are, you know, it’s just a handful of us around the table is that we do, I would say, sort of some creative things to, you know, make our ecosystem also aligned with us. So one program that I’m particularly proud of, is called our sage program. And the idea on this, you know, a lot of firms have Venture Partners, and these are people who are affiliated with the firm’s who, you know, can source investments and may sit on boards. And what we were noticing is that, you know, Venture Partners, it can be really positive, but one of the best parts of Venture Partners is their domain expertise. But the problem is, as soon as you pull them out of being CEOs are pulled them out of their domains that expertise, expertise starts to age. And so we we basically came up with a clever way of saying, no, we want you to continue being CEOs of the amazing companies that you’re working on, you know, and continue to be solving problems within your industry, but we also want to be able to, you know, incentivize you when you see something that could be a fit for us to help us make those investments. And so, you know, so our sages are kind of a twist on venture partner where they still have full time jobs as CEOs doing what they’re doing but they’re in the flow of really interesting companies and occasionally pickoff a few things where they work with us and, and right now we have four stages. And just to give you an example of the kinds of people they are, you know, one of our sages who we’ve been working with for a while is Brian Lee and Brian was the CEO of Honest Company. Neil had worked with him for a long time was on his board, and Brian has a small seed fund in LA he’s a prolific investor. Gerson, multi time entrepreneur and founder and and he’s super, super active as as an entrepreneur and CEO. And so by having him as a sage, you know, we have alignment with an incredible person who has, you know, amazing domain expertise who we can tap into. But he’s actively continuing to build that expertise.

Nick Moran 20:22
I like that word sage, we, we have one venture partner at the firm here, and we just refer to him as the most interesting man in the world. That’s

Trae Vassallo 20:30
good, too. Yeah, you know, we picked me picked our words carefully. And I like to say to I mean, we picked a five for a reason. And, and it’s because you know, being an entrepreneur is so hard. It’s like you’re constantly coming up against roadblocks, and you’re doing things that people tell you you shouldn’t be doing or couldn’t be doing. And so it is kind of this act of defiance. And it’s one that I personally resonate with a lot just because, you know, being a woman and technology and kind of having done the things I’ve done, I’ve I’ve sort of felt like I’ve had to be defiant over the years to get to where I am. And so part of that was trying to, you know, capture that in our brand, and have that, you know, look, we hear you entrepreneurs, we want to help you go out there defy and win.

Nick Moran 21:16
Awesome, awesome. So, you know, I think I came across some content, an article that talked about, you know, looking outside of San Francisco for investments, is that a part of what you do? And, you know, how are you seeing? You know, right now, a lot of the situation with a pandemic, of course, is exacerbated, you know, what’s happening in San Francisco, I’m getting pinged by friends in SF that her, you know, trying to sublet their places, and everyone’s kind of trying to get out. And honestly, I don’t think that’s just unique to SF, I think New York and Chicago and LA, are going through similar things. But yeah, you know, talk a bit about investing in and out of San Francisco and kind of the trends that you’re observing.

Trae Vassallo 22:00
Yeah, sure. So, you know, San Francisco, it was just really getting quite frenzied. And, you know, as we are a smaller newer venture fund, you know, if what we did was Chase Chase shiny objects in San Francisco, you know, we’re going to, we’re going to be, you know, paying super high prices on things that other people have passed on. It’s just, there’s so many reasons why San Francisco can be problematic and kind of part of our philosophy is we want to back we just want to back incredibly authentic entrepreneurs who are solving big problems, and those entrepreneurs don’t all live in San Francisco. And so we love the idea of backing these folks who still have access to great teams, you know, and understand how to hustle and work hard and, and execute in an entrepreneurial way. But those people, you know, don’t just live in the city. And so we have been very clear is a firm that we’re happy to invest. In fact, we sort of say we’ve kind of got a West Coast focus. So we have companies in San Diego, Carlsbad, la Seattle, Santa Barbara. And, and now with COVID. And what’s going on with kind of the city right now, I do think this is a trend that’s only going to be you know, furthered with the fact that it’s just it’s hard to do business in the city. And I will say to that leading up, this is pre COVID. When you if you’re a startup and you’re trying to hire you know, some tech people, it was really getting hard. And, you know, if I I’m anecdotally thinking about the portfolio, pre COVID, but almost every company had a cluster of people who were not local, everyone had already embraced remote teams at some level, just because supply and demand was making it impossible to do it all in one location. I think what’s happened with COVID Is this has just massively accelerated the fact that, okay, we’re all learning now how to work in, you know, in a collaborative online way. And as people are sort of escaping to places where we can live maybe in with a little more distance between each other, I think that will further cement the fact that, you know, while San Francisco certainly has been a leader, there’s no reason that it needs to stay that and so, you know, smart people who know how to build tech companies are are now getting distributed to lots of corners. And so hopefully, I think we are going to see a better distribution of, you know, companies that that succeed now, we still need to start that, you know, that that needs to play out and part of the reason San Francisco is so powerful is in areas that success does beget success. So, you know, once a company has a success those employees you know, then at some point spin out and start new companies in that low occasion. And so, you know, it’s going to take a while to sort of see what happens. But, you know, I think we’re optimistic that our strategy of not necessarily being 100% focused on San Francisco is it makes sense.

Nick Moran 25:11
Yeah. And your point around having these these other offices, even for r&d, I mean, I feel like I’m seeing that more and more with startups, startups that are in, you know, centers of influence in tech, New York, Boston, etc, that have a developer group and in an LCR, in the LCR could be, you know, abroad, or it could be an LCR within the US. It’s kind of in Colorado,

Trae Vassallo 25:36
for example, yeah, no, no, in fact, at one of our portfolio companies, you know, they didn’t renew their lease, they just they let it go, because a big chunk of their engineering teams in Canada, and and what they found was that, you know, when you have a big chunk of the team that’s not in the office, and there’s a little bit of this have have not culture. And by kind of exploding everything and making everybody remote, it actually sort of leveled the playing field, and actually improved productivity. And obviously, they spend a bunch of time really figuring out how to get people to connect and nonwork ways and really gel as a team. But they’re actually quite optimistic. And I think we’re going to see that across a handful of portfolio companies that don’t go back to an office. Right,

Nick Moran 26:21
right. Good. You know, I want to talk about your founder experience a bit. You had your experience when you were, that was in 2000, I believe, right, early 2000s. So after sort of the.com, collapse and everything, and now

Trae Vassallo 26:38
we’re going through during Yeah, do right. Yeah. Like, I’m

Nick Moran 26:42
sure you took some lessons out of that. Are those things that you’re you’re helping founders with now that we’re going through the current crisis? For sure.

Trae Vassallo 26:49
I mean, actually, both Neil and I like to say, you know, we’ve seen several ups and downs, not not only did we both live through the kind of crash of 2000. But we both actually were venture capitalists during 2008, you know, when we had that crisis, so we’ve had to kind of triage and mobilize, and in part of our thesis to is a small venture firm, pre COVID, we weren’t investing a lot of money into companies that I always joke that we’re using cash, you know, cash is a moat, right? Like using gobs of cash to buy customers, right, like our thesis and premise as a smaller firm is investing into efficient growth. And so especially right now, you know, all of the training that we’ve had in, you know, from 2008, and previous around, the first thing you do is make sure that you’ve got runway, you know, is exactly what we leaned in on and, you know, and then the other thing, too, is that, when you have these moments, and you start to several of our portfolio, companies went through this where they had to make some deep cuts. But in doing so they actually unlocked incredible productivity, what they didn’t realize was that, you know, they got cash, they got investment, they added people where they thought they needed it, but they actually weren’t scaling efficiently. And so in some ways, it’s kind of interesting to see how, you know, a little bit of some steps back and bringing people back down to more of the basic, you know, here’s the bare bones of what we need to move forward, actually helps reset them helps a renewed focus on product as well, I think, you know, in these times when, you know, maybe the buyers aren’t there and the customers aren’t calling, you know, there’s a focus on Okay, well, how do we make the margins better? How do we make the product more self serve? How can we emerge from this crisis better than when we went in? And, and so I think there’s, there’s a lot of conversations with our portfolio companies on those fronts, and, frankly, I’m pretty optimistic on on most of the portfolio and that I think they will emerge in much better, healthier shape, you know, but it’s, it’s certainly these are hard times to go through,

Nick Moran 29:06
you have experienced investing in seed Series A, in some cases, Series B, I imagine you see a variety of different capital efficiency scenarios. You know, regardless of just raw progress and raw growth. It’s not just growth at any cost and any amount raised right. Are there some guidelines or heuristics rough heuristics that you guys use to kind of assess capital efficiency with various startups?

Trae Vassallo 29:36
Um, you know, I would say some firms are very particular around look, we want to see that you’re this you know, LTV to CAC ratio, and this CAC payback, and, and they’re very, very metrics driven. And I would say, we’re, we’re, we pay attention to those metrics, but we also know that you, you can kind of manipulate numbers to say what you want them to say And so you really have to dive into a lot of the nuances. Yeah, and, and capital efficiency is one element that, you know, we like, we certainly love businesses where, you know, the cash cycles are great, they’re paid up front, the margins are big. But we also understand that there are businesses, you know, and I’m a person who has invested in a lot of hardware companies and just invested in a company like a Rivo, that’s robotics, for manufacturing, you can’t look at that and go, that is the most efficient business model, but what you can look at is go, you have to balance the fact that the industry that they’re disrupting, you know, has a totally different kind of risk reward schedule. And so part of what we’re doing as investors is building out a portfolio of basket of different types of risk. And so we love SAS Risk, we, we love marketplace risks, we have a basket of, you know, we balance enterprise versus consumer, and then we want some deeper tech risks as well. Whereas if those things really end up working, you know, the IP is really incredible. That could be, you know, you know, super effective on moving an industry forward. And so, I would say, you know, we’re not a group that’s looking for a cherry, you know, a, you know, a cookie cutter sort of set of metrics that define an area, it really it kind of depends on the industry, the leader, all sorts of things.

Nick Moran 31:27
Right, right. And, you know, you mentioned before, how you brought on another partner, you know, an operator that was closer sort of to the action, you know, as you got more experienced in your investment career, I’m curious, you know, how do you? How do you find a way to approach these opportunities with fresh eyes, right? How do you try and keep this beginner’s mindset? Because I’ve noticed, even myself, you know, as I’ve gotten further and further away from my, my product and my entrepreneur roots, it’s, it’s hard to kind of remember and go back to original mindset, right? It

Trae Vassallo 32:03
really is. And one of the things that’s important to us as a firm is to just approachability and authenticity. And if you can’t emphasize or speak the language of what the entrepreneurs are going through, I think it makes it a lot harder. And so, you know, fortunately, I am kind of a tinkerer at heart. So one of the things I have tried to do over the years is, you know, like, I need to test a ton of things, I install everything myself, you know, like, I just set up a fancy enterprise class Wi Fi system at home, and I insisted on doing the entire thing myself, so I did debug all this stuff. And, and, you know, I was also looking at a company that sort of in the Shopify ecosystem, so I, you know, I set up a Shopify store, and I tinkered around with it, and I built a website out. And, and I’m like, I think it’s really important to have that intellectual curiosity. And it doesn’t have to go super deep, right? Like, you know, I’m obviously not going to be running an e commerce Store anytime in the near future, but like, understanding the flow, and the steps, and, and those sorts of things I do think are really important. And, you know, I’m also fortunate that I’ve got kids and so like, I embrace the fact that, you know, when my daughter was, you know, getting interested in robotics, like I said, Hey, I’m going to coach the robotics team, and I was able to get flex my robotics muscle and get in there and help them debug and build out their platforms. And, and, you know, that kind of stuff is really good at reminding you that, you know, there’s a lot of complexity in here and, you know, doesn’t just happen with a snap of a finger.

Nick Moran 33:49
You know, let’s, let’s talk a bit more about the founders that you’re interacting with. You know, it’s the interaction has changed, or the basic interaction has changed. You know, a lot of people are pitching over zoom. Of course, there’s been a lot of tips on that, but just, you know, more generally, what are some of the biggest mistakes that you observe founders making, you know, when they’re pitching?

Trae Vassallo 34:09
Yeah, gosh, it’s so hard right now. And I do think that, you know, as an investor, and I’m on zooms all day long, everything just starts to blend together. So I think it’s really important to try to be memorable and you know, and don’t forget people are people are still wanting to engage. Right? So I do think just making those personal connections in the beginning, and you know, are important, but the most important thing for me is the the like, why you why now story which may not always come out in your deck, but this authentic story of what led you to this point that is causing you to build this company now and why is now the right time and this I always, I always say this is kind of the preamble to starting the slides where it gets A little more scripted. And I always think that this is the point, this is the place where you get me on your side emotionally, and I’m rooting for you, and I’m connected with you. And it makes it so much easier for me to remember your story. And so I think that kind of personalization at the beginning is super important. And then the other thing that I think, is, again, really important is a lot of people will go very deep into the technology, and they’ll explain it. And, and frankly, I’m a big fan of, if you can demo it, start with your demo, just go straight to here’s what we do. And the reason I think that’s so important is that, you know, I’m sitting here trying to visualize in my head, what you do and how you look. And so I’m not necessarily hearing everything you’re saying, as I’m architecting, this thing in my head, so if you can just start me off with, Hey, here’s what we do, then, then you’ve got me right there, it’s sort of the, you know, a picture’s worth 1000 words, a demo is worth, you know, a billion. So you just get me straight to the point. And, and I also say to that, like, while I’m a product person, and I shipped and built products, and for me kind of feeling and seeing like really helps me remember, I like to point out that most venture capitalists haven’t done that. And so when you’re explaining this to them, most people are really, they’re not going to understand what you’re saying very well. You’re living and breathing this every day. We’re not we’re jumping from company to company. And so, you know, demo demo demo. And if you can’t demo, do a mocked up demo, do a video, do something that gets that point across. And the corollary to that is, while the technology is important and relevant, and why you can do it better, you have to be super, super clear on the value that you’re providing to the end user. And so making sure that that, you know, almost the sales pitch, or the the customer experience, user experience is really, really clear. Because, you know, Silicon Valley has had a history of being too tech centric, you know, build this great tech, and people will come. Well, now tech is basically revolutionising everything. And so what you need to prove to me is that you’re solving a person’s problem, and the most elegant, efficient way possible. And so I need to sit in that chair for a moment and really experienced that. And so I’d say that’s the other really core thing that you need to get across to me when when you’re pitching. What about,

Nick Moran 37:31
you know, building that relationship and ongoing engagement with investors? Any any thoughts there on? how better to do that when there isn’t an opportunity to meet in person?

Trae Vassallo 37:41
Yeah, well, I would say, you know, to the extent we are investing in entrepreneurs in the Bay Area, we are we’re finding ways to do safe meetings outside. And when you are making a big decision, like is this a partner that I want to have for the next however many years, you got to spend time with them and being in person, even if you’re at distance outside, you know, with masks on, it’s, it’s actually really, really valuable to get that time together. So I would encourage folks to to consider, you know, finding safe ways to be able to spend that time, we have certainly done other investments at a distance. And I think it’s it again, it comes down to communicating your goals and needs. And I think we’re always very clear that, like, we’re here as a resource to the entrepreneur, we’re not going to force something on you if you need us. You know, here’s my phone number. Text me when you mean, you need me, I will be there. If you want to talk in a weekly cadence, great if you just want me kind of out of your way and as needed for a little while, totally fine. And so I think it is important to make sure have those conversations with your investor, get on the same page around what you want from them. Don’t be shy about asking the best entrepreneurs send me like, Trey, this is what I need from you. And you know, and I got to follow up I got to produce. And I think that is a really important way to manage your board your advisory board as a founder,

Nick Moran 39:20
are you trying to meet with founders in person before making a commitment? If

Trae Vassallo 39:26
it’s possible, and if people feel comfortable doing it, you know, outside again, in a safe way. I think it does give a whole additional level of insight. Pre COVID Actually, one of the things that was really important to us at defy was to actually go to their office. So we in fact, we would joke that our partner meeting is at your office, we don’t want you to come to defy because we’re gonna get this scripted. You know, selling and dance. I actually want to see you in your environment. People let down their guard. You can see how they’re interacting with the entire team. And I think there’s a lot of valuable, you know, information that comes out of that. And so, you know, that getting getting to people’s offices, not something we can do right now. But, you know, definitely kind of pre COVID times was a key part of of the vetting process, at least for us.

Nick Moran 40:21
You know, I, I hesitate to ask this, because I don’t want to bring up, you know, horrible tragic memories. But I know you’ve gone through severe personal experience of your own near death situation a few years ago. Yeah. Yeah. How did that sort of change your? How did that change you, you know, as a professional and as an investor? Yeah.

Trae Vassallo 40:41
Well, it was, it was kind of this crazy thing that happened as I was leaving Kleiner, where I ended up getting sepsis. And, you know, it was scary, and everything I got through it. And the important thing was that it happened to me at a time where it forced me to slow down and think about what I really wanted next. And I actually, like when I think about if it didn’t happen, I probably would have rushed out and joined another firm that kind of looked like a Kleiner to go continue doing what I was already doing beforehand. But because I had this sort of stop everything moment in my life, I did just that. And I sort of changed my priorities for a little while most important thing was get my health back, which I did, by the way, and now I’m healthier than ever. And that’s a whole nother passion that I have, which is all about, you know, being healthy, getting sleep, getting the right nutrients, getting exercise and body hacking, and so I could talk for hours on that. But it also got me to kind of ruthlessly prioritize and, and that was where I kind of came to this realization that I love early stage. And I think that venture firms don’t scale well. And that I think, smaller firms that have, you know, a handful of partners around the table, that is an ideal state. And so that to me, ended up it was the greatest gift in some senses is it was a huge catalyst to go find that partner. Fortunately, I found Neil, which was awesome. And then we started Defy. But it also then kind of gave for me this notion of ruthless prioritization, because venture is a tough industry and that you at any one time, there’s 10 million things you shouldn’t be doing, but you’re not doing and, and so it’s hard and you can kind of spin your wheels doing a lot of things that don’t necessarily result in moving you forward. And, and so and I don’t always have the right answer here. And and, and, you know, sometimes I might be slower to respond to people than others. But I think for me, I’m trying to still figure out how to be scrappy, and hustling and, and a great helpful venture person, but also balance that with being a well rounded, great parents and partner. And, you know, and having a good reset like that, you know, midlife I think I think it’s actually in the end, you know, it was a really good thing, because I feel like, you know, my priorities are much better balance than they were when I was in my 30s.

Nick Moran 43:12
So amazing, Well, glad that that, you know, that had a a good end result, if not a very pleasant experience to go through. Sounds sounds terrible. So I’m gonna ask you a question. It’s called three data points. This is a hypothetical scenario, this is not how investing works. But I’m going to give you some information on a startup. And you need to ask for three data points to make a decision. I know that you have some consumer hardware experience, euro and drop cam, and others. So we’re gonna give you a situation with a consumer hard tech startup. Let’s say that startup is doing a million and a half of ARR. Let’s say it’s growing 15% month over month, the LTV to CAC is four to one. But here again, the catch is you can only ask three questions for three specific data points to make your decision. What three questions you ask. Yeah,

Trae Vassallo 44:10
so I’m laughing because I think as I alluded to earlier, I think this is we’re not necessarily a metrics driven firm. And the issue that I have on consumer hardware is that one and a half million in consumer hardware may not actually be that high of an end. So like, you know, your customer acquisition costs, those could be our friends and family. Yeah. Have a great cat because you’ve sold two units at you know, $750,000 each. So I love this question. I do think it gets to the heart of like, what are those questions you ask, but I might not be answering it in the way that you were. You were intending because again, I just I don’t know that there are three specific metrics per se. But there are a couple of questions that I always ask that I want to get to the heart of. And in one I think I alluded to a little bit earlier, which is the why you and why now. And so those are two questions. And the reason why I think those are so important is that no new no idea is a new idea that it’s existed before people have tried it before. The key is, why is your team going to execute better than other teams have? And so really selling the specifics of of why a team is going to win. And this is super important, because it’s not just the CEO, it’s the team. And it’s not just the technical prowess, but it’s the ability to get the go to market, right, and all of these other things. And so there’s a lot embedded in that why you question? And then the other part of that, which I think I like, even more is the why now, and this question is so interesting to me, because I’ve seen now that I’ve been in this industry for a while, how so many people have the right idea, but their timing is just wrong. You know, and I laugh, especially having been a hardware person, you know, look at how many times people tried to do tablet computing in it before Apple finally got it. Right. It was decades before it 80s. Right. And look at

Nick Moran 46:11
you do an Eagles poem. The poem before the iPhone, yeah. Right.

Trae Vassallo 46:15
Right. So I mean, so these ideas weren’t new. It’s just there was something that got unlocked about the timing, consumers were ready for it, or the software was in a different place, this part of the ecosystem was finally there. And so usually, there’s some kind of unlock that has happened that is making this opportunity doable today, when it wasn’t doable two years ago. And then there’s the other part of that, which is why is today, right versus a year from now or two years from now. And so, so that’s another part of, you know, that question that I think is super, super interesting. You know, and then, let’s see the third question here. What would it be? I mean, I think especially in hard tech, business model, it is critical, right? So you, what’s your question here? You said arr. First of all, which is unusual for consumer hard tech, right? Every that’s kind of the Met Holy Grail, can

Nick Moran 47:16
we get arr? I’ve trained my founders? Well, yeah.

Trae Vassallo 47:19
And then the other thing is, like, your cash cycle, right? So that with these companies, especially that are doing hardware, one of the places where they really get in trouble is that their cash cycle is dramatically messed up. And what I mean, what I mean by that is that, you know, if you’re paying for inventory two months, before they can make a product, that someone else is ordering later, that then is shipped to them, you know, you can be putting cash out for a product, that’s not going to actually create any revenue for some period of time, which means you consume a lot of cash to grow. Now, you know, if you can buy a finished product at a higher price, but you’re not using your venture dollars to do that. And you can get a consumer to prepay you for that or pay to build, and you can create a cash cycle that has you getting cash before you have to pay it out, then you know, everything gets tipped upside down, and your model gets a whole lot more interesting. So I guess that’s a backwards way into getting at, you know, like, really understanding the cash cycle of these consumer hard tech businesses is super important. Really

Nick Moran 48:27
great point, right? Especially if you’re if you’re doing hard tech, you’re trying to do Arr, and you don’t get the annual prepay. You can you know, if you’re not selling the product upfront for let’s say, 100 bucks, and instead you’re selling it for five to 10 bucks a month. I mean, that puts you in a really tough working capital situation. Yeah. But you know, the venture investors are looking for the IRR. So yeah, it’s a tricky tray, what resource? Have you found really valuable that you’d recommend the listeners?

Trae Vassallo 48:57
You know, I’m sure you get a lot of advice on tactical, you know, this blog or that podcast. But there are a couple of books that have been recommended to me over the years that now I recommend to a lot of CEOs and folks and there’s there’s two different ones. There’s for folks who are dealing with like cash, I’m building my E team, and we’re having issues. There’s a book that’s been around for a long time five dysfunctions of a team leadership fable. Um, you know, it’s kind of written in a story like way, but it’s just so good at illustrating how and where teams break down and how you build up a good and high functioning executive team. And so I always recommend that book. The other one that I found more recently that I think is phenomenal is the 15 commitments of conscious leadership. There’s a trio of authors and I know Diana Chapman is one of the authors on that book. But you know, as I again as I’m focusing on how do I help CEOs kind of grow into their roles and be the best leaders they can be, you know, how do I also, how can I be the best coach I can be. And so really understanding what it means to be a great leader and what it means to be above the line. And I just think it’s a phenomenal book. And I do believe that when leaders are paying attention to, to how they lead and how they build their teams, it’s an incredible strategic asset that doesn’t necessarily get the focus that it should. Because when you can build those teams, they endure the ups and downs that startups are inevitably going to face with in a much, much healthier way.

Nick Moran 50:37
Awesome. Today, what do you know, you need to get better at

Trae Vassallo 50:42
coaching? You know, that is my thing right now, I do think that the best investors are the ones who are really good at helping CEOs maximize their potential. And, and so that is about being a better listener being really good, asking the right questions, being good, and being better about where to apply pressure, and where to apply encouragement. And so that is something that, you know, I aspire to be much, much better at, I care about it. And it’s what I love working with great CEOs. And when you can have a relationship where you feel like you’re really kind of helping move the ball forward. That’s it’s incredibly fulfilling. And so so that’s something I’m spending a fair amount of time on myself. So when

Nick Moran 51:33
he was just telling me about reboot, and you know, Jerry, yeah, he’s great. Yeah. Easy. Okay. Yeah, I haven’t I haven’t read the book, but thinking about checking it out. And then finally, Trey, what’s the best way for listeners to connect with you?

Trae Vassallo 51:46
Yeah, sure. Well, you can our website is defined at VC. We’re all up there. All of our emails are up there as well. My email is Trey T R A E at defined at VC. And, you know, and importantly, we want to be reachable and out there. So don’t hesitate. If you’ve got a startup you want to get in front of us. We’d love to hear more about it.

Nick Moran 52:10
Awesome. Well, we will certainly get some startups in front of you have we’ve invested in hopefully you’re open to the Midwest. But Trey, this is a real pleasure. I really enjoyed the conversation. And thanks so much for sharing the time.

Trae Vassallo 52:21
Thank you for having me on. Really appreciate it.

Nick Moran 52:28
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