Mike Smerklo of Next Coast Ventures joins Nick to discuss The Sustainable & Temporary Trends of COVID, The Self-Aware Founder, and Writing the Survival Guide for the Mental Aspect of Entrepreneurship. In this episode, we cover:
- Walk us through your background and path to VC.
- What’s the thesis at Next Coast Ventures?
- What are ‘Next Coast’ markets?
- How do you come up with the themes that drive investment focus at NCV?
- What are some of the trends emerging now that you are following that may have the most impact on new business creation over the next five years?
- Which are sustainable and which are temporary? Especially in the post covid world.
- The biggest difference in the founder journey from the LoudCloud and ServiceSource days vs. today?
- What qualities do you look for in founders when investing in the early-stage vs. growth stage?
- How do you help founders?
- What led you to write the book Mr. Monkey and Me?
- Why are you giving all the proceeds for the book to charity?
- I would love to hear your thoughts on self-awareness w/ entrepreneurs and your approach to it.
- This question is called three data points. I’m going to give you a hypothetical situation w/ a startup, and you can ask three questions for three specific data points.
- Let’s say you’re approached to invest in a Series A Marketplace startup…
- The company is based in Houston
- The sector is oil/gas.
- They launched 24 months ago.
- and they currently have $500k/month GMV and a 25% take rate ($125k monthly revenue run rate)
- Again, the 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?
Transcribed with AI:
Mike Smerklo joins us today from Austin, Texas. He is the co-founder and managing director at Next Coast Ventures a fund investing in early stage and high growth startups in next coast markets prior to next ghost he bought and scaled service source to become a publicly traded company worth nearly a billion dollars in value. Mike, welcome to the show. Nick. It’s
great to be here. Thanks for having me.
Yeah. and talk to us a bit about your background and your path to VC.
Yeah, I probably took the slowest and least traditional path to VC I was I started off in my quick background as a first person my family ever go to college. I got educated, got out of Toledo, Ohio, and went and was initially my career started off in financial services. I was public accountant for two years, when those jobs you walk in and go, Oh my god, what am I done with my life. But if two years, then I went to work in an investment banking firm called Lehman Brothers when there was a Lehman Brothers. We’ve got my MBA at Northwestern. And then I moved out to Silicon Valley in the late 90s, when it was literally the wild wild west and got to work with some great entrepreneurs. My first operating job was with Marc Andreessen and Ben Horowitz, they were starting a company called loud cloud. So if you ever read Ben’s book, The hard thing about the hard thing, I got to live that from a handset IPO. And then I quit. And one and for for a whole host of reasons to run my own show, want to be an entrepreneur wasn’t sure how to do that. So I raised a small pool of capital to look for a company to buy. And then I bought service horse. And I ran it for, as you mentioned, almost 13 years all the way through a few million revenue to 300 million to go public in 2011. And then 2014, woke up. My wife had just had her fourth child, I was exhausted, I was way under qualified, and decided that it was time for me to move on and move to chairman and then I started next coast ventures with a longtime friend tomball in Austin, Texas, so a very circuitous and long path to venture capital. Amazing.
Yeah, I did read Ben’s book, of course, about that. The loud cloud story and then some, any I know there are a lot of highlights and lowlights in that journey. But anything that stands out good luck. Good lesson learned from that experience.
Yeah, it was it was one wonderful to just watch, too. I’d been on the sidelines, I’ve been professional advisor in various roles, and you kind of think you know, what a startup is all about. And then you go and do it with those two type of characters. And you learn so much. My joke is a little bit like, you know, if you think about running a marathon, and then you go to Kenya and train with two hour marathoners, you quickly realize like, Oh, my gosh, is a totally different game. So first of all, just the pace and the chaotic nature. And you know, it was 1999 and all this stuff. So there was just that, jumping into the movie and really experiencing what it was like, firsthand. And then secondly, I learned a ton from Ben, I didn’t realize at the time about culture, and hiring and building for scale. He did a lot of practices early on that, at first seemed a little bit what why are we doing this? But then later, when I became an entrepreneur and a CEO, I really appreciated what I’d learned from Ben on multiple levels. Just, you know, just
very quickly before we jump into next coast, you had the experience taking a company public. Any thoughts on sort of the rise in specs? Yeah, and that is a method, you know, to take companies public.
Yeah, I don’t it’s it’s fascinating. Like I someday the music will stop. I mean, I think it’s a it’s an efficient way to take companies public, you skip over a lot of the process and disclosure to do it. I’m not smart enough to understand what will stop the SPAC movement. But when you look at quote, unquote, dry powder, while there’s a ton, and there’s already a ton with late stage private equity and buyout firms, but now, if you just aggregate I forget the numbers, I read somewhere, but the amount of SPAC dry powder is shocking. So perhaps it’s a disruptive force, it’s here to stay the old at this point in my life, and I like sometimes when things keep going like this, it seems like they’ll break at some point. But I don’t know. I don’t know what we’ll do it.
Yeah. Yeah. It’s funny because we we started this show, I think, almost seven years ago. And for much of that time, we had conversations about companies staying private longer, and how there is almost like a lack of supply side, tech stops stocks in the public market. Because, you know, companies were holding out and staying private longer than was traditional. And now we’re seeing this flood of tech companies that are have gone public or are going public via spax. And clearly the the demand side was hungry, because there’s a lot of money flowing into them.
Yeah, it’s really insignificant. And I think for what we what we do, right, early stage investors, I think it’s a really good thing. I think it’s great for entrepreneurs too, and there’s a tremendous number to Europe. There’s the alternatives. Now, if you’re starting a company, and you got to get it to scale, but between strategic between traditional IPO between recapitalisation with all the growth equity or now sfax the alternatives are extraordinary. So I think for both entrepreneurs and early stage venture investors, I think it’s a good thing.
Yeah, I agree. I, I am enthusiastic and optimistic. And I hope that, you know, this this vague and commission that the the public stockholders ultimately are paying doesn’t cause these these enterprise values to adjust down over time. And, and, you know, the public stockholders are holding the bag and, and that creates issues, I
hope, I hope
the markets are efficient enough that this is a positive thing and continues, but we should transition a bit to Next Coast. Tell us tell us about the thesis at the firm. Yeah, so
we started Next Coast. Interesting. We started a little over five years ago. And our general theme was that really exciting companies could be built outside the coast. Even though I lived and worked in the valley for almost 20 years, just felt like this movement was happening pre pandemic around entrepreneurs wanting to be in markets that were a little bit smaller, a little more affordable, a little easier to live and what we wanted to do it next guest and our tagline is built by entrepreneurs for entrepreneurs, was bring some of the old school cue that, you know, to the dinosaur video to come in right now. But, you know, venture venture capital it originally been usually been operators they had progressed in their career and then switched over to venture. And that model, I think what Mark invented clearly had injuries and Horowitz is proven to be a really, really good one doesn’t mean the only one but it does work. And that’s what we want to bring to Austin and to market similar to Austin. So our overall approach was everyone around the firm is making investment decisions, has hired and fired has had to raise capital has laid awake at three in the morning, wondering how the hell they were going to make it through the next day. So we’ve got the empathy, or at least the battle scars of having been entrepreneurs. And so we want to bring up started a firm that would bring that ethos to it, and focus on next coast markets and Austin being a really, really good one to to focus on. But we’re not just Austin, about 70% of our capital went into Austin, but similar markets where we see just a ton of great entrepreneurial activity.
So assume these next goes markets are sort of outside the tech centers. Is that primarily the focus not just Austin in Texas, but uh, but other cities around the country?
Yeah, as a country music’s on goes the flyover states, but it tends to be, I do think, you know, we’re not going to the, we would look at something we do have one investment, for example, in Missoula, Montana. But for the most part, we’re looking for emerging tech hubs. And I think, obviously, Salt Lake Austin, Chicago, Detroit, now Miami, places like that, where there’s enough. There’s enough groundswell. There’s enough on productivity, capital, resources, talent, where you can start to really see multiple companies emerge. That’s what we’re focusing on. And right now, in our own backyard of Austin, hard to argue there’s a better one. So that’s why we’re spending the bulk of our time there. But we have invested in in all the markets I’ve just discussed.
Good, good. So I want I want to talk a bit about the themes at the firm. And, you know, before we jump into those specifically, can you walk us back a bit and talk about, you know, how did you come up with these themes in the first place that really drive your focus in your investments that at next goes,
Yeah, we’ve got a large monkey and a big dartboard. Is that by not a bad idea? Yeah, exactly. Exactly. Yeah. Finally, finally, we know the truth of adventure.
No, we did, we sat back. And first of all, we’re a small firm, right, our first fund was 90 million. Our second fund is 130. And so I think the pre ambled of that was, we have to have so called swim lanes where we can focus. You know, we can’t look at everything and we can’t be generalist. Secondly, our general belief was by by spending some time upfront and saying what do we think the four or five big themes are? That one that we think there’s a long runway on and two that we know something about? The second one probably being as most interesting as the first is because, you know, again, small firms so we sat down, before we even launched our first fund, and came up with four or five themes that drove our investment activity. And they’ve been they played out well, and in the, unfortunately for the past, the pandemic has been a disaster, clearly, but a lot of our themes got accelerated. So we spent time thinking about the future of work. And so one of our themes, the changing face of reach at retail, digital natives becoming digital consumers, healthcare hacking, which is an unusual one, and software three Dotto. Those are probably our Five most relevant themes. And all of those have served as well. And as I said, got it. A lot of them got accelerated in during the pandemic.
Got it? And does everyone at the firm focus kind of across themes? Or do folks have specialties?
Yeah, well, so what we do is interrupt about six investing professionals now. But what we do is basically we publish those themes. So anyone who’s interested in go on our website, you can see our view on that, and we refresh them every year. So we put those two out, first of all, for entrepreneurs to say, here’s what we’re thinking about, then we’re generalist across it, but every time we seen an opportunity, we have a very simple process, which is, how big is the market? Do we think the solution is disruptive in nature? And then third is does it fit into the theme, a theme that we’re passionate about, and then we get we know something about, and then it drops down the entrepreneur. So we use the theme or as a one advertisement out entrepreneurs, here’s what we’re looking for. And then a little bit of a backstop or a funnel to say Yeah, yes, I think kryptos a big crypto is a great example. Yes, I think crypto is massive. I think it is disruptive in nature. But my goodness, you know, I might be the dumbest guy in the venture community around what that means and how that all impact blockchain, blah, blah, blah. So if that came through our door, we’d say yeah, really interesting. But we’re not the right folks to spend time on it. So it’s both a qualifier and a disqualifier. And I think that helps with entrepreneurs, because we’re, we’re a pretty fast pass on a lot of things that just simply are outside of our proverbial paygrade.
Yeah, I wanted to get your take on some of these trends that are emerging, and that you’re following. And maybe maybe they’re consistent and tie pretty well to your themes. I don’t know. But, you know, what, what are some of the trends that you’ve seen, that you think are gonna have, you know, some of the biggest impact in tech over the next five years?
Yeah, so I went through them pretty quickly. But I think all the things that we’re we’re focusing on, clearly, and let’s let’s go pre pandemic, then post pandemic? No, they were trying to spend a lot of time and Nick, I’d love to get your take on this is, which of these are permanent, which is temporary? You and I were talking a little bit before the interview about the future of work, and specifically office space, right. So what does that look like? And how much of that is temporary versus permanent? But we really, we actually sat down with our themes in the middle of the pandemic, because it was kind of that period in April, when nothing was really happening. And we challenge ourselves said, Okay, do these do these still stand the test of Let’s not make any decisions based on what’s happening right now? But did they stand the five year rule or longer? I would tell you that I think ecommerce is one that future of e commerce we were it’s been a theme for our fun one and fun to I’m even more excited about that. I just think it’s completely changed. And I don’t think that we put the genie back in the bottle. I think software and the full software stack. I think we’re just getting to this one. And what I mean by that is, if you think about you’re a CIO at the fortune 500 company, you had a certain set of protocols and security methodologies and approved applications. And that all worked when your 100,000 employees 90% of them showed up at a physical location. Now, if you combine future of work and future software, what is the stack look like? And I’m not I don’t have a defined thesis on this. But really think about what is the stack look like now in a distributed world? And how do you think about not only software purchased, but security, monitoring every aspect of the stack that was quite easy to control and for the history of software has been done in a kind of four walls CIO level purchasing decision. Another one I’m also really passionate about is I think healthcare something we avoided like the plague and we don’t go up to anything diagnostic or tools or anything along that lines. But personal healthcare. It was a theme we had a little bit and fun one, I think the entire consumer view of health care up to care up to like, actually, I need to go get a surgery is up for grabs. Because we had these trends, like you know, like telemedicine is a good example. Hmm, we knew it was out there. Would you use it? I don’t know. It felt kind of weird. Now. Yeah, I’ve got an issue. I’m going to go use telemedicine, we’ve got a company every Well, I’m going to do lab testing at home. All of these things have been have changed radically. So much the thing, the idea of a consumer, getting in a car driving to a doctor’s office sitting in a doctor’s office, okay, I need to go get a laptop. I mean, all of that supply chain or or I guess, chain of activities. I think it’s entirely up for grabs. So I’m pretty excited about that. I think that gets disruptive. It took something like COVID to disrupt a really staid industry.
Yeah, it’s really remarkable. I mean, I think about my own use case, you know my own existence and how much data I am tracking and using to kind of inform you know, my life and decision making when it comes to my let my sleep In all these different, you know, physical data attributes, and you have to ask yourself the question, you know, how much how much data do you want to be giving to Apple and some of the tech companies, but when the benefits outweigh, you know, whatever concerns you have on on that front, it’s really amazing what can be done with technology and sort of the future of health and wellness. So anyway, that’s, that’s pretty interesting. I think. Your point about commerce, I was just talking to Monique Woodward Woodard about that she she wrote this article and found that the majority of commerce and e commerce spend is actually has been done over the past year by boomers. Which I thought was really surprising. But but interesting. Yeah, it gets to that.
I mean, it’s since you said about the health care and the data, but you just start to run a, I wrote a blog post about the the trends that were again, these 10 year trends that got accelerated down to three months. But now, let’s go to let’s go to optimistic view. I’m an optimist. Let’s go to revaccinated, we’ve got some herd immunity, and we’re getting back to some quote unquote, normal life,
whatever that looks like.
Now I say, hey, Nick, you want to drive to a shopping mall? Do you know do you want to drive to a doctor’s office? Do you want to start to think about the I certainly I can’t wait to go to a sporting event. Live music, restaurant, I think travel all those things come roaring back. Like the the whole 1920s theme that’s out there and kind of venture land. I think that’s true. But then I think about what are the things that you just simply go I don’t want to do that. Again. I didn’t like to do it in the first place. And now I’m aware of the alternatives. I’m just not going to do it. And I think that is also like the boomer thing in e commerce. Yeah, they had they were forced to sit inside couldn’t travel. Okay, I’m going to change a habit. And I don’t think that Genie goes back in the bottle.
You think of things like like clubhouse, right. Is that? Is that sort of an artifact of the time that we’re living in? Or do you think that, you know, it’s here to stay, and it’s, it’s got the makings of a of a huge tech company, you know, creating this synchronous sort of chat forum for people to debate and discuss.
Yeah, it’s interesting. I’ve been spending a decent amount of time on it and pondering that exact question. I guess the short answer is, I don’t know. I think there clearly is a craving for so what I like about clubhouse I like the fact that you can’t have anonymous personalities, rights, if you you have to be a known entity. I like the community aspect of it. And I really like the ability to sit in on sessions that you would never have before made. So you just ability to listen to a conversation that you might never have access to. I think that’s a wonderful. I don’t know what I’m pondering I love you your take on it. I don’t know how much of it is not novelty. But I don’t know how you work it in your day. Like I’m using the evening. They’re reading my book, I get a notification clubhouse. Oh, Marc Andreessen is talking about that. Okay, I’ll listen for a bit of time, it’ll be interesting to see how that weaves into the fabric of everyday life. And whether it’s a novelty, and then it changes or morphs into something else, or it really does change behavior. I don’t know, what do you think? Well, I’m
certainly not the authority on this. But I will say, you know, we launched the first VC podcast in 2014. And I got a lot of not criticism, but I got a lot of strange looks from folks that asked me, you know, why aren’t you doing video? or Why aren’t you doing some sort of live show? Or? And and the simple answer was my target audience. And, you know, know, your customer, my target audience are very busy people, they’re typically high net worth folks. And they consume stuff like this when they have time. And so because of that, I need a program that they can download. And they can consume when they’re on their commute, or when they’re walking the dog or when they’re doing the dishes or when they’re working out. Right. Like if if I do a live show, then all the people that I’m targeting, need to have the free time to show up when I’m when I’m producing. And if I’m doing a video, like how many folks in my target market have the time to sit in front of a screen and watch a video of me talking to Mike smartflow? Like they just don’t? I don’t think my audience does that. I think my audience wants, you know, audio when they’re on the go and they want to multitask. So, from that standpoint, I’m not a huge believer in synchronous audio. I think one of the more interesting things to me about clubhouse is that participants there is there’s an element where they feel like they can join the conversation. You know, they raise their hand and they can join the panel. And even if they don’t get chosen, that little mental trigger creates, you know, I think For a lot of the audience, it makes them feel like they’re actually a part of the conversation. And they have an opportunity to participate, whether they they get called on or not. And I think that one aspect of their platform might be interesting enough that it draws a lot of people into these conversations. But you know, I look at the numbers, I look at the downloads, we have, you know, for one podcast, and it dwarfs like the numbers of people that show up for, you know, a conversation between Ilan musk and the founder of Robin Hood. And you know, that gets a ton of press and everything. And it’s a huge story. But the number of people in the audience that were able to consume that was was still quite low.
Yeah, yeah, I couldn’t agree more with all your entries. And also, it may just be fitting the need, I do think, and we talked earlier about work and location and all that stuff. I’m a social person. So I was actually listening to a podcast with Mark and Ben, and they were talking about how the introverts love COVID. That was, I think, marks points, like the introverts are like, man, finally, you know, I’m on par with the salespeople, I don’t have to go, you know, try and try and raise my hand quietly in a meeting. But I don’t know, I guess my point is, I just wonder if it’s taking, it’s filling a void that we’re all seeking, which is to go to a conference, or go to a session, or even go to an office and share exchange of ideas versus doing it over zoom. So I don’t know. It’s fasting, and like everything else. So it’s always fun to see. That’s why I love my job. You see these interesting ideas, and they seem so obvious and silly, and then they blow up and you’re like, Huh, okay, let’s you know, is this sustainable? Not it’s fun to watch. Regardless,
it is really fun to watch. And I, I know you being the Father, for me being the father of one, even if the most interesting conversation pops up on clubhouse tonight, for me to carve out an hour of my night away from my my son and my wife, and getting permission to do that, you know, to plug into that. It’s not gonna happen. Like, yeah, I’m waiting weeks notice maybe
leave quietly is my favorite. I mean, I, I literally go in. And I’m like, this is kind of interesting. But I’ve got reading, I’ve got homework. I’ve got you know, all this stuff my kids down like, yeah, believe quietly. But yeah, nice. And that was out there.
But, Mike, let’s talk about founders a bit. And I think a decent place to start is maybe what what do you see as the biggest difference in the founder journey? From the loud cloud? Or maybe the service store stays versus today?
Well, I think I’m so again, back to my optimism, I’ll answer a little bit during I’m in Chrome, right now could be the greatest and the worst time to be an entrepreneur. But some of the tale of two cities. I think, from a founders perspective, right now, there are some wonderful things that weren’t present certainly in the lab cloud days, or when I did it with service source, because the tools that are available, the kind of ability to attract people remotely, a lot of the, I guess, barriers that you would think about starting a business had been removed. And I do think back to our disruptive nature, again, not minimizing the pandemic, but I think it has created opportunities that may be once in a lifetime in a bunch of categories. So if you’re thinking about an entrepreneur, and you have right now, I think there is no shortage of opportunities that you can go pursue as an entrepreneur. On the flip side, so that’s the good tale. Good city, the bad city is, I think, probably the hardest time to be an entrepreneur, because a you got to do this, you got to try and do you deal with all the normal quote unquote, stuff of being an entrepreneur, a B, you’ve got to handle it remotely. So the good of being able to recruit anywhere is great, but I was just on a board call companies growing like crazy hired 30 people, oh, how are we doing onboarding? How are you in training? How are we making sure they understand what our values are all that’s gotten a lot harder, still have the uncertainty of the pandemic. And you’ve got a bunch of social issues that have been brought to the forefront, I think, in a good way for society. But cantley up until the last few years, most businesses or startups could just stick their head in the sand and not really worry about the social issues. You can’t do anymore. And well, I think that’s a really good thing for society. As an entrepreneur, as a founder, I think it’s one more thing added to your list of again, stuff that you have to worry about. The point.
Yeah, I mean, to the to the point, earlier you made about hiring and onboarding, and the tech features gonna, it’s going to need solutions to better onboard remote workers better incorporate them into culture, because the existing solutions that we have today is is insufficient, in my opinion.
Yeah, that’s for sure. I think we’re running, running a really interesting experiment. And I think if you asked anybody 12 months ago, maybe 15 months ago, this Because we’re doing this in February of 2021, if you said, Hey, Nick, your portfolio companies, the fastest growing company in there, maybe it’s on employees, I don’t know what it is, we’re just gonna have all be distributed immediately. They’re all gonna work from home, and they’re going to use slack as their communication channel. And that’s how you’re going to build out the culture. You know, having said that, I think in a, in a normal world, again, kind of a normal, you would have got no way, there’s no way I’m going to do that. So we were forced to do it. I think the productivity has gone way up what I’m not sure about, or I’m concerned about what our portfolio companies I’m concerned about burnout. I’m concerned about connectivity to the to the mission and why you’re doing this besides creating a big company. And I’m concerned about values in an organization that is fully distributed. Yeah. And then I’m worried about the business side enterprise sales, like, you know, how do you sell enterprise solutions in a world where that was normally done face to face? So I think we’ve all been forced to accommodate and do this overnight, literally, I don’t know what the long standing impacts of the experiment will be. And minor more on the softer side, I think that’s the risk of, of the permanent work from home or lack of cohesion around an office.
Yeah, we were, we were staying in in Santa Barbara before our current location. And one of my team members and new stack lives in LA. And so he came up for a socially distance dinner. And I just, I feel like we made more progress. And there was better bonding and just, you know, more easeful sort of communication, and in, you know, building more rapport in that four hours, then, you know, we’ve had over the past six months over zoom. And I don’t know if that’s because you can’t over zoom, or just because I don’t, I don’t really know the right lens or have the right tool set, or you don’t know how to do that over zoom, but it just it you can’t under estimate the value of being in person with people.
Yeah, and what I mean, one of things I’m into Nick is great point. And it feels to me like some of our employees and said, Yeah, I’m getting more work done. But I missed the I missed the sitting around and chatting and feeling some team camaraderie. But the other thing I’d think about this, too, is, you know, it’s entering an early stage investing is all part of our process always been, you hear the pitch, you get to know the entrepreneur. And then usually you’ll have coffee, or beer or glass of wine with with him or her. And you just get out of the setting and you connect with them. And that’s always been in parrot and critically important for us. I would also say when I was running a company, and we were doing enterprise sales, there was the meeting, right? I always remember this, like, it seemed like there was always the meeting you had we presented and 10 people sitting around a conference room, a bunch of stale sandwiches in the corner, and all that stuff called coffee. And then after the meeting, a handful people would sit around, and maybe you’d walk to the front desk with your executive sponsor. And she would say something like, you know, Sam in the meeting seemed a little bit off, you know, you might want to spend time with with him. And that was the critical difference between closing the sale or not. And my point of this is, zoom doesn’t have a capability. There’s no after meeting, right, there’s not that meeting where you’re like, you get those few extra minutes before after. And I think that is both in enterprise sales and just general human camaraderie, the part that we’re missing. And I don’t know how to solve it, but I think that’s where the experiment may go a little bit off the rails.
Very good. How about, you know, on the, on the investment side, so you’re engaging with founders, quite often, Mike, you know, what are some of the qualities you’re looking for in founders, you know, when you’re investing, whether it be early stage or growth?
When I when I came into the job, I was quite convinced I had this really specific thesis that there was a certain attribute that I was going to find, you know, I’d been I’d seen great entrepreneurs, I’ve been one myself. And I was quite convinced there was be a couple attributes that I could figure out. And I would tell you six years, and I can’t. And I think that’s a good thing. I mean, introvert extrovert, product, sales, marketing. And the good news is there’s multiple ways to get to be an entrepreneur, so or to become a successful entrepreneur. I think what we have boiled it down now after two funds and 50 different companies and some degree of success. Tom ball, my co founder and I, we really started thinking that maybe self awareness is the biggest determinant of success, no interest among other things, and, and what I mean by that, so when we’re looking at entrepreneurs, our big push is we you have this term, and Elan musk just picked it up. So you must have stole it from us, but called glass cedar, and we used it because it was the most extreme and obvious and painful attribute we could describe for an entrepreneur, which is to be a glass eater. What we meant by that is we know how hard the job is there’s gonna be ups and downs. So does the author have the willingness to do everything it takes within legal and ethical bounds To be successful. And so that was the first one. And that could be hard work or persistence or tenacity, but just something kind of an X factor that you can pick up after a few conversations. And now I think it’s that plus self awareness, which is, those the entrepreneur actually understand what she’s good at what she’s not good at, where she needs help, how she made where her blind spots are, all of those things. I think maybe the the two things, we probably look for more than anything else, even more than the idea. candidly,
like that, like that, how do you work? How do you tend to work with founders post investment?
Well, we try and do is and again, this is the the benefit of being have been an operator. And having raised a bunch of capital, what we try and do is whether or not we do this or not are on for is going to test but we try and say we are going to bring some probably sympathy, sometimes empathy and some experiencial attributes that help the entrepreneur think about the problem at hand. But the biggest challenge, we always say this is the bright line line, red line for us is trying to tell, because the risk of being an operator, when I first came into the job is like, Well, I know what to do here, I noticed that that person’s not gonna be great. And here’s how you need to set up your go to market. It tends Nick, entrepreneurs, myself included, don’t really like to be told what to do. If you’d like to be told what to do, you probably wouldn’t be an entrepreneur, right? So we really been focused on just how can we bring the experience we have to bear and help the entrepreneur, Okay, I understand what you’re going through. I’m gonna be curious about what you’re facing. And I’m gonna help you think about the problem. And clearly when there’s times I’ve got a lot of experience and go to market where an offer says, Hey, I’m really thinking about this. I’m not afraid to give specific advice. But I find my job more and more is to be a sounding board to be curious, and try and provide observations back to the entrepreneur that she can then take and try and address her or move forward versus anything else.
Got it? Got it.
So So Mikey, you wrote this book, Mr. Monkey and me as a survival guide for entrepreneurs published last November. Why’d you write the book?
Well, like like being an entrepreneur, I wrote it because I didn’t know how hard it was gonna be. When I went to be an entrepreneur, yours is bliss. Right? But no, in all seriousness, what I wrote I’ve been always been writing under my name, Mike’s mercado.com, a blog around the mental aspect, I used to call it the other shit TLS canley. That was not really good working title. But that was a working title for and I wrote it because I kept finding two ends of the spectrum on content for entrepreneurs. One there’s the here’s how to raise capital, here’s how to write a business plan, some very specific tactical input and advice, which is really good, really good all over the web. And then the other end was what I would call is called entrepreneur porn, which is just this like, you know, the 10 things that Elan musk does before breakfast or x you ever exchanging hacks. I hate the term because what it implies there are certain hacks I do, I’ve learned, but what it implies is that there’s an easy path forward. And so all of that content to me, felt like whenever I’m like really hungry, starving, I don’t have time to eat, I go grab a bag of junk food. My case I love Cool Ranch Doritos. It’s my, my nemesis, you know, you grab the bag, and you’re still working in you shove a few in your mouth and you look down, you’re like, Okay, I’ve consumed a half a bag of Cool Ranch Doritos. I’ve got cheese all over my fingers. And I’ve got a beard. And I feel disgusted. And I feel disgusted. And so a lot of that content I found had the same effect, like you read. Mark Zuckerberg wears a black shirt everyday, okay, great. But he’s the second or third wealthiest person in the world. None of this helps me and makes me feel bad because I’ve got this small, little startup and I don’t know what to do with it. So that was that was a reason what the content I saw there. And what I wanted to write was content that would really help entrepreneurs think about the mental aspect of the job. And my real goal was to help encourage people to pursue entrepreneurship, those who are doing it to continue after it. And for those that are successful, to not lose their way. Those are my three primary goals. And the whole book is about not just my experience, because that would be that’d be a maybe a two page blog post. That’s but really about what I learned and what I’ve seen at next coast, saw with Mark and Ben and others, that people do right on the mental aspect of what they do wrong. And then give some very practical advice and tips that people can use hopefully to to increase our mental tenacity
for for an industry that talks so much about, you know how important the founders are that they’re investing in. It’s a it’s a topic area that is severely under addressed if you like, but I’m pleased to hear that you You know, you wrote the book, and I look forward to reading it. I also noticed that you’re you’re giving all the proceeds to charity. Have you chosen the charity? And, you know, talk us through that. That’s Yeah,
yeah. I mean, yeah. So anyone who does get into the book, please note that the reason I did that as well, I’m in a fortunate position. So this was not a money making. I’m not, I’m not trying to be the next Tony Robbins and go out on the speaking tour when those come back. So this was a one and done for me. But most importantly, yeah, we set up a charity at my alma mater, Miami University. It’s specifically for students who are interested in entrepreneurship that come from diverse and underrepresented backgrounds. I’m the reason I did that was one I want to be specific about it. My wife and I did this is. And two, I believe in my core, that entrepreneurship will solve the biggest problem The world is facing. social, political, economical, you name it, I’d rather bet on entrepreneurs than any other area. And too, I believe that we need, we need more entrepreneurs, but we need more folks from underrepresented attributes. We need people to not let Mr. Monkey who’s the real star of the book, tell you you can’t do it. You need to get the courage, you need to get some advice and coaching and then get out of the shower and get after it. And so my goal around the book and the scholarship was to encourage students who don’t come from too shall pass to get after it and learn more about it and see if it’s the right path for them.
That’s great. That’s great. And it seems like you went to school in the Midwest twice. Are you a converted Texan? Are you originally from Texas? Midwest? No, no.
Yeah, like everybody else these days? No, I grew up as I grew up in Toledo, Ohio. My joke is I grew up in the bad part of Toledo and the boys are good partners. Yes. There’s a couple of streets but I wasn’t on on that matters. First was my family go to college. I just went I went to Miami while I tried to go play basketball there. That was a short lived dream. And then I decided to maybe get educated, which worked out okay. And then Northwest, I went to Chicago, Northwestern, I really moved to the valley and love California was there for 20 years, I loved every part of it up to the point where my wife and I looked around and we’ve four kids, we were starting to see and now it’s becoming much more prevalent, we start to see this kind of monoculture start to evolve in the valley. Yeah. And we also want to be in a place that was closer to her family and just seemed to be a little more well rounded and balanced. And that’s what brought us to Austin, six years ago. Well, good. Well, Mike,
I’m gonna ask you a question. It’s called three data points. So I’ll give you a hypothetical situation with a startup. And you can ask me three questions for three specific data points in order to make a decision. And no, this is not how investing works. But it’s kind of a fun little fun little hypothetical,
that it’s actually it’s as fun as how my kids my kids think I’m on Shark Tank, or Here we go. There we go. Yeah, let’s go.
All right. So let’s say your approach to invest in a series a marketplace startup, the company is based in Houston. The sector is oil and gas they launched 24 months ago. And they currently have, let’s say, half a million per month in gmv. And a 25%. Take rate. Again, the catch here is you can only ask for, you can only ask three questions or three specific data points in order to make your decision. What three questions do you ask?
is a good question is what I just on a board call with the marketplace? That’s really super insane. Okay. And I’ve not met the company before. So this is I’ve gotten like, this is my kind of quick. Do I spend more time on it? Yep. Okay, first question. This is a really good one. Um, do the founders know anything about marketplaces and oil and gas? Do they have anything their background would suggest they know both sides of that equation? Okay. My second question is, what is the customer experience on both sides? Why is this incredibly valuable? And what would either the buyers or sellers in the marketplace say why they can’t live without the solution? Okay. And the third would be to the entrepreneur. How long do you want to do this? And what would be an amazing outcome for you?
Those are good. Those are good. Let’s say hypothetically, answer. The first is yes, they both have, you know, good experience in the in the sector, and they understand marketplaces, both sides between the founding team. Let’s say, your your second question was
about value for the write
that write the value. So let’s say there’s that let’s say the value is basically just price. So it’s a marketplace and it allows, you know, much better, more cost. To fit effective in potential even faster transactions? Yep. And the answer to the third, let’s say they’re going for, you know, 10 billion plus, and they’re all in.
I’m super excited. let’s let’s let’s let’s dig in. And the only question the only syncing is the part where is the second point is the third question is kind of obvious. Like, what do you really want to do this? But the second one is, and I would, then I’d follow up on the sustainability is prices and interesting differentiation. But it can be a temporary, easy to replicate. And so yeah, then I would really want to start to understand the quote, barriers entry is easy term. But really, what is the value that’s long standing after price arbitrage goes away?
Yep. Yep. Mike, what resources have you found valuable that you would recommend to listeners? founders or investors?
Well, for founders, I always recommend for founders is go back to the book I referenced, I wrote, but like read long form content, you know, listen to founder stories. I think, for example, Reed Hoffman did this masters of scale, which I found a great podcast for founders. He talks about the founders of Airbnb and what they really went through early days, I think it just anything along foreign content, or someone that stood the test of time, go read shoe dog, by Phil Knight about Nike and read about a 35 year journey to build Nike. It just helps you a think about what it takes to be how long it takes. But also more importantly, just understanding the ups and downs that everyone experiences. Of course, love Ben’s book, The hard thing about the hard thing I think anything that can get you into, I put a shameless plug for my book, just because hopefully, it tells me it tells more cringeworthy stories about what I did wrong versus what I did, right, but just books that are written or content are going to help you understand what it takes to be a founder, and get rid of all of that, you know, Shark Tank, thumbs up thumbs down overnight success, because it really doesn’t happen very often. For entrepreneur or for investors. I love your podcasts. I think it’s phenomenal. I’ve also i do think, I think the Andreessen Horowitz materials, just there’s so much good content there. Yeah. And I love their willingness to take all of their ideas and put it out there, mostly, and I use it more around technology trends and things that are happening in the valley. But those are my top couple.
Awesome. Mike, what do you know, you need to get better at
how much time you have left? Nick. I think what I probably have to get better at is, listen, I’m an entrepreneur at heart, I have great empathy for what entrepreneurs what it takes to get into, I was talking to my buddy, Jeff Jordan, who’s a partner over at Andreessen about this, and he just said, it’s such being Doctor No like, because you know, the day I can espouses entrepreneurship, but I still say no 99% of time. And so I think what I have to get better ad is one, not falling in love with an entrepreneur. And I mean that in a platonic sense, not getting caught up in the entrepreneur and making sure I really think about the market. And I think I probably get better at when I do say no, I really struggle with how much feedback to give the entrepreneur. Because everyone says they want feedback. But you know, sometimes you just you hear no when you want to move on. So I always struggle with I’d love to get better at what kind of advice can I give to an entrepreneur when I have to pass that can be helpful to him or her she she or he moves on in their journey?
That’s a good one. It’s it’s a tough one too tricky one.
Yeah. And it stinks. But yeah, and sometimes people say I want I want feedback. And then you call them up and they start trying to convince you and so I appreciate your your passion. But no, it is no. And now you’re just looking to try and convince me and that that really doesn’t happen very often, if
ever. Right? Well, I feel like the right move is to give some feedback. But usually that’s received not, it’s not received, as well as just encouraging them and saying keep in touch. And so kind of it’s weird how it, it almost seems like it it ruins the possibility of anything in the future. If you give people feedback that they don’t want to hear.
Yeah, don’t tell him I found the contrary, Nick is when it’s it’s stage, right. And I can be very honest, and self I’m always on this, but to say it’s not the right time. And we’ve actually had a couple of situations where throughout summers credit he or she stayed in touch and then we re engage and it turns out to be an investment. But if it’s you know, it’s a Series B and that’s we do A’s and B’s and Series B and we pass, we’re probably not going to work together in the future. But I want to have the relationships I try and do in a way and I also feel like my biggest duty to entrepreneurs is be the fastest pass around. And I say that all the time. Like not waste your time. And that’s the biggest I think the biggest mistake or biggest disservice venture folks do is take endless meetings and then say no Like you pretty much know soon enough. So let the entrepreneur right away and let let her get on to the next opportunity to raise capital.
Yep. Yep. Agreed. Seems to also be this fine line between you know, what, what feedback does a founder need to learn on their own versus what is it, you know, your responsibility to tell them? So, anyway, yeah, about that when it comes to prospective investments as well as post investment sometimes at our firm. Just to wrap up here, Mike, what’s the best way for listeners to connect with you?
Yeah, so all of my so one, Mr. McGee is available on Amazon now love people check it out. Under my name, Mike smarthalo, which is SM er klo.com. I’ve got a bunch of content all around the mental aspect for entrepreneurship. It’s even got a quiz. There you go take to see about your mental readiness to be an entrepreneur. And then that’s my handle for all of my social. I’m not a huge social user, but Twitter, and LinkedIn is all in the name Mike’s mark. Well,
well, Mike, this has been a real pleasure. Really enjoyed the conversation. Look forward to reading the book. I hope you survive both the weather in Texas as well as the invasion, or at least perceived invasion of VCs and everybody else leaving San Francisco.
It’s all good, Nick. Yeah, we I’m a big believer. ecosystems thrive when more capital and more resources come in. So come on down to Austin. You’ll like it here. And Nick, thank you so much. This is really fun and loved the questions and the dialogue.
Thank you, Mike. Appreciate it. Take care.
Transcribed by https://otter.ai