Jonathan Ebinger of Transform Capital joins Nick to discuss Donating Half Your Carry, Why Open Banking is the Future, and Recruiting Outside the Bay Area. In this episode we cover:
Walk us through your background and path to VC Tell us about your experience at Blue Run and why you decided to launch Transform. What is the thesis at Transform? Portfolio construction / stage / check size How did you come up with the model to donate 50% of your carry? What causes are you allocating carry to? What was the biggest challenge in the transition from early stage to late stage venture investing? So you led the Series A in Jackpocket at BlueRun and the later stage Transform. How do you avoid conflicts of interest across both firms? I know you are an active fintech investor — w/ regards to crypto… what areas are most compelling right now from an investment standpoint? We’re in a hot market at the moment — seeing lots of fund creation, lots of startup formation, and valuations are inflating to 2-3x what they were a few years ago. Is the market overheated and are too many startups getting funded? Is the bay area being threatened in its supremacy? The Economist last week talked about the slowing pace of innovation and rise of mega-companies. What’s your take on their position that innovation has slowed — and what does that mean for venture?
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Transcribed with AI: Jonathan Ebinger joins us today from San Mateo. Jonathan is general partner at BlueRun Ventures, an early stage venture firm, and he’s also co founder in general partner at Transform Capital, a growth stage firm donating half of their carried interest to philanthropic causes. Jonathan, welcome to the show. 0:35 Nick, thanks very much for having me. And thanks for the for the introduction. That’s really what I want to talk about today. It’s a couple of really fun things going on at both the BlueRun and Transform. 0:44 It’s a pleasure to get you on the show. I know I’ve been asking for years, and we’ve known each other for some time, glad we could finally get the schedules aligned. But talk to us a bit about your path, maybe your original path to venture even prior to BlueRun? 0:56 Sure, absolutely. Well, I should say this, my original path actually takes me initially through Chicago, I was born in Cook County Hospital, probably not too far from where you are. But fast forwarding about 30 years from there. After grad school, I started my own company called simply savings, which was in the hot, hot category of Communications at that point, which was an industry full of exciting companies like psi net, and u u net and AOL and MCI. All of which are now gone. But for the time when I was coming through in the late 90s, that’s where the innovation was, it was really all at the infrastructure level. And I was really excited about that. And we were working on innovating on things like building out the internet. And that was really a really heady time building out the platforms. He saw a lot of companies and optical networking going public, and it was a big, big market. And DC where I was living at that point was really the cradle of a lot of that innovation. So I started my career in venture, looking for next generation innovations in communications. The thing that I didn’t really understand then is that a lot of folks didn’t understand is that the innovation layer at that point had moved out to Silicon Valley and had moved to the application layer, what’s network was built out, it was clear that there was this going to be just really an unending river of innovation continuing through today. And I’m sure for a long time at the application layer. So I basically said, Well, look, I gave it a good run for a few years and looking for innovations and technology at that comms level. And then we moved the family out here to the Bay Area. And I’ve been out here now for over 15 years. 2:29 Amazing. and talk to us a bit about your experience at Blue Run. Also, you know, you’ve launched this new firm transform. So it looks like a bit of a transition from early to late stage. But tell us about BlueRun and and why, you know, the launch of Transform. 2:44 Sure, absolutely. So blue. Ron initially started off as Nokia Venture Partners. When I first joined back in 2000, we were investing in all things communications related. Nokia really was the apple of its day, if you remember, the majority of handsets being sold that were being sold by Nokia. And they were smart enough to realize that anything that was happening in mobility was going to be good for them, whether it was new optical cameras, whether it was battery life, Wi Fi, you name it, that was going to help them. So that’s how we started investing in all things, communications. And one of the first investments we made was in a company called infinity, which had a product called PayPal, because that was just about beaming money back and forth between cell phones. So that really are charted a course for us to be investing in a wide range of more FinTech companies that involve mobility involved networking. So we continue to lean in on the FinTech category over the next really over the next 20 years in companies like freedom pay and Coupa and Kabbage and just a long litany of companies in the financial services space. And I was helping lead that practice along with my partner john, who founded the firm. And we just had a really broad aperture for looking at innovation that was primarily driven by by Nokia, because they were a global firm. So we worked we became a global venture fund, and we’ve rebranded as blue run ventures and raised six funds, almost $2 billion over that 20 year period, had some really some met some really great founders and have some great relationships with folks that we invested in as well as folks who didn’t invest now, which is more important, really for transform some of the folks that we ultimately did not put dollars into, we ended up coming back around and giving a look for transform, which is I’ll talk more about in a little bit. So we had a mix of consumer products. We invested in ways we were in a wide range of companies over in China, we had companies that were going public in Beijing that were effectively really innovative. We had p2p companies doing p2p streaming, we had Craigslist competitors coming out of China. So it was really a wide, wide range of deals. So one thing led to another, we decided to effectively raise separate pools of capital on Asia. We had raised a pool in China raised a pool in Korea and then raised a pool here in the US because the opportunities were so varied. I mean, the Korean folks are going later stage China was just investing in everything. And the US markets really we were focusing more on some of the it stack we were more comfortable with. So after about a guest noticed about 20 years into it, my interest has always been drifting more towards helping entrepreneurs and doing work with startups, as you know. And I’ve done some work at Darden or my business school helping the innovators and entrepreneurs there. So it was sort of a natural progression to get more involved in, in working with with the school, and some of the ideas coming out of there for innovation. And the dean there, Dean Beardsley asked me if I could get more creative around around entrepreneurship. And I said, Well, why don’t I just do this? Why don’t we just start a fund up, that will donate the profits from the GP, just bring it back to the school, and we’ll have the will have the limited partners keep all their profits. And we’ll just have a bunch of a bunch of alumni from Virginia, just be the LPS in the fund. And so that sounds great. We put that together. In short order, we raised about $10 million. And really just a few weeks. 6:05 What was the timeline on that initial one, Jonathan? 6:08 That was at the end of 2018. End of 2018. Yeah. So we were trying to figure out ways to, to give back and more innovative ways, you know, schools and other not for profits often talk about giving your time your treasures and your talents. And so well, let’s why don’t I just do that? Why don’t I give my give us my time here and see if we can create a venture fund that will create outsized returns, and the fact that there was this philanthropic component to it, we thought we’d be able to get into some pretty interesting deals. And that’s really what ended up happening. We weren’t investing in seed deals, we’re investing in companies that were really constrained deals that were hard to get into. But folks led us into them, because they liked the fact that we were having this philanthropic back end. Of course, the whole model does not work unless we actually make money. So the idea is that we were going to give, like I said, all of our profits away. And so a couple of my LPs said, hey, you know, that’s really, that’s generous, but it probably makes sense for you to have some skin in the game too. So we ended up with a model of 50/50. So we determine where half the half of the profits go. And they determine where half the profits go up on the GP side, I know it’s initially a bit confusing, but the model is really a straightforward venture fund where the LPs keep all of their profits, they can do whatever they want to with them. But by the fact that they’re investing there, enabling this fun to exist and generate that Philanthropy In the back end, kind of put it in dollars and cents neck. If we’re currently raising what we actually had our first close on Wednesday, so we’re on the way to our third Fund, which will be $100 million fund, we did $100 million fund, if it’s a 3x fund, that will return $40 million to the GP, half of which will be donated. So $100 million fund that does 3x will generate $20 million in philanthropy. And we can do that every three years. We’re doing $20 million, every three years, you know, $6, $7 million a year effectively once we’re up on a run rate, and all those donations. Yeah, all those donations are just basically directed by the LP he said, our investors sort of drive from the backseat, the dollars to the causes they care about so 8:07 And what are some of those causes, you know, who are the beneficiaries of the 50% carry? 8:13 Well, it started out just as, as a few universities, we had Virginia, then Virginia Tech, and then Villanova and count Morehouse and Tulane. And that was great. And it still is great in this folks are super valuable LPs. But now we broaden out the LP base to we have some institutional investors make some family offices. So we’re giving money to to cancer cancer research we’re giving money to there’s a homeless foundation here in San Francisco, we’re really not, where as long as it’s a 501c3, we are fine writing a check to them. So we have our own our own foundation at transform that the dollars flow into our foundation, then on a deal by deal basis, we contact the LPs and say hey, it’s time to to choose where you want the dollars to go, and so on literally on a deal by deal basis, all of our LP is going to come to determine Hey, I think it’s time to help out the folks in Haiti after the last earthquake or it’s time to help the folks in New Orleans after last flood, or it’s time to continue to double down on my Endowed Chair I’m working on my alma mater so it’s ultimately flexible and 9:18 The LPS move as block or individually, they can allocate 9:22 the move individually each and each LP on a pro rata basis determines where they where they send the dollars out. It’s a lot of flexibility. And we also watch I think is really kind of fun. We created a small sleeve for the founders of the companies themselves to have a say in the philanthropy for their individual exits. Since we’re we’re doing this on a deal by deal basis when a company returns capital dollars are effectively tagged to that company and then we will reach out to the founders of that company and say hey, you know there’s X dollars available would you like those to go 9:56 Love it, love it. So in broad strokes on portfolio construction Stage check says I, I get the sense you’re doing more growth deals now than blue Ron’s early stage deals. 10:05 We are Yeah, we’re doing we’re doing later stage deals, there’s really we’ve sort of pick up maybe a few stages after blue Ron leaves off blue Ron generally goes through about a Series B, sometimes series c, this company or transform is really more of a follow on funding for existing syndicates. We’re not pricing rounds, we’re minimally dilutive, we really just come in and say, Look, I think that if you take a million dollars from us, we can provide a least annoying daughter the value to you. So if we came into around, it was raising $75 million. We wrote a check for 750,000. I talked to the founder, I said, I think we can provide 1% of the value that the $75 million check is and he said, Oh, absolutely. So it’s really, the idea is we’re working in sectors that we know. And we are not adding any overhead to the management to the board, any sort of oversight, things like that. So it’s it’s a very creative, really to all party. So yeah, it’s been it’s been a lot of fun. We’ve made about a dozen deal. So dozen investments so far last year and a half. 11:03 Well, good. And then, you know, what are? What are some of these challenges of transitioning from you know, an early stage fund the late stage? I I suspect the the evaluation is different, you probably lead a lot of deals at Blue, run your following a lot. And in the current model, you don’t talk us through this transition from I think you spent over 20 years right, as an early stage investor and did Yeah, 11:23 yeah, you know, the transition really is I thought it was going to be more around letting go a little bit because not having the board representation. I thought that was going to be tough, but what I’m finding is that I have a really different relationship with leadership teams. So a lot of times that they will run things past me I’m more of a kind of a kitchen cabinet member. So that part has been okay. In terms of the diligence, a lot of times what I’m finding is that we’re investing in companies that I passed on seven even 10 years ago, when they were too early for us or maybe I just missed it as a series A investor stayed in touch with leadership, help them build syndicates over the ensuing time and when the time comes to raise a series D Series II I’ve effectively done the diligence because I’ve effectively lived with these folks for the last X number of years and so we draft on the diligence of course from the lead investors but oftentimes we’re coming into deals they’ll look they’ll simply expand the size of the round around is $50 million on the headline it’s really 49.2 or 56.1 it’s never 50 on the nose right? So there’s always room for folks who can add value without without additional additional overhead so but anyway, he asked me what was what was hard about the transition. I think the hardest thing which I did not anticipate was you know, oftentimes if your personal portfolio, you have a you buy a company and the stocks and the stock goes down, you just don’t want to sell it because you think it’s going to come back that happens on that flip side as well. So if I pass on a company for series A now I come see it for series C Series D it’s you know, 5, 10, sometimes 100 times more expensive than when I saw it, but I still think it’s a good deal so writing that check at a higher price than I could have gotten in years earlier that’s probably been the hardest thing to do. But in stocks you know generally they go up if if you would have not bought Amazon because the stock was going up you would have missed a lot of the upside. So I think for me that’s been one of the trickiest things is just getting comfortable with the fact that hey, I’m in a different stage now 3x returns what I want now I’m not looking for a 10x so it’s a it’s been sort of a you know journey for me sort of psychologically realizing that hey, these are these are great companies and they still have a lot of room to run. 13:39 There’s like even a micro example of that within the early stage market that we’ve noticed so in our deal flow funnel we have a stage that we call active watch and passive watch so these are really interesting companies to us that we want to kind of keep an eye on but may not be ready for a financing and just a few weeks ago I was asking one of my dealer leads hey can we really review the list of the five that are inactive watch and he said Oh yeah, I forgot to tell you all five got into YC so the prices are now four or 5x so it’s kind of interesting what’s happening is YC scales but that’s probably a topic for for another day. 14:19 Yeah so you see know what I’m feeling man when you put that over a span of years and you watch these companies and I didn’t really have a vehicle in which to invest in these businesses and so I’m really delighted that now I can follow some of these founders that are really had a lot of respect for but for some reason or other maybe we had too much industry concentration of blue Ron or something wasn’t quite right. We just we stepped back so that’s been that’s been the biggest biggest so learning for me at this point. 14:48 And I assume Jonathan there’s not conflicts because I noticed you know, you led the the a round for jackpot at Blue Ron and then you you also invested later stage with transform but As a non lead investor at the least stage, is that kind of how you avoid the conflict there? 15:05 Well, yeah, we avoid the conflict more because we kind of cap out at BlueRun, jackpot going in specific BlueRun is still the largest investor in that company got it. But when companies get up into half a billion dollar valuation range that’s out of the purview that the blue runs ever really put new new capital under these companies. So it leaves a door open with those pro rata available. So if we will take it, we’ll pass it on to our LPs, whoever makes sense. 15:32 Well, and who knows Jackpocket better? herself. 15:35 Exactly. Exactly. 15:37 Jonathan, you’d mentioned that FinTech before, you spent a lot of time doing a lot of deals that we know well now, probably not at the time he did the investment but kind of wanted to pick your brain on crypto bit, you know, what are some of the compelling areas within the crypto space that you’re kind of studying and looking at from an investment standpoint? 15:58 Sure. Yeah. There’s a couple things to crypto. Obviously, you’ve seen a lot of same headlines I have in terms of the what’s going on with with defy, and that’s really, I think the that’s probably three or four steps down the road from where crypto is today. I mean, today, crypto is great. As for the what we know, is just the middle transactions, we have a company called pay stand, that is actually in both transform and blue run that focuses on on crypto backed transactions. I think that’s that’s not going anywhere. I mean, then now we’re in the number of we’re not in the trillions of dollars of transactions industry wide that are crypto backed on in terms of in terms of how they are being recorded. I think that when we move over to defy that’s, that’s a huge governmental and regulatory hurdle to get over in terms of really decentralizing the currency. I think if we, if we kind of dial back from crypto, I think what is in front of us now is, is open banking, which is kind of like a cousin to kind of a of a defy, look at open banking, as being more of a consumer version of a defect will be on a on a global basis. What What can really do with open banking, this is as you as you, as you probably know, that gets effectively is opening up API’s. For banks and new FinTech companies to be able to share data more freely and just unlocked is a wave of innovation companies like like acorns, folks like that can really provide a lot of value. And if the legacy financial institutions are smart, they’ll realize that by opening up, they will actually keep some of their customers and help serve them better. So I think that that is I’m more excited about that. I mean, crypto crypto, you know, plays into that more on the on the edges and more on some of the new companies. I don’t, I don’t think that having a crypto strategy, certainly for what we’re doing transform is something that we’re looking at doing. You’re definitely seeing funds. I know that. I guess Chris Dixon at Andreessen has a crypto fund now. And so which is great those, they have the resources to really go after that long term horizon. But for, for what I’m looking at, I’m looking, I’m less sector focused than I have been in the past and much more stage focused. And so while we do have a crypto company in the portfolio, probably going to put another one in. It’s not something that I’m looking at as a core piece of my portfolio, it’s really more of an underlying technology. And it’s people using crypto without even knowing it today. So that’s really the way it should be. It’s just more of a fundamental underlying technology. 18:37 Got it, infrastructure level. So I assume that you won’t take currency positions cryptocurrency positions with with transform? 18:45 No, no, I don’t think so. That’s gonna be outside of our of our domain. 18:50 It’s kind of funny, like you mentioned, Chris Dixon, like depending on the LP, you talk to some are calling injuries in, you know, a crypto investor, not a venture investor anymore. Who knows what the percentage of holdings are that are allocated to crypto and currencies? But I’ve I’ve heard it’s exceptionally large. 19:08 Right, right. Yeah. You know, we’re not we’re not playing at that level. I mean, our investors, our we were family offices, and they expect more conventional enterprise software companies like that for us, and they should definitely feel free. Feel free to diversify into crypto with the rest of the portfolio, but I don’t think they need that at risk with us. 19:28 Jonathan, we’re, you know, pretty hot market at the moment. Lots of fun creation, lots of startup formation, valuations inflating to 2, 3, 4x multiples, what we saw a few years ago, in your opinion, is the market overheated? And are too many startups getting funded? 19:46 That is really the big question, isn’t it? folks have been saying this markets been overheated for five years. 10 years, 10 years. I mean, if you had been sitting on the sidelines, Oh, my gosh, I mean, you’d be really in sad shape right now. So you’re calling to talk the markets obviously a fool’s game. Is it overheated? The good news is for me, I don’t really you know, I can’t really control how many but other people do. And as you as you know, you don’t, you don’t need a license to practice venture capital. So. So I think we’re seeing that there’s just a large influx of folks coming in it’s, you know, microfunds, seed funds, you actually have have some really strong street crowd even before starting your fund. So, but a lot of folks are saying, Hey, this is really an interesting way to diversify. I have no problem with that. I, I think that the market, I have an infinite trust that the market will sort itself out in terms of companies being funded. And what I’ve found is the real constraint, and we’ve already we’ve removed we’ve removed money as the constraint. It’s really just the talent. If you’re starting a company, you and a friend you have you have two people, and I’m one person, I’m half as big as you are already. So you know, I can I can I hire a person with the same size. So that’s what’s happening companies are these these early stage companies, they’re, they’re merging, they’re breaking apart, they’re reforming. I think it’s super exciting. I don’t have any issue with it. And not that I can control it anyway, with the number of funds out there, the number of startups being funded, I think that you’re definitely getting some price escalation. And you’ve seen it when the rounds are being raised those dollars, they don’t. They’re not just people talking about a burn rate. That’s not they’re not being burned. They’re being spent on people’s compensation generally. So salaries are going up. That’s really the the watchword and so I think some of this sort of decentralization outside of the valley for a lot of new hires is really going to, I think, in the near term, even accelerate the number of startups neck because it’ll be even less expensive. Given with the additional dollars to go further with the dot with the, with the funding that they have, 21:59 do the does the volume or percentage of successful exits, and or the size of those exits the multiples on exits, you know, does that keep up, or run faster than the inflation in pricing at the early stages? Because, you know, on one hand, if you if you looked at BlueRun’s portfolio and said, Well, if we had paid 3x, the price for all these TVP, it doesn’t look so good, right? But Fast Forward 10 years, if if, if the percentage of successful outcomes is going up, and if the size and scale of those outcomes is going up at a faster rate than the early stage prices, then it the model still works. 22:38 Yeah, that’s true. I think that that where the model breaks is when you move from the private markets to the public markets. We had that situation we were in investors in Coupa. And we led the series a week we put a million dollars in and a for pray. And that was I mean, he just wouldn’t do that today now, for a 20 billion $20 billion company. But we when we went public, we were right at the cusp between the last round and what what the banker said we could go out so that was we were looking down the barrel of possibly a, you know, sort of just a modestly up round on financing for the IPO that he had financed the public financing. Turned out we had a nice bump in the market, you know, went up nicely the closing day. But there’s a number of companies now which I think the private markets have really outstripped what their public comps are. And so I think that’s really, that’s where we’re gonna see the problem. And so you’re getting these companies to scale all the dollars going in. That’s important. But then at some point, you do have to compete with other public markets. Of course, you’re seeing terms for the last money and in terms of getting downside protection for IPO and things like that. But you know, I’d like to not to have to get into financial engineering to get a return. If I could, I’d really like to make it based on just the growth of the businesses. So yeah, you’re right, there will be they’ll definitely be a come up and when in the public markets, obviously are pretty frothy right now. But if that comes back to a more normal PE, then there’s going to be a real disconnect between the private and public companies. 24:10 I mean, when it comes to late stage investing, which is you know, what you’ve, you’ve been doing since 2018. And now fund three for transform. Lots of news, of course about tiger, but of course, also the Coatues and Softbanks and you know, lots of active groceries investors Tigers, probably moving fastest and doing the most as you think about deals that you’re going to invest in. Are there certain partners, you will work with others that maybe not so much, or is it all about just the company? 24:42 Well, no, it’s really my deal sourcing. A lot of times comes from other GPs folks that I’ve worked with over the last few decades and they understand what I’m doing. We just did a deal with with new view. You may know new view the folks that spun out of Nei which was did a great deal with them. I’ve worked with With Ravi Vishwanathan, for a number of years for probably almost 20 years, we did a deal with with a deal that was backed by Sierra, I’ve known that partner there for 15 years with him. So it’s really about the GPs, as much as anything for deal sourcing for transform, we know each other, they know what skills transform can bring, I understand the kind of quality work some of these folks are doing with their portfolio companies. And so it’s, that’s really a really a big part of what it is. And of course, it’s not gonna, we’re not going to go into categories, we don’t know, I’m not going to be going into you know, biomedical engineering, things like that, which are super important. But it’s not something that we really know about. We’re really, what’s nice about having come from Blue Ron, and this wouldn’t have happened without my time there is that we have relationships really all over the globe, I was looking at a map of our portfolio just this morning for the call. So we’ve done a dozen investments, half are in California and half are in, in the rest of the US and beyond. So it’s a very distributed and we have GP relationships as well, I have a partner and I we are on his way, and she’s a Singaporean female founder, who has a great network herself. And so our networks are just really expensive on the GP side, fundraising is also see you also double duties time, you probably know that folks from X Factor venture, she’s a partner there. So we are really trading strongly on the on the very on the personal relationships that we have, because these are these deals are they’re oversubscribed or they’re constrained to get into. If you want to invest money in a seed deal, with a few exceptions, like some of the YC companies coming out, you can generally get money into a company at the seed level, you hear the same stories, folks will pitch 20 or 30 different funds to try to get funded. So if you want a company you can probably get in. That’s just not the case with later stage investing, you need to really have a strategic advantage in order to get into these rounds, which are are not infinite. They’re very known. They’re very finite number of companies, which are going to be the be the market movers. 27:08 Interesting. Do you think you know you may, you mentioned some stats about unicorns in the Bay Area versus outside? Do you think sort of the valley supremacy phases over or do you think it sustains and continues? 27:21 Well, I guess there’s two points on that. I mean, it’s it’s never really been a competition. As far as these I’m concerned. And we’re looking. And I think I speak for a lot of folks out here and you’ve been out here a lot as well. I know, when it’s not a Silicon Valley versus the other folks, I think it’s I guess I can draw an analogy. My I grew up as a as a university of Maryland football fan. And our big game of the year every year was playing against Penn State. And Penn State playing Penn State’s playing Maryland that was just like an easy victory was really made their their radar. But so I kind of view that the same way. Like I don’t think that we’re looking to beat anybody. It’s not, it’s not a competition against other places, or other people or other cities, or countries, it’s really just trying to find the best entrepreneurs on a global basis. So one thing that is not one thing that is not going to change anytime soon, is that there is just a lot of critical mass for acquiring companies out here. So going back to the very beginning with the the the semi, the semiconductor and silicon companies writes through till now, these companies, you know, Facebook, Google, they’re super acquisitive Apple, they’re all obviously we know who’s here. And they’re acquiring a lot of companies. So it’s going to be important to have a presence here, whether it’s every employee working within 30 miles of you know, Menlo Park, I don’t think so. But I think that the critical mass is gonna be here for quite some time. 28:49 Right, right. We just finished up our our annual summit last week, I was looking at some stats, and I was comparing things in May of 2014 when I launched the podcast to now. And it was when Eileen Lee had released her report, the unicorn report. Right? Do you remember the number of unicorns there were in like late 2013, early 14 plus? Yes. 29:11 Maybe it doesn’t. 29:12 I don’t know exactly on the spot. So there were 39 I think like high 20s, of which were in the Bay Area. Currently in 2021. There’s 32 unicorns in the Midwest. So more unicorns in the Midwest today than there were in the valley in 2014. 29:28 Outstanding, outstanding. Yeah, I was just read this morning that I think there’s 69 companies have gone public in the Bay Area this year alone, and we’re two thirds the way through the year. So I mean, there’s there’ll be 100 public companies coming out of the Bay Area, I’m sure there’s probably there’ll be a dozen. Probably coming out of out of Chicago area in the Midwest area this year as well. It’s there’s 1000 flowers blooming right now. It’s it’s really an exciting time to be an investor. 29:53 It is an amazing time. You know, speaking of which, economist recently published this, this article talking about how innovate has really slowed in how that might impact tech and venture. What’s your take on, you know, their assertion? And in data that innovation has slowed? Yeah, that’s 30:11 the I hear that from time to time. That the that the tech conglomerates are choking innovation out there buying all the competitors before they have the chance to grow. And I think that’s generally a little little short sighted. I guess, drawing back from my time in communications. When I worked at MCI we were we broke up at&t, and people were going bonkers. How can we break at&t up here, but they didn’t realize that all the innovation that was going to come out from people competing against this this juggernaut. And so when I see that I see the same sort of thing happening with with Google and, and Amazon, there’s companies who are saying, Hey, this is a huge market for us to go after. If I can, I can compete against these folks that they’re not going to be able to focus on everything. We’ve been around, we’ve sold part of four or five companies to Google in the time that I’ve been here. And we’ve known times we could just compete directly with them at the fact that we both know you worked for what for Danaher, for a number of years, and you can’t keep all the corporate priorities straight. So there’s, there’s areas for innovation that may not capture the attention of the boardroom. And so there’s absolutely room for innovation. The thing that’s it’s interesting, it comes back to the old saying earlier about the constraint on talent, these folks are really getting well compensated at some of the some of the the super conglomerate companies, the the Big Five, you know, Amazon, Apple, Microsoft, Facebook, Google. So it does get harder to pull some of this folks out, because look, it’s your betting, you know, with your life, right? I mean, it’s a, it’s a huge risk to put five or seven years into a startup. Yeah. So you have to really have a lot of conviction for what you’re doing. And as you’re walking away from what options are relatively lucrative of the if not the most exciting and very lucrative financial package that you currently have. But no, I think we’re definitely we’re, you know, we talked about briefly about defi. That’s just a huge opportunity for innovation, distant, distant financial services sector. And I think you’re, you’re starting to see it in other categories as well. So I’m really excited about about the number of companies coming out. I mean, you mentioned it yourself earlier, with the number of funds and number of companies being being funded for startups. I mean, there’s just I think that the, the level of interest to start companies up right now is greater than ever. I think the pandemic really showed that. I think, folks realize they can work from anywhere that their ideas are worth pursuing. So I think it’s I think we’re coming into a really, really prolific stage for innovation. 32:57 I tend to agree I, I guess, one counter example that we witnessed two weeks ago, a junior developer left one of our portfolio companies. So he was two years out of school. And he got an offer from one of the Fang companies. I’m not sure if it was 350 or 400, a year, a year, with a full year’s salary signing bonus upfront. couldn’t turn it down. I mean, Junior dev to this wasn’t somebody, you know, senior. Yeah. I mean, it’s just astounding, what, what, what type of comp these these young folks can command. And you know, the trade offs, working for a startup, for peanuts on a lot of upside, no less. Or you go, you know, add a fan company to your resume, and you’re, you know, nearly a millionaire within a year. 33:47 It is tough. Yeah, the the race for talent is real. And it’s been exacerbated by some of the immigration policy is going on right now. We’re, there’s been a lot written about, and the access from California and all that. The thing that is not really written about is that California if you if you subtract immigration, out from California, California has been net negative for almost 20 years. So it’s, this is not a new thing. It there’s a constant flow of people coming in and going out of California, it’s what’s happened recently is that we’ve cut off the intake valve. So we’re not getting the next generation of, of immigrant entrepreneurs such as you know, in order to have a commanding presence on the Fortune 500 and companies that are going public, so we need to get that get that sorted out. But I think that the I think it’s super healthy, that people are moving to other parts of the country, and it’s not something that is new. I think you’re getting a lot of there’s a lot of kind of fun, and maybe not so fun ribbing between Texas and California and other states as well. But if what ultimately happens is that more, more technology jobs are able to be pushed out to other parts of the country parts of the economy, I think some of what you’re saying will hopefully start to mitigate itself. And we can get people who were comfortable to live, and maybe lower cost areas for your salaries that are not so supersized, and be able to keep your keep your junior engineer in your company. 35:17 hope so, Jonathan. So this question is called three data points. I recognize this is not how venture works, but I’m going to give you a hypothetical situation with a startup, you can ask three questions for three specific data points. So let’s say your approach to invest in a series A enterprise SaaS startup, I get it, you’re doing later stage stuff now. But humor me for a second, the company is based in Seattle, let’s say it’s FinTech company, they have two and a half million of arr. They’re growing about 25% month over month. Again, the catches here, you can ask three questions for three data points in order to make your decision. What three questions he asked. 35:55 Gotcha. Well, you know, I usually ask five questions. So three is going to really be constraining me for my decision. 36:02 Let’s see here on hard on you, Jonathan. Yeah, exactly. 36:04 Three. So since it’s a SaaS company, I don’t need to ask about their gross margin, I assume that’s probably in pretty good shape. I think what I probably ask is What is there? But I’m going to just take a binary question, it’s going to burn one question on a binary Yes, or no question. Asking if there is if they’re taking any balance sheet risk? Are they doing any direct lending? Is it are they putting the company at risk for any, you know, bad debt and defaults, things like that. Because that’s just a non starter. For me at this point, if they’re doing that, and I’ve made investments in that category, it’s worked out, we were investors in cabbage, and that was a nice one. But I’ve learned a lot of lessons there inside. So that’s off the off the bat, number one. Number two, I’d like to get a sense for what their what their mix of revenue is, by sales channel. There, obviously, it’s going to depend if you are if you’re just a total back end technology play, you’re going to have you need a new tab channel partners. If you’re looking at being something more like you say, like a toast, you have a you know, you’re you’re going more direct to the direct to the restaurants and you have it’s kind of combination hardware software model. So you want to get a sense for the mix there. And I guess the third question is, it’s not a, it’s not a specific data point. But since I had a binary question earlier, I’ll give you I guess I’ll take some liberty, I’ll ask them what their crypto strategy is. Crypto, to see what their what their strategy is there. It’s going to be I think any company in the FinTech space has to have have a point of view on that right to know what that is, before I, before I write them that check. 37:42 Very good. And if you get that five, what are the other two? 37:48 Well, that at that point that I’d have to start getting into is more into the backgrounds of the founders and so forth, and saying what kind of what kind of chops those folks have. 37:57 So assuming there’s that balance sheet risk, and you know, revenue by channel looks attractive, and they have some thoughtful answers around crypto, you know, is this? Is this the type of profile you’d be looking for, for series A, or is this something that? 38:12 apps? Absolutely, absolutely, yeah, there’s a in the that’s, that’s already 2.5 million? ARR? I’d be happy to get that for series A Yeah. where things are going right now? 38:27 A lot of series A just done for less? Yeah, yeah, absolutely. 38:31 So it’s interesting, what I found going to later stage some things, I had some preconceived notions that the leadership and the founders were much more important early stage and later stage and that I used to talk about a continuum of sort of more qualitative at the early stage and quantitative at the later stage. But I think that was probably a little bit wrongheaded. When you really spend time with these founders, the good ones are just as curious as ever, and really want to be as much of an omnivore of information and knowing that almost any piece of data they have can have some sort of impact on their business. The conversations I’ve had with a lot of the founders of these portfolio companies is it’s not so much around your AR growth in your channel strategy, but it’s more about, you know, what, you know, how they’re what, what’s their approach for, for weekly meetings, how, how are they How are they approaching daily stand ups in a zoo protocol world in a in a COVID protocol world, trying to get to know them more on the EQ side, and I think that I think can go a long way to assuage some of the concerns you’re having about losing some of your high quality technology, folks, and if these folks are buying into a larger vision, I think that really, really goes a long way towards towards employee happiness. It’s not it’s not just simply a balance sheet calculation for for employees, right. They want to be you know, they want to be happy on the left hand right side of the brain, right. 39:56 100% Jonathan, if we could feature anyway Here on the program, who do you think we should interview? And what would you like to hear them speak about? 40:05 You know, I had dinner about three years ago with with Gordon Moore. He lives here in Woodside not too far from me here. He would be an interesting guy. He has obviously he was part of the one of the fair children starting Intel with with with Robert Noyce. And he’s seen the not not, of course, there’s no Moore’s law, which is, I’m sure he talked about, but he’s just seen so many different layers of innovation coming in. He was obviously at the near the very beginning of Silicon Valley. But he’s also seen the power with application layer on how that’s and how that really impacts the need for more and more processing speed and so forth. Great guy. Interestingly, his family has been out here for generations, his, you know, maybe great, great grandfather came on a wagon train on the the group right behind the folks from the Donner group who notoriously known as the Donner pass. So he came out here, you know, the early days. And I think he’d been interesting got to half he splits time between here and only Kauai. So you have to, you have to fly to Hawaii to meet with him. 41:12 I’ll put it on the list. That’s amazing. Jonathan, what do you know, you need to get better at? 41:17 I think probably time management or maybe time balance, I guess. I mean, I find with my, my, my daughters both off at college, and so I just find out his work all the time. So because it’s it’s a, you know, it’s a it’s a fun way to spend your time, you know, I like to sell art to solve problems. And so it’s a, I think it’s probably this kind of is my hobby and my job all at once, right. So, yeah, need to get better at unplugging sometimes. 41:45 After after 20 years, hopefully, hopefully, there’s some improvement there. You know, I aspire to get much better at that myself. And finally, Jonathan, here, what’s the best way for listeners to connect with you and follow along with transform? 42:01 Sure, you can just hit me up at Jonathan at Transform-cap.com. And of course, there’s always LinkedIn and all kinds of other ways, but that’s probably as good as any. 42:13 Well, there it is Jonathan Ebinger. GP at BlueRun ventures also Transform Capital, the firm that’s donating half of their carried interest to philanthropic causes. Jonathan, best of luck with fund three, and thanks so much for the time today. 42:27 Thanks for having me on, Nick. 42:34 All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot him an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that. Some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over prepare, choose carefully and invest confidently thanks so much for listening. Transcribed by https://otter.ai
Transcribed by https://otter.ai