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Google PodcastsTX Zhuo of Fika Ventures joins Nick to discuss Fika’s Playbook for Success, Finding Value Outside of Central Casting, and the Future of Fintech as Banks Get Unbundled. In this episode we cover:
- TX’s Background & Path to VC
- Fika’s Playbook
- Lessons From Cobra Kai
- DAO Infrastructure
- Unbundling the Bank
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TX Zhuo joins us today from L.A. TX is general partner at Fika Ventures. He has led investments in Pipe, BuildOps, PapayaPay, Noyo, and Edge Impulse amongst others, TX, welcome to the show.
Thanks for having me, Nick. It’s a pleasure to be on your show today.
Of course, yeah, tell us a bit about your background and your path to venture.
So I grew up in Singapore and came to college here in the US on a full scholarship, but I never expected to be an entrepreneur. So I would call myself the accidental entrepreneur. I think what happened, I think it was devastating at that point in time, but ended up being one of the best experiences in my life. So my dad passed away my freshman year of college. Well, my mom was stuck trying to raise the family. And she was like, Hey, I think you need to figure out a way to support the family. And I was like, Hey, this is my policy in college. I’m you know, scholarship, what do you want me to do? So long story short, I had to take some time off college and was fortunate to get hooked up with one of my college roommates. And we started an online company, we were selling college textbooks online, over the course of about three and a half years grew it to about a $10 million dollar run rate business. And we sold the company in late 2006. And I think through that experience, one, I think it got me very excited about starting and building companies. But more importantly, I think what I realized is that we actually tried to raise some capital when we first started the company and couldn’t do it just because we were two 20 year olds with our backpacks and no credibility. So we ended up bootstrapping the company. And so through running the company over the course, about three and a half years, I realized it was a very lonely journey for both of us whenever we need that helpful advice we don’t have anyone to turn to. And I think what summarizes the experience for us is when we tried to sell the company, we actually accepted an offer that was much lower than what my business partner and I agreed upon simply because we had no advice. And we were caught in the moment. But I think based on that experience, I really enjoyed it. But at the same time, I think it gave me this desire to want to give back to the community. So I told myself that if I ever had the opportunity to be on the other side of the table to help, mainly first time entrepreneurs like myself, I think that that will be something great and something that would bring sort of great satisfaction to my life. So that’s kind of how I slowly found my way to become a VC.
Very good. So did you begin, you know, working with businesses, tech businesses of normal scale or lifestyle businesses? Or did you jump straight into some sort of venture scale investing?
Yeah, I took the accidental path. After selling my company, one of the informal advisors to my business. I know I said, we don’t have any. This was one of the very few, he actually ran the McKinsey office out of New York. So I think when we sold the company, he came to me and said, Hey, I know you have no formal business experience, I think it’d be good for you to get some formal training. So he shipped me off to London, where I spent two plus years working for McKinsey. But while that was a great experience, I never felt that this was what I want to do in life. So I tried to find my way back to Silicon Valley, through business school, and through business school was very fortunate to have the chance to work at innovation and diverse intern throughout business school, working with innovation. This was, I think, year one of the operation. So I really had the chance to see firm building from the ground level, was working hand in hand with the managing partners then got to see venture firsthand where we invested in great companies like Spotify and Uber. So through that journey, I think I was able to build my own connections, and then started a venture fund based in Los Angeles. Together with a family office, the Carlin family was a 30 $35 million fund. They liked the startup experience that I had, and also having worked at innovation and diverse for shorts, then they gave me the insight of managing a fund. So that was kind of how I got into the venture business. Awesome.
Well, TX, I’d like to talk a bit more about Fika. You know, this firm has an incredible track record. For those in the audience that aren’t familiar with Fika in the emerging manager community, it is rarefied air. Very well regarded and many LPS that I’ve spoken with have very, very excited things to say about Fika. TX you and I have known each other for some time. We share deals from time to time and often find ourselves in very similar investments even if not the same. Tell us more about the firm and your specific focus.
Yeah, that’s way too kind of you. And Nick, I actually feel like on a day to day basis, we feel like the ducks in the pond where everything seems good on the surface. But I think we feel very much like a seed or series, a company that we’re trying to build a firm, we’re trying to build a practice there. So it’s very kind of you. But I’m sure there’s a long journey ahead of us. But I think switching back to your question, I think even I, we’re both entrepreneurs in the past. And I think our enjoyment, as I mentioned, comes from working with companies at the very earliest stages and taking ideas that these founders have and helping them translate it to actual businesses. So I think with that context, it limits on investing to the pre CBZ level. So we’re focused on companies that most of them have a product and market but haven’t found that product market fit. So that’s where we want to get involved. And we want to help them just because we’ve been through that journey before, and are able to help them find scale at the early stages. So Efika, we decided that we want to focus on what we know best. So we’ve limited our investing to four main verticals or categories, namely FinTech enterprise software, marketplaces, with a b2b focus and healthcare it when we first started being open with you, Nick, we were generalists across these four sectors. But as we started to evolve as a firm, we realized that sort of in today’s market, you need to really specialize in certain fields to do your job well, whether it’s in terms of the knowledge you bring to the table, or the networking community that you provide. So right now, this happened to me about a year ago, I personally cover most of our FinTech investing, which includes web three applications and horizontal enterprise software. As of now,
I imagine you’ve had a busy 2021 getting up to speed on all that, you know, in light of that I’m curious to see how you balance, you know, all the responsibilities. I mean, you’re going across multiple sectors, you’re going deep within those sectors, many of us in the business, you know, we get to fund three, you end up with 30 plus 40 plus portfolio companies to support. You’re still constantly doing your networking for new deals and follow on partners, your fundraising, managing and investor base, plus a number of other marketing and admin activities, you know, how do you fit it all in?
Yeah, that’s a great question. And something we’ve been wrestling with over the last 12 months. I think you’re right now we have 254 portfolio companies and I serve on 12 boards right now, some in an observer capacity, but it doesn’t get easier on a day to day basis. I think what we’ve had to do, we started being a full service 24/7 shop where we would tell founders that you could call us for anything. If you need help with financings Call us if you need help with a specific hire, call us. We still do most of that. But I think we’ve been sort of more focused on helping them with what I would call the highest return activities. So specifically, sort of, we’ve told our founders that fika will be there for you, 24/7. But what we really specialize in is two things. So we’ll help you a lot with your go to market strategy. So that’s all the way from how do you hire the right people to sort of introducing you to the right customers? And then the second thing that we’ve been very involved in as your product strategy? So how do you build a repeatable product that’s loved by your end users and customers. So we’ve limited the areas through which we will want to serve and help founders that’ve been pretty important to us. And I think the other thing we’ve been intentional about building out an advisory and scout network as well, where a lot of the sourcing and supporting activities have been supplemented by these people in our network. And I think that we’ve been very fortunate to have great co-investors like yourself. So I think one thing that I’ve learned in my venture career is that I think it takes a town or community to support a company. And it’s so important, at least for us to pick the right core investors who are following investors whenever our companies have the choice. I think this allows us to not only get leverage, and also have that collective knowledge that everyone brings to the table.
I’ve also heard through the grapevine that you personally are highly, highly structured in the way you think about time. Do you have any tips for other investors or emerging VCs?
I know my team actually makes fun of me that I’m almost too structured. I think my calendar gets booked up probably a month in advance, but I like booking out sort of certain time slots within a day to do certain activities. I think having these boundaries, I think, for some people might seem very constraining, but allows me to focus and do certain things. So one example is I block out an hour every evening to read and learn about new technologies. I think the flavor of the month, the last month has been web three infrastruc and this has really helped me level up. So no distractions, I turn off email, I turn off my phone during these periods and then I’ve similar time blocks where I’m trying to reconnect with people, my network so I can focus and have sort of deep conversations without being distracted with email or web site. So I think having a very regimented calendar, I know it’s not for everyone, but really allowed me to get way more productive in my day to day life.
Awesome. Well, I want to talk about VC and seed investing and the market at large. So TX, you know, we’ve seen these seed valuation spike, median valuations, jump from 8 to 12 mean has jumped from 11 to 16. Only in the, you know, the past couple years here, and everyone’s kind of writing about the frenzy. Fred Wilson is sort of frustrated seeing these 100 million dollar seed valuations, as I’m sure many others are. But I also saw this interesting tweet from Jason Lemkin, who said that new mega seed funds help firms win the obvious see deals, they are so competitive right now that deals with the right teams, the right schools, the right spinouts epic, but early traction, the non obvious see deals still have a dearth of capital, TX, what are you seeing in the market? And how has this impacted your investment strategy?
I think that’s that’s very true, Nick, I think deals entrepreneurs that come from Central Casting are definitely the beneficiaries of this, I would say, heightened interest and heightened valuations. And it’s harder and harder for us to compete in this space. I think having said that, we at FECA have always tried to look beyond central casting. I think we’re trying to buy entrepreneurs that have a unique perspective on a space of problems from their prior working experience are the time they spent researching the space. And as we look back to our prior funds, I know we’re still pretty young in our journey. But most of our winners have come from founders or companies that were not obvious at the seed stage. So these were people who didn’t raise from brand name funds at the seed stage or took a while before they found their stride and ended up doing very well. After two or three years. I think we found repeated success going after this model where we don’t solely focus on people coming from Central Casting. And that has helped, at least for fika. Given that we’ve taken that approach over the last four or five years, we are sort of less afraid of this new environment that we’re coming into. Yep,
yes. So central casting, of course, being the entrepreneurs based in the Bay Area that went to the prominent schools and worked for big tech. If not that, then what what is the profile of the founders that you’re looking for?
I think we’re looking for founders that fit certain profiles. I think one of them is did they come from a specific industry? And do they understand the problem better than most? So I think they give you some tangible examples. One of our companies is doing well. It’s a company called Bowery valuation in New York, both the founders were former appraisers for commercial real estate, and they decided to leave and build appraisal software for the market. So they understood the space better than most where they come from the valley. No, were they working in big tech before? No. But we thought that these were the right people to solve that problem. And we’ve seen similar success for other companies like spec, right in the manufacturing space, or a pie in the payment space. So I think what we’re looking for is that unique perspective. And I think the second thing, maybe this is another problem that we should talk about, Nick, is that I think capital is abundant in this environment. So I think what happens is that it’s almost too easy to start a company. In today’s world, you’re having what we see is a lot of people from Central Casting accidentally start a company, they have a couple of conversations. And before they know what their five G’s on the table, and they haven’t really thought about why they want to build a company. This is almost the path of least resistance. And it seems almost fashionable in today’s world and age. But sort of I think, on the other hand, what we’re trying to weed out is how does that have determination, grit and passion, that this is really something they want to do for the right reasons. And I think you need to spend time with them. And I think, fortunately for us, especially companies in our neighborhood, I think LA is fast becoming a focus area for a lot of VCs. But we still have an opportunity to spend a bit more time with these entrepreneurs compared to those in Silicon Valley, to weed out why they’re really building these companies and sort of the underlying motivations.
Well, it’s funny because you know, these flashy resumes, and these people that have built skills and experience, they go to big schools or they work for prominent tech companies, and they acquire a network and they acquire the ability to start a tech company. But you know, as we think about You know, what are the necessary characteristics of a founder in success at the very foundation is mindset. And you have to find, or at least we believe, one has to find these people that are just uncharacteristically committed to building businesses in creating, you know, new, innovative products. And it’s a rare sort of type of person that’s like that. And then if you layer on the right skills, and the right experience on top of that wonderful, but it for us, it just doesn’t work the other way around, where somebody can have the skills and experience but not that that knows, for building and that irrational commitment to just seeing it through to the end, hook or crook, they’re going to make this into a successful venture.
Yeah, you’re right. Like, I think the reason why founders that come from central casting, a lot of them end up being extremely successful. So I’m not sort of saying that this shouldn’t be sort of the the archetype that you should go after as a VC. But I think it takes a lot of the risk off the table. So I think people from this network, sometimes they get a hall pass for future funding rounds is because of who they are. They have a built in network of talent that they can access from their prior jobs. So I think from a VC perspective, is understandable why there’s a lot of capital chasing these type of founders, because some of the ingredients that you need, maybe not the primary one, which we talked about, present for these individuals that come from central casting. So I think the number of challenges that they would face within the first six to 12 months, arguably would be less than people who don’t come from central casting,
You know, so we’ve spoken a lot on the show about remote teams. And of course, the pandemic has accelerated the entire process of working remote. How have you seen things evolve with remote teams? And you know, how are the startups in your portfolio thinking about distributed environments, distributed remote talents in building their company without, you know, a central HQ?
Yeah, I’m really torn on this one, Nick, to be honest with you. I think for some of our companies during the formation stage, I think it provides a lot of flexibility in terms specifically for talent, like they’re able to find amazing talent across the country that will be willing to join a startup but not necessarily want to relocate. So I feel that it’s open the aperture for a lot of our companies. When it comes to hiring, we’ve seen a few of our companies get to that 100 sort of employee Mark, where it starts to get a bit challenging with remote teams. I think there’s definitely stress on company culture. I think there’s stressors on accountability that we haven’t really solved for in this new remote working world. I think zoom. And I think virtual conferencing has made it super efficient for us to get work done and sort of maybe be almost too transactional on these calls. But the people relationship hasn’t really been built over zoom, especially for new employees. So we’ve seen that assimilation be a challenge for companies that have gone to scale. So we’re still debating internally of how we think about it, but at least have a preliminary view that maybe a hybrid approach works well where remote teams are going to exist. That’s the future of the world, but maybe clustering people in certain cities, perhaps by functional groups might be a good middle ground solution.
But it does feel like it’s that 100 100 employee company. That’s kind of the tipping point.
Yes, yes, I think the tipping point is when you have more individual contributors versus managers. That’s what we typically see as the tipping point. And once we see that most of our companies who have had most of their staff joined within the last two years, especially in a COVID environment, those companies have struggled with the pure remote team setup.
Interesting. Do you feel like five to 10 years ago, failure was celebrated in the valley? Do you think that’s still the case?
Maybe this is a contrarian viewpoint. But I think we are not embracing failures as we should in today’s environment. I think there are a couple of reasons. One, that’s a lot of capital flowing into tech and the media has been sensationalizing these large funding rounds and to founders who are on the news. I think they see it as a failure. They can cause funding rounds every 12 or 18 months. And I think it prevents founders from embracing failures at the micro level and making tough changes that are sometimes required at the company level. And I think what makes matters worse is that employees now are exposed to sort of funding cycles and have less patience to stick it out if a company is going through a rough patch. So all being said, I think we’ve created this echo chamber, where founders need to raise capital every 12 to 18 months to validate their own successes. And given these compressed timeframes. It doesn’t give them the breathing room to embrace failures, even on the micro level and sort of make changes that I think in the long run will definitely help the ecosystems. I do think we need a mindset change within our industry.
How does that manifest? What are you seeing, you know, with, with founders resistant to micro or macro failures? What’s the result of that?
The result of that, it’s a couple of things. I think founders are hesitant to make personnel changes, especially at the management level. Because if they make a management change, they’re perceived as oh, something’s wrong with the company. That’s why this person left. So I think they let sort of problems fester for longer than they should. That’s one, I think, to product innovation within a company, it’s sometimes challenged, because they’re too afraid to take a hard pivot and say we are sunsetting. This product, we’re launching these two new product features just because we want to test them out when sort of the initial product is working, there just isn’t that wiggle room to say I’m losing 30% of my revenue today. While this is good for the long term future of the company, so and what we seen, at least at our late stage companies is that some of these stresses are now playing out. And they could have been fixed cut 12 months ago, simply because founders were focused on the Northstar metric, which was to grow revenue as fast as possible. So that grow the team, at least from an external perspective, we are hiring, we’re not making any cuts. This is the team we’re building. And that works well sort of for fundraising. But ultimately, a company is going to be judged by exit. So I do think correction needs to be made in that regard.
How do you advise you know, when you’re working with founders, how do you advise them with regards to having a set of metrics, Northstar metrics you mentioned, and being committed to their plan and exceeding their plan, but also having the flexibility to iterate, test figure things out, right, you’re often investing pre product market fit. So to a certain degree, there’s a lot that still needs to be figured out. There’s a lot of exploration, yet we’re in a business, that’s all about growth, I mean, and very, very fast growth every 12 to 18 months, closer to 12, these days or less. So how do you balance those two things?
Yeah, I think in the past, we made the mistake of sort of anchoring our companies towards the revenue metrics too early on in their life cycle. And we’ve taken a step back now Ivica, where most of the companies that we’re investing in, in sort of today’s climate, are mainly pre revenue companies, they usually post product pre revenue. So our sole focus, at least for the first 12 to 18 months is helping them find a product that really, really resonates with their customers. So we are less focused on quantity, more quality of relationships that they have with the end customers. And I think we’re also very focused on building a sustainable business model that’s almost profitable from day one on the unit level. And to that, we’ll see the quality of revenues, that ACBS will continue to grow, and that this expansion opportunities simply because of the product suite that you’re building. So we are laser focused on these metrics that are sort of less revenue focus, I think the crossover points when they get to the CVS, where we now kind of flip the switch and say that, hey, you need to focus on some of these traditional metrics. And I think the rule that we give founders today is that there should be three quantitative and three qualitative sort of Northstar metric that you should focus on at every stage. So you shouldn’t just be solely focused on revenue growth and not care about product and that creates a good balance for them to sort of be able to focus on
Yes, I want to talk a bit about, you know, seed investing at large and what that means for fika. Maybe if you could quickly, just remind us of, you know, your check size, you know, stage focus ownership. And then tell us a bit about, you know, how Fika positions in the seed environment going forward?
Yeah, that’s a good question, Nick. We are just transitioning to fund III right now. So I think for some context, our first fund was a $41 million fund in 2017. And then we moved on to a $77 million fund in 2020. And starting now, I would say in Q2 this year, we’ll be investing from a third fund which is 160 million. So stage wise, it’ll be The same we’re focused on pre series a company. So this could be pre seed, seed, or now what they call mango seeds just before they hit series A. In terms of check size, we write a check anywhere between 1 to 4 million to own 10 plus percent of the company. Having said that, we’re trying to be slightly more flexible around our ownership targets. Having in the past, we’ve been pretty fixated on terms of getting to that sort of 10 plus percent number. And I think with that approach, we unfortunately have missed out on some great companies, I don’t think we would ever sort of invest to get to a 2% position. But we’re trying to sort of move away from solely focusing on that 10 plus percent number. So in certain cases, we made exceptions where we own sort of 70% of a company. And I think the thesis we have is that we remain helpful to founders who will have the opportunity to invest more in future rounds.
Got it. How do you focus on avoiding getting squeezed from both series A from the top, you know, we see a lot of traditional series A firms and funds, the Sequoias, Indexes, Greylock’s doing a lot more seed deals. And then also the angels and other players that are coming up from the bottom, often investing in uncap notes. And there’s just a lot more players in the angel pre seed friends and family stage. So how do you avoid getting squeezed,
I think, to articulate what our value proposition is very clearly, I think two things right one, we are the firm that will help you go from zero to call it one to 3 million revenue just because of what we’re focused on on the go to market and product side. And that pitch resonates very well with a lot of founders. And to this is our focus, right, we’re not investing at Seed, A, B. So like our craft, and our practice is built around you as a founder at the seed stage. So what that means is that all the tooling, all the network, all the community that we’re building, it’s geared towards supporting you as a founder. So even if we take as we think about the venture operators and advisors, we’re adding to our network, these are people who are very good at sort of discovering product market fit very quickly and helping founders get there. So I think we given that we’re very focused on our craft, that has allowed us to differentiate ourselves. And there’s still a group of founders who still pick the multi stage funds, I’m not gonna lie, where they’re like, Hey, this is perpetual access to capital, and they’ll still go there. But there is still a substantial group of founders that want to work with us. And I think to my earlier comment about being flexible and ownership, we’re trying to be more accommodating at fika. We never take entire rounds, I think most of the time, we take about 50 to 60% of around when we lead. So I think we’re there, it gives a lot of room for angel investors. And sometimes we can even accommodate a multi stage fund. So I think with that people see Fika more as a collaborative platform than a competitor in the space.
And is that the primary reason why you do often take 50% of the round, because you want to bring in collaborative help?
Yes, yes. And I think we want diversity in terms of thinking and perspectives as well. So while we believe that we can help companies, we don’t think that the optimal outcome is to be sort of the sole investor on the cap table. So that’s a perspective that even I had been founders in the past. And so that we took that kind of mentality along with us to fika. Today,
G actually wrote this really enjoyable article to read on TechCrunch. It was a Cobra Kai. Themed article. So there’s a special on Netflix related to the Karate Kid movie, which is funny. One of the quotes from that show is, it’s like strike first strike card, something like that. And you talked about this concept and in how you from a sourcing standpoint, you know, you try and find deals strike first move fast. Tell us a bit about how you go about sourcing and attempting to identify deals first and then get to conviction quickly?
Yeah, I think it comes with training. And I prepared my neck because can I extend the analogy? I think for us, again, this has happened over the last 18 months that we sort of go deep within certain sectors. So for the last year, I’ve been focused a lot on embedded finance in terms of payments, looking at new insurance models and on the developer tool. So looking at sort of more collaboration platforms between developers and security teams and looking at the data stack to look at more self serve data platforms where not everything’s relying on the data professional to understand the end consumer. So I think having these focus areas allows you to network within the right circles, one allows you to quickly understand us baseball to allows you to build a community that can support a company that you’re investing in. And I think three, I chose the founder that like, if we were to invest in this company, this is a focus area of the firm. So I think with that approach, it’s allowed us to move faster on certain deals. I think one thing that we’re trying to get comfortable with is that we’ve been kind of very data driven investors that we we typically go through a more deliberate diligence cycle before we invest in cubbies. I think now that we have a lot of repetitions in and the team has done this for a while, I think we need to get more comfortable with our own convictions. And sometimes we are that 80% level where we kind of basing the investment on two or three sort of spikes within a company or we see could be other founder level and we should just trust our judgment and goals. So I think that’s been one of the learnings for the year where sometimes we almost overthink stuff and try to talk ourselves out of the deal. But usually, when we get to that 80% level, as we look back into deals we’ve passed on, those have ended up being great companies.
Is there a common reason why you have hesitation at the end that you you try and look out for like, this is not an adverse signal. This is one that we should push forward even though it gives us pause.
Yeah, we we consensus driven fun. So I think we’d like to do deals when we feel that everyone’s bought in and everyone’s excited about the deal. But I think in venture I think what we realize is that sometimes we have to embrace outlier thinking as well. So I think where we’ve gotten stuck in the past is when one investment team members extremely bullish about a company, and someone else on the team has stuck not because they don’t trust the other person’s judgment. But just because they spend less time in a category or space. And we’ve been working through it where we’re trying to support and promote outlier thinking within fika. And that change has helped over the last cut out say three to six months.
I want to talk more about the team. But before we do final point on sourcing when it when it comes to an advisor network and a scout network, you know what, what types of individuals are you guys looking for that are dialed in and help you identify strong potential investments.
Yeah, we’ve taken a slightly different perspective, we are very focused on people who are still very involved in day to day operations. So we’ve intentionally kind of stayed away from sea level, VP level execs within companies, we are looking for people who are actually living the pain point on a day to day level, and are looking for solutions to solve their problems. So at least from the seat level, what we seen as seed or precede companies typically would approach a manager level IC level within a company and try to get them to use the platform, especially for enterprise software. And that seems like a good network of people for us to know, I think one we get practical feedback on whether this technology is actually useful to your business. And I think too, in a lot of ways, this network, they are hungry to build an investment track record or get exposure to companies. So we feel that they’re more receptive, at least, to be involved with a fika community.
Awesome. And then circling back on the team comment, you guys have done a very impressive job, I think building out a team at figa and kind of having your own vision and a unique approach. Talk to us a bit about you know, what you’ve done at fika how you think about talent development and succession planning for a VC firm?
Yeah, I think that even I started pekao goal was speaker to be a platform that will exist beyond the both of us. So I think having that framework, it’s almost a great starting point. So when we are hiring for people on the team, we think of people with the potential to be a partner might not be a year might not be three years, but at some point, we’re looking for that spark that will allow them to be future leaders of the firm. So I think with with that approach, we actually spent a lot of time grooming them, giving them the right levels of exposure, so that introducing them to people within our own community and network who are very close and dear to us, who we work typically wouldn’t have exposed a lot of people and that has helped and I think we’ve been very open about kind of promotion cycles within Fika like ventures a nonlinear career. It can take you six months, it could take you three years to get the next level but instead of being sort of time bound, in terms of these levels, we’ve been very clear about the milestones and what it would take to succeed at each level and have communicated them to the team. So I think on the team level they feel they feel very empowered that this is their firm. This is where they want to be for long term and this could be sort of a permanent career instead of them doing a two year stint and leaving fika. So I think that’s been very helpful. And then I think the last thing is prioritizing intellectual honesty, I think everyone should have a voice when it comes to decision making, provided they do the work and sort of have a viewpoint supported by data. So that’s something that we’ve trained the entire team on. And I think what that promotes is leadership, even at the junior level. And I think these are the key ingredients that you need, in order to build a good succession plan. I know it’s not and it’s not like a play to play plan. But I feel that if you get the right building blocks in place, then it’s pretty easy to carve out a good succession plan after that.
And can you give us a quick example of, you know, when it comes to a specific deal, how different types of junior and senior team members might interact with that deal through different stages?
Yeah, so So we typically sort of prosecute deals in a three step process. So one person on the team was the sector expert, it could be a partner could be associated with sort of run with the first step of the process, then we’ll bring in a second person who’s the counterpart within that sector. And finally, when you bring it to the team, we do a closed room vote voting system at the end, I think we feel that in a lot of firms or partnerships, the partners voice kind of like outweighs the other people in the room and influences how we think about deals. So what we do is like post meeting, everyone fills up this form that we built and rate to do on certain categories, and what lists down so the remaining concerns, and then we have a very objective viewpoint on how we feel about the deal as a team that we come back and chat about as a team. And I think that has really helped promote a certain level of intellectual honesty and diversity of perspectives at the table, and it has improved decision making as it relates to deals.
And how do you handle a situation? You’re a consensus based firm, but if somebody is, if a partner is really passionate about a deal, and is banging the table, you know, Are there exceptions to the rule? Or is it close vote? And that’s, that’s it?
Yeah, I think if someone’s really passionate about do I think this might be a lot of the inner workings, but we have a rating system for each company, I think four represents a key, I absolutely want to do this deal. I’m very passionate. And I think if we find someone in the opposite camp who’s a one, then we have a conversation around that between the four and the one but there’s someone in the four category and no one in the lowest category typically will trust the judgment, especially if that person is the sector expert only for a certain sector, then we would still go ahead and do a deal in the past, we required everyone to say yes, and this changed about nine months ago. Got it?
Good. I want to talk about FinTech a bit. Maybe we’ll do some quickfire on some different aspects of fintech. But according to a16z, only 20% of millennials and Gen Z trust their banks, thoughts on the future of banking,
I think there’ll be unbundling, because more of these millennials and Gen Z’s will be less reliant on banks for access to financial products, whether it’s insurance, Wealth Management, and this is a huge project core banking revenue. So I think a lot of these banks will will see challenges and kind of short or medium term, I think the way to solve for at least from a banking standpoint, for a lot of these traditional financial institutions, they need to get more aggressive with partnerships or acquisitions, I think what what they have going for them as the huge deposit base that they have, that lowers the cost of capital, as well as, as well as the wealth of consumer data’s that consumer data that they’ve collected over the years. So I do think there’ll be an unbundling, especially on the consumer finance side of things. But there’s this window where a lot of the traditional financial institutions can still recover and partner with the FinTech companies that are building sort of novel products.
And so this is in this space, about payment processors. You know, a number of folks have been on the program saying that there’s just, there’s so much opportunity and just monetary loss and the 3% Plus tariffs on, you know, every, every credit card transaction, you know, what are you what do you think is the future with with the visas and the MasterCards?
Yeah, it’s pretty much a duopoly between Visa and MasterCard, especially for offline channels. But I think it’s more FinTech players. Trying to bypass these processes, payment processors will feel the pressure in the near term. I do think the inevitable future for a lot of these payment processes is driving revenue from other income streams, whether it’s product expansion, affiliate partnerships, I think one examples, American Express partner with better mortgage and this has been kind of a good lead gen relationship for both of them. Um, so I think over time, there’s three different percent tariff on transactions hopefully will go away. I think it’s a big price to pay. That’s a big friction point for commerce and transactional businesses these days. But I do think there’s still a future for payment processes to exist.
Any thoughts on the future of lending and better risk assessments and just more fluid options for lending against assets and in maybe consumer lending?
Yeah, I think more marketplace and commerce companies will be lending originators going forward. I think in the past, they’ve been partners with, think of a car rental marketplace, they’ve just partnered with the Geico. So Liberty Mutual will to offer kind of rental insurance, but now they’re seeing that, hey, we actually have a hold the data, we need to underwrite these policies. And we can actually expand our product and take on some of this risk. So I think that’s very interesting. So I think a lot of lending will start to originate from the point of transaction. And I think the first iteration of this will be ecommerce companies at scale and marketplaces that have enough data to kind of pull the risk across all their customers.
Wonderful. Any thoughts on embedded finance and embedded applications?
I think this is part of the neck, I think lending will be part of it. I think it’s a lot easier now with kinda API’s for you to offer these products, I think, right? The very first phase of embedded finance will be just a pure distribution relationship. And as companies get more comfortable with the risks they’re seeing and add more data points, then they will take underwriting in house so I think embedded financial happen in two main steps distribution and underwriting
are good web three, you know, we saw the Twitter wars had recently who’s gonna own web three, do you think it’s these this vow meritocracy with, you know, defy and Power for All and distributed control or to the VCs ultimately, build the control in the incentive upside?
Yeah, I do love the concept of meritocracy. But I don’t think on a business level, we’ve seen any corporate structures, be able to maintain a consensus driven kind of structure approach. So I do think sort of there’ll be a hybrid outcome, where I think with what’s happening in web 3d, a set of challenges that need to be solved from a governance legal taxation standpoint. So I don’t think it’s as polarizing as the VCs are going to take over the world, I will have a truly decentralized platform where everyone’s gets the beneficiary of what’s happening in web three, I think there’ll be a hybrid situation where I think we’ll see an outcome that’s in between
We just had Ramy Adeeb on the program talking about 2022 predictions and talking a bit about killer apps within Web three and crypto. Do you think we have a killer app? If we do, what is it.
Yeah, I don’t think so, I think we’re just too early. These are the early innings where I don’t think I’m ready to sort of predict which will be the killer app, I do think the killer app will come in a few categories. So I think they’ll come in the picks and shovels. I think one category that we’re really excited about is any infrastructure company that’s supporting the growth of douse, I think DAO’s is something that will stay whether they become mainstream, I don’t know. But I think there’ll be a big component of corporate structure in the future. And anything that sort of allows traditional companies to interface with web three. So we are heavily looking at investing in these two spaces. And I think that will continue for the next two to three years.
Yes, this question is called three data points. I’m going to give you a hypothetical situation with a startup. And you can ask three questions for three specific data points. Let’s say you are approached to invest in a seed stage enterprise SAS startup, the company is based in New York, the sector is dev tools in security, they have 250k of ARR and are growing 20% month over month. Again, the catch is you can only ask three questions for three specific data points in order to make your decision. And the close vote happens here. No, we’re not going to committee.
That’s it. This is a tough Vivek. Let me think. I think the first question I would ask is, if this company is wildly successful, how does it change the day to day operations of DevOps or security teams and really quantifying the benefits that it would bring? That’s, I think, question one. So I love the founder to have a clearer perspective on what the long term vision is. And if the company was successful, like, how does this fundamentally change the way we do things so that’d be questionable. One thing the second, the second thing that we’ve seen specifically for dev tools and security is that thought leadership is very important. So the second question I asked is, What have you done to build thought leadership in this space? Or get in front of the right influences? That sort of building cutting edge technology, or other decision makers for what you’re building? So this, this could mean like, what have you done from an open source perspective? What have you done from community building? Maybe you’re used to setting up like an online conference of like, all the top see sorts of 10. So anything that points me in the direction that you’ve done something meaningful, would be very helpful?
So that would be the second question number two, and in the final?
And the final one will be what has your conversion funnel look like in terms of close rates? Time to close? And how often have you displaced a competitor? I think that would tell me how important this technology is to the end customer. And that will be a good proxy for product market fit.
So what if it’s a product led growth situation? Right, and developers are using this tool? To your first question, let’s say they can push security updates and new code and 1/4 the time right. So they love it. They’ve onboarded on the tool themselves without any leadership approval. And the the close rate, I guess, is, is quite short, because it’s more product led growth. So you’ve got individual devs adopting.
Yeah, I think that case, the sort of the intent of the question still applies, I think, one we’ll look at sort of persistency like, are they still are most of your users still using the product after three to four weeks? And how often have these initial users recommended the product because someone else either within the organization or someone they’re connected to. So I think this is again, a good proxy. And again, apologies, Nick, that this, I was trying to come up with three questions as fast as possible. So it was more geared towards sort of traditional enterprise sales as opposed to product lead growth.
I love it. I was just giving you a curveball there. But well done. TX. If we could feature anyone here on the show? Who should we interview? And what topic would you like to hear them speak about?
Yeah, I think one of the people I look up to and ventures Hold on, and the rest of the Altos team, I think they’ve taught us a lot. And even I’ve been the beneficiaries of getting to know them over the years that they’ve always been so generous with their time. I think two things that stand out, it’s patience in venture and trusting in your strategy. And I think those are two very important lessons for any aspiring VC to learn in today’s environment. So I think for anyone, the Altos team would be a great person to feature on the show.
Amazing, TX, what do you know, you need to get better at?
I need to, I need to be able to say no to things, I need to be better at sort of focusing and sticking to my own strategy. And game, I think I do suffer from a bit of FOMO. If I were to be honest, like I want to see every deal that’s going on the market. And I realized over the years that I really don’t have to that’s one. And then I think three, I’m trying to get more involved in the web three community were sort of now my primary kind of communication channels, the founders discord Telegram, it used to be met iMessage and WhatsApp, but I quickly have had to switch and I joke about this like 10 years ago, I was making fun of people who are using older technology, and now I’m becoming one of them. So get comfortable and brace these new technologies. I think our team has done a good job over the last six months, but we need to continue to innovate and keep up with the trends.
And finally, here TX was the best way for listeners to connect with you?
DM me on Twitter, or you can email me at tx@fika.vc.
TX, this was a true pleasure. You are one of the best in the business, one of the kindest, and clearly the returns speak for themselves. So, you know, thanks for sharing your time with us today and your insights.
The pleasure is all mine. Thank you, Nick.
Transcribed by https://otter.ai
