Dan Ahrens of Left Lane Capital joins Nate to discuss The $30 Trillion Dollar Market Opportunity, Formulas for Successful Consumer Investing, and The Current Macro Environment. In this episode we cover:
- Firm Building at Left Lane
- Raising a $1.4B Fund II
- Investing in Consumer Tech and SMB
- The Current Macro Environment and much more!
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Transcript:
Dan Ahrens joins us today from right here in Chicago. Dan is the Co-founder and Managing Partner at Left Lane Capital, a venture fund specializing in high-growth internet and consumer companies. Dan has investments include M1 Finance, Wayflyer, Moove, Arc Technology amongst many others. Dan, welcome to the office and the show! It’s a true pleasure to be doing this one in person.
Thanks for having me.
So can you walk us through your background and talk about the story? What led to founding Left Lane?
Yeah, absolutely. So back on Venture, like a lot of people I’ve heard on this podcast and other podcasts was not necessarily what I wanted to be when I grew up. When I graduated college, like a lot of folks who liked solving problems, like math, like working with people, and didn’t necessarily have the clearest career path, I decided, let’s go to management consultant. So did that for a number of years, picked up a few good skills that have been helpful along the way, but really just reaffirmed my love of a couple of things. I think the first is learning new things, and having the opportunity every two to eight weeks, depending on the project to suddenly have to force yourself to become an expert in an entirely different industry, a passion of building relationships and working with people. And then fortunately for me, also a passion for technology. So when I was working as a consultant was able to work on a few projects, helping large enterprises, completely digitally innovate and become digital first organizations. And through that, that was where I really knew that I wanted to work with technology companies for the rest of my career. And from there was a pretty natural move over to Venture was able to have a number of conversations and was fortunate enough to move over to Insight Partners it’s about a little over seven years now, seven years ago now. And in Insight is really where the Left Lane group started working together in earnest. And the beginning of our journey together started, and over time developed more and more conviction that you can actually build a long lasting institutional investment group and strategy based on the consumer internet revolution that we’ve been seeing over the past decade.
What’s the thesis at Left Lane?
It’s a simple thesis, there’s $30 trillion of consumer spend in the Western world. And over the last 10 years, you’ve seen a fundamental transformation in that spend, where now every category, whether it’s healthcare, education, financial services, anything that a consumer is spending $1 on is now shifting almost one from one to digital first businesses. We believe that this is we’re in the very early part of this adoption curve, and that this is going to continue for decades, to come. And we also saw a market where no one else was really focused exclusively on this at this breakout growth stage of a company’s lifecycle. The entire world and for good reason, had focused on enterprise software for a number of years, right? It was where a lot of major funds had made their returns. That was where a lot of innovation was happening for a long time. And for good reason. There are elements of enterprise software that make it a really highly resilient business model. As everybody knows, you lock in the product into the enterprise, you have extraordinarily high retention it’s highly scalable. We fundamentally believe that when you start taking the needs of consumers at the most foundational level where you get your food, again, where you educate your family where you get health care, we felt that we can find a lot of those great characteristics of resilience that you find in enterprise software, we felt like we could find that in this $30 trillion opportunity with an entirely new generation of company. And so that’s the bedrock of the thesis is the belief in that macro tailwind and that opportunity and then the work we’ve done since then to just really hone in on what are the heuristics that make a consumer internet business very resilient and long lasting.
If you look at the longer term trajectory of consumer investing, you know, you’ve had in the .com era in that sort of boom or bust era, there was a lot of information that moved online for the first time when you looked at the social network era, which we’ll call that, you know, I don’t know, 2003 to 2010, 2011. It was all, the outcomes there were all very dynamic, right? You either one, your demographic and your social network or you didn’t, if you were the third best social network and a demographic, you weren’t going to be worth a whole lot of money. And so I think that somewhat scared people off from deciding to focus and invest more in the space. And so for us, what we started to see over the last 10 years was that when you’re providing services that customers are going to need for five, 8, 10 years, and you can build relationships with customers for five, 8, 10 years, then you’re able to build similar levels of resilient relationships and long term relationships and lock in, that gives you some of that dependability of software in the market that is, you know, 15, 20 times larger from an overall spend perspective.
I’m excited to go into some of the specifics of investing in consumer which we’ll we’ll do in a few minutes. But I’m, I want to pick your brain about going from being an investor at a large institution to running your own shop. Like what was the biggest adjustment for you personally? Or what did you find to be your biggest challenge in doing so?
Fundraising to start. I know that sounds obvious. But for most of the first year that we were working on Left Lane together, we didn’t do a deal. And so our whole business professional muscle shifted from only investing in companies to suddenly like a lot of founders we work with, we were on the road every week, flying around the cities, not just in the US, but internationally, trying to work with LPs, find LPs and raise money. So you know, you wake up Monday you get on a plane, you land in some city, the first stop is FedEx, because this was before the pandemic and people still wanted this suitable, got these bags. And then you’d hustle around the cities hauling your suitcase in a big box of decks to go around and tried to raise the fund. And I think that was such a great forcing mechanism in many ways for us to be crystal clear about what our thesis is, how we feel like that thesis and our approach to it is differentiated. And really set a great set of North Star metrics, constraints, considerations for us to then operate the fund towards and make it very clear to the rest of our team that that’s what we’re operating towards. So I’d say fundraising certainly one thing, second thing, absolutely just the plumbing and infrastructure of running a fund, which isn’t something that we ever had to think and think about when you’re when you’re sitting over at a large institutional fund like we were, I always remember our first institutional LP one of the first checks that we had before a lot of other people believed in us was doing their last rounds of due diligence. And so for a venture fund, a lot of times what that will look like is operational due diligence. In other words, this group of highly institutional LPs come into our Williamsburg, Brooklyn, we work in our tiny one room, we work and sit and evaluate our operations and do the due diligence there. And at 1.1 of the due diligence requests was very simple one was for us to send to wire $1, from our account to another account to simply prove that we could do it. With the time we had just opened up a bank account at our new event, our bank partner, maybe a week earlier, this was very much day one we had never actually sent $1 to anybody before. And so for a while, for those 10 minutes, it felt like the future of our funds depended on our $1 in the most basic function is VC fund has, in doing so while a group of people sits in nervously across the roof. So a far cry from the visions you have when you think about what starting a VC fund can can bring and certainly a far cry from sitting in the nice offices of a firm with tens of billions of dollars. Okay.
Is there anything you wish you knew when you guys were first starting, like your first instantiating Left Lane? What’s one thing you wish you knew at that time that you know now, specifically around these areas that you’re talking about?
That’s a good question. I think one of the things that we wish we knew was just to what extent it’s important, I guess I’ll frame it a slightly different way. If I were to give advice to somebody and I have two groups who are just starting out for the first time and thinking through fundraising for the first time focusing on that differentiation is so incredibly important because particularly over the last few years, anyone who follows VC personalities on Twitter, etc, knows there’s a lot of capital available. There’s a lot a lot of dry powder, that differentiation has become more and more important. And I think limited partners have become more and more discerning about which groups they actually think are going to be able to drive alpha and drive out performance. And so framing things around that and starting that from day one, I think is the biggest piece of advice that I give out to groups because we knew it was important. And we always framed our conversations around it in many ways. It just really struck me when you go through your first 40, 50 LP meetings. That’s question one, two, or three and just about everybody’s, everybody’s minds.
Yeah. Do you see gaps in the market, in the venture market still, or areas that you don’t think firms are doing a good job around differentiating, like any vectors of differentiation, you think that are not, are not being built upon to their fullest extent?
I continue to think that there’s opportunity for sector specialists, right, which is really how we view ourselves in many ways, where, again, focusing on consumer and SMB internet, this breakout growth stage, left behind is really our focus. But I think that there are spaces and spaces within spaces where smaller funds and sector specialists can really differentiate through the value that they can provide to entrepreneurs through their differentiated understanding and selecting these deals, because they only live in this one part of the world. I think that’s an area where we’re going to start to see more and have seen more now continue to proliferate.
Yeah. So in terms of the fund itself, you guys recently raised $1.4 billion, which congratulations on that.
Thank you.
How do you approach deploying a $1.4 billion dollar fund? But what does portfolio construction look like? How do you guys approach that?
So before we get to portfolio construction, I actually think the most important part of that is our team. And that was one of our biggest strategic focuses from day one at Left Lane, if you think about our constituencies, our constituents, we have our limited partners, we have the entrepreneurs that we work with. And then we have the team, the goal for us from day one was to build an institution. I mean, we were fortunate inside it from day one, to have a lot of opportunity to build our platform and grow our career. And we knew that if Left Lane is to scale, and to reach the ambition that the managing partners have for it, we need our team members to step up and do the same thing. And so one of the first questions we asked ourselves is, how do you create the best possible environment for a new venture capital professional to build their career? And how do you give them both the tools to know what a Left Lane deal is to go evaluate deals and the way that we evaluate them at Left Lane? And then how do you give them the creative freedom and create an entrepreneurial enough culture for them to do that, because four managing partners alone in a vacuum, for us attempting to deploy the $1.4 billion that we raised in our second fund was never going to be something that was going to be successful. And so we’ve had a couple rounds now of promotions, where we had folks who joined us at the associate level who have now moved to the Vice President or the principal level. And for us, those are absolutely massive wins and great days to celebrate, because we know that we now have more folks in market, and we’re going to do a great job working with entrepreneurs and being valuable partners there. So I really think that’s the first tenant of how do you actually deploy at scale, right?
I want to almost pause there, and then we’ll talk about portfolio construction.
Yeah.
And we could almost do an entire episode on how do you build the structures and processes to promote junior folks now. But I guess, to make it simple, what is one key learning that you’ve had around developing the processes and systems to take junior folks and promote them up to become principals or one of the partners and then then we’ll talk about portfolio construction.
It’s less process and mechanics, and it’s more culture. And I think it starts by setting the tone for that culture at the top of, look, we have to earn the right to work with an entrepreneur among their scaling journey, right? And so what does that look like that looks like before getting on a call, really understanding enough about the space that you can already be ideally contributory within those first few minutes of the conversation that you’re having with somebody, it looks like if one of your portfolio companies is struggling or need something that’s getting on a plane going there the next day, and sitting down and working with them and helping them there’s a culture of hunger and drive and entrepreneurial spirit that is, you know, I hate the phrase culture and its process for breakfast or lunch or whatever meal it is, but it really is the case. And I think giving that tool and the ability and the empowerment for them to know that hey, my job is actually to build my own business here and to build my platform here to find these companies and to be hungry and get in front of that next one. I think that’s the most important thing because without that, it’s really difficult to, you know, truly get them in the spirit of what a good venture capitalist was looks like.
Got it. Yep. So back to the 1.4 billion. The foundation is laid with the team and the people in each investor having the right mindset, when the 1.4 billion that’s deployed, how many companies will be allocated to? Or what will the portfolio shots be?
So for us, what’s important is a couple things. First is executing the strategy that we know we have experience with and that we’re good at which is investing that at Left Lane at this, what we call the breakout growth part of a company’s lifecycle, it’s when product-market fit has been established. We know that there’s a group of customers that liked the product, they use it in certain ways, they decided to keep using it and ultimately decided to come back. And where we feel like there’s a ton of runway for this company to keep doing what they’re doing, just do more of it and accelerate. But that typically looks like is some call it five to $50 million general starting positions, within saving meaningful reserves to continue investing in the companies that that we go from there. So for us, that will be some types of companies 30, 40 plus companies in a $1.4 billion fund likely.
Got it. And how do you guys think about concentrating capital in your winners and in doubling down and tripling down in the ones that are starting to break out? I mean, are you predicating, the strategy on backing up the truck in a few companies? Or do you believe in saying more properly diversified?
It’s always been a part of our strategy will always maintain a good level of diversification. And we know we won’t have one position ever be a majority or anywhere near a majority of our capital, for example. But one of the benefits and advantages we feel we have as a $1.4 billion dollar fund is the ability to continue to support entrepreneurs and founders as they grow. And at times, you know, if we invest in a company, this series A and we see really good trajectory, leading the next round and the series B in certain circumstances, while always making sure that we can continue to support our founders along the way is the situation that warrants it.
Yeah. So I want to go in a little bit deeper into some of these areas that you guys strategically focus on. I mean, you talked about investing in consumer tech, SMB tech, in, you know, you’re one of the few that strategically focuses on those areas. Not many investors have the appetite for it. I mean, what gets you guys excited about investing in SMB tech and consumer tech and what makes you feel that an institutional firm can be built off of that thesis?
So the exciting part about this space, which has always been the exciting part about this phase is twofold are the obvious exemplar part. Market opportunity, market size, $30 trillion of spend in the Western world, as I mentioned, there’s, I think, 33 million small businesses in the US, right? And when you look at the main categories of spend for both consumers and SMB is, so much of it is still offline. It’s still manual, we did an analysis of digital penetration across key categories of spent, most categories is single digits of our sentence still. So it’s the size of the opportunity, and then it’s also the tailwinds and the runway ahead of the opportunity. Those two things are very self evidently exciting and always have been for us. The question not just for us, but for the industry at large was, can you reliably find resilient businesses within consumer internet and SMB technology? So often, the knock on the space was that everything was boom or bust?
Yeah.
And what we found, particularly in the last few years, is that as the relationship of the consumer and digital platforms has changed, so has the ability to build resilient business models. And what I mean by that is, if you look 15, 20 years ago, let’s take the use case of going to the doctor, for example, 15 to 20 years ago, maybe you would try to find a doctor on the internet or you would read reviews of a doctor on the internet, then maybe 10 or 11 years ago, you would book an appointment with a doctor on the internet, that is a really small financial portion of the total dollars that are getting allocated to that doctor visit. And now if you look at what that use case looks like, I’ll use Left Lane portfolio company, Talkiatry, is an example which is a digital psychiatry clinic. This is a healthcare technology business where almost the entirety of the psychiatry experience is all digital now. That’s opened up two things. It’s also opened up a whole new portion of that $30 trillion economic pie. And then it’s also come a much more resilient relationship with the customer. Because the customer continues to go back to that psychiatrist and use that service week after week after week, as they hopefully, the ultimate purpose of the business, solve whatever needs that they need to solve. So both the increased economic opportunity there, and the fact that this customer is going to come back, and this patient will continue to come back session after session after session, hopefully, as they work to get better. That’s opened up a totally different style of business. And it’s a business where you can have a 10 year relationship with the customer, such that, you know, if you think about one company that’s growing fast, it can grow quickly, while a lot of its business is coming from repeat customers and customers that it doesn’t need to go back and reacquire. And so those two components were things, those two components being the overall spend and the higher retention, were things that we’ve really seen transform in the last decade. And that’s the beginnings of where we focus and the characteristics that we’re looking for in companies.
Yeah.
These are fundamental needs in a customer’s life. They’re businesses where a customer will be around for a very long period of time, such that the business models start to become much more predictable, much more resilient, and you’re not just worried about overall, you know, how about your CAC is it just for this month because your whole business is reliant on your new customers?
Yeah, yeah. Makes a lot of sense. I mean, you’re alluding to this, but I’m curious, what are the ingredients and Left Lane’s mind of a truly special consumer business? So to provide some more context, in terms of where this question is coming from? You read about this, you hear about it, but many of the very successful consumer businesses, say Peloton or, you know, really pick your favorite consumer business, a lot of them were looked over at even the series A or the B stage because those ideas were thought of as crazy, right? I’m curious, how do you avoid similar mistakes at Left Lane? And how do you identify not just the metrics, but also the potential of the business without over indexing on the perception of the idea, right, like seeing the true upside?
I’ll start general, and then I’ll work into one specific.
Sure.
It starts really with the strength of the customer relationship. And the way that we evaluate companies at Left Lane is a little bit different, I think, than what we’ve seen that a number of other venture funds, where we focus first and foremost, on the strength of that relationship. Do we believe that this is a product that in good times and bad times will become part of the operating system of a consumer’s life? Do we believe this is a product where customers will continue to use it for 5, 10 years? So to do that, we actually pull before we do a deal, we look at every single transaction many times the business has ever done. We’ll also look at every single engagement point, in some instances of anonymized, of course of users using an application or using a tool to try to really understand, hey, what is this to a customer, right? I’ll give you an example of GoStudent, which is a deal that we did out of our first fund based in Vienna, Austria. GoStudent is an online tutoring and education marketplace that pairs students from kindergarten through 12th grade with tutors who can help them in a wide variety of subjects. And when we were first evaluating this business and doing diligence on it, one of our questions was exactly what you laid out. How do we know this will be resilient? Do we think that this is actually a very large fundamental opportunity? So what we did when we started to look through some of the usage behavior, when we started to look through some of the transaction behavior was, we found that this was really becoming a core accessory to preschool and elementary school and high school education for people in the markets that they had entered into. And so what sounds what may sound at first, you know, a tutoring service sounds like a very simple thing, something that I and a number of other people listening I’m sure have ultimately interacted with. We really found that it was much more than that to a number of their customers who were digging in more and it was the type of thing where, okay, we solve the fifth grade math problem. We’re moving sixth grade, let’s solve the sixth grade Science problem. Let’s have some help on seventh grade English and continuing to evolve from there. We knew that this was a fundamental part of educating a child. It was a cost effective part of educating a child growing up. And so for us, that’s when it turned from something that was, okay, you know, a small thing tutoring to something that can really be transformational in people’s lives in a number of different continents globally.
Do you find any special characteristics of a founder as it pertains like specifically to their customers, and they do from your experience do these founders have, are they more astute about what the needs of the customers are, the customer experience, the product experience, if we’re to think about like those that are really great and have had breakout consumer successes versus those that you’re excited about the concept, you may have seen something interesting in the data, but maybe didn’t perform at the same level? Essentially, what I’m getting at is, from a founder perspective, what are some of the characteristics of these companies that make them great?
It’s a few things. And I think for the record that founder evaluations bilaterally by the founders, evaluating venture capitalists and venture capitalists, evaluating founders is one of the things that is most difficult to get correct in this relatively, unfortunately, short timeframe that everybody in this industry has been making decisions on in the past few years, it’s moved very quickly. And there’s a little bit more art than science. So there’s no silver bullet. I think people from a wide variety of backgrounds and experience levels in a particular space, can absolutely go start a company there and be successful there. We have founders in our portfolios that found out about the problem that they’re solving three months before they launched their company, we have founders who were born into a family who face this exact problem and then spent their entire lives combating it. I think the characteristics that we see tie through our regardless of the experience you’ve you’ve had in it, really understanding the customer really having a good knowledge of what drives a customer’s decision making process and why they continue to use a product or why they don’t continue to use a product. And then frankly, ambition and scrappiness to follow what’s a less well worn path and consumer than in maybe some other industry or some other areas like enterprise software, for example, to figure out what the exact right business model is to ultimately push that forward. So I think it’s it’s really just empathy, awareness, understanding of the customer, and then just brute force drive and problem solving ability to try to lay out what the right model is. Because as you look at consumer over the last 10 to 15 years, it’s been a story of business models, in many ways. You know, sometimes the asset light marketplace works. Sometimes the asset light marketplace doesn’t work. Sometimes it’s e-commerce, sometimes it’s e-commerce enablement, right? There’s a wide variety of ways to go about things. And you’ve had winners and losers solely based on a model alone. So I think starting with those two ingredients is most important. But you can’t distill that process correctly down to those two, there’s a really, it’s different in every instance for for deciding whether
Yeah.
founders, right.
So the business that we were talking about a moment ago, the tutoring business, where’s that located again?
It’s located in Vienna, Austria. It’s where it was founded.
Okay.
It’s now moved on to 20 plus countries.
I’m curious as you guys, I know, you invest all over the world. But how much do you find that consumer trends correlate across geographies? So for example, you see that company doing incredibly well in Vienna? Maybe education is different, because educational systems are different across countries, even across states. But in general, when you’re identifying consumer trends, how often do you say, “Oh, this really worked in this part of the world? Let’s see if there’s a copycat in another part of the world,” or how often you find that these trends correlate in other geographies?
We find often that they will correlate there are businesses and other parts of the world, right? Where goes to isn’t it and that look like a duck student at our tutoring marketplaces that were built in other countries first, where maybe tutoring and education was a higher priority, or the innovation simply happened first. So we will very frequently see that as you look across the different markets globally, similar trends that do get ported over but we will also see in many times there are country by country or geography by geography, nuances and how that happens. Right? I’ll give one example. So one of our investments out of, our first one is M1 Finance. And M1 Finance really a completely holistic finance app now began as a long term investing solution, which was a free way for you to freeway with the help of automation and a really great product interface to build your long term wealth to self-manage your investments and create your own public equity portfolio. So in the long term investing space, when we did that deal in the US, what we found was, there were our stock investing and equity investing is something that most Americans, a lot of Americans were really comfortable with the idea of, and there was already a decently high level of trust there such that when M1 was going to market, it was less about, hey, equities are safe, or a good place to park your money. And it was much more about here’s what everyone does differently, here’s how it empowers you with the help of our technology to make your investing more effective and make your investing ultimately, much easier and higher trust for you, while not, you know, charging an arm and a leg to do it. When we started to look at brokerage business models and investing in business models and other parts of the world. That obviously just wasn’t the case, the penetration rates on public equities investing in other markets was totally different. And so when you import that business model into other parts of the world, there were so many other considerations that you had, culturally, did you need to go to market in a different way? Structurally and regulatorily, did you need to think differently about monetization mechanics and if there’s certain streams are, were legal in one place, or an illegal potentially are frowned upon and other places? And so we’ll see a lot of the same trends and consumer needs and market in each of the different markets. But there will always be nuance around that. That is you’re entering a new market for the first time you have to dive in and understand.
Do you recall a time where you saw a copycat model appear in a geography that you guys are excited about, and it didn’t work out for a reason that wasn’t obvious. Like one of these, you’re talking about some of these nuances. And oftentimes, we can think about a model porting well to another country, I’m curious from the partner perspective, if you’ve ever been very excited about a business, you guys thought it was going to work very well. And then really, when rubber hit road, it didn’t go the way you thought and what your key learning was around that. Or if a story comes to mind.
Going back to the FinTech example, for a moment, I think if you looked in you saw neobanks grow in every different part of the world, right? The way that neobanks evolved in each part of the world is slightly different. If you look at the big winners across each of the different geographies. In the United States, for example, where you have, you can get reasonable interchange on debit cards, such that debit card at the beginning can actually be a decent business model, you will see a lot of debit first neobanks that ultimately popped up Chime being an example of that, along with their with their pay advance product, if you would look into if you would do that same exercise in parts of Africa, for example, for one reason or another, a number of the neobanks that popped up there were lending first, right where it needed to be almost an unsecured or consumer loan first, before there would be any sort of debit relationship. If you look in Continental Europe, it was more debit cards with the premium subscription model due to some of the interchange. And so it was really each of these different nuances where, you know, we we looked at neobanks, across the entirety of the world, and you had a thesis on one in one space, and you start to look at the other geographies, and you realize that both the emotional relationship or the overall regulatory structure of the market is just going to require a completely different approach, which is a really interesting and fun problem to get to think about on a regular basis. And one of the reasons you know, I’m personally very happy that we do about 40% of what we’ve done historically has been into Europe and internationally.
Yeah.
I think that’s a big part of our practice.
Yeah. One thing that you mentioned earlier that I want to circle back to is you guys invest at the stage where a company is about to break out. So I wanted to pose a hypothetical to you, let’s say that there’s a company doing a couple million in revenue. And they’re growing, let’s call it 10% month over month, and we have two separate companies here. What are three questions that you would ask in order to determine, yes, this company is about to break out or no, it’s not. Like what would be some of the the next leading indicators that they’ve really found something and they’re about to hit the hockey stick versus what is delineating the two from this one’s about to break out versus the other one is not going to hit the hockey stick?
Yep. So we’ll look first at retention, which is one of the core theses of Left Lane. That’s the reason that keeps coming up as often as it is, and so we’ll see of the book on 3 million of revenue rendering, of that 3 million of revenue, how much of that do we reasonably expect to be around six months from now, do we expect to be around 12 months from now. So that’s one thing that we will dig in on. The second thing is looking at just the overall efficiency of the go to market motion and the go to market model. Has it been easy for and affordable for the company to acquire customers to date, people break this down into a lot of different ratios, payback period, lifetime value to CAC, etc.
Yeah.
Do those ratios look good or not? And then importantly, is the way that they’re acquiring customers now going to be the way that the business is acquiring customers in the near future. Has it been all organic today? And we’re going to start to need to figure out a new channel? Do they have one channel, say Facebook, that’s working particularly well, and we think they’re going to need to go to channel two, three, and four? Each of those different facts will help inform a little bit where we think the company is going to be how ready they are to break out.
Yeah, yeah. If you’re comfortable sharing, what would you say has been your biggest miss out Left Lane? And what has been a learning moving forward that you’re, you know, you’re employing because of it?
Yeah. So when, when you attack, or when you approach a space with such specific heuristics, as we have, right, long term customer relationships, high gross margin at time of investment, good fundamental unit economics, when you have heuristics like that, at times, because for obvious reasons, there are going to be businesses that don’t fit those heuristics that break out and become great companies. It’s not like we’ve put together some indefatigable code here that solves everything. One particular group without going into specifics of companies, if you think about businesses, if we tend to have tended to avoid historically, businesses that are designed to ultimately be deleted, or businesses that have efficacy churn, as we call it, the purpose of the product is to solve the problem so that you no longer use the product.
Yeah.
If you take that, and you only apply that in a very, very simplistic way you miss huge businesses, you miss all of the dating apps, you miss weight loss, yeah, there’s so many great companies have been built, because of the way that you ultimately apply things. And so going back to the conversation we were having earlier around, working with our team, one of the coolest things, and working with a team that we’ve been able to put together is the process by which you take the heuristics that we love about, that we love at Left Lane, we focus on at Left Lane, you abstract away, why they’re good, and then you try to find other things that solve for those constraints and solve for those conditions. And that’s what we’ve certainly tried to do. We’ve missed a lot of good companies, we will continue, unfortunately, to miss a lot of good companies. But that’s the process that we try to instill not just among partners, but really among the entire organization to try to take what we think we know today and then use that term very intentionally, and see if we can make it better.
So if you came across a dating app today that had very exciting metrics, is that something you’d be interested in?
So look, any fundamental use case for a consumer that’s digital first company, absolutely. It’s something that we would be interested in. I don’t know if there is one that’s ultimately as fundamental as dating as finding your partner. And so I think without getting too much, I’m then able to evolve a little bit how I think about things so that we don’t make the same mistakes we made 5,6,7 years ago.
Yeah. So what are some of the areas that you guys are focused on now, in 2023, any areas you’re specifically excited about? And I mean, especially during these turbulent times, thinking about businesses that are going to persist through the cycles is an important topic. So I’d be curious how you get your thinking through that.
So in general, if you go look at US census data, they have a great breakdown on how a consumer spends their dollars on an annual basis, take those top 10+ categories, no matter what the year, we’re going to continue looking in each of those categories and evaluating each of them. Because we really believe this is a long term, macro shift this digitalization of these fundamental products and services. And so while one year, two years demand may be up or down, we still believe in the fundamental truth of that continued penetration and the fact that all of these characteristics we’ve talked about around retention, scalability, etc. Those will be the types of things that help you navigate any cycle. It’s one of the reasons we’re fortunate to be in a business that you know, you have seven year periods where you can start to see much more, hey, where you right, where you wrong, you can really think of that long term lend which we’re absolutely using right now, I think, when you think about what should or how to shift more short term for 2023? Number one thing, one of the one of the top things that’s happening right now is just a complete shift and capital availability at different stages of the market. Right? As everybody knows, 18 months ago, capital, much more available, much cheaper, particularly growth stages, and particularly with a higher tolerance for different capital intensive business models. We’ve seen that shift away, I think we’ve adjusted accordingly, near term of when you think about business models, specifically, going after things or thinking through things that are much more that are more asset light that are more scalable, that won’t quite be as capital intensive, as you’re carrying through. Your question also touches a little bit on verticals and use cases and what we think is going to happen in the investable in near term exciting over the next 12 months. I think one, one area where I’m continuing to spend a lot of time was just on that capital availability point for the consumer and for the small business as interest rates have gone up, right? And unfortunately, it seems like consumer defaults credit, or in the very early days of doing the same, credit is going to be less available. And now in mass, consumers will unfortunately probably be solving some problems that they haven’t been as solid as frequently in this era of FinTech problems around defaults, problems around, you know, housing prices, particularly shifting the price of assets, particularly shifting, and trying to think through what are ways that technology can help people solve some of these problems and keep capital flowing, whether that is, you know, an investment we’ve closed but can’t announce yet that is focused on finding a few $100 of savings for the American family on an annual basis to another area where I’m spending a lot of time and how can technology help make lending more efficient, more effective and capital markets more resilient to what’s going to you know, what it seems like maybe happening over the course of 2023. So there, it’s really thinking through what are these kind of big fundamental problems that are affecting consumers and looking for opportunities for technology to help make better.
I feel like we’re hearing all the time right now that it’s the best time to be investing. Do you agree?
It’s an interesting time to be investing, I hesitate to say that it’s the absolute best time to be investing, I think there are certainly dynamics that make it an attractive time. And I think, you know, talent availability is one of the reasons that you often hear excited, and I think for very good reason where you’ve had people who have gone through now a cycle of really successful startups, seeing what successes looks like, and are now either spinning out to start their own company or available to join other startups that are getting off the ground, which I think is a great thing for the environment. I’d say another thing that I think is interesting and maybe talked about a little bit less so it was a topic is talked about is the idea that as capitals become less available rates of innovation from incumbents are going to slow in the hurdle rate internally for investments for that legacy bank to launch the potentially competitive products to the disrupter. I think that is slow. And I think that’s going to create a lot of opportunity. Whereas before, everyone was always afraid of sort of the elephant in the room when entering a new market, I think there’ll be more opportunity for companies to carve out really large spaces that other larger incumbents or legacy players are going to be less likely to enter just given the focus on capital preservation.
So do you think valuations are going to come back here? Or what do you predict?
I think, I doubt valuations will come all the way back to the peaks that we saw in 2020 and 2021. If I had to use my crystal ball, which is a deeply imperfect crystal ball, it will be most interesting to me to see is the way that the later stage growth, equity markets start to move. Because right now we’ve seen a really tremendous slowdown, unfortunately, in investment at those late stages, we’ll call it series C, series D, and beyond. A lot of really strong companies that would otherwise be entering that stage from a financial profile basis, have a tremendous amount of capital already, thanks to all the capital that was deployed over, you know, maybe not over the last six months, but the 18 months directly preceding that. And so that’s going to be the dynamic that we’re watching most closely in terms of what we think is going to happen with the rest of the private capital markets. And so you’ve had this deterioration in public multiples which has made people less enthused excited about investing in later stage growth. And then from a private standpoint, if that later stage growth market starts to open up a little bit, I think you’ll start to see things flow a bit more freely. I do think it will take a while. I don’t know exactly how long that is, but for the best companies who are well capitalized, to work through some of that capital and ultimately realize, hey, you know, we’d like to go back out to market and there’s an environment that’s favorable for the later stage for folks to get involved.
Yep, yep. To wrap up here, Dan, what do you know, they need to get better at?
Succinctness and podcasts for one. For us, we recognize that Left Lane is a is a new firm, we’ve been working together for upon three to four years, in many ways. We are a startup, just like a lot of the founders that we ultimately work with. And so what we’re pushing ourselves every day and with our team, and with our LPs and with our founders is figuring out how do we be better fund managers? How do we execute the business of running the fund and positioning ourselves for our LPs and our founders in the best possible position? And I think that is, it’s a broad thing to say we’re getting better at but it is anyone who’s starting, running a company, it is what we’re focused on ruthlessly, you know, we back to the question of what’s different between being an individual in a larger firm, and then stepping out with your partners and starting something new. It is the amount of time mental emotional energy that goes into running your business the right way, and always thinking through what are some of those ways that you can get better, so we’re pushing that we’re pushing ourselves on it everyday.
Where’s Left Lane in 10 years?
Hopefully, our ambition is to be the group that any consumer and SMB tech entrepreneur in the western world wants to be a part of, and ultimately wants to work with that can be through direct funding that can be through, hopefully, this unique network of people that we’ve had the chance to work with by being consumer and SMB specialists over the last decade for some of us, right? Hopefully, people see the attraction of that want to be a part of that. And there’s just a wide variety of ways that we can be at the hub of that industry, you know, for the next decades to come.
And Dan, what is the best way for listeners to connect with you?
LinkedIn, I’m not an active Twitter personality, do I necessarily. Feel free to connect on LinkedIn. Hopefully, if you are a founder who’s building a high growth company, someone from our team is in touch with you already and you’ve got an email from Left Lane waiting in your inbox before you had the chance to think of us but if not, feel free to connect with us with that outlet.
Awesome. Well, thanks again for coming on the show. And thanks for doing this first one in person.
It’s great to be here. Thanks, Nate.
Transcribed by Otter.ai