409. Why the Growth Equity Model is Broken, the Playbook for Scaling in Between the Coasts, and the Verticalization of Big Data (Joe Kaiser)

409. Why the Growth Equity Model is Broken, the Playbook for Scaling in Between the Coasts, and the Verticalization of Big Data (Joe Kaiser)


Joe Kaiser of Mercato joins Nate to discuss Why the Growth Equity Model is Broken, the Playbook for Scaling in Between the Coasts, and the Verticalization of Big Data. In this episode we cover:

  • Investment Strategy and Ideal Company Fit for a Midwestern Venture Capital Firm
  • Scaling Companies in Different Geographies and the Role of AI in Various Industries
  • AI Investment Strategies and Valuations
  • Startup Valuations, IPOs, and Growth Equity
  • Venture Capital, Investing, and Entrepreneurship.

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Transcribed with AI:

Our guest today is Joe Kasier, a Managing Director at Mercato Partners, a growth stage venture fund located in Salt Lake City focused on investing in technology companies outside of the Bay Area. Prior to joining Mercato, Joe began his career at Blackstone and eventually transitioned to becoming an operator where he served as a Director at Vivint Solar and helped the company scale to IPO.
0:23
Joe, welcome to the show!
0:25
Nate. It’s a pleasure. Thanks for having me on today.
0:28
Yeah, of course. So, you know, we’re gonna dive into your background in a moment because you have an interesting path to Mercado. But for those that haven’t heard of Mikado partners, can you share more about the thesis of the firm and your investment philosophy?
0:41
They thanks for the question about our history. So we’re kind of started in 2007, our founder, Greg Warnock, saw something in the market as an early stage investor here and Utah sauce saw an interesting paradigm developing and that was, there’s no local growth equity. And so these amazing founders and with businesses that had great traction, but each time, they had to go to the coasts to find capital for that next that series B, Series C and beyond. And the challenge was sort of twofold. One, why should these amazing founders have to go to the service provider instead of the service provider coming to him coming to them? That seemed odd. But the second thing and you being a venture investor in Chicago, this will resonate with you, I think, is that the this notion that one size fits all, from a company scaling perspective, just didn’t seem right. And it doesn’t fit in, because the what we’ve found is that when you’re scaling a business in the heartland of the country, you’re solving for different problems than if you’re scaling a business in the bay or New York or on our coastal market. So we wanted to bring not only the capital, but also the scaling expertise for where these companies are. And so fast forward to today, we’re deploying our fourth fund, but with a very same mantra and mission, and that is to help the best founders and companies scale where they are.
2:19
So you know, I’m curious what made you choose Mercado though, because you were an operator, you took a company public at Vivint. Solar, you also worked at Blackstone, which one of the largest, most prestigious names in the industry. So why did you choose to do growth investing? And how is the accumulation of your past experiences enabled you to create an what sounds like a new category of growth investing in the Midwest?
2:45
Yeah, well, I’m from a small town in Missouri, that’s where I think it all starts. My parents were entrepreneurs, and that they had, you know, the local mom and pop store. And so I saw them, you know, fight to make it successful, but also the pride that they had in building that that Hometown Store. And I learned so much at my time. At Blackstone, I know, so many skills and what great culture looks like. But I also knew I didn’t want to be a mega cap. But I also at Vivint Solar being around the 25th employee and being on that hyper growth journey that that business went on and working closely with the CEO Greg Butterfield and seeing me him build that business. I took a lot of lessons from that as well. And so when I was ready to leave Vivint, solar post IPO, I said, I wanted to get back to the roots of, hey, I want to Kim I find that intersection of my passions of scaling companies, but also in the in the interior of the United States. And that is exactly what Mercado was I had the great fortune of meeting Greg Warnock, the founder, and a few of the other partners, just socially and knowing that it would be a great fit and that we were very aligned from a from a sourcing and a portfolio construction standpoint, it’s a little bit inside baseball, Greg and I, when we finally said, Okay, let’s figure this out. One Saturday morning, we dedicated an hour to sit down and sort of what would the role look like and how would I come in and so forth. And six hours later, and one of us looked at our watch and said, Well, this is supposed to be over at nine it’s like two should we get lunch at least? So and I started a couple of days later and the rest is history. That was That was eight years ago now Time flies, but it’s very, it’s funny, I think if we eat our own dog food, the the, the mission and purpose is, as you know, as an early stage investor, the mission and purpose is so important for, for companies to have at their core. But I think in our business, it’s rare. But at Mercado, we absolutely have it. You know, our mission and purpose is to help these amazing companies grow where they are, and and help facilitate that. Whether it’s pattern matching to how do you recruit and retain, or build the Salesforce or best practices and product and manage it, the money part is relatively simple, but it’s the scaling part where the differentiation occurs and the understanding of how to do it where they are. And so that’s our mission and our purpose. And just, I’m blessed to get up and do this every day.
5:44
I’m curious to get your take on a quote, because you’re talking about scaling startups where they are in geographies, obviously, a large piece of the thesis there at Mercado, and you I think you had actually shared this with me prior to the interview. But in 2015, Reed Hoffman said in an interview with wired that lots of markets around the world have figured out startups, but only the Bay Area had truly figured out scale ups. I’m curious how you think about that economy between the two and you think read points, so holds true today? I mean, that was eight years ago, a lot has changed in eight years. But how do you think about reads, quote, and how the ecosystem has evolved over time?
6:24
That’s, it was the first time I saw it, shortly after I joined Mercado is a bit of a gut punch, but also a bit of a fire in the belly moment for me. I mean, how insulting at it but but as as I’ve moved on, from the emotion of it, of the comment, I think, I think we nailed it. And it is exactly what Mercado wants to do and why we exist. And that is, you know, I talked a little bit already about like the problem set that you solve for in scaling in the bay versus the problem set, say in the Midwest, they’re fundamentally different. And that is in the bay. So many, not only founders, but so many of those early employees, they have stage experience, they bring that they know how to operate in a highly unstructured environment. Compare that or contrast that with with, let’s say, Chicago, there are brilliant people in Chicago, you know, top 10 research universities, fortune 500, companies incubating talent, lots and lots of really special special people. However, the volume of startups and scale ups and hyper growth companies is much smaller than in the base. So there are far fewer people that have have that stage specific experience that have that time at a company that was growing to 300% when there’s only 20 3040 people inside the company, and you’re figuring out the sales motion, and you’re figuring out the dynamics of feature release. That is what I think that’s Reed’s point is, hey, in Chicago, there’s not very many people that know how to do this. And the bay, we have a lot of people that know how to do this. And I think that it’s gotten better over time. But there’s still a big divergence. And so that is actually the problem. The challenge that that Mercado wants to help amazing founders solve. So I think he’s actually as as emotionally charging as it was at the time. I think there’s, there’s merit to it. But I think, you know, firms like yours, and ours are working as hard as we can to help companies solve it.
8:41
It feels like overtime, it’s coming less and less true. Like in 2015. I don’t have the exact numbers in front of me, but very few unicorns outside the valley outside New York. Today, I think we’re almost at 1012, perhaps and in Chicago. I know there are a number out in Utah, but has my point here is like as this flywheel gets turning, do you see that spinning off more operators that know how to scale these businesses up? And you know, injecting angel capital back into these ecosystems are like as you pull that thread into the future, do you see Chicago, Salt Lake, some of these second tier third tier cities remaining relatively static, in terms of their their output of unicorn companies?
9:28
Yeah, that’s a great question. I think it to your point, it definitely is solved over time. Right, moved to Salt Lake 10 years ago. The risk everyone talked about was well, as we were recruiting people from outside the community, the local community to bring new sets of skills here. The the comment was always, if this doesn’t work, do I have to move back to New York or the bay and I know in Chicago like when Groupon was being built, and I Trunk Club has been built, you know, they face the same sort of questions as they were recruiting. Today, you don’t get those questions. You don’t get those questions in Salt Lake, you don’t get those questions in Chicago and St. Louis and Atlanta, like you would have in years past. So I think that is a huge hurdle that these that these interior markets have have faced and overcome. So yeah, I think we’re getting beyond that point that the flywheel point pretty quickly. Yeah.
10:29
At the early stage, it feels as if coastal firms have moved in at an increasingly faster rate. You know, we’ll see large names, the tier one names and even see deals here in Chicago or Tennessee, what have you. And I’m curious if you’re noticing the same thing at the growth stage, like, have you found that competition is higher from coastal firms over time since you started at Mercato? Or are the coastal firms still relegated solely to the bay and New York?
11:04
I first I’d say rising tides lifts all boats. So I’m, I’m thrilled to see to see coastal names on cap tables of Midwestern and southeastern and Rocky Mountain based companies. I think it’s fantastic. The second thing I would say is a trend that that at least I saw, I think in you know, in 2020, and 2021, started to see a lot of companies in the Midwest, getting coastal attention and some coastal dollars. And I think in 22, obviously, with the with the macro adjustment, I think we’ve seen a retrenchment of coastal investors pulling back to to their roots and being less active in the Midwest, and then markets like the southeast and in the Rockies. And I think that at some level certainly benefits Mercado, this is this is what we do. And so our continued commitment to our to our what our our home ecosystem, as opposed to just following trends and weights, I think will benefit us long term.
12:11
from a competitive standpoint. Do you think over time it will become more competitive as more of these companies are started and founded in areas like Chicago, Salt Lake? Or do you think that the coastal investors will stay on the coast? And I’m curious, because in terms of competition, especially at the growth stages, I’m curious how that impacts your guys’s ability in or how you think about winning deals, and how it impacts your guy’s ability to win deals against coastal firms that might not be as price sensitive, or might be bringing other value adds to the table? Yeah.
12:51
Well, hopefully it’s not overly it’s not more competitive in the sense that the pie is getting bigger, that there are more high caliber BC the stage companies available, read overtime. So and that is happening. So hopefully, competition is diminished in that regard. Secondly, I think because we are the local growth equity investor, you know, I have I have the good fortune of meeting founders and CEOs, often years before they get to the growth stage before they’re like, Okay, I need to raise that 25 million Series B or that 40 million Series C. And so we know each other really well. And they can they have the opportunity to say yes, Macondo was a great fit for us versus no, maybe mercados not maybe I want that, that some other investor, whether coastal or otherwise, that’s a better fit for our culture, and our you know, our strategic needs. So I think that competition actually is a good thing because it it’s I believe that there’s a clear differentiation between what Mercado is and brings to bear with portfolio with potential portfolio companies versus other investors, whether they’re coastal or otherwise,
14:08
how would you describe like the company that is the ideal fit for Mercado versus one that has a culture that might be better aligned with a coastal firm,
14:18
growing 1,000% A year and totally de risk? It should totally get? You know, I don’t think it’s actually quantitative. From what what, what’s a founder or a CEO look like that we want to team up with? I think it comes back to I learned a line from a CEO that I had the great experience to work with a company in Boise, Idaho, called Cradle point and CEOs name is George Mulhern. And George had this message to his employees and shared it with me and that is, we all have to be hungry or hum and humble, or the market will make us all hungry and humble. And I think the CEOs that and the founders that Start with that mentality that they’re hungry that they are that they are going to take the hill. But they’re also humble enough to say I personally won’t have all the answers, I’m going to do everything possible to figure out the answers. I’m a sponge, I want to learn, I want to take inputs from from each direction. That’s the founder that that I really, really want to team up with. So I’m not sure there’s any magic to that answer. But But I think it is. Absolutely. I mean, we could talk about growth rates and retention rates and unit economics and margins. That’s all important obviously. But But I really think it all starts with the with the makeup and the grit of the of the founder.
15:47
Yeah, I’m sure cradle point was a fun one to be a part of, I think that was a Boise’s first unicorn.
15:53
It was, it was I mean, one could argue micron might be Boise’s first first unicorn. But yeah, what an amazing ride and an amazing executive team to just be on the journey with mumble open and transparent about what they were building. And I think it’s interesting, because George continues to run the North American business for Erickson today, and I think that’s the caliber of his leadership.
16:20
Yeah, tough to do. One thing you alluded to earlier that I wanted to circle back to was the playbooks around scaling in the Midwest or outside the coast versus those that are headquartered in the bay or in New York? What are the the key differences that you see in scaling a company between the two geographies and more specifically, like perhaps what are some of the nuances that aren’t so obvious?
16:45
Yeah, well, first, I think it is, is the people side. I think in the bay, again, there’s so many people that have relevant stage and technical experience, that the human capital challenge, by and large is retention, how do I keep my best people because there’s so much activity and volume, that it’s a very liquid human capital market. Contrast that with the Midwest, again, like there are brilliant people very capable of working at our stages. They just never have. So it’s a it’s not a retention problem. It’s a training problem. And so I think on the human capital side, that’s the first thing that we work with our portfolio companies to solve. And then there’s, you know, the sales dynamic, the product and Inge dynamic, I think it is, what we push at our stage is hiring people that have been there before that bring a playbook to bear for the company, like let’s not have our sales leader learn how to be a sales leader. With with us, let’s find people that have been there, done that. And then it’s kind of in my view, it’s an 8020 rule. 80% is an existing playbook. And the last 20 is adapting that playbook for the specific needs and journey that the company is on. And so whether it’s, you know, a CTO hire or see your chief marketing officer hire, it’s that, like they have been in this set a similar seat before can bring that expertise to bear on on the company and its journey. What about business
18:26
types? You find that certain business types are more suited to the coasts versus the Midwest or other other geographies in between the coast
18:37
or? Yeah, I definitely do. And I think in my, my way of thinking about it is each region has has a center or centers of excellence. So you know, the bay is certainly very technical. So today, we’re seeing it in AI with the explosion of AI. And a lot of the technical development that’s occurring today is based centric, and it’s a talent. It’s a talent matter. And then if we if we think about the Midwest, what what are the centers of excellence in the Midwest? Well, we’ve got health care for sure. Insurance, financial institutions and agriculture. And so I think as we think about how you deploy technologies, particularly enterprise software technologies into these industries, I think that gives you the greatest, those are the foundational characteristics of great companies that can be built inside of in the Midwest, for instance. Now does that does not mean that there’s going to be that it’s impossible to grow, you know, a martech business in the Midwest, I mean, Groupon for for instance, grew up in Chicago, but I think the the preponderance of of opportunities will come up investment opportunities will come up in those four categories in the Midwest because again, you have these bedrock Large companies in insurance for instance, you’ve got nationwide American family StateFarm, etc. Like we could go down a laundry list of the 15 of the largest insurers in the world, their training that talent, their training, actuaries, their training folks about how the insurance industry works. And they can then spawn from there. So you get companies like, like, like being benefits that are coming from that, that that training ground and building big, big companies
20:30
in on the topic of some of these areas that have been historically slow to adopt technology like health care, insurance, ag tech, maybe even FinTech, you could throw in there to some degree. I know you spent a lot of time thinking about the verticalization of big data. And what effect do you think AI is going to have on these industries,
20:52
incredibly disruptive work and credit. We’re at an evolutionary moment, across all of these industries, we pick on healthcare, for instance, I think like the uninitiated, their mind immediately goes to Oh, AI is going to remove the doc, and maybe maybe in 50 years, but I think the opportunity is much, much greater in the short run. If you think about the size of the American healthcare system, it would be the fifth largest GDP in the world. That is how massive our spend is in health care. Now, what I like to do, and hopefully no, no question that clinicians out there get offended by this analogy. But I like to think about the healthcare system and the hospital system, very similar to a factory, because I ramble. In a factory. Our goal is the machines, those very expensive machines that we have on the factory floor, our uptime makes us money. And anytime that machine isn’t producing a widget, it’s not making us money. Well compare that machine to the doctor. Anytime the doctor is in front of the patient, the hospital system is making money and the patient is getting better too. But the hospital system is making money. And anytime the doc is not with a patient, the hospital system is not making money, pretty simple. Now, a third of the time, only a third of the time, on average, does a doc actually spend her his day with the patient. Two thirds of a doctor’s time is spent doing something other than spending with the patient they’re doing note taking they’re doing coding so that the hospital system can get paid by the insurer, they’re doing all these other administrative tasks that we’ve required them to do, other than make the hospital system money. So I think AI solves that in very short order, helping alleviate all of these administrative burdens that we’re placing on clinicians removing that from their days. So now they have the ability to spend time with patients and generate revenue for the for the system itself. So that’s what I’m most excited about in healthcare. And you can do the same thing in insurance where big data is enabling the underwriters to go, I’ll call it down market to go from being accurate at underwriting big employers, because the economics work for an actuary, human actuary to do that, to now going down market using AI to underwrite that 1020 3050 employee company with the same accuracy as a legacy insurer would underwrite 1000, employee company that’s happening around us right now. And I’m excited to see the evolution of insurance because of it. How do you
23:55
think about these opportunities from the lens of a growth investor? Or maybe I should ask, what are you seeing in terms of opportunities from the lens of a growth investor? And to elaborate, like there’s a debate whether AI is more of a sustaining innovation and benefit the incumbents? Or is it going to be a disruptive force that yields an entirely new wave of startups that are able to unseat incumbents? And I think my take is, it’s probably a little bit of both, but from what you’re seeing right now, are you finding that companies you’ve been tracking through the early stages are leveraging this technology and are consequently seeing stronger market poll, whether they’re insurer tech startups, ag tech startups? Or do you feel that you’re going to have to wait until some of these newer companies that are just being formed make their way to the growth stages,
24:48
when they I think the benefit of being at the growth stage is companies already have product market fit. So So I have the luxury of of seeing that play out through the p&l by the time we Best. But I think your question I civically to your question, I think this is a moment of mega disruption. I mean, you know, the the incumbents, like set aside the hyperscalers, for a second as as in as the incumbent class. And let’s think a bit more about the incumbents in industries we’re talking about whether it’s insurance, or banking, or healthcare or manufacturing, I think those industries are ripe for disruption, disruption, and here’s why I think it’s important for startups to start on edge cases, in terms of let me pick off segments of markets where the incumbents definitely cannot compete if I deployed big data analytics and AI, because it is, again, like if we, if we go back to the Christiansen paradigm of the innovators dilemma and innovators, disruption, the challenge is, is as much cultural, it’s more cultural than it is technological, for the legacy companies in this incumbent companies are at this historic companies to adopt the technology. Like there there are, you know, I guarantee you and these huge insurance companies or manufacturing businesses, there are engineers that are that know as much about AI as engineers and founders of startups, but they they are, a lot of the time they have, they have a hard time convincing that they’re their managers to make that see change to from how we’ve done things for 20 3050 years, to how things are going to be done for the next 20 or 30 years. Versus if you go to a startup, you just start it from scratch, you don’t have that culture, cultural friction to overcome, in one can say what and you also don’t have the, you know, the legacy technological architecture that you have to tear down and rebuild and put put your your customers at risk. That’s true, too. But I think it’s as much cultural as anything. And I think that is why we’re going to see some of these industries get disrupted by by newcomers.
27:13
Does it scare you at all, as a growth investor that perhaps some of the large enterprises or incumbent could potentially turn that technology on? And they they have the data set that makes the technology especially valuable? Or how do you think about the risk of one of the incumbents doing that, and obviously, this is very market dependent, but thinking through the risk of the fact that the technology is available? Culturally, I agree, it’s difficult to make a shift and be more innovative and go through all the checks and balances. But with the risk being present, Does it scare you at all as a growth investor? How do you think about it?
27:53
Yeah, it’s a great question. I think one, you know, similar to you, like our businesses, is not only making great investments, but finding ways for these great investments to ultimately. And so I think the incumbents seeing the value of that of technology, the if history is any kind of proof point, they will buy technology and bolted on and ingest it, as opposed to as opposed to singularly trying to build organically. And so I think, if we’re making the right investments and backing the right disruptive companies, they will, the legacy businesses will look to buy them to bring in their know how expertise in product set. But from a risk standpoint, I think you’re you’re absolutely right. And I think this just spotlights the value of information. And as investors speaking with and building relationships with these legacy companies to understand, at some level, how they’re thinking about the world, what they’re building challenges that they’re facing, I have found a lot that whether they’re senior product, people, corp dev people, CVC people, they’re happy to share the things that they’re trying to sell for, because that’s how they’re going to sell for us communicating. So I think there’s there’s an opportunity to understand the risk.
29:17
Another thing I was curious to get your opinion on were the multiples because a few of the growth investors I’ve spoken with that have also been tracking AI closely, I mean, who’s not tracking closely these days, but they share your excitement, but they’re finding that the multiples on these companies resemble that of 2020 2021 the most exuberant times that we’ve seen in recent history. Are you funding this too? Or how do you balance participating in such an exciting time with potentially disruptive companies while also remaining price discipline given the environment that we’re currently operating in?
29:54
Yeah, I think the data supports it. There’s there’s been a market wide compression in growth activity in the first half of 2023. And I think it’s largely because of that bid ask spread that you were just talking about not only our founder saying, Hey, I’m an AI company, I’m going to disrupt and look at the market opportunity. So valuation, you shouldn’t even think about valuation. But also because you know, at our stage, so many of these of these interesting companies raised and 21, when multiples were much, much higher. And now, despite their p&l success, that, you know, multiples have compressed so much that that oftentimes, the math just says, despite your success and performance, it’s really a flat round. And I think that’s really hard for a lot of founders to digest. But we’re starting to see that realization set in. But how I think about it from how do we get comfortable with valuations in the market today, we’re looking for vertical, vertical application, by and large. And so I think in that instance, it is much less about, you know, the headline raises that we’re seeing all the time about this company barely has any revenue and is raising at a billion because they’ve got this new algorithm that’s better than chat GBT this week. So I think there’s a that is that is changing. And are they sorry, that is a space where we’re not terribly active. I think also how natives were at Mercado, how we’re thinking about playing and AI, specifically verticalized applications, and also the picks and shovels. We recently made an investment in a company called lambda Labs, which is exactly that they are a picks and shovels for AI providing hardware and and dedicated cloud application for for AI engineers. And that company is doing very well. We’re excited to see where it ends up.
32:03
Why do you have an affinity for vertical software versus horizontal? Because I know, horizontal markets, at least historically have been valued at higher multiples than vertical applications. And I’m curious how you think about that aspect, the revenue multiple at the growth stages? And do you think vertical software will continually become more attractive or unbundle horizontal? Or why do you have an affinity for vertical?
32:34
Well, I think if if software was going to rule the world, it’s going to rule the world even more. And I say that because if you think about these LLM models, as a layer, that horizontal layer, they are, they’re generically trained, right? They’re trained on all data. But as you want to deploy those to solve specific problems, they have to be trained on specific datasets. And so the vertical application companies that we’re excited about today are thinking through, how am I collecting data, ingesting and storing data and setting it up so that it can be used to train models specifically in my category? Those are the types of companies that that we’re super interested in. In fact, the the challenge that I pose with all of my founders is, if we turned off the cost of the product that we’re selling today, would we have an interesting date of business? And the answer needs to be yes, not that we shouldn’t stop charging, but that the data that we’re ingesting is the true value of this business. And as a consequence, we could at some point, just completely give away our product in exchange for that data.
33:53
Interesting. How would you assess where the growth markets are out today? So you said that founder expectations are perhaps coming down to earth back to reality, but how would you assess overall where we’re
34:05
at? I think we’re early innings in the thawing of the growth equity market. I think, you know, as I if you think about what are the things that that need to be true from for from a market standpoint, one the earlier stage needs to be incubating and growing companies and I think that continues I mean, you would know better than me, but from what I can tell, that continues to be the case, a lot of the early stage investors that I that I speak with volume is not a problem and in fact valuations are coming in from from their peaks and 21 the other end of the spectrum has to be solved as well and that is the excellent environment has to be the door has to be at least cracked open and you know rising rates have made it may eliminate challenging for a lot of large acquires and then also obviously the IPO market has been closed for several quarters. Now. I think one of the IPOs that I’m certainly keeping a close eye on is is Clavijo. Obviously, their numbers are insane what a great company. But it’s the first true enterprise software company to and several quarters. And so if they can pull off a successful offering, I think that sort of will be the enabler for other data, bricks and other companies that have been waiting for the market to turn back on. And if that starts to happen, I think that also spurs m&a. And then that should cause the unlock for growth, equity as well. And so if you have both ends up the both ingredients working, then I think that growth equity market, maybe not to the to the extent of 21, that comes back to normal levels across across the country, not just in the coastal markets.
35:58
Got it. So we should be keeping our eyes open on the Clavia IPO.
36:02
Indeed, indeed.
36:04
What do you what do you think about the current backlog of IPO companies? It feels like, I don’t know exactly how many unicorns are today, but it’s in the hundreds now. And not all of them are true unicorns. But there’s such a backlog of these growth companies built up now. And I don’t know how they’re all going to exit and get liquidity. What are your thoughts on that?
36:24
Well, there’s that you’ve, you’ve hit on an important dynamic, which is how many of those unicorns are actually like, not only worth unicorn valuations, but actually real companies? I think a lot of them, if you unpack their financials, you’d see a company that they haven’t figured out unit economics, yet they haven’t figured out how to be self sustaining. And so they’re not necessarily worthy of the valuations that they’ve raised that previously. But if you take a company like, like, Clavijo, let’s, let’s say because their financials are publicly available, you know, rule of 40, I think they’re at 75 growth is still, you know, top decile they solve a particular market need and that, that their leadership in that category looks to be sustainable. And so I think if you can check the box on those three categories, rule of 40, growth, and category leadership, I think it’s a really interesting business that the public markets are ready to support.
37:23
Yeah, I don’t know, if you will, obviously don’t have to share specifics, but for companies you’ve met with that are either unicorns or flirting with unicorn status, what percentage of them? Would you say are justified like their valuation is justified? Well, I
37:41
only I only meet with the good ones. So 100%. I know this is the benefit of, of being in the Midwest is we don’t have quite that same frothiness. I mean, there’s certainly companies that without naming any of that, that got got valuations that maybe aren’t quite justified, but I don’t think we suffer from that same frothiness as, as some other markets, but there are certainly a handful of companies. I mean, in Chicago, if we’ve talked about, like, shipbob, they’re just such an amazing company, well suited, I have no inside baseball, but you know, I just knowing that the business from the outside well suited to eventually go public. Yeah.
38:25
So do you think this is a founder problem or an investor problem? And what I mean by that, is it founders in the valley in their mindset, just optimizing for capital moreso than their counterparts in between the coasts? Or is it investors see these coastal companies as brighter, shinier objects and want to pump money into them at higher valuations more so than the coastal counterparts? And which side do you think is more to blame?
38:53
I think it’s, it’s a bit 5050. And from an investor standpoint, that you know, that what we’re solving for, ultimately, is multiples, right? Like, what is our mic that we’re delivering, that’s what we get paid to do. And so whether we’re entering at a billion and exiting at 5 billion or merging at 100 million and exiting at 500 million, the MOYOCK is the same. And so, you know, I, I think the the valuation expectations of 20 and 21, or in 99, and 2000, were driven because investors were fighting to get into the best names and that just, you know, supplied man just drives up the valuations, particularly when you’re not explaining to them being disciplined and explaining to founders, like the dilution that you are going to take, whether the valuation is 800 million or a billion is so de minimis, that if you’re growing the way that you’re forecasting, it doesn’t matter. So I think from an investor standpoint, we’ve certainly driven a lot of that misbehavior from price and pricing and that’s obviously coming back and now the other aside, though, particularly on the interior, the country like Midwestern values, right like this, so often, I’m coaching my founders and and Potential portfolio company founders. Even we’re, we’re, we’ve been taught since we were little, and just do it, and then talk about it, as opposed to tell everybody in the world about what your you’re going to do. And I think that is this the tenant that I think a lot of Midwestern, I love it, I love it. But that’s different about founders in the interior of the country, is they just focus on doing rather than being an evangelist, and I think that’s something that, you know, interior, the founders in the interior of the country can get better at, by and large.
40:49
Joe, if we could feature anyone on the show, who should we interview on? What topic? Would you like to hear them speak about?
40:55
Oh, you know, I think there’s there’s two sets, one from an industry standpoint, I’ve had the luxury of investing with George Goya who runs at Intel, I think because of George’s customer. And he brings a very unique perspective that in particularly in today’s world, and with with global relations as they are, I think Georgia bring a really interesting conversation. The other investor that I love spending time with this name is Nicholas Mark, who runs inter mountain ventures, CRM for for Intermountain Healthcare, and I think just the depth of his understanding about healthcare is enlightening. And then the last I would have to say, is any of the legends you know, like, I love, I’m gonna sound super boring. I love going on YouTube and watching clips of Jim gets talked about his investing. You know, before Sequoia was Sequoia today, his thinking around the types of companies that he invested in, and the types of companies he liked to build is just super fun to watch. Yeah, so So the legends of venture I think, are fun to listen to as well.
42:03
Yeah, Jim gets would be amazing. Joe, what book article or video, would you recommend to our listeners, something in recent memory that you found either informative or inspiring?
42:13
The full ratchet, of course.
42:17
Don’t worry, you’re coming back on.
42:20
The book, I think that we’ve passed around recently, relatively recently, our firm is the power law. I think, again, just great one, you have to be a student of this craft to be good at it. And the more information and history that you can you can absorb about what works and what hasn’t, you know, alleviates the need to make the same mistakes again and again.
42:42
Joe, do you have any habits, tactics or techniques that you would constitute as a secret weapon?
42:47
If I tell you they’re not secret? No, I think, I think, again, this I think what we talk a lot about is being a founder is the loneliest job, because you’re often on an island, and you own the decision. At the end of the day, the CEO owns decisions. I think the second loneliest job is being an investor. For a lot of the same reasons we have partner, obviously, you and I both have partners that we talked to our investment our investments through prior to pressing the button, and also the performance of our companies and how we can help but at the end of the day, we own it. And so I think it’s had we all deal with the stresses of that being an investor present is hard. It’s really hard. It’s maybe the hardest part of this job and so you know, I continued with it by by exercising every morning at very early hour, and then also doing meditation and just trying to I think, more than the practice of meditation but it’s just that that quiet time of releasing the stress and having clear thought about whatever the day has thrown at me or or will is super helpful for for me avoiding becoming an Axe Murderer.
44:05
Well, I think you might have to retake that that test at
44:10
some point just don’t give jelling any ideas. He makes life hard enough already.
44:15
And the job last but not least, what’s the best way for listeners to connect with you and Mercado partners?
44:21
Oh, please anyone that wants to catch up. I’d love to. Very simple. I’m an active user of all things social. So I’m on x. I use LinkedIn and Mike my contact information is their email is super simple. Jay Kaiser at Mercado partners.com I’d love to hear from from anybody.
44:41
Awesome. Well, thanks again for doing this really enjoyed this.
44:45
My honor, man. It’s such a pleasure.
44:48
Awesome. Thanks again.