55. The Hands-on Investor | High-Engagement Investing, Part 1 (John Greathouse)

The Full Ratchet Podcast on iTunesNick Moran Angel List

John Greathouse of Rincon Venture Partners joins Nick to cover The Hands-on Investor | High-Engagement Investing, Part 1. We will address questions including:

  • Greathouse Hands-on Startup InvestingCan you walk us through your background and how you became involved in startup investing?
  • I came across your writing on lessons from surfing for the startup investor. Can you take a moment to talk about how surfing has helped you become a better startup investor?
  • You’ve spoken in the past about investors helping startups gain institutional mass. First off, how do define “institutional mass” in the startup context?
  • What are some of the methods by which investors can assist startups in building institutional mass?
  • Which of the methods, do you believe, can have the most ROI for a B2B SaaS business, for example?
  • How tactical do you get and what does a weekly review look like? Are you framing the conversation? If you are plugging in in a marketing and sales capacity are you reporting on lead and conversion metrics? Can you talk about the detail of that weekly meeting?
  • What are your thoughts on how hands-on investors should be and/or your philosophy on investor engagement with portfolio companies?
  • How does this approach play out in practice from Ricon’s standpoint and do you require a board seat upon investment?

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*Please excuse any errors in the below transcript

Nick: Today # John Greathouse joins us from Santa Barbara. He’s a partner at # Rincon Venture Partners, has held a number of senior executive positions with successful startups, is a professor at the University of California at Santa Barbara, and writes over at his blog johngreathouse.com . John, thanks so much for joining us on the program.John: Yeah, thanks for having me Nick, I appreciate it.

Nick: Just to kick off, can you get us started here by walking through your background and how you became involved in startup investing?

John: Yeah there’s a million paths to venture capital , which is one of the things I think is cool about it. Because it brings people from just a variety of backgrounds. My particular path was the operator path, which, you know, some of the others, some of my buddies, Mark Suster and Brad Feld. These other guys had made more prominent cases and that kind of took that path.

Nick: Yep

John: I was a serial entrepreneur. I was kind of that fifth grader selling lemonade and all the way through selling crap through junior high and high school. And did a medical robotics company which we sort of created another robotics industry. Which I think somebody publicly sold it to a surgical , actually merged it into the surgical. I then ran into a professor and we ended up creating 1:10 and going to a meeting, go to my pc family products, which we sold as thrifts. Helped another little company go public. Took some time off and I started doing angel investing. And realized that was kind of fun, because I could help startups along the way. I never thought I’d do all that investing. By the end of 07, I joined # Jim Andelman who had already started Rincon ventures. He started it in 2005. I’ve been with Jim now, it’s the longest tenure I’ve ever had. And —-1:36 John, let’s venture now. And I’ve been teaching, as you mentioned, about the same amount of time. So I guess that was how I have been teaching for about 9 years, and I’ve been in VC for about 9 years.

Nick: Got it. Has the focus, the investment focus shifted over that period of time?

John: No. When I joined Jim had a little bit more eclectic focus before, as he was not an operator. He comes to venture through investment banking. But he had a wider aperture. When I joined, it just made sense for us to narrow the aperture down to things that I had some experience with. So we’re B2B SaaS. I think we’ve really carved a name up for ourselves, certainly in southern California. We’re really one of the, I guess, most prominent and —2:14 big fish in a small pond kind of thing. We’re one of the most prominent B2B SaaS early stage venture funds, it’s just up in Rincon, southern Cal. Now we’re getting a reputation in northern California as well. 5 of our last 6 deals had been in the Bay area.

Nick: So we just had our first 10 inch snowstorm here in Chicago this past weekend, and I’m kicking myself for moving back to Illinois. I’ve got to ask how has the surf been out at Rincon point?

John: No, Rincon is too good for me, so Rincon is a world class surf spot. I’m more of the fifth class of surf spots like the one in Campus Point or some of the other more local ones. You have to be pretty good and —2:53 get a nice wave in Rincon. But the surf business has actually sucked pretty dramatically. The last several months we haven’t had too many swells. So then everybody is ready with the menial world 3:03 , ready to get up and get wet.

Nick: Spending more point at Campus Point instead of Rincon?

John: Exactly. Yeah, Campus has a nice little 3 to 5 foot width wave that I can ride. Rincon is a pretty darn —- 3:15 wave.

Nick: So this is a bit of a curve ball, but I came across your writing on the lessons from surfing for the startup investor. Can you take a moment and talk about how surfing has helped you become a better investor?

John: Well, I think that might be a good indication of how boring surfing can be when you’re sitting out there waiting to waves to come.

Nick: So that’s really when you’re not catching them, right?

John: I know. I remember thinking here I am, I’m surfing and I’m thinking about how this relates to investing , that’s really sad. But, and I’m also not a very good surfer. I just don’t want anybody thinking. There was a recent, we did a nice very flattering piece of me locally here. And they took a picture of me with my surfboard. I’m like Jesus Christ, I’m not , for the record I’m not a great surfer. You know, I think some of the thoughts that came and that I wrote that over a two year period, like every time I would go out there. In the boarding, well, between sets, I would think about different aspects of, different analogous aspects of surfing and —- 4:14 some of them are pretty obvious. One thing that I think Jim is really good at, my partner Jim Andelman, is his patience in not chasing the last wave. So you’ll see people that are new to surfing will often kind of go to where the last peak was on the last set. And sometimes , sometimes it’s consistent, you know, see peak after peak after peak. But more often that’s not the case , so just because there was a nice set that rolled in to your left, it doesn’t mean that’s where where the next sets going to roll in. So be patient, not chasing the last set, is it the one. I think friendly yet aggressive operations are not a good one. Anybody that surfs knows that it can be cut throat. And if you paddle out and there—4:55 sit there for a while, there’s a whole etiquette as to how to approach them and sort of turn to ingratiate 5:01 yourself, and not piss everybody off. So in other words, you want to take your wave when it’s your turn, and you know you better get your own waves. If you sit there actually passive, you’re not getting anything. But if you’re a dick about it, people are going to cut you off whenever they can. So it’s the same thing in investing, right. Like you can screw me on a deal, right. You know, you can, but I’m probably not going to want to a deal with you ever again. And so in surfing it’s called snaking somebody, when you snake them, you either take their wave or you clip their board, knock them off, or whatever. And if somebody snakes you once when you’re surfing, they’re going to do it a bunch of times, rather than just do it once, it’s a pattern of their behavior. And I think it’s the same thing in business. If somebody is going to do that they’ll keep doing it. So do yourself a favor and just avoid those people,

Nick: Yep

John: So it was a fun article to write. But again, I ain’t no great surfer.

Nick: Neither am I. So John, you’ve spoken in the past about investors helping startups gain institutional mass. First off, how do you define institutional mass in the startup context?

John: Yeah, it’s probably an overly fancy term. But for me just taking 6:03 it in from a handful of founders. And we typically come in very early. We’re not first dollar in. Clearly we want to see —resident 6:12 families , schools, and other other people put money in first. But we’re often the first institutional investors. So there will be often angels or the whole angel syndicate , people who does the seed. And then we’ll come in . But it’s not uncommon for us to come in with the founders and maybe two or three other people. We’re very early. So institutional masses people, it’s hiring the first sales person and the first sales leader, somebody who doesn’t know just a little bit about how hard it can be. Somebody often times sits hiring that first financial person. You know, we don’t need a CFO in early stages. But we do need somebody that can manage payables, receivables and keep us out of trouble, make sure —6:46 well and on our terms. And often times, you know, sometimes those are super easy hires for founders, sometimes their so called —6:53 run into business. It’s helpful to have someone do the interviews, help recruit and use their networks to fill some of the slots.

Nick: So what are some of the methods by which investors can assist startups in building institutional mass?

John: We’re very hands on. So I think the advantage of having a very narrow focus, and as I mentioned the B2B SaaS focus. We also have the other part of our portfolio is to add tech, meet marketing tools that help other companies make money online. So the forming that would, you know, help someone upscale up there their marketing stand

Nick: Sure

John: Now of late, there’s been a lot of disruption in the adtech market. So I’d say the last 18 months or so , with almost all the deals we’ve done and did on the other side of the house which is B2B SaaS. Because of that, you know, we’re solving the same problems over and over again. So that’s the same set of marketing challenges, the same set of lets say 7:43 sort of marketing content questions and the same kind of sales people with a certain mentality. But we want to bring in somebody that understands SaaS. Maybe they’re not a former or old rep that made five hundred thousand last year. But they’re not a 22 year old kid right out of school. What does that profile look like? Because we’re solving the same problems over and over, I think we could really help founders that maybe haven’t seen that problem before, five times before 8:08.

Nick: Yeah. What are some of the methods that you’ve used that seem to have the best payback or the best ROI for a B2B SaaS business for example?

John: Well, you know, there’s no silver bullet. we all wish there were but, for some of the ventures it has been content marketing. So lets see how far we can get on inbound, so driving just inbound leads without spending money. So a little more like earned marketing instead of paid marketing. Let’s exhaust that or at least reach a plateau and then start to pour in money into marketing. It’s opposed to a synergy to get financing. You’ll obligate it to , you know, start spending it on customer acquisition. Which certainly you have to do that or you’ll never get a sale. But sometimes there’ll be a slight —8:50 that will too prematurely with us —-. That’s one area . I think the other one is just not being afraid to hire salespeople and to rub it in 8:57. You know, being willing to invest in two or three people, let me think if I know any one. Knowing that some people are going to trade out, some people are going to, it’s not going to work for them. Often times these entrepreneurs are just really frugal. That’s why they can’t get your money in the first place is they were able to 9:13 perform ——. Sometimes they actually need to be pushed, not to spend a little bit of money, which is always painful for me because I’m the cheapest guy in the world. When I was an operator, I was a very frugal operator. I find myself —9:26 first of all, sometimes telling folks to spend more money. This is close to —- always trying to save it 9:30

Nick: So is this often happening in an advisory capacity? Or are you really hands on, are you taking some tactical actions as well?

John: Yeah, we definitely, our tactical is going to depend on the investment. Most of the investments of the 30 some odd that we’ve done with three different funds, the large majority, probably 26 or 27, something like that, we’ve led or co-led the round. And we have board seat. There’s been a few exceptions to that but in those cases, as we are on the board, often times we’re the only representative of the preferred shareholders on the board. We are taking a very active role. So the first year 18 months in some cases even 2 years, we act as an adjunct member of the executive team. I’m doing weekly calls for a very tactical low. I’m trying to help the companies. Now if all goes well, I’m growing out of that role, right. Weekly becomes too —10:25, too redundant, and then maybe every other week is appropriate. And then eventually lots of months 10:30-. lending enough time for us to thought. But that’s just company scale, and thats as executive staffs are filling in to the seats around at the table. In early days it’s so often me and the CTO and Jim and the CEO and we’re trying to build a company. And we get it to the point where we don’t need to be —10:46 involved. Because that’s where —-10:48 .
If you don’t remove yourself from a weekly load, then you’re going to limit the number of companies that you could be helpful to.

Nick: Can you give us a sense for how that weekly engagement looks? Are you reviewing matrix of a high level? Are you framing sort of the discussion? Are you wearing the marketing hat and contributing by reporting on lead acquisition, conversion, sales efforts, things of that nature? How does that weekly early meeting go when you’re stepping in as a part of the executive team?

John: Yeah. That’s a timely question. Because I just had this conversation last week with a CEO that invested in probably two months ago, a month and a half ago, that we’re just now getting our kinks 11:31 down. And the answer is it evolves, it changes. The topics are going to change over time, depending on what’s the most important issue the company is facing. I always leave it up to the CEOs. We want them to value our input and to love—11:44 our input. We don’t want to impose our input. So we say to our CEOs, you would — in the case of this fall 11:49 not me. If you think every week is too often, leave me, I’ve other things I could fill my time with. If you feel like that you’re just not getting value from these calls, then you know we should really talk about the way they’re structured and consider changing that. What I also —-12:05 is please don’t ever prepare something just for me. I don’t want a report just for me, I don’t look for matrix just for me. I should be able to help you based on the matrix and reporting that you use to run the business. If I can’t help you with that data, then there’s somethings wrong. Like there’s a breakdown somewhere. But I shouldn’t be asking you to prepare like special stuff just for me. And that tends to work pretty well, because that reduces the overhead. Now a CEO isn’t having to run a bunch of reports and sacrifice some investor. Maybe just simply come to the conversation with the data and the numbers that they’re already using to run the business. So it’s going to vary sometimes. It’s going to be, you know, we give up, we’re trying to ramp up our sales , lets talk a lot about that, or ramping up our mrp—-12:43. And you know how it is in businesses always , the point of the arrow, that’s the focal point. So, you know, sometimes there’s not enough leads for marketing, this is not just not about sales to sales 12:52, sometimes it’s product development. —- 12:55 obstacles and part road map, whatever the issue is that the CEO is probably contemplating, try to talk about it. The other thing we do , which my wife finds hilarious because I think I’m the world’s worst, I would be the world’s worst therapist, like I just don’t think I have that personality. But as you know, as an investor you become a bit of therapist for your CEOs because

Nick: Sure

John: even if they have a co-founder, there’s things they can’t talk about inside their company. There’s personality conflicts, —-13:25 trouble with another investor, maybe it’s with the CEO and other companies that they’re partnering with, who knows, right. But they can’t just walk around halls in their own company

Nick: Sure

John: —- 13:34 or just needing a shoulder to lean on. And often the investors like that will also accidentally sue 13:40. You know that’s certainly not an every day occurrence or a weekly occurrence, but I think it’s an important part of the process where it’s a trusted, always in a trusted sounding board that they can feel very comfortable being honest with and getting hopefully some constructive feedback.

Nick: Yeah, my wife runs a psychotherapy practice and sometimes I wish she could be involved in some of these meetings, because she’d be a lot more helpful than me.

John: ——14:09

Nick: So can you talk a little more about this philosophy of being more hands on and more engaged with entrepreneurs and why you’ve chosen this approach as opposed to maybe a more high volume approach and being a little less hands on?

John: Yeah. I think people do what they want to do and they rationalize it. So they wrap all this rationalization around what they want to do. So I think you need some kind of a academic-y, text book sounding answer, but that would just be bulls*t , like I just, this is the way I want them to invest— 14:42 , right. This is the way I want to interact with my entrepreneurs. So what we found is certainly obvious, which is we have to be very very careful going in to these conversations before we write a cheque, that it’s the right style of interaction with the entrepreneur . You know, frankly when I was an entrepreneur I didn’t want this kind of involvement from my investors. The chemistry wouldn’t have been good. I probably would have turned an investor like myself off because I just would have made it clear that I’m not looking for this scenario at all

Nick: Interesting

John: It’s fine, right. It’s just that we all have different personalities. So since we are so early on, we really have to have this partnership approach with our entrepreneurs. And they have to really feel like that they are getting some value beyond just a chat. We’re never the highest valuation, we’re never going to be the most expensive term sheet. We want the entrepreneurs to really reach and want to work with us. Because we think in a long term. And we really strive to put ourselves on the same side of the table as the entrepreneur. And we do and certainly have a conversation where we could do it. We don’t put any weird funky terms in our termsheet. We try to make our stock as close their stock, so that we’re both looking at the company through the same lens and with the same agenda.

Nick: Got it. So you talked a little bit about board seats before. With all these investments are you actively taking a director’s seat?

John: For the most part of it. So I don’t know the exact numbers but certainly 80+ % we have a active board seat. There’s a few companies that we , we’re primarily California focused, not a 100%. We have investments, you know, throughout the country. We’re going to look at every deal but we’re going to invest most in California. And that’s because we want to be involved, we want to be local. We think if you’re early stage investors, it helps if you’re local if you’re going to be a high volume , oh excuse me, low volume high commitment. And so, the actual number of board seats, again it’s going to come down to, do we think we can be helpful on this board, and do we think the chemistry is good with the CEO that , you know, that’s going to involve some involvement 16:45. And that’s not for us, it’s in most cases, that’s the answer to both of —-16:49