Investor Stories 15: My Investing Strategy (Hamid, Polovets, Medved)

Nick: In this special segment, we have Mamoon Hamid of the Social+Capital Partnership.
Mamoon, can you talk about how you evaluate early stage startups, your philosophy and
or thesis in how you choose to make investments?

Mamoon: So, it’s a lot about what’s—the now-thing to say is the team and market, you know, you want
to invest in a superb team going after an exploding market.

Nick: Sure.
Mamoon: And that’s, okay, easy to say. How do you invest in that? So you have to have point of view
on the market, you have to have a prepared mind approach to where you think the world is going, where
you think the opportunities will be. It’s a lot of times informed my—the discussions you have amongst
your partners—partnership, amongst—with entrepreneurs that you respect and trust. It’s the portfolio
companies you’ve invested in that are sort of guiding you towards—you’re learning with them as well as
to where the market is headed.To give an example, I invested in a security company called NetScope.
It’s completely outgrowth. It’s a derivative of all these SAS companies taking off. So now CIOs and
CISOs have this desire to regulate and policy the use of the SAS apps. And they don’t want to just do
it within one app, they want to do it across the hundred and fifty two apps they got appointed across
their company, and so NetScope helps them do that. So that investment is informed from my views derived
from my involvement in Box, Yammer. And that’s what happens over time, you continue to evolve your viewpoint
and you develop this prepared mind. It’s like “Ah! This problem exists and I know you’re solving a real
problem that companies have.” Or I can talk about our investment in a company called Greenhouse, recruiting
software company, where I’d hear entrepreneurs lamenting about how bad their recruiting software was, and the
moment you saw what they were building and the entrepreneurs are like “They’re onto something” and you
show five entrepreneurs what they built and they’re like “This is it. This is what he need.” And so, really,
your viewpoint is informed by a lot of conversations, a lot of board meetings, a lot of pitches, so it’s a
lot of learning that happens on an ongoing basis and you feel—you create this viewpoint of the world that
helps you make good decisions on the early stage investing, even when there’s very low data.

Nick: You mentioned earlier that one of your partners’ kids was using Facebook before any of you guys were
at your age. Is there any way you tap into sort of the collective mindset of the younger generations?
Mamoon: Absolutely. You know, that’s, uh—we actually have a deep venture of entrepreneurs and residents who
hail from companies like Facebook and Google and Apple and Redfin and all kinds of Square and Instagram and
we tap into their collective wisdom as well. They’re part of our team here and they’re here with us all
week long. A lot of the different product and market expertise to help us sort of form a complete viewpoint
as opposed to sitting in an ivory tower—which hopefully we don’t sit in an ivory tower, we sit in a loft
like looking space in Palo Alto, but just to have a lot of voices around the table, that can inform our
view of the world.

___________________________________

Nick: On today’s special segment, we have Leo Polovets of Susa Venture’s.
Leo, can you talk about your thesis and/or how you evaluate and select early stage startups for investment?

Leo: Sure. So at Susa Ventures, our focus is on companies building valuable data sets.
And we think that’s a great thesis, because more and more, we see data as being a great
competitive advantage over time. Used to be that just having a good infrastructure and
good software and good hardware was a competitive advantage because you’re fundraising.
Like, in 2000, you needed to go raises five million just to set up a small data center a
nd hire a bunch of engineers. And over time, now you don’t need to set up your own
servers, there’s a lot more source software, it’s easier and easier to build a product
with very limited resources. And so those hurdles have gone down as far as being great
competitive advantages.

But data remains something that’s very hard to get, unless you actually have a good product,
users using it, a smart data collection strategy. So we really like startups where, through the
course of whatever product they’re building, they collect a lot of valuable data, and then that
data let’s let make better product. It lets them create features that competitors couldn’t do at
all without access to that data. A good example would be like if you’re trying to come up with Yelp
right now, you can make as nice of a UI as you want, but if you don’t have the reviews, the business
listings, the reservation system, you’re not gonna get very far. And so we really like companies with
that kind of defensibility.

Along with the data angle—and actually kind of going with the data angle, we really like at least
one of the founders to be very technical. And generally, we invest where our partners are located,
which is San Francisco, LA, New York, cause that’s where we think we can be the most helpful.
But basically, the core of what we look at is technical founders, data is gonna be the competitive
advantage, and it’s a good horizontal piece instead of one that a lot of companies fit into.

Nick: I guess it makes a lot of sense considering your background, your time at Google and LinkedIn
and some of your other experiences.

Leo: Yeah. I, uhm—I actually have kind of a funny anecdote about that. That I worked on payment
fraud detection for Google for a couple of years. They basically have a product, kind of PayPal,
called Google Checkout. So a team of engineers and I were trying to develop algorithms to detect
fraud before it happens so Google wouldn’t be on the hook for a lot of money. And the thing was kind
of split up where I and a couple of other people working on the algorithm side, and then the rest of
the team was just working more on incorporating more data from new data sources.

And in college, I studied algorithms. That was kind of one of my fortes, and I really thought my part
of the team would have the biggest contribution, and then the data side, that would be a nice little
boost but not a big deal. And it turned out to be the exact opposite. The algorithms mattered a little
bit, but in the end, what really gave us a great fraud detection system was just having more and more
data sources. And since Google, I’ve seen that in a lot of other places too. Where a good product with
a really great data that leverages that data wall was often better than something that looks really nice
but doesn’t have as much substance behind it. That’s also easier to defend on the data side.

____________________________________________________

NICK: On today’s special segment we have John Medved. John, can you talk about how you evaluate and select early stage startups for investment? Maybe talk about your thesis for a little bit and how that may unique from other investors.

JOHN: I don’t know if it’s unique or not. We follow best practice in the venture and angel world. We’re very focused on teams and who they are. We’re very fortunate here in Israel that we have so many serial entrepreneurs to choose from. There are a bunch of companies that are being led in our portfolio by people who have been there and done that in some cases several times before. That really improves your odds.

We look for first timers too with compelling people, good managerial background, fire in their belly, and light in the eyes. So we focus really first and foremost on the team. We then take a good hard look at the market. Because if you’re going to pick the market wrong, I don’t care how good your team is, you’re going to have some trouble.

So we look at making sure the market itself is going to grow in a dramatic fashion. You don’t look for market share plays. People are going to ensure an already established market; we’re looking for growing markets. We’re very focused on traction. Has the company started to achieve its goals? Because if we get guys who come in and say look, hand me check and then I’ll do the following and make something happen, that’s not for us.

We want people who are already demonstrating progress with the trains pulling out of the station and we’re jumping on, we’re going to push and shovel some more coal into the already turning engine. We want this thing to be moving already and we want to be able to call customers and to call partners. Most importantly we look for sponsorship.

We think that building a startup is a group sport. Right? We don’t like to be alone as an investor. We like to invest as part of syndicates, either ones that will build and lead ourselves or ones that we will join on.

NICK: There will be a lot of chatter lately amongst venture capital bloggers and angel bloggers about sort of high touch involvement, post investment, or lesser involvement. And how much impact really the investor can have with the startup. What’s your take and what’s your involvement, post investment, in terms of helping the startup to achieve some of those milestones?

JOHN: I appreciate you asking that because if I had to say what is the most distinguishing factor on the r-crowd platform as opposed to all the other crowd funding platforms, I would say it’s our high touch with the companies. I’m a complete proponent of the definition of smart money in this business, being people who help. Someone who just deploys money and says vaya con dios, my darling and I’ll see you at exit, in my opinion that is pretty much the definition of dumb money because if you think that you’re that good of a stock picker, then pick stocks. But if you’re in the startup business, you got to help.

And that helping includes sitting on boards and providing good governance and strategic input. It includes making connections for the company to distributors, to partners, opening doors, getting them access to the media, helping them to make good hires, and if you’re not doing all that stuff, you’re not doing your job. The beauty of our crowd, and I think the potential of crowd funding done right is that you can involve not just yourselves and your partners at the platform level but your whole board of people, the crowd, can get involved in what we call crowd building.

And we are spending a lot of money right now developing software and focusing on how do we mobilize the crowd on behalf of our companies? So we already stepped out, we bring mentors, or from the outside to sit on our company boards because we can’t physically sit on all 70 soon to be 700 company boards. So we recruit members of the crowd to do that. basically training our CEOs to expect this from us.

So we’re getting literally every day, inquiries, incoming from our company saying do you know somebody here, do you know somebody there, I’m going to Minneapolis on a business trip, who else can I see? And we have that ability now, not just to ask around the table, the 4, 5 days like who would be in a venture fund. But we have the ability now, tapping into the resources of our thousands of investors, and this is potentially explosive.

NICK: So I’d imagine you’d pull in some of these subject matter experts or domain expertise folks in the diligence process as well? Pre-investment?

JOHN: We absolutely do. And again, I don’t want to talk too much out of school but we’re very focused on how we can even better leverage the power of the corwd, not just to deal source but to deal diligence and to provide all kinds of additional smart input as we pick and then build the companies. And we’ll be revealing this as we go forward but we’re obsessed with it. Got to tell you, when we look at what we’re doing, we’ve already proven we can raise the money, that people will come and invest and the companies will come and list with us.

But the real challenge is going to be can you provide phenomenal returns for your investors on a consistent basis? I think the big secret sauce in that is going to be based on can we make better decisions by using the crowd’s wisdom in terms of where we put our money and making sure we check things out? And can we engage the crowd in helping to push these companies forward in a new way? I think that’s where the battle ground is going to be fought between the various platforms.

Those who win are going to be the guys that see those two elements.