Investor Stories 18: Why I Passed (Mirabile, Polovets, O’Donnell)

Nick: Today, Christopher Mirabile joins us from the Launchpad Venture Group. Christopher, can you tell us a story about a startup that you chose not to invest in, why it was that you passed, and if there was a key learning that now informs your approach?
Christopher: Well, you know, thereís the ones where youíre glad you didnít. And then thereís the embarrassing ones where you passed. You know, I think the area that is troublesome for us here in Boston, which is a town with an enormous number of college students and a ton of research money in raw technology, you know, MITóitís these one that look really promising but when you really get down to it, itís kind of still a science experiment and the founders are technical and thereís really no business experience on the team, nobodyís done it before and you want to love it, but you canít quite get there. and Iíve had a few situations where Iíve fallen in love with the team or the technology, and thankfully sobered up before writing the check, and seen these companyísóseen them go on to really kind of struggle to find a business model and to get this technology to market in some kind of a capital efficient way. So you know, thatís something that, in a city like Boston, you see a lot of in raw tech and raw science experiments sort of looking for a problem to solve.
Nick: Yeah, I wrote a little reminder to myself about six months ago that says ìDonít fall in love on the first date.î Because you see these companies the first time, and the ones that are in your sort of screening set, some of them just sound fantastic and you get a little further down the path and youíre just setting yourself up for sort of a disappointment.
Christopher: Yeah, itís really a trough of disillusionment, right, when you first hear about something thatís awesome and the entrepreneur is charming and when you get into really look at it and take different opinions and so forth, you often really fall out of love with it. And I think angel investing is about having the perspective to get across that trough, and then get back to a place where you write the check. And it takes a lot of experience and having a lot of deals to understand that all of these things are gonna have some warts on them, but which ones are gonna be acceptable and gonna be recoverable and which one too many warts, are they too serious. And I think that itís an imperfect art. You never really get perfect at it, but with time you tend to get a sense of which little hiccups can be overlooked and which ones you really need to just stop the presses.

 

Nick: On todayís special segment, we have Leo Polovets of Susa Ventures. Leo, can you tell us a story about a startup that you had significant interest in, but chose not to invest, and what the key factors were that led you to pass?

Leo: I guess unfriendly terms are definitely things that made us pass a couple of times. And itís always a shame because we have a lot of conviction about the company, we like the founders, the product, but we just canítówe canít of canít get there during valuation.

And thereís one specific startup where I really liked that they were basically building a really smart sensor based platform for marketing, so you can go to a store and just by proximity to something, you get a coupon or you get a special deal. And the way they had done it was very elegant and nice. And the challenge was I think they were raising at about three or four times the valuation we would have pegged from that. So we tried to talk to them about it, and kind of asked ìHey, how do you justify the really high valuation?î and their justification was basically ìWell, we need x million dollars and we donít want to take too much dilution. So I valuation is what it is because we need this much money.î

Which I think is not a good justification. Just because you need the money doesnít mean that thatís the right price for you to raise that. So we discussed it for a while, went on a theme, and basically decided we couldnít invest on those terms. And this happened a couple other times at other companies as well.

Nick: Interesting. Sounds like they could have benefitted from this podcast. [both laugh] Did they end up closing the round or did they end up sorta ratchet back their fundraise amount and come down to more interesting levels?

Leo: To be honest, Iím not sure. This is a couple months ago, and I havenít heard about them because they arenít around, so Iím not sure. They were in a strange position whereóI mentioned earlier that sometimes angels are a little more price insensitive, to actually raises a pretty rich angel round before this, which I think limited their options and how low their valuation could go for this round that theyíre currently raising.

Nick: Got it. You had mentioned there were some other terms or some other factors that have led you to pass on investments. Are there some in particular that have come up more often than others, aside from valuation?

Leo: Pro rata has come up a couple of times where if we canít get pro rata rights then I think thatísóthat makes it a little harder to invest. Weíll still do it sometimes, but I think it sets up a higher hurdle for when we would invest or not.

 

Nick: On today’s Investorsí Stories segment, we have Charlie OíDonnell of Brooklyn Bridge Ventures. Charlie, can you tell us a story about a startup that you were very interested in but chose not to invest in, and why it was that you passed?

Charlie: Sure. I wish I could say that there was never a deal that I missed, and that every single great deal to come down the pipeline, Iíve caught, but there are lots of regrets. Itís interesting, though, most of them are ones where I didnít even get close, and they turned out to be good investments, and I have more stories like that than ones where I was on the fence about.

So, for example, I got a change to see ClassPass very early. And, at the time, it was called Classitivity. And Classitivity was a different business model. It was a class search, so it was basically Google for classes. And the problem was is that people didnít know what classes they were looking for. In fact, what is now ClassPass solves a lot of the problem, because they enable people to discover classes that they didnít know about.

And so, I didnít back it. The founder didnít stick with that model. She realized it wasnít working. Payal was very impressive in person, and we talked about the economics of that search and referral based model, and the math didnít really work. I think the tough part is that when you aim to be the first person that someone goes to with a pitch, a lot of times, if you turn them down, they donít come back to you. and the benefit of the pivot goes to the eighth best investor they know because theyíre working their way down their list of who they really want in their deal. And they tried to pivot out on the next investor on the list as opposed to the seven who turned them down previously.

Nick: Is ClassPass the gym membership class?

Charlie: Yes, itís the unlimited monthly gym membership, which plays right into how their mostly female audience wants to work out. They want diversity, they want to experience new things, and they donít always know exactly what they want in their workout next month. And so thereís a discovery mechanism verses what was more of a search tool, and itís incredibly popular.

And, yeah, I could certainly count that as a miss, but I didnít pass on ClassPass, I passed on Classitivity. The founder herself passed on Classitivity! She changed models. But that happens more often than not.

I just realized I was also one of theóprobably first twenty-five or fifty users of a site called Hubdub. Do you know what Hubdub is?

Nick: No idea.

Charlie: Well, Hubdub became FanDuel.

Nick: Oh, wow.

Charlie: And Hubdub was a prediction site where you went on this very barebones site, and you said ìHey, I think the New York Jets are gonna lose thirteen games this year.î And somebody would come along and say they did or they didnít and so you could kind of make bets with your friends. And they didnít really have a critical mass. It wasnít necessarily compelling. The founders were in Europe, so itís not like you could have met with them very easily and had a conversation and said ìOh, these guys are smart guys. Theyíll figure it out.î And then they wound up pivoting to daily fantasy betting through the loophole of the daily fantasy is not a skill base game, and theyíre a billion dollar valuation company these days.

But nobody bet on Hubdub. I donít think they raised any money for Hubdub, but thatís what that became.

Nick: Do you come across businesses just in your everyday life and your everyday habits that you pursue for investment? You find them as opposed to maybe meeting them or interacting at a startup or tech oriented event?

Charlie: Yeah. Thereís a companyówouldnít quite talk about the investment yet, but there are companies where Iíve gotten to know the founder through the communityóIíll talk about this one company. I canít disclose, though, who it is, unfortunately. But the founder came to me who was a product manager, and he was looking for his next thing. And Iíve built up a reputation for helping people out with recruiting and job placement, and he knew I invested in a lot of companies and figured I might have an opening. And so I opened the door to sort of career counsel him almost and we talked about a potential group of opportunities, and it just didnít seem like anything was sticking.

ìIíve got this side project.î And the side project was in the education space. It was a very interesting distributed model, sort of built aroundósometimes founders get to scalability because they start off part-time, and so they build it in a way that doesnít require a lot of their time, which is a great way to build a business. And he told me about the business and I said ìI really like that, I think you should do it.î And Ióhe said ìWell, you know, thatís not the type of thing that VCs fund.î I said ìI would totally fund that. Letís look at the math. Letís build a model around it. Let me introduce you to a bunch of related people in the space.î And he and his wife were working and they both wound up going full-time in this business that I just recently led the seed round of.

And so he wasnít pitching and I convinced him to work on this thing full-time.

Nick: Wow. So he just stopped the planned business and he went with this side business?

Charlie: Well, he stopped his career as a product manager working for other people. And had a little side thing and basically didnít think that his side project was fundable, or didnít think VCs would fund it.

Nick: Circling back to something you said before about pivoting, Iím curious on your decision to pass or proceed with businesses that you know may have to pivot, and if you can see where theyíre gonna pivot toówhether it be business model or maybe product pivot. How do you make decisions on businesses you know they got a strong team, you know theyíre in a good market, but you can sense thereís gonna be a pivot. Is it a pass and wait until they explore that new opportunity or can you proceed with an investment on a business that you feel like may have to do a major pivot?

Charlie: Well, sometimes you go into a business…the bet is ìI really like this team, I really like this space. We got enough time to figure it out.î And itís sort of a ìWe know weíre gonna try a few things…î and I canít say Iíve really done too many of themóIím trying to think if Iíve done any of those actuallyóbut I think it would be very hard. If you though that there should be a different move that the companyís making and the founders didnít think so, you gotta be on the same page as the founders.

Iíll give you a real life example. Thereís a company out of TechStars in New York with a terrific team called Spoon University. Their distributed content model is short of if every single campus were to set up its own Eater, but the students all work on it. So you bring your own mini version of Eater to your campus. And I love distributed models. I backed Chloe + Isabel back when I was at first round capital. Iíve back a couple in my fund. So I really like the model of individual operators so of pulling something into a market through various incentives.

And theyíre focused on food as a vertical, and I personally think that verticalís too small. I think itís a terrific team and if that team came to me and said ìWeíre gonna sort of replace the campus newspaper with student run publications on a platform and cover everything. Weíll do sports. Weíll do news and politics and all this sort of stuff and every campus is going to have this thing.î That would be very interesting to me with that team. And we have conversations about it, and theyíre focused on food. They want to be the next Food Channel starting out with campuses and they will definitely fill that round. They will get backers.

And weíve seen media companies like Mashable and Refinery29 go for a long time in one vertical, get really big, and break out. But I think in each of those categories, they were potentially big and lucrative enough categories to build venture backable businesses.

I think I would just be like too at odds with the team to be a productive investor. Iím a lead investor. If I was passive, if I was just writing small checks and saying ìHey, those guysíll eventually figure it out and theyíll come around and Iíll try not to make too much noise about it and try to be helpful,î maybe Iíd go in. but as a lead investor, you really need to be on the same page with the team.