Investor Stories 24: Why I Passed (Heltzer, Gurrieri, Hamid)

*Please excuse any errors in the below transcript

Nick: On today’s segment, we have Jason Heltzer of the #Origin Ventures. Jason, can you tell me about an investment that you’re very interested in but you ultimately passed and why you decided to pass?

Jason: I’ll talk about feed burner: Yeah, I looked at Feed Brenner earlier in my career and I met with #Dick Costolo who became C.E.O. of Twitter as we all know. They were just getting publishers ramped up and at the time their main strategy was, “Look, we’re going to have these RSS feeds and we’re going to be able to push advertising through them.” Most people use different reader software to look at RSS feeds and most of the readers were text based is about just basically plunging a bunch of headlines in front of you and clicking on what looked interesting. I was very sceptical of the ability to put advertising through. The publishers alternately wanted to convert our assess… their using ourselves access fees to bring traffic back to the websites where they knew how to monetize them so I looked and then said I don’t see how it’s going to get to revenue but I fundamentally missed how that company was building value and the way it was building value was building these relationship with publishers. I mean, I don’t know how many they eventually wound up… You know their venture acquired by Google for hundred million but you know they had probably thousands of publishers, probably great publishers and they also really were instrumental in making our assess a true standard.

Both of those things had incredible value. You know not to mention a really good engineering team. I didn’t see that, I didn’t play that out and you know, ultimately advertising was not a way they made money and certainly not a way they made a ton of money. I could look back and say< “Well, I was right about that” but it’s like saying you know, I was right about ten percent of something but wrong about ninety you know. You can’t… It’s like going to Las Vegas and saying, “Wow, I’m really up in the last three hours today and yesterday from two to five…” you can’t pick and choose like that and so you know, ultimately that was a successful business I think. Look, you can’t just ignore revenue in a business model and say, “Well, you know their value can be created by eyeballs and traffic.” you know. We learned in the late nineties, we learned even in the late 2007, ’08, ’09 time frame that you can’t build on that but there are ways to create true strategic value through partnerships, relationship with customers. You know, I think #GrubHub demonstrated that with the relationship with restaurants with the data that it achieved with delivery, circumferences that no one else had, that they got menu data no one else had. You know, those are really, really valuable things that don’t necessarily show revenue immediately that you have to be able to extrapolate and see is a company later on going to pay strategic value for this and that’s something that I’ve certainly changed since the fever burner deal, to look at things more holistically.

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Nick: On today’s special segment, we have Sergio Gurrieri of Tech Coast Angels. Sergio, can you tell us about a situation where you were very interested, but ultimately you passed on an investment, and can you talk about why you passed and if it was the right decision?

Sergio: So I like to go back to the company I mentioned before, RetroSense Therapeutics. They’re based in Ann Arbor, Michigan. They’re developing gene therapy to restore vision in patients that are blinded because of retina [inaudible]. So the company came to TCA about a year ago and they were really late in the round. Technically speaking, I was just not fast enough making a decision, because sometimes, actually, that’s reality. Sometimes you can take all the time you want, sometimes you have to be quick and be willing to take a risk with the information you have. So the result was actually the same.

So basically I missed the opportunity. So I don’t really regret that decision, because it was the best decision I could make at that time based on the information I had. So I wish I had a little more time, but I didn’t.

The reality is, again, the reason we invest as part of a network is we have a lot of expertise. So we have many spine surgeons, plastic surgeons, we have physicians, we have breast cancer surgeons. Well, unfortunately, we didn’t have any retina specialists with TCA when the company came, and so given my role, I wanted to make sure the proper diligence on the company. So it took for me about six weeks or so to understand well enough the technical and the clinical risks, which of course at the time were perceived to be really substantial. So by the time I got comfortable because I had to educate myself fin this space-which is, by the way, very interesting-and that’s part of the reason I do TCA investment, because it’s an excuse to read a lot and to educate myself about areas that I’ve never been involved in.

Nick: That’s why I do the show.

Sergio: Yeah! Intellectually, it’s very rewarding. Because you get to learn things that have been on your mind for many years, but you never had the chance to get involved.

So reality is just I took about six weeks or so, and by the time I got comfortable, it was just simply too late. The round was on the way to closing and then I kind of missed my chance. So, hopefully, there will be a future opportunity, but I don’t regret it. I just wish the best, and I think they’re doing well now and hopefully they come back to TCA at some point in the future. Because, again, this company will keep going, it will need more money as it did before.

And sometimes, it’s not that they need more money because they company’s not doing well. They company’s doing well, but things change and based on circumstances, based on circumstance, they’re raising it for long. It might be the high price. So that’s what you pay for when you miss your chance. You might have another opportunity in the future that most likely is gonna be at a higher cost. But it’s fine. That’s part of the game, right? Its part of the risk verses reward.

Nick: Well, and the next one that comes through the funnel that’s got a similar profile, I’m sure you’ll be able to act with a lot more speed.

Sergio: You just need to be comfortable. So it’s not about speed, for me, you just need to be comfortable. If you have information you need within a week or two, I have no problem making a decision. However, don’t rush. So maybe, my advice, don’t rush if you don’t really fully understand the risk, because eventually, you’re gonna get it, eventually you’re gonna regret it because you need to be very aware, very conscious, and you need to be comfortable, because you want to sleep at night. [both laugh]

That’s my number one priority, is I want to be-even if I made a decision that at the time sounded good and then the company didn’t make it, I did my best. I’m comfortable, I’m comfortable with the risk, and I’m comfortable with losing that investment. That’s why you need the whole portfolio. You can’t really count on one single investment, you need to build a portfolio. Because if one doesn’t make it, it’s okay. It’s part of it. You should expect it. So-and you still want to be able to sleep at night, even when a company goes down. Maybe you’ll miss one night of sleep, but no more than that.

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Nick: In this special segment, we have Mamoon Hamid of the Social+Capital Partnership. Mamoon, 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?
Mamoon: Yeah, so, it’s a good question. It’s always a great one. Actually it changes over time. I remember early on in my venture career, had a change to do the Series A in Yelp, which started by a good friend of my, Jeremy Stoppelman, and it’s always a blend of you work within a firm and in a firm there are lots of decision makers, not just one. So even if you wanted to do an investment, there might be others you have to convince. So in that case, I probably didn’t do a good enough job convincing my partners that we should have done the deal—even though I became personally involved with Yelp because my firm at the time, USP, didn’t do it.
But more recently, at Social+Capital, we’ve unfortunately missed opportunities to invest in Uber, probably about two and a half years ago. And I remember the weekend when we were discussing the investment and it was really a short fuse, because it was literally a weekend to decide if we wanted to invest or not. This is still when it was a black car service company, and gross margins were negative, and its first city in San Francisco. And really got hung up on market size and the TAM and margins without thinking of it in terms of sort of what it has become, which is it fulfills a basic human need of transportation and it’s gone obviously down market, which at the time UberX didn’t exist. So one could rationalize that we didn’t have enough information to make a good decision, but, you know, that’s definitely one where you look back and say “Man, we missed a big one.”
Nick: Is it typically a business where there’s one thing that stands out? Like total market size, TAM, or another metric that causes you to pass?
Mamoon: Yeah, I think it’s in consumer businesses, a lot of times in the on-demand economies, its gross margins where you’re spending a lot of money to grow, to build that city by city, like in the case of Groupon, LivingSocial, had to go city by city. It was a lot of manual, a lot of people to be hired. In the case of Uber, same thing. Or there’s a lot of companies—even Instacart or DoorDash that go city by city, lots of capital raised to just sort of stamp out the footprint. And there it’s a lot about gross margins and that’s where you tend to get hung up. And I would tend to say all is well in an environment like this where you can continue to raise money. Any blip in the markets for any of these companies and you can really be toast. And, you know, I think a company like Uber is really set because of the war chest, but…I think this a topic du jour in Silicon Valley, is the crazy burn rates. But some of these companies will be caught red hands when the music stops. Obviously you don’t wish for tat but it can certainly happen.
You know it’s actually kind of happened in the ecommerce space where there a lot of funding for ecommerce startups over the course of the last decade, and I think we sort of publicly know about Fab, and we know about things like Gilt, which is still a good company but it was poised for greatness five years ago. And even in those companies, ecommerce, it boils down to is it just a one to two times revenue business and these companies being valued at ninety percent gross margins, which they’re not.