Investor Stories 26: My Investing Strategy (Davis, Carter, Struhl)

*Please excuse any errors in the below transcript

Nick: On today’s special segment, we have #Mark Peter Davis of #Interplay ventures. Mark, can you talk about your thesis and also how you evaluate early stage startups for investment and maybe mention aspects of your approach that may be unique from other venture investors?

Mark: Yes, so on the foundry side, it’s a little different. We’re looking for companies where we think we have an unfair competitive advantage given the platform we have at Interplay. We founded ten companies that have built kind of the service layer platform for the venture community. So, that out of that comes lots of opportunities to build and continue to add value. I mean, the investing side, we’re very uniquely agnostic, source stage agnostic, sector agnostic and geography of agnostic. I don’t believe I can come up with every great idea that’s ever going to be done and go find a company that’s going to do that. I believe in sourcing wisdom of the crowds and letting the innovation flow in it. I am looking specifically for patterns and the great thing is, if you’re an investor for a while, I been doing this for a decade now and you get started flashcards, you start to see so many of these things maybe in a couple thousand a year, you start to see what’s going to work and what’s not.

I’m looking for teams that are in place and make sense. They’ve been able to get burner traction on a relatively limited out of capitals and capital efficiency. Real understanding… Like having a real understanding of the path to revenue and the pain point that’s being solved and for me I generally like to see things where they have some traction, i don’t require it but it’s wonderful when people walk in and like, “Look, we’re doing this thing. We’re doing ‘X’ per month, it’s growing at this rate. There is risk about us growing it but we feel like we know there’s two or three levers and the levers make sense and obviously we have to go learn and figured it out.” Those are easier bets where I like to get involved and be helpful in any way I can.

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Nick: On today’s special segment, we have Jeffrey Carter. Jeffrey, can you talk about your thesis and/or how you evaluate and select early stage startups, and why do you approach investing with this philosophy?

Jeffrey: So you’ll hear the same thing over and over from seed stage investors, I think. We invest in people first, right. We invest in the team. For me, yeah I invest in people, I like sort of companies that are not consumer facing generally. I don’t rule them out, I’ve done some B2C, but I really like B2B companies that work from one business to another, because your target market is much more focused and less fickle. The problems that you’re solving are more tangible, in general. So it’s easier to build a business one you find product markets in, I think.

That being said, I think B2C businesses are the ones that sell for billions and billions and billions of dollars. There is no Snapchat for B2B right now, right. It’s a B2C company. There is Yammer—sold for a lot less than Facebook did. Yammer was B2B Facebook. So you have to recognize that so it make you structure the deals differently.
But getting back to like, why I am the way I am, I was a floor trader in the Chicago Mercantile Exchange for twenty-five years. So I was belly to belly with people all the time, or belly to back, or belly to butt, or however you want to call it. And that changes you as a person. That makes you a different kind of investor. I’ve always been very, very highly competitive. Being a floor trader really heightened that sense of competition, but at the same time, floor trading was a people business. It was a people business first, before anything else. And being that it was a super highly charged, highly competitive environment with lots of emotion, and that it was a people, you had to get along if you were gonna be a part of any sort of big trade.

Venture capital is very similar to that. Highly competitive, but it’s a people business. And so the characteristics that I developed over twenty-five years as a floor trader allow me to quickly ascertain if people are good people or bad people, first of all, and then over time figure out—a short period of time, I’m not talking about years—figure out if they can execute or not. So on the floor, our saying was “Your word is your bond.”

Ethos really resonates with me. My first school was the US Air Force Academy where they have an honor code, and I like that way of doing business. I like being able to talk to people and your word is your bond. And you don’t necessarily find that in VC a lot. I think there’s a lot of—not liars, but just people that aren’t saying what they really believe. And a lot of people will drop into MBA catchphrases and stuff rather than just be plain and transparent, and so I like to deal with entrepreneurs that are plain and transparent.

That’s what sort of separates my investment style from a lot of other people’s, where they’ll get really deep down in the weeds on this sort of potential or that business model. Business model’s great and you gotta look at it and you gotta ascertain it, but at its core, it’s a people business and you have to be able to size up people pretty quickly.

Another thing about floor trading that translates pretty rapidly is you can do all the due diligence you want, and there’s people in the angel world and the investing world, they will gnaw on that deal like a dog does a bone until there’s nothing left, and then try to make a decision. And you just don’t have that luxury of time with seed stage investing. You gotta figure it out pretty quickly. You’ve got to make a decision.

And it comes down to almost a gut feeling, a leap of faith, which, hey, that’s floor trading, man. You took fifty different pieces of information that were confronting you at once with people screaming in your ear and pushing you physically back and forth with your own money on the line and you had to synthesize a trading decision within seconds—and then act on it, and the manage it. So once you made the decision, there were emotional highs and lows that went into it, what do you do with your losers, how do you get out of your losers, how do I handle failure, how do I handle this—and all that is wrapped up in the seed stage entrepreneurship. And it’s directly translatable.

That being said, with floor trading, there’s always an out. It just costs you, right. So if you got a bad one, you can get out, you can recoup from your capital or—even though you lost money—you can fight another day. With seed stage investing, once you’re in, you’re all in and there is no out door. So it’s like the old roach motel commercial, you can get in but you can’t get out. If you want to get out and people let you out, you probably don’t want to get out. You probably want to reinvest. So that part’s very different. The time horizon’s very different. You’re talking about a seven to ten year holding period, not seconds or minutes or days or months.
Nick: Feels a little bit like the poker table. Once you put the chips in, you can take them back.

Jeffrey: Yeah! Early stage investing, it’s really interesting. Fred Wilson made this point, and I love it, because early stage investing is paying the ante. And you get to see your cards and you get to manage them, and then you get to decide on every round if you want to be in or out. And so, if you got a good hand, boy you can really press your bet.

Late stage investing is all the cards have been dealt, you gotta pay up all the previous antes and put in way more money, and you don’t even know what the cards are. So, in a weird, perverse sort of way, later stage investing, if that’s all you do—you know, I only invest Series B or later—is riskier than seed stage investing because seed stage investing is smaller check sizes, you get the optionality of investing throughout the deal and you get to take advantage of pro rata rights in later rounds. Whereas, late stage, you’re all in on every hand, so it either works or it doesn’t.

Nick: I still gotta ask more folks that don’t follow on and don’t negotiate for a pro rata why that is their philosophy and why they wouldn’t want an option at a later stage to press a Yammer or press a Facebook or a Groupon.

Jeffrey: Sure. It’s an asset, think of it that way. So on a balance sheet, you got the assets and liabilities and shares over equity, and your pro rata rights for seed stages investors are—you can call it account receivable on the asset side of the balance sheet.

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Nick: On today’s special segment, we have #Jonathan Struhl of #Indicator Ventures. Hi Jonathan, can you talk about your thesis and how you evaluate startups for investment and then maybe mention aspects of your approach that may be unique from other investors?

Jonathan: We have a concept called Digital Efficiencies. We invest in Entrepreneur words that are leveraging digital whether it’s hardware or software to make business or consumer life more efficient. So it’s really all about making the world more efficient through technology. So, while we’re a little more opportunistic you know, we’re really micro V.C.,seeds stage fund. Say opportunistic is important for us but also we look for really important indicators when we invest. Revenue in a real business model is important for us. So, I was talking about East Coast versus West Coast investing, I mean we harp a lot on revenue. A lot of that was what we’ve learned from Angel Investing and investing in companies that don’t have a revenue or a plan how to grow revenue which is really important for us. Additionally, we evaluate early stage start ups. A lot of times in the lens of our team so we have seventeen experts that help us with everything from deal flow, to due diligence, to portfolio, to maintenance these seventy experts are industry specific influencers so to speak and help us evaluate start ups and sends us deals as well. I think another thing to point out and there’s been there, this crazy around the millennial V.C. They’re not that young, have a lot of experience in investing and seen hundreds of companies, thousands of companies over my life and I mean, I’m a user of a lot of the stuff. So you look at sort of the Snap Chats and when I use Snap Chat, me and my friends are on snapchat on daily basis. Look at some of the other VCs and it’s about, “My son or my daughter uses Snapchat” or even worse “My grandson and my granddaughter use Snapchat so I’m going to make the investment.” I’m the user of a lot of these stuff and I try to invest through that lens and try to bring my young network in as well. This is something that you guys would use and if people of my generation who would use this or actually using it, that’s a key indicator for us.