Investor Stories 349: Why I Passed (Rueckert, Tunguz, Rotman)

Investor Stories 349 Why I Passed (Rueckert, Tunguz, Rotman)


On this special segment of The Full Ratchet, the following Investors are featured:

  • Rob Rueckert
  • Tomasz Tunguz
  • Frank Rotman

Each investor highlights a situation where they decided not to invest, why they passed, and how it played out.

The hosts of The Full Ratchet are Nick Moran and Nate Pierotti of New Stack Ventures, a venture capital firm committed to investing in founders outside of the Bay Area.

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Transcribed with AI:

0:18
Welcome back to TFR on today’s special segment, we asked guests to discuss their anti portfolio startup investment that they passed on. Here’s the segment called Why I passed.

0:35
On today’s special segment, we have Rob Rueckert of Sorenson capital. Rob, can you tell us a story about a startup that you passed on?

0:42
Yeah, there’s a, you know, I’m speaking to you from Utah, there’s there’s a Utah company called Divi that sold for a tonne of money at a fantastic outcome. I know the people, they’re there. They’re incredible people, I had the luck and the opportunity to speak to them when they were tiny, a tiny company, I had an opportunity to invest in them. And I didn’t. And I didn’t, because I just didn’t know, I didn’t understand the space really well. And I’ve learned a long time ago through another story. But one of my biggest learnings early in my career was to only invest in things that I really know. And I really can be comfortable with, that the product really resonates with me. And this was a case where I didn’t know the space. Well, I didn’t know the product well. And so I passed. And I couldn’t I shouldn’t have passed, I guess in hindsight, because it was a nice big outcome. But I’m okay with the past because I It wasn’t something that I knew very well. And I think you’d make a lot of mistakes when you invest in things that you don’t know.

1:45
And today’s special segment, we have Tomash Tang goos of theory to Marsh, can you tell us a story about a startup that you passed on?

1:53
Yeah, I mean, there’s so many, I think the one that I passed on, boy, what’s a good one? I think I remember meeting Jeff Lawson at Twilio at the seed. And Jeff has this unbelievable combination of being able to describe very technical topics in a really elegant way. And he was solving the telephony problem for developers with literally five API calls, five lines of code, something that would have taken 12 months of partnership conversations, and then many weeks of programming and obscure XML to achieve. And I wrote about this recently, which is, I ended up passing on market size, because the demonstrated market at the time was really small, not large enough to justify a venture outcome. And what it’s taking me a decade to learn is that the market size of the market is the output the sum of all the outputs of the people in the market. And the people who are in the market can change the market pretty rapidly. Nobody knew they wanted an iPhone before. Steve Jobs showed them that they wanted one, nobody knew that they wanted a self driving car. And so to look at current market size, Kriegers and growth, that’s one thing to just kind of give you a level sense of where the market is today. Shopify is the same thing. I wrote a blog post about Shopify pass on them for the same reason, which was market size, and Toby and the rest of that team, they just change the demand curve, right? Like we’re talking macro economics, this is apply this is demand kind of seems fixed. But the reality is, the players within the market can suddenly change those curves pretty meaningfully. And startups they’re the best startups are actually incredible at doing that. So that’s been a consistent mistake in my career.

3:38
It’s hard to make that investment though, when there’s no market pull. We’re looking at a couple right now that are fascinating. But yeah,

3:44
I think is really important, right? Webvan versus Instacart. I went back and I read this book called done deals, which was interviews with venture capitalists in the late 90s. And they, I had no idea like lotus went from zero to 40 million in revenue in less than two years. Anyway, so like, you kind of hear from these previous eras about the way that startups grew, or which companies were hot, which companies were not. And a lot of them, the ideas are similar and the market timing is different, or something changes. And so I think one of the hard parts about the hardest part about this job is you get to learn a lot from brilliant people study markets, and then when a company comes, an idea comes back around, you have to forget you have to pick what you forget about the last time you analyse that market and pick what you thought beliefs change as a result of the team or what’s going on and that’s really hard.

4:44
On today’s special segment, we have Frank Rotman of QED. Frank, can you tell us a story about a startup that you passed on?

4:51
So it’s not a company that we passed on? I would say that they passed on us so that makes it hurt even more, but it’s a company that’s in the news a lot, because they’re doing quite well a company called the ramp. I don’t know if you heard of them, but they’re doing well. So we had a chance to invest in them at the seed stage, we knew the team, well, they had actually sold the first business that they built a Capital One. So coming from Capital One, there’s capital on DNA, and we got to know the team through mutual connections. And they’re building something in the sweet spot of what we know really well, which was credit cards, it was business credit cards, but it was credit cards. So if there was one firm on the face of the planet that knew what they were doing, and how it worked, and why it wouldn’t be valuable, like I thought it would be us. And we spent a lot of time with the team. And I absolutely loved what they were really chasing down. And it turned into a competitive bidding war between us and Keith Raboy. So Keith was at Founders Fund at the time, and Keith is just a very high quality hands on investor as well, I respect him immensely. But every time that we put terms on the table, like he went over the top and changed the terms, so they were more attractive. And they would come back to us and say, if you really would like to invest in the company like this is what we’re dealing with, like we just have a new term sheet that came in, did about two or three rounds of this going back and forth, constantly increasing the valuation. And eventually I drew a line in the sand. And I said, Look, this is a great company, we love you guys. And I would love to work with you, and ended up losing the term sheet to keep. And I respect him immensely. I respect the team immensely. I don’t hold it against them. He’s a great investor to have around the table. But it’s the one that got away. Again, it’s a shame when it’s in your sweet spot. And it’s something that you could have helped the company with. Obviously, they did not need our help. They’re doing extraordinarily well without us.

6:49
But if you could go back, I don’t

6:51
know. I mean, there’s a point where price discipline actually matters. And it’s not just about the one company. It’s about what you do as a firm. And Keith even talks about ramp as one of the boldest moves that he made in venture and he’s talked about it on podcast as well. I’ve we’ve been on podcast together where we’ve talked about it. So he knew he wanted to win this deal and he wanted to work on it so he was going to do anything that it took. So more power to him and more power to the company still love them, so don’t hold it against them.

7:29
That will conclude this instalment of investor stories. If you’re enjoying the programme and would like to see it continue. Take a moment and leave a five star review in iTunes. Okay, that will wrap things up for today. Until next time, over prepare, choose carefully and invest confidently thanks for joining me