On this special segment of The Full Ratchet, the following Investors are featured:
- Kevin Stevens
- Manish Patel
- Han Shen
Each investor highlights a situation where they decided not to invest, why they passed, and how it played out.
The host of The Full Ratchet is Nick Moran 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:
0:19
Welcome back to TFR on today’s special segment, we ask guests to discuss their anti portfolio, a startup investment that they passed on. Here’s the segment called Why I passed
0:35
on. Today’s special segment, we have Kevin Stevens of energize Kevin, can you tell us a story about a startup that you passed on?
0:43
Oh, there’s many. There is a German version of Sunrun that we were we looked at the series a three years ago now, and it was coming out of a series of investments that didn’t go well for us, that weren’t B to B SaaS. And so we internally discussed like, Okay, what is energize great at and we determined that that was enterprise SaaS. We were going to do those types of businesses. And so this company comes to us, great metrics, looks like a winner, buy, all intents a home run. And we just said, Hey, we don’t do this anymore. We don’t do anything different outside of our strike zone. And so we for that point. We know you’re a winner, but we have to pass and as a result, it’s like a $3 billion company now. And so it was, it was a big miss, and the learning for us was maybe we focused too much. You know, as as climate focused and energy focused investors, we do have this earned secret of what we think could win in the market, and sometimes we should listen to that instead of just completely retrench into a very narrow window
1:54
on today’s special segment. We have Manish Patel of Nava ventures. Manish, can you tell us a story about a startup that you passed. Oh yeah,
2:01
so many in my anti portfolio, I would say the one that comes to mind most vividly is Snapchat. So snap. Evan Spiegel was in the class I teach at Stanford. He was the year before I started teaching. Actually met him. Did not get it at all, at all, right? I was even then as young guy, I was an old man, did not understand why this app was addictive. Saw it as the, you know, 35th messaging app passed on the seed opportunity, and that was a big Miss. What did you learn from I learned to trust my instincts and not to trust all the BS rules of thumb, you heal here from older VCs and other folks about what makes companies great. You know, trust your instincts. Look at the data and go from first principles. I think there’s a lot of garbage out there around even the KPIs, and things about how people look at companies, that the great companies redefine the KPIs.
2:54
Yeah, 100% love that.
3:02
On today’s special segment, we have Han Shin of iFLY Han, can you tell us a story about a startup that you passed on?
3:09
So I will not name the company, but it’s such a category of dockless bike sharing, right for a while it was buzzy those companies in China, US and Europe, raised a ton of money, and I had, I happen to have some, you know, connection with a bunch of these founders and also manufacturers on the supply side. So I probably spoke to over a dozen dockless bike sharing startups, mostly here in the United States. So again, without naming them, I pass on all of them, right? So a couple factors. First of all, let’s remove this kind of a buzzword, urban mobility, which sounds fancy, right? But to me, dockless bike sharing, or later on when you look at scooter sharing, to me, that has fundamentally no difference from transportation infrastructure. By that, what I mean is that you have to build a lot of CapEx upfront, and hopefully the cash flow will trickle in to cover the initial capex, right? But when you look at transportation infrastructure playbook, you are talking about airport, highway, road, port and so on, right? So the capex for such project has expectation of a very long cash flow stream to get the money back if ever that happens. And that’s also why, in many countries, governments are often involved to synthesize the cost. But when we talk to these startups that try to sell the story. Now, of course, as consumer, I love it. I have some of these accounts too. I see you use these scooters to tour around when I go to a different city. But to me, the in. Investment model is very tough for VC, right? When you raise the most expensive capital in the world, which is venture capital, then build a return model based on capex infrastructure, that’s already a disconnect. And I still, you know, feel puzzled why people did not think that was a problem. And the second part of the reason for saying no is probably because the market was very, very friend founder friendly at the time. And as a result, I would say probably some of the founders didn’t even give deeper thoughts into the operation economics, right? So a common Q and A is, how do you get to break even? And the founders would typically tell me, yeah, you know, if we can get a spike rented for a dozen times a day, we’ll easily get to break even. But I realized none of these founders understood this concept. So called service model, right? So, so let me explain what, what service model is. I somehow became United Airlines, global service by flying way too many Economy Class flights. And to me, when I say that, it feels like a penalty for all the fly hours. But having said that, you know, the service model, service level means when I call United hotline for global service. You know, within 10 seconds someone answered the call. Right? To do that, United has to staff abundantly. Some of the people, I guarantee they are idle all the time just to get ready to answer my call. Right? So that’s a very high service level at a very high cost. But because the value the LTV of me for United, makes sense. They can do that, yep, for the dockless bike sharing, right? When we introduce the concept of service model, you cannot think, oh, we have 10,000 riders. That’s why we bring in 10,000 scooters or bikes. Doesn’t work that way, because the rider steps out of his or building there better be a bike sitting there ready to go. Yeah, you don’t expect a guy to walk two miles to get to the next
7:10
bike. Yeah, that means far more idle supply, exactly.
7:14
So the service model means for dockless sharing, you have to have like 20, 30x supply side so that the rider the demand side can be addressed readily and easily. That’s a very different kind of a break even model. And somehow I felt surprised that none of these founders, you know, when it came to pitch me, even had a clue about what that how that works, and how to build a model on that, right? So with that, I said, Look, you know, I’m happy if you guys raise money. In fact, some of them became unicorn later on, but I never regretted about not investing, because if it does not meet my own kind of a criteria, I’ll just feel happy not to do it right. And obviously, later on, the model was taking a hit, and COVID made it even worse. We all know what happened later in this landscape, so I use that as an example to say, as investors, as founders, we both have to do the right homework to understand what makes sense.
8:12
Payback periods matter Absolutely.
8:21
That will conclude this installment of investor stories. If you’re enjoying the program 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.
