163. The ‘Softbank Effect’, Financial Discipline and the Interworkings of a Top Seed Firm (Joe Medved)

Joe Medved Full Ratchet: The 'Softbank Effect', Financial Discipline and the Interworkings of a Top Seed Investment Firm

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Joe Medved of Lerer Hippeau joins Nick to discuss The ‘Softbank Effect’, Financial Discipline and the Interworkings of a Top Seed Investment Firm. In this episode, we cover:

  • The focus at Lerer Hippeau
  • The adoption and integration of the Binary Capital Portfolio
  • Why they dropped ventures from the name
  • Joe’s take on the “Softbank Effect” and the challenges and opportunities created by it.
  • how founders should think about raise amount and valuations
  • The effect of late-stage capital on early stage investors
  • The capital strategy mistakes that lead to startup death
  • Joe’s take on early-stage investors taking early exits when they are offered liquidity.
  • The strategy for their sixth, $150 million fund
  • How Joe’s team approaches sourcing, vetting, diligence
  • LH’s focus on outbound vs. inbound
  • Joe mentions a key analysis item that is often overlooked by many investors
  • Lerer Hippeau’s portfolio management process: How often they interact and what activities they engage in.
  • The impact of raise amount on outcomes


Guest Links:

Quick Takeaways:

  1. Lerer Hippeau is a New York-first, seed-first fund. They have expanded investments to SF, LA, Canada, and Europe.
  2. They write a $1M check into $2-$3M rounds. They are very active and take a board seat.
  3. The early-stage Softbank portfolio was transferred over to Lerer Hippeau. At that point Joe also made the move. This is when Sofbank decided to focus on later stage, growth investing w/ their Vision Fund.
  4. The influx of late stage capital has significant impact on liquidity. Incremental, late-stage capital delays going public, lengthening time till liquidity.
  5. Lerer Hippeau adopted the Binary Capital portfolio in a similar fashion to the way they took over the Softbank early-stage portfolio.
  6. A big challenge to founders is financial discipline. There should be greater focus on optimizing outcomes.
  7. It’s important for founders to consider taking liquidity when they can, as it offers stability even when there are temporary downturns. This allows for greater risks.
  8. Lerer Hippeau reserves 2:1 for incremental Capital in select investments
  9. 3/4 of a firm’s decision is made by assessing the quality of the team.
  10. LH runs two regular meetings: One to discuss the investment pipeline and one for a broader discussion of the firm.
  11. When approaching firms, Lerer Hippeau doesn’t focus purely on themes. They are opportunistic. They start by identifying segments of interest and then a team member dives into that segment.
  12. The “direct to consumer” space is becoming an area of increasing interest. However, it’s often overlooked how vital experience is, especially within logistics and operations.
  13. At the Seed Stage, board meetings take a back seat to planning strategy, networking, fundraising, and improving engagement.
  14. Lerer Hippeau created a talent tracker containing connections to those with engineering and sales expertise, which is provided to their portfolio.
  15. Lerer Hippeau hosts events to facilitate interactions between those in their portfolio such as breakfast sessions. These are used to promote sharing of best practices.
  16. Mutual connections are the best way to get in contact with VCs.
  17. VCs should focus on leveraging data for investing decisions– biases often impact judgment.

Transcribed with AI:

welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran and this is the full ratchet

Welcome back to TFR Today we welcome Lehrer hippo partner, Joe Medved to the program. One of the key firms driving seed investing in New York City, Larry hippo just closed their six $150 million dollar fund. Joe has had a unique path that included time at the firm that has created waves for the entire asset class, soft bank, and he’s here today to talk about his experience there, and also how Lehrer hippo has achieved the success that they have. In today’s interview we cover the focus at layer hippo, the adoption and integration of binary capital’s portfolio. Why they drop ventures from the name Joe’s take on the Softbank effect in the challenges and opportunities it has created. How founders should think about raise amount and valuations effectively stage capital on early stage investors. The Capital Strategy mistakes that lead to startup death. Joe’s take on early stage investors taking early exits when they are offered liquidity the strategy for layer hippos six $150 million fund, how Joe’s team is approaching sourcing, vetting and diligence. LH is focused on outbound versus inbound. Joe mentions a key analysis item that is often overlooked by many investors. Then we discuss Larry hippos port co management process. And finally we talk about the impact of razem out on outcomes. It was a real pleasure to have Joe on the program. He was candid about a couple of different hot button issues and gave great detail about their internal firm processes. Here’s the interview with Joe Medved.

Joe Medved joins us today from New York City. Joe is sp capital partner at Lera hippo. Previously, he was a partner at Softbank capital and associate at Constellation ventures, and began his career in banking at JP Morgan in their tech media and telecom group. Joe, welcome to the program.

Thanks for having me.

Yeah, let’s kick off. Can you talk about your path to venture?

Sure, yeah. So as you referenced, I started my career in investment banking. And, you know, I came out of school in 1999. And, you know, it was focused really within the tech media and telecom space. And it was an incredible time, actually, to be a young banker, because they just sort of needed warm bodies at tables, so they could collect fees across these banks. I mean, companies were, you know, raising incredible amounts of capital as sort of the first wave of the internet was really taking off. And I stayed in banking for about five years. And so I, you know, I went through the kind of boom and bust cycle of the first wave of the web as a financial advisor. And I just found sort of as I progressed in my career in banking, that I was more interested in working with smaller companies, and helping focus on strategy as opposed to financial engineering. And so about five years in, I made the transition to a fund that was at the time part of Bear Stearns asset management, we were our own little fiefdom sort of within that entity and focused on investing in mostly sort of the digital media sector. And I just found that I had so much more fun kind of working with those early stage businesses, I’d been in banking, I’d spent almost two and a half years in my five year career working on one transaction, which was the the acquisition of 18 t’s cable assets by Comcast has really turned Comcast into this cable behemoth. And I think that the banker in some like 100 million in fees on the transaction. I think it was the eighth largest m&a transaction in history at the time. And I just found that I just didn’t enjoy that part of the business as much on the financial engineering side. And so that’s why I made the jump over to the investment side.

Got it. And that that was with Softbank didn’t

know at the time, it was with constellation ventures. So it was a it was a fund that was actually located across the street from our office, I actually had to go into a bar nearby, take off my tie, and go in for the interview and then back across the street, hopefully without anybody noticing at that, at that point in time.

That’s pretty funny. And then how did the transition work from constellation to Softbank and then to Lehre. So

I had been at Constellation for a couple of years, and the partner that I was working for ended up leaving the firm. And so I was it’s sort of in a weird spot there. So I looked around at various options, and there happened to be an opportunity to go work with Softbank capital in their office back up in Boston actually sort of a stone’s throw from where I’d gone to school at Boston College. And the team was focused on a segment that I was very interested in and you know, I was very intrigued with the angle around Softbank Corp as the sort of primary investor out of Japan. And they’d really been one of the leading investors in the first wave of the internet. And I was really interested in working with the team there. And so I made the transition and moved out of New York backup to Boston, where I was for about seven years and then came back to New York for Softbank thereafter. Yeah,

well, I want to jump into your experience and Softbank a little bit more, but But first off, tell us about Lera. Hippo and sort of the focus there and what you guys invest in stage sector, you know, check size. Sure.

So So lair hippo is one of the most active seed investors in the country. We are we’re sort of a New York first seed first focus fund. We have over 300 active portfolio companies, about two thirds of which are in New York City. Our next largest market is San Francisco in the Bay Area. And you know, we will invest really across the country, Los Angeles is an increasing focus for us. And we also have a handful investments up in Canada, a few in Europe as well. But you know, the fund is actively focused on coming into seed rounds that for us are, you know, typically a two to $3 million round, we’re writing an average check of about a million dollars. We are taking a board seat in a very active role at the company, and helping them get to Series A. And the fun was founded by my partners, Kenny and Ben lair. Kenny had been involved in the early days of AOL and MTV. And then he he founded the Huffington Post with Arianna Huffington and Jonah Peretti. His son Ben founded Thrillist, which has turned into now group nine, which is a a large media company that’s a combination of now this and the dodo and some assets that discovery contributed to the business. And then my partner, Eric hippo, had been running the Softbank Capital office, when I joined about a dozen years ago. And Eric had Eric had been involved in Ziff, Davis sort of nearly days of publishing. And then he ended up being coming the CEO of The Huffington Post with Kenny, and when he left, the Huffington Post after was sold to AOL, we started investing in the Lair hippo funds out of SoftBank capital. So that’s that’s how that relationship started. Got

it? And just to sort of rip off the band aid here, I know that in the news there was there was some news about Blair hippo taking over the the Binary Capital portfolio companies and, you know, I don’t want to put them through a hard time here. But, you know, what’s, what’s the status on that? And what was the thought process for you guys?

Sure. So and I think really, the portfolio is in a good place at this point, they obviously went through a challenging transition. But effectively what happened is, it’s somewhat similar to what we had done when I transitioned from Softbank capital over to Larry hippo. And so Softbank capital was a fund that had most of its dollars from Softbank Corp, which I think probably as most of your listeners know, has shifted focus to much later stage investing is $100 billion Softbank Vision Fund. Now, that’s really investing globally. And that trenches transition started about two and a half, three years ago. Now, when the company decided to focus on these types of very large late stage investments. We had been operating Softbank capital as an early stage fund, it had been around for a couple of decades. And effectively when that transition happened, we felt it would make sense to transition the management of the early stage Softbank capital portfolio over to layer hippo. So soft bank remained the core LP, but the layer hippo platform, which has been built out over a number of years, and has a lot of great resources for recruiting and finding customers and fundraising basically adopted the portfolio, I transitioned over with my colleague, Graeme Brown, to effectively continue to manage actively the Softbank assets, which included investing reserves in those companies. And when the transition happened at Binary Capital, we had some common LPS at layer hippo, who reached out and had seen what we’ve done with SoftBank. And, you know, asked if it would be something that we could do with the Binary Capital companies as well. And so we’ve effectively adopted those companies, and they’ll be treated just like every other layer hippo company, and have sort of full advantage of the resources and platform that we offer there, and will continue to manage the reserves of the portfolio so that we’re in the midst of onboarding all those companies currently. Got

it. Well, glad to hear that they can, they can move on and move forward and have a great investor like like you guys behind them. So lira hippo used to be Lera, HIPAA ventures, you know, why did you guys drop the ventures? And for that matter? Why are so many firms rebranding and dropping the ventures are the Capital Partners? Sure.

So we’re I mean, we’re a very brand focused investor. I mean, we write on our website, it says that we invest in brands and for us, you know, brand is relevant for both consumer and enterprise businesses. And given that we preach so much around a brand and a brand narrative, we decided to reassess our own brand, which has really evolved since the founding of the fund. I mean, the the original fund was called layer ventures. When Eric joined it became layer hippo ventures and And, you know, over the years, there’s been some confusion, we’ve been called layer ventures layer hippo ventures layer hippo LHV. And we felt it made sense, given that we should practice what we preach, and to create, you know, a very clean brand. So we’ve made the transition just to layer hippo, and, you know, sort of updated the website and all our marketing materials and the like, just to avoid any confusion in the market. And I think, you know, I mean, in terms of the transition in the overall market, I think part of it is that a lot of models have evolved, you know, maybe there’s some sort of stigma around the traditional ventures name, but I think a lot of platforms have transitioned to the point where, you know, when I started in venture about 14 or 15 years ago, you know, when funds were, you know, pretty actively focused on, mostly on the capital element. I mean, there’s, there’s more and more activity around platform resources for recruiting and helping with fundraising and, you know, a variety of networking activities and events that that a number of funds like ours are building up. And I think, in part, it’s kind of moving away from just that, that sort of traditional venture name. And then you also have, you know, there’s a lot of entities like a beta works, or a science or an extra that are sort of combination, that a combination of both venture capital firms as well as incubators. And I think you’re just seeing that that kind of evolution happen, which is why people are shifting away a little bit from from that traditional name, there’s still plenty of amazing funds with any ventures in them. I think. I think that’s why the transition has been happening.

Got it? Yeah, it’s kind of interesting, because we’re new stack ventures.

And I would say about 90% of our branding is just new stack. And for people that aren’t in the industry, they’re like, What the heck is new stack. But everyone in the industry, you know, at least in Chicago, they know us pretty well. So I guess that’s what’s important is people in the industry. But let’s talk a little bit about SoftBank. So, lots of opinions lately about Softbank, the very large investments at late stages, the massive funds that they’re raising, I’d love your take on the Softbank effect and benefits and or challenges that is presented. Sure.

I mean, it’s been it’s been sort of had sort of a fascinating impact on the market, obviously, over the past, you know, couple of years here, I think, you know, it all comes back to the founder of SoftBank Masayoshi Son or masa is he’s now sort of within within the company. He just has this sort of amazing vision of the future. He literally has a 300 year plan for SoftBank. And so he’s he’s a, he’s a long term thinker. And, you know, if you look at the way Softbank has evolved over the years, and, you know, masa came from fairly humble beginnings in Japan, and he’s become, depending on where the stock price is, you know, one of the the sort of wealthiest person in Japan, because he’s been willing to take a lot of risks that people deemed crazy when he first set out upon them, right. And if, if you look at the business that he’s developed in Japan, he has this, he has this core business that throws off $35 billion of cash flow annually, which has, you know, they operate one of the most successful mobile carriers in the Japanese market, they have a very large enterprise business, particularly on cloud computing. So that’s been a very successful business in and of itself. But he’s always had a very global scope. And if you look at this off, make investing activities over the years, like in the first phase of the web, when Eric was helping run Softbank capital with our old partner, Ron Fisher, up in Boston, who’s who’s now vice chairman of SoftBank, you know, they were helping masa invest in kind of the next wave of Internet businesses across the globe, had been a very successful fun. And there was a period of time when he shifted focus back to the Japanese market to build out his core operations there. But he’s, he’s clearly on a sort of a great path in that regard. Now, he had bought out Vodafone’s wireless assets in the Japanese market, when they were a really sort of a fledgling company not doing well, everyone thought he was nuts. It was sort of one of the biggest leveraged buyouts in the history of Japan, turning to the most profitable wireless carrier in the world. And when he did that, he realized sort of, you know, he wants to step back and look at what I think the sort of future of the web would, would be globally, and ultimately decided that he wanted to kind of invest in the next wave of of large tech enabled companies across across the world. And you know, he’s had great success on the investing side, in particular with his investment in Yahoo in the US in the very early days, which Eric hippo had introduced him to, when, when masa became involved with as if Davis and Comdex which Eric had been running, you know, Softbank owned about a third of Yahoo, and it went public in the US. And then he also got the rights to launch Yahoo, Japan as a joint venture in the Japanese market, which today he owns half of it is a it’s a, I think, a $25 billion enterprise value business. So that was an incredibly successful investment. And then he also bought a third of Alibaba for about $20 million in the very early days. Wow. As the story goes, he had he had met with one of our sister funds and China had said have meetings with, I think like, you know, a dozen entrepreneurs, one of them was Jack Ma. And within the I’ve heard different stories, it was either within six or 12 minutes, he offered Jack Ma 20 million bucks for a third of Alibaba, whatever it was, it was a really good call, you know that that’s probably one of the greatest investments of all time, and really helps drive a lot of the enterprise value of SoftBank Corp overall. But, you know, I think given those experiences, masa feels like, you know, he wants to focus on finding kind of the next wave of Alibaba and Yahoo’s. And his strategy for doing that is raising this obviously, massive fund, bigger than anyone’s ever even dreamed of, I think in this space, and he just wants to invest in every great company that could be have drive sort of an Alibaba like return, you know, over the very long term. And I think, you know, it’s obviously scares a lot of sort of traditional investors, because no one’s sort of playing at that scale. And it dramatically changes the dynamics of any company that, you know, sort of raises a war chest from SoftBank. But I think, who knows what’s really going to happen long term, but it’s hard to bet against someone like masa. When

did he make the shift from investing early to, you know, these later stage rounds?

You know, it was a few years ago now, initially, it was prior to the Vision Fund, Softbank had recruited Nikesh Aurora from Google to come over and help really build out sort of a global investing strategy. And with the caches guidance, the team that started investing in India in particular, which is, you know, a market that has sort of a tremendous growth path ahead of it. They’ve done a little bit investing in China and Southeast Asia as well, into cash or ultimately left to see, he was interested in becoming CEO and masa, ultimately, you know, decided he wanted to stay on the CEO for a bit longer. So in the cash, you know, they mutually agreed that Nikesh would go and, you know, seek some other opportunities. But even after he left, you know, masa continued with, you know, with that strategy, and ultimately built out the sort of formal Vision Fund, which is, you know, about $100 billion. And, you know, there’s anticipation that, you know, they’ll continue raising subsequent funds of that size. You

know, there’s, there’s certainly founders that would rather stay private, you know, raise money in the private markets, not go public. But recently, I was reading, and I wish I knew the company, but I was reading an article about a founder that felt like he had to take money from Softbank, because if he didn’t, then his competitor would. And if his competitor had the war chest, then, you know, they could invest forward more in growth and take the market. So, you know, I’m curious, your thoughts on that. And, obviously, it’s a, you know, it’s a compelling position for SoftBank. But, you know, how, how is that impacting sort of entrepreneurs?

Sure. I mean, I think and I think it was the CEO of Uber, actually, that might, that might be who you’re thinking of, I think he was, was sort of okay. Yeah, cuz, you know, because there was speculation that, and I don’t have direct details on this information. So this is my speculation on my part, as well. But, you know, there was speculation that Softbank might invest in Lyft, if they didn’t invest in Uber, who’s probably a good negotiating tactic on Musk as part of fuels, if he was pushing that narrative. And, you know, even a company as large as Uber, right, which has raised incredibly large amounts of capital, felt that they would prefer to have the kind of SoftBank war chests behind them, as opposed to one of their competitors. And, you know, I think moss has generally sort of had that strategy with his businesses, including Yahoo, Japan, where he built sort of a large eBay like marketplace, you know, he’d helped advise Alibaba similarly, to really focus on growth in the, in the early days, you know, potentially at the cost of profitability to really become a dominant platform in the market. And Softbank has been very successful with these type of marketplace investments. And you know, when you have that scale of funding, you have the ability to kind of, you know, drive out your competition over the long term. And I think I think that strategy can make a lot of sense for the right types of businesses. You know, I think there’s there’s other situations that with sort of, you know, potentially smaller scale outcomes where it’s a lot riskier, really sort of depends on the business. I mean, Softbank is very much focused on businesses that have massive scale, not just like in the US or India sort of alone, but really, potentially globally, you know, the types of businesses that consume and utilize that type of capital in a proper way. You know, the one challenge it creates in the market, particularly as there are a lot of other funds that are trying to catch up raising very large funds is that sometimes there are businesses that are raising significant amounts of capital that really shouldn’t be taking that much. And it’s a challenge for the entrepreneurs and where I think an entrepreneur has to be careful is if you’re raising too much capital, you just have to be you have to be under you have to understand it sets the bar that much higher for your business and you have to realistically determine If your business has the capacity to get to the kind of outcome that warrants raising that much capital, because if not, you know, there’s been plenty of examples of businesses that have raised too much money tried to grow too quickly. And ultimately, they haven’t reached profitability, the music stop, no one wants to fund it, and they’ve got this massive preference stack ahead of them. And they’re common shares are worth nothing, right. Whereas had not raised significant amounts of capital, potentially, they could have sold the business at a much lower level, which would have made all the early investors in themselves incredibly happy. Right. So I think, you know, it only makes sense for the right for the right types of businesses.

Right, right. Yet, the program is called the full ratchet. And part of the reason for that was to, you know, we’re trying to demystify the asset class and alert both investors and entrepreneurs at the early stages to some of the, you know, the downstream unintended consequences of doing rounds with different terms that can affect the common stockholders. But, you know, how,

how about the investment side? So how do you think, you know, this influx of of late stage capital is affecting earlier stage investors? You guys included? Yeah,

I mean, I don’t think it’s had an incredibly, you know, I don’t think it’s really challenged the market that much, it seems sort of changed dynamics in a significant way, right, because these larger funds are not necessarily competing at the seed level as of yet, right? I think where it changes things is when, you know, the companies are getting to a scale where there’s a potential, there’s maybe there’s potential near term liquidity. And, you know, instead of going public, or, you know, considering a sale, they’re taking on this incremental capital, and it’s not just from Softbank, but from, you know, a lot of the other funds that are writing very large checks, I mean, there’s a lot of, there’s a lot of, you know, sort of venture oriented or venture growth funds that have raised, you know, north of a billion dollars, want to put a bunch of money to work, when they put that money to work, it just, you know, it lengthens the time, the path to liquidity. So I think there’s a, you know, a variety of flavors of seed funds, you know, some seed funds are more focused on companies that are very capital efficient, that might sell for 50 to $100. million, and drive, you know, really high quality returns, you know, we tend to focus on businesses that have higher potential outcomes, given the size of our fund, you know, we’d like any one investment to be able to return the fund. So we’re certainly looking for those larger outcomes. So we’re, we’re more comfortable raising incremental capital over the long term. But you know, even even some of those businesses just depending on how they’re performing, you’d prefer they not go out and raise something very large. So I think it just, you know, it can challenge financial discipline, in many ways with, you know, founders that might have kind of stars in their eyes about raising very large rounds, and not thinking about optimizing outcomes. And I’m not opposed at all to companies raising really significant rounds long term, but I think it’s, I think it’s important for founders to think about, you know, taking some liquidity when they can, if they really want to go for broke one of my best stories, you know, Foursquare in New York as an example, which was a company that was on a really steep growth trajectory, you know, really buzzy company, when they raised one of their, one of their rounds, in the early days, the the investors were really pushing the founders heavily take a little bit of money off the table. And as the story goes, the founders, you know, we’re not necessarily interested in doing that. But at the end of the day, it was good that the, you know, the investors push them to really do that, because it allowed the founders, you know, particularly, you know, one of the founders left, one of the founders stayed, but, you know, it gave them the sort of financial stability to kind of ride out a wave when, when the company went down for a bit, and come back and turn it into a, you know, a real business over time. It’s, you know, it’s Foursquare has really significant enterprise value now. And it’s good that the founders were able to take a little money off the table at the right point in time, after they built it up, to give themselves financial stability, so they could take some greater risks. Yeah,

it’s interesting. How often do you think Capital Strategy mistakes by startups and founders, you know, lead to great businesses blowing up and fire sailing or going to zero?

Yeah, I mean, it happens, it happens more often than I’d like to see, particularly in this market when there are very large funds, right? I mean, if you look at the way, if you look at the way fundraising has gone, I mean, there’s obviously there’s a lot of sort of seed funds in the market a lot of precede funds, particularly on the West Coast, right, which provides kind of ample access to capital. But even more so, you know, at the the funds that are writing the kind of series and a B checks, series A and B checks that have become really substantial, you know, instead of putting 15 million to work around, maybe they want to write 25. You know, and sometimes it just it, it’s sometimes if it’s not particularly it’s an inexperienced founder, they you know, they look to move too quickly. I was involved in in one company that I remember we raised, we raised a series a substantial Series B round was really hot business, very promising company, and I can recall it the day after the round was raised. The founders reached out and said, Hey, I’ve been talking to the new investors. And I think we should try to grow twice as fast. And that company ultimately had a very poor outcome, in part, because they raised all that capital tried to grow very quickly before they really had unit economics working. So they were burning significant capital growing rapidly, they ended up actually being able to raise another significant round thereafter. But ultimately, at one point, like the music stopped, because they needed to raise really significant capital still to get to profitability. And they got to a point where there just weren’t investors willing to, you know, take it further at that point. And they had already raised such a massive amount of capital, that they had a large preference stack, so their money was kind of useless. And it was challenging to get anybody to come in and recap it. And it was a really poor outcome, when had they raised honestly, less capital and grown more slowly, you know, they probably would have had a much better outcome. So it’s, I think, kind of in heady times, it’s, it’s still important to maintain financial discipline, you know, as if, as if you may not be able to raise that next round, you have to really think about that potential path to profitability when you’re raising significant growth rounds. Yeah,

yeah. And, you know, over the years, we of course, have heard about the series eight crunch and startups, you know, not being able to access capital at Series A, but the other side of that coin is, there is a lot of capital at both A and B. And those investors, when they get conviction in a deal, they want to, they want to put a lot in, they’ve got their ownership targets. And, you know, just with our portfolio, a very strange dynamic that I wasn’t really expecting. You know, each of our companies has raised up rounds, and many of them have moved on to Series A, a couple are entertaining B’s, but what we found is that the series A investors in in, you know, be investors are offering to buy us out of our positions very frequently, they want to optimize for ownership. And one way for them to get more ownership, if not from the company, you know, is from the earlier stage investors. And I think it’s kind of interesting, I don’t know if there’s, you know, too much capital at those phases, or why this is happening. But it’s, it’s strange, because it’s changing the way that we look at venture, you know, this is an indie powerline industry where everyone’s trying to hit that maybe one in 20, or one and 30 in their portfolio that goes to 100x 1,000x Plus, but you know, if you can get a five to 10x, five to 15x, in 18, to 24 months, and, you know, rinse and repeat that that’s pretty compelling, right? From a DPI standpoint, you can put a lot of wins on the board, and you could be at the top of the board and dpi. So, I don’t know, i How are you guys thinking about that? Clearly, I don’t expect that you’re exiting your positions. You know, my expectation is that you’d be taking pro rata and probably putting in more money in your winners. But I I’d be curious to hear your take on that. Yeah,

I mean, it’s, if you look at the various cycles it Yeah, it’s not a great signal when people when, you know, funds that are typically focused on investing primary capital, right, so the dollars that are really going into the business to build it are, you know, so focused on ownership, that they’re willing to, you know, do a lot of secondary to very early stage, doesn’t mean it doesn’t work. But it’s not, it’s not something that’s, you know, sort of common over historical cycles. But, you know, to your point as well, we look at it similarly, like, within seed, you know, it’s a small portion of companies that are gonna drive the vast majority of returns across your portfolio. You know, we like a number of other funds have have raised our we call it our select fund, it’s, you know, some other funds, call it an opportunity fund, but it’s incremental capital to enable us to really, you know, triple and quadruple down on our winners. And even when I was at Softbank for years, I recall my partner’s saying, like we never, we were never disappointed by putting incremental capital into our winners, right. And you should have, you know, sort of asymmetric information in those early stage businesses and have, you know, a good idea across the partnership as to sort of which funds which companies rather are likely to drive the largest returns. And so yeah, we tend not to sell out of our positions in kind of the fastest growing companies until they’re they’ve reached a fairly mature state. And I think it depends kind of where you are in the fund cycle as well. Like, if you’re, if you’re getting your funds going, you definitely want to demonstrate some liquidity for your LPs to help raise incremental funds. And I mean, if you can make 15 times your money in 18 months, it’s hard to turn that down. Certainly, yeah. You know, or, you know, potentially what you do is you take a piece of it off the table. And, I mean, we’re honestly even seeing that somewhat later stage companies. You know, I think companies that are raising money from Microsoft bank, you know, they’re certainly heavily interested in ownership and need to be given the size of their fund. And so some of the early investors are selling, you know, a piece of their ownership. And some founders are doing the same, so that you can lock in a return and but still Oh, you know, kind of ride some some additional upside? Right.

Right. And there’s always always questions about discounts based on chair class or, you know, are you getting full value, but, but that’s probably a topic for another time. So, you know, you talked about your own fund and your own approach. I noticed the SEC filing that you guys closed, I think it was fun six at 150 million. What was the strategy for that fund? Is that both seed and opportunity? You know, are you going to allocate a certain amount for reserves there? Or, you know, is it kind of status quo doing more of the same for what you guys have done in the past?

Yeah, no, the fun strategy remains, you know, consistent with what we’ve done historically, right. So we’ll continue to focus the seed, sorry, focus to fund at seed writing checks have on average, about a million dollars, you know, we’ll probably make about 40 to 50 investments across that portfolio, and we’ll reserve kind of one for one across all those businesses. And, you know, so we’re going to maintain a heavy focus at seed our, the our select Fund, which is our opportunity fund, is what’s utilized to put in incremental capital and more sort of growth stage rounds more like kind of Series C and D. But out of the core fund, we will, you know, make, you know, lead investment, the seed round, and then continue to support the company at a and then and then it be and then usually at that point, it’s when the opportunity fund comes into play, kind

of, and then how do you guys process deals in and operate internally within the firm? Is it you know, every partner kind of runs their own deal flow and works with, you know, associates or analysts to kind of run those up the chain and then propose it that at, you know, your investor meetings? Or is, is everything kind of a team effort, and you’re looking at stuff together? You know, how do you how do you guys approach sourcing, vetting? Diligence?

Sure. I mean, it’s a really, it’s a really effectively run cohesive group. And I can’t take any credit for this, because I just joined a couple years ago, but I think if you look at a lot of traditional firms, particularly of this size, in terms of team and dollars, you know, there’s, there’s typically a traditional kind of Monday partner meeting where, you know, deals that have been sourced and diligence by, you know, a core partner, and usually a junior team member will be presented to the group, often with a memo presented beforehand, which was certainly the format that we had when I was in South Bend capital for about a decade, but it seemed, you know, we feel like you obviously have to be able to work quite a bit more rapidly. And honestly, much of the decision making is, is based on the team, right, as you know, your stage, I mean, as well, I mean, we’re probably three quarters of your decision is around the quality of the team, if not more, there’s often just isn’t as much to diligence at that stage. Right. But so the way we function as a partnership is that, you know, we will have deals come in through a variety of sources to make him come in through the partners, they may come in, through the junior investment team, you know, the vast majority investments, honestly, that we make often come through our existing portfolio. So it’s through founders that, you know, have friends that are raising rounds, and and recommend us to their their friends. And, you know, typically we’ll we’ll have a first meeting with either a partner or a junior member of the team. And on a weekly basis, we actually do our partner meetings on Tuesdays, you know, we will bring up we have, you know, sort of our investment opportunity pipeline, we will discuss that with the broader group, get a sense of everyone’s interested in the business model, feedback on the team. And then we think about people within our network, who can be beneficial references for us, and hopefully, beneficial conversations for the companies as well. I mean, I think that the best references you can get as an investor is, you know, introducing a potential client or partner or recruit to a business, someone from that industry that understands that, well, that can give you very candid feedback on the business and can also help expose your network to that company. So they understand, you know, what value you can bring to the table. And so, you know, typically will conduct a number of those types of references will have the companies meet with multiple partners, often one on one, we don’t necessarily do kind of a song and dance in front of the broader team as part of the discussion. And I think, you know, we tend to run a fairly efficient diligence process. And I think, you know, the group has just done a really good job at building a lot of sort of process and protocol around it. So from a deal tracking perspective, we use streak for, you know, which is a CRM solution. Yep. So it’s a great tool, right, it is easily add deals to the pipeline, sort of directly from your, your inbox and share the information across the team. So you know, leveraging streak, we’ll have our kind of deal pipeline each week that we review in detail with the group. And then we also spend our our partner meetings, you know, half of them focused actively on the existing portfolio companies that need support that are raising additional capital, et cetera, and determine how we can help. So it’s it’s a really efficient process in that regard. You mean usually on Mondays, that sort of junior investment team, we’ll help kind of filter down the pipeline and we have a broader discussion with the group on Tuesday and determine, you know, which ones we’ll prioritize for that week and move forward from there. Got

it. Got it. You know, you talked a little bit of About outbound versus inbound, you know, sourcing deals through the portfolio company founders, and then also, you know, your team going out and finding deals. I’d be curious, you know, sometimes I hear investors say, I’ve been looking for a startup in a certain sector that’s doing X, you know, do you guys have pre identified ideas or categories? Or solutions, that you’re actively searching for searching for great teams that are addressing those? Or are you a little bit more opportunistic, or somewhere in between?

You know, it’s honestly a mix for us. I mean, part part of our strategy given that we have, you know, we have a fairly broad focus in terms of sectors where we’re investing across consumer and enterprise, we don’t necessarily want to, you know, encumber ourselves in terms of being purely thematic, because so many trends emerge that, you know, we may not necessarily, you know, have thought about previously. So, we certainly are opportunistic in terms of kind of what tends to flow in, and we, you know, as certain sectors are emerging, we tend to see a number of companies and founders going after those segments, you know, that said, though, we will identify certain segments that are of interest and, you know, potentially there’ll be an individual on the team that will sort of dive into that space. Like one example, honestly, is, and this just came out of an experience. And I love the story that my, my partner, Ben tells about Casper, whereby he had gone out to buy a mattress with his wife, you know, he was at one of these old mattress stores, and he walked out of there thinking this is the worst consumer experience I could possibly store. There’s a million mattresses one cost $10,000, one cost two, I can’t tell why there’s a difference. You know, there’s like, very little transparency, terrible, we’ve all been through it. Yeah, it’s it’s a horrible experience. And, you know, he came out at saying, like, there has to be a better way to sell mattresses. And he had spent some time with folks on the team really digging in and understanding like, what this is a tremendously large market, with very high margin products, with really old sort of tired brands that don’t speak to millennials. And, you know, as he was thinking through that, he came across the CASPER team, and was really interested in what they were building. And that’s how we ended up investing in that company. And, you know, it really came out of that sort of experience. And ironically, honestly, like Ben had, you know, gone out to a number of his friends in the market, including us and Softbank capital at the time to, you know, raise that seed round. And most people, including ourselves at Softbank, unfortunately passed at the time thinking like, well, how often do you buy a mat? I mean, none of us, we could probably remember the last time we needed purchased a mattress. Right, right. But I think Ben saw the sort of consumer experience and how tired and old it was, and knew that the millennial consumer in particular, would want a new way to purchase that item. And obviously, Casper has been one of our best investments. So you know, that one was sort of based on individual experience. And then we’ve had, you know, we have had other segments, including, like the marijuana industry as an example. And certainly things around blockchain and crypto, where we’ve had members of the team that will really sort of dive into the segment and kind of put together a report so that we can think about sectors are really opportunities within those verticals that we should be going after.

Talk about something that’s overlooked by many investors, you know, something that maybe isn’t being written about, but you think is critical in in your investment thought process? I

think, well, you know, one of the segments where we’re, we’re very active is in the direct to consumer space. So our team has seated companies like Warby Parker and Casper, as I referenced Allbirds glossier Everlane, Chubbies, a lot of really great, sort of direct to consumer brands. And I, you know, I think it’s becoming an area of increasing interest, you know, sort of across the venture landscape, particularly as everyone’s seeing sort of Amazon disrupt the broader ecosystem, I think there’s even an opportunity honestly, to, to create some Amazon first brands, you know, while I think a lot of traditional players are kind of afraid of going there first, but I think one of the things that’s really overlooked in that segment as you dive in is the is sort of how critical it is to have someone who is incredibly experienced, and well network into the kind of sourcing and logistics and operations field. I mean, it’s almost like thinking about investing in if you invest in a software business without a CTO, you know, you’re a little nuts to do that. But I think the same holds in the consumer space, just given the challenges that you have, you know, most venture investors are so focused on tech enabled businesses that, you know, scale with code, people often overlook how critical it is to have someone that can think about inventory management and sourcing, which is something that has killed so many direct to consumer businesses, even ones that have really significant demand, you know, they just screw things up, because they don’t ship things on time or, you know, kind of find the right, the right manufacturer or three beyond those kinds of things. So I think that’s a critical element to think about when you’re investing in that space. Interesting.

So fulfillment, inventory, management quality, probably price, if ordering is often there, they’re probably paying more for their inventory than they should. I mean, those are some of the common missteps that direct to consumer businesses are facing. It’s

often that I mean, like, you know, particularly when you know that maybe the holidays are coming up and things get busier. or you don’t understand that, you know, Chinese New Year means that your manufacturer may not respond to you for three or four weeks. Right? It’s challenges like that, that, you know, if you haven’t invested in the segment before you presume it’s a pretty sort of simple thing to handle, but it really can just destroy these businesses. I mean, you you could have a massive amount of demand. I mean, how many of these like, you know, you’ve seen so many of these crowdfunded businesses on the Kickstarter, somebody that does that raise, effectively, you know, it’s sort of revenue based financing, raising, raising money and pre orders and are never able to deliver because they ultimately didn’t really factor in all of the costs. Right. And so I think that’s just, you know, that has killed a lot of promising businesses without having, you know, that skill set on the team.

Yeah, yeah. Well, everyone says hardware is hard. And I think that, you know, it extends to CPGs and consumer products. However, there’s a huge opportunity there, right. I mean, startups in general, are hard. People get burned on angel investments, and then they write off the entire category. Yeah. But if you find the right team that’s addressing something hard, boom, you’ve built an incredible moat, and hopefully a brand at the same time. Yep. Interesting, um, talk a little bit about portfolio management, you know, on what cadence Do you speak with your portfolio company founders, you know, how are you providing value on a regular basis? And how does that change over time?

Sure. So in lair hippo has evolved. And we were our sixth fund, like I said, the the initial fund was an $8 million fund that was mostly, you know, Kenny, and Ben’s kind of, you know, money, and they’re their friends and family. But, you know, as the fund became more of an institutional investor, you know, we’ve shifted focus to really take board seats now on all of our companies, you know, we always lead or CO lead the investments we’re making at this stage, and really want to be intimately involved with businesses and supportive. And what we tend to do is, we will really be actively involved with the company’s, you know, probably, in particular, for the first kind of 18 to 24 months of the company’s life, right. So our goal is to support the businesses at seed, get them to a series a where we can help attract some really high quality investors. And we now have a really extensive network, particularly in the West Coast, have a lot of funds that are writing those kind of later stage checks that will come in and join the boards and often kind of take over for the role that we’ve provided, or at least on a board level, right. So we’re, you know, in its seed, you know, we’re not thinking of having a board meeting every four to six weeks, where you sort of regurgitate a bunch of financial information. For us, it’s more about, let’s get together, let’s talk about sort of the key strategic decisions, you need to make the key hires that need to be made, you know, partners you’re trying to connect with, and then particularly around the fundraising process, let’s really help you formulate your pitch. And think about not just the kind of five funds that you should really be targeting about maybe the five partners that are really a great fit for your focus. And so, you know, our goal is to, you know, maintain that level of engagement, until we can help bring on institutional investors that will really take over that role on the board. And then we sort of recycle our time with new investments. But the companies also, you know, maintain access to the platform resources that we’ve constructed, you know, which includes, for example, like a database, we call it our layer, hippo talent tracker, which is a database of high quality job candidates that we meet every day, you know, someone on the team is probably meeting someone new, who’s, you know, thinking about moving companies, or, you know, shifting from corporate to startup, we’ll help filter those candidates and circulate that list of engineering sales, you know, executive leadership to the portfolio every two weeks. And then we also have a database of sort of who everyone’s you know, you could come into this service we have and say, like, I’m a series B Company, located in San Francisco focused on SAS, who else in the portfolio has raised at random from what investors and so you can help get feedback, etc. So, and then we host a wide variety of networking events as well, which includes our early stage companies all the way up to our most mature businesses, so they can all share best practices. So there’s sort of the benefit of the of access to the broader portfolio, which, which, you know, now the Softbank capital companies in the binary capital companies have access to as well, you know, so that’s, that’s always there, but in and then in terms of the board role, like I said, it’s usually this first kind of couple years of our relationship with the company.

You know, I always struggle with how to connect portfolio company founders, right? Because people are busy, and you just do it over email, or it sounds like you guys put together some events where they can interact, is that the primary method for facilitating interactions are, you know, are you making email introductions? Or do you have a Slack group?

Or, you know, what is the way that sort of your portfolio company founders interact with each other? Yeah, we try to

offer sort of a variety of tools for that so that everyone can kind of optimize their time, right? Because as you can imagine, if you’re a new direct to consumer business, like you know, everybody wants to talk to the head of opposite Casper or the CTO of Warby Parker, right? We obviously can expect them to spend you know healthier time answering those calls, but so so we’ll have a variety event. So for individuals like that, you know, will will often host a like a breakfast session. and invite they’re sort of 15 peers at at similar types of companies, they can come in and you know, sort of share best practices as a group, we also have, you know, email forums where, you know, say someone’s like, you know, I really need to find a branding agency or I need to find a, like an employment lawyer, like, who’s who’s somebody utilize that we can share. And so those conversations kind of naturally happen on our email list, we also got to maintain a list of vendors that can be shared amongst the group. And then we’ll, you know, turn of events to also we host, an annual CEO forum where everybody comes together, and we’ll bring, we’ll bring in kind of, you know, luminaries across the industry, as well as those within the portfolio to share there as well. And then certainly, when there are, you know, kind of discreet requests that people have, you know, we can we can make those connections as well. But we always try to be mindful of, of everyone’s time, you know, particularly those companies that are at significant scale that everyone’s always reaching out to, you try to do kind of a double opt in intro on those those types of situations.

Yep. Yep. You know, I was at a conference a while back, and Jeff Clough, VA, and Manu Kumar and Hunter walk where we’re chatting about board seats. And I think on one extreme, one of them was saying, I can only handle five board seats at a time. And on the other extreme, somebody was saying, they they do about 15 at a time, how, how can you guys, you know, serve on so many board seats? I think you said, you’re gonna invest in around 50 companies out of this fund, you know, how do you manage that load with, you know, portfolio company management being on so many boards?

Sure. I mean, and of course, it’s, it’s, I think it’s incredibly challenging, particularly at seed, because that’s typically the time when, you know, a company needs them the highest level of support. Right, you know, because they just they haven’t been able to fill out their their overall team yet. So

tribunals, you see Joe draperies.

And then yeah, then they want you there day week, right? Yep. You know, and honestly, part of it depends on the founders to like, I’ve always found that, you know, you don’t want to force yourself upon these teams, right. I mean, I’ve had some founders that want to have lunch once a week, but I have others that, you know, want to connect once a month. And, you know, there’s there’s a responsibility, obviously, on the founders part to provide reporting in the light. But you know, the concept is that you’re, you’re really in the loop and helping provide strategic guidance where you can be most helpful, but I think, you know, with our founders, you know, our expectation is that we can, you know, connect with these founders every, you know, kind of one to two months, depending on the stage business, when we’re at the board level. And typically, what happens is, each company is assigned a partner, as well as a junior member of the investment team. And then they also have access to the platform, as I mentioned, so, you know, a lot of the communication, you know, maybe around our sort of quarterly, founder events, which, and we have we host, even on the West Coast now, I mean, in San Francisco in LA, we’re now hosting events to bring those teams together. So we can spend time with everyone and make sure that the companies are connecting with each other as well. But yeah, I think it varies is you It depends on the focus, too, right? If you have a fund that is investing in it, we’re doing as much as a couple investments a month at this point in these early stage businesses, and we’re going to own about 10%, you know, we can take more board seats than a traditional fund that’s going to take, maybe they’re going to make 18 to 20 investments over three to five years, but stay on those boards for seven to 10 years, right? Because we’re gonna stand on the boards for an average of maybe two years. Yeah, right. So it gives us the capacity to be involved more actively with more companies. But I mean, no doubt, like having this these sort of platform resources built out and all these events and activities, you know, helps us do that more efficiently. And it works because we have a breadth of businesses, right and enough that have sort of common things they can share with each other. It’s not as easy to do that, obviously, if you’re not at that level of scale.

Joe, if we could cover any topic here on the program? What topic do you think should be addressed? And who would you like to hear speak about it?

You know, I think really one of the hottest topics that we’re seeing sort of, I think, you know, within our kind of peer circles these days is around leveraging data for for investment decisions. You know, I think social capital in particular, I think Jamaat there would be a really interesting interview, you know, he’s he’s trying to leverage incredible amounts of data to take sort of bias out of investment decisions, which I think is really intriguing. You know, I think a tool that a lot of funds lately we’re starting to use is a second measure, which is a Bessemer backed company, which has all kinds of interesting data run consumer wallets, you know, I’ve had funds reached out to us about speaking to some of our companies that they see are gaining an increasing share of wallet in certain industries. So I just think there’s, you know, every industry, including venture has the potential to be disrupted by data and technology. And I just think it’s an intriguing segment, I still think, you know, venture is a mix of art and science. You know, a lot of the art is particularly at seed when you’re investing in people early on, and it’s part is also very much relationship driven, right. I mean, you you know, the reason so many funds are looking to build out a lot of these platforms and resources is to, you know, generate strong reputations in the market as supportive investors. I mean, because you may be, you know, brilliant data scientists. But if people don’t want you on their board, then then they don’t have to take your money. There is some balance around it. But I do think it’s a, you know, really intriguing topic. That’s, that’s worth addressing. Right.

Joe, what investor has influenced you most? And why?

I probably have to pick two if I’m allowed to do that. So I think, you know, one is definitely Eric hippo, my partner hip. I mean, I, you know, I really, my venture career really, sort of took off at Softbank capital. And Eric had run our New York office. And Eric had come from a very successful operating background. And he’s, you know, he’s really, really one of the most efficient investors I’ve sort of ever seen or worked with he, you know, he doesn’t, he doesn’t allow his emotions to be, you know, to really sort of drive many of his decisions. And he’s very fair, with founders, very open and honest. And I think he’s really helped teach me to be a much better investor. And then the second one I’d pick who’s a peer of mine is my foreign partner from Softbank capital, Marissa Campisi, who is is someone who’s like, she’s a very, she’s actually probably a very different personality than Eric, but she’s a very passionate investor, who has really taught me really how to help assess the potential of founders as well, like, I think I, as an investor, my early days really would become a lot more enamored with, you know, sort of the business model and concept and not focuses heavily on the team. And I think she’s someone who just really has a nose for great founders, great deals as well. And so she’s helped me to change my lens in that way. So I pick Eric Mercer,

right. And just wrap up, what’s the best way for listeners to connect with you?

You know, I think the best way I think, to connect with us and I’ve actually been I’ve written a blog post on why VCs never respond. The best way, I think, to connect with any VC is through a mutual connection. But just in part, because, you know, VCs get so many requests. And it’s not that we’re trying to be jerks in any way, but like, you need to set some level of filter. And I think, and I’m sure it can be frustrating to entrepreneurs, you know, if they don’t have sort of those direct connections, but, you know, the way it’s often perceived in the industry is like, if you want to be able to get to us, you have to also be able to, you know, we want to know that you can get to customers that you don’t have connections with and partners and recruits. And so there’s nothing better than coming through, you know, one of our founders, or some other mutual connection, and if that’s not a possibility, then I think, you know, demonstrating that you’re sort of a scrappy networker, like attending events that VCs will be speaking at, or participating in particularly, I think, really niche focused events, I think one of the best ways to meet investors is to figure out sort of which smaller format events someone is attending that are filtered with people who are, you know, clearly interested in the same segments that they are like, I think, like I love Matt Turk from FirstMark capitals meetups that he’s built around hardware and big data, you go to those events, and I like attending them, because it’s people in it. And he, these are segments I’m interested in, I know that I’m gonna go there and meet other founders that are specifically interested in those events. I think it’s a lot harder to, you know, meet someone who’s speaking at like, TechCrunch Disrupt who’s gonna stay in the green room the whole time, and you know, run out the second the conference is over, because there’s like, 1000 people there. So, that’s my two cents.

Good. Well, I’m in light of that big thanks to John Gannon, for making the connect between us. And thanks for doing it. Joe. This was this is a lot of fun, and I look forward to potentially sharing the cap table someday. Sounds great.

Thanks for your time. All right. Bye, Joe.

All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email, let them know what particularly resonated with you. I can’t tell you how much I appreciate that. Some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same compliment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over prepare, choose carefully and invest confidently thanks so much for listening