Rob and Josef talk podcasts, and comes clean about his awkward intro to Nick Moran.
Nick talks about his path to becoming a General Partner of New Stack Ventures and the host of The Full Ratchet podcast. We talk decision-making as investors, and advice for founders, including the most common mistake: building a product then trying to find a market for it. Then dive in to address the problem of matching opportunities to investors, whether it’s founders pitching VCs, or VCs pitching institutional investors.
Rob and Nick connect as founders-turned investors, while Josef jokes about the Insane Clown Posse in a truly additive and valuable fashion.
Who does Nick see executing? He calls out two companies that have pushed through the pandemic, Flamingo and Tripscout.
Full Transcript Below:
Welcome to execution is king, the Great North ventures podcast. Today we’re joined by general partner of new stack ventures, Nick Moran. He’s also the host of the full ratchet podcast. With me today also his general partner of Great North ventures Rob Weber. Thanks for having me, guys. This is such a pleasure to be here, Rob. Always good to see ya. Thanks
for joining us, Nick. First starters, talk a little bit about how you became a venture capitalist. And also tell us about a little bit about your work with the full ratchet.
Yeah, you got it. I mean, we’ve talked in the past, it was a bit accidental. This is my second career. So I started out in corporate America, doing m&a, you know, scouting out early stage tech companies to buy through a roundabout series of events, I ended up being an entrepreneur within this organization taking a product to market over three years, working with a large r&d team of 30. And we had sort of extraordinary success with that product. I was a beneficiary of that success and was able to sort of leave corporate america and, and figure out my next path in life as a young man when I was about 32. So I moved back to Chicago with my wife, I started angel investing and, you know, fell down this rabbit hole of venture and startups and, you know, how do you build the next transformational multibillion dollar tech company? And yeah, through that series of events launched the full ratchet, I think it was, maybe at best a clever hack to network with some folks on the coast. At worst, you know, it was just kind of a fun program for me to learn. And it really worked out. I mean, I think I was early to the podcast thing and got lucky. The audience sort of exploded, you know, before there were 1000s and 1000s of podcasts. And that resulted in a lot more deal flow than I knew what to do with and sort of snowballed into this investing for newstagged. ventures.
And you’re up to almost, is it almost 300 podcast episodes so far? Is that right?
Yeah, I think so. It’s probably more than that between we do these special segments in between episodes. So I can’t imagine how many we have total. But I would bet how it gets it’s more than 500 at this stage.
Yeah, it’s really impressive. I was just talking with Nick before the show about these great episodes he does with investor stories, that are just great little bites. So if you have a minute, check out the podcast, that episode I’m talking about the last one is about 11 minutes long. And it sees for investors giving post mortems on these companies that failed. And it’s just as super interesting, especially like the example around the one that failed due to COVID. Because it just this excessive headwinds and stuff. But there’s some great points from Great Investors on that podcast, urge you guys to check it out.
Yeah, I think part of the context that makes your experience, Nick, as he talked about it, you know, so interesting is having been on both sides of the table, you know, building a product, and then spending all this time interviewing all these investors, and then, you know, actually running a fund. But you know, especially as we think about, like, the product side, that’s kind of the background that my brother and I had before we started getting more adventures, you know, after, you know, spending so much time in this space. What are some of the takeaways you have, you know, for new founders, you know, in terms of product development? What are some of the common mistakes that you see, or what advice would you have, and I know, your fund is kind of in the pre seed seed stage was very early, in fact, earlier than probably a lot of other venture funds. What would be some of the advice that you would give to, you know, a first time founder who’s building their first product?
It’s a good question, I think, sort of classic mistake that still the majority of entrepreneurs make, even though we’ve we’ve said this advice over and over again, Rob, you and I have talked about it is, you know, they build a product and then look for a market later. Actually, just last week, we were talking about this episode I did with Dharmesh stacker from battery, right. And he was saying one of the weaknesses with doing investments in serial entrepreneurs. So folks that started and had success with a tech company from a previous generation is often those types of founders from you know, that learned in an old generation of tech, they often want to build super powerful tech, and then go out and you know, find a market for it. try and convince customers that this is the solution to all their problems. And in the modern world, in the modern tech world. That’s just not how things work. You need to prove value up front. You need to deliver ROI and value super fast. I think Dharmesh, his rule is in 90 seconds or less, you know, the end user needs to understand why this is transformational for them and makes their life better. And so we’ve seen this big shift to a focus on customers focus on needs, you know, what are the key problems that you’re facing in your work life or in your consumer life? And then how do we reverse engineer a solution that really delivers on on that problem? So if I were to give advice to the early stage founders, it would be you know, become obsessed with your customer, find your ICP, your ideal customer persona, spend time in a market, discover the key insights, you know, what are the key challenges facing that market, and then figure out how to build a solution that meets the need, you know, don’t just just because you’re a developer, and you’re a talented builder, that doesn’t mean you should go out and build some super powered tech, and then just assume that the market is going to love it.
Do you think that’s a consequence of tech really exploding out of, you know, the confines of being its own sector, and just kind of taking over every sector? that that that shift away from just being able to build something great, and then figure out a way to sell it, versus having to build to actually fulfill these needs?
Is that Yes, I think so. Joseph, I think it also goes a little deeper. I think it’s a mindset issue. And I think it’s, it’s the victim of arrogance, right. So we all have a bit of confidence, and maybe maybe a shred of arrogance, some more than others. But when you are arrogance, you believe the world operates like yourself, you believe that the mindset of the consumer base is much like yourself. And so you think that if you can build something, that’s your ideal product, right? That’s your ideal technology that ever the market will come? Right? If you build it, they will come? The reality is that, you know, if you’ve met one consumer, you’ve met one consumer, right? There’s a lot of shapes and sizes, there is no one size fits all anymore. That just doesn’t work. And so you need to figure out, you know, what are the segments within the market? What are the consumer groups, or the buyer groups within b2b that have a similar philosophy or ideology or buying behavior or need set, and you need to you build products that really serve a problem and serve a need. So I think it’s a problem of mindset. And it’s folks thinking that the rest of the world operates like themselves. And that’s just not the case.
It’s interesting, I do think there’s a sort of fine line between self confidence and being open to feedback, right. And I think in entrepreneurship, like you kind of have to have a balance, I think the best entrepreneurs app have developed that strong customer empathy. So they can kind of wreck, you know, they can take the feedback loops, and kind of, you know, bake that into their product development. It does take a degree of self confidence, though, because you can’t have every, every single feedback session or artifact, you know, can completely push you off your strategy. So it’s kind of a fine line of being a good listener, but also having, you know, some confidence in finding the right path forward. Right. And when you are building out your products in the past, like how much do you stock? Do you put in just like the systems for startups? Like, are your real vocal proponent of kind of lean startups and all the, you know, systems behind that? Or are you kind of take a more like open approach to, you know, in terms of the systems that these entrepreneurs are utilizing to kind of bake their strategy or their product development?
Yeah, that’s a tough one, I would say, Yes, I am a proponent of the lean startup, but more at the theoretical and philosophical level, I think some entrepreneurs can get maybe too caught up in the tactics, and you know, the details with that and chase their tails a bit. I mean, to your point before, you can’t be so wishy washy, that all feedback from customers finds its way into the product. Right? We like to say that when we’re selecting founders, or we’re investing in founders, we like to find people that are incredibly stubborn about their vision, but incredibly flexible about the path to get there. Right. So you need to have a really strong vision, here’s where we’re going. But you need to be incredibly receptive to the market in the customers and how the product actually manifest in the path. To tie this back to my experience with the product. I’ll give you a simple example. Right? I was building a handheld device, right? It was a handheld device for measuring compounds in drinking water. So things like monochloramine or chlorine or nitrate or iron, right. And a huge number of the customers That I did testing with said, I would like this to be touchscreen. Right? We launched this product in 2013 ish timeframe. And there was a big proponent of customers that said, I really need this to be touchscreen, right in the markets that we’re testing. Well guess what the reality is, there’s a lot of cold weather climates, where people are doing this testing on the back of a pickup truck in sub zero degree temperatures in places like Minneapolis, or Chicago. And they’re doing it with huge gloves, and big parkas and a hat and goggles. And you can’t have a touchscreen device in that environment. So this is just one simple example of the overwhelming feedback was we want touchscreen. But when you look at the markets we’re going to sell this product into it was not a viable decision for the product, right. And so that’s just one small thing. Like you need to collect all the different information from the customers, but it’s the job of the product manager to decide on the solution. Right? It’s the customers that surface the problems, the product manager needs to find a solution that most appropriately services the market.
That’s really interesting. Well, yeah, bringing up, you know, kind of the Midwest in Chicago. I know, that’s where you’re based. Can you describe a little bit about your experience, since you moved back to Chicago? What is the startup ecosystem like there? For those who are unfamiliar?
It’s exploding. I mean, I’m not on the ground in Minneapolis, I’m sure you’ve seen things really develop and evolve in your ecosystem. But in Chicago, I got back in 2012 2013, in 1871, had just opened, which is sort of the incubator startup Mecca. Within Chicago, we were really just finding our footing on becoming, you know, a real sort of call it a second tier tech ecosystem, not not on the level of San Francisco, New York, but a major player, right, we had had some big exits, we had some big successes, and that had spurned some talent in the ecosystem that went and started more companies. So now, you know, during the past almost 10 years, geez, it’s developed quite a bit, you know, there’s more venture capital firms than ever before. There’s more startups being funded than ever before. we’ve really seen the ecosystem progress for the better, and sort of hit its stride. So I think Chicago is only going to go from here. But you know, if you go back to the time I started investing, there was very few pools of capital. And we kind of, we had our choice of the startups we wanted to invest in now. It’s, it’s, it’s more competitive, which is better for everyone involved.
I was really impressed. When I went back to Northwestern in February, pre COVID. For venture capital events. I had gone to school at macdill. So I haven’t spent a lot of time at Kellogg, but when I went there, they have this fabulous new building, which they were just building when I was at Northwestern. And it was just a beautiful setting right there on the lake, the field. And it was full of all kinds of people. Betsy Ziegler was there from you mentioned 1871, some other people, all kinds of great funds represented there, mingling with just these top level up and coming VCs, out of Kellogg, and just being in that spot. And that’s not even that’s up in Evanston. That’s not in the heart of anything, which, from my experience is more towards 1871 would be kind of the heart of a lot of this action, while at least downtown in general will be more towards the heart of it. But it was super impressive. It really gave me some hope for what what we can aim for here. You know, like getting that vision, getting that idea, that vision for Minneapolis and what the ecosystem can aspire to be.
Yeah, it’s really great. I mean, you’ve cited the university’s Stanford and MIT their efforts are well documented and the stratix accelerator at Stanford, you know, one of the most prominent in the country. But look, look at Northwestern, you mentioned them, they’ve got the Wildcat challenge and look at Chicago Booth. They’ve got the NVC the new venture challenge, which I believe kicks off tomorrow on the third of June. This has become the Chicago Booth one has become one of the preeminent accelerators in the country. That ranks right up there with the YCS and Angel pads, right? The successes from that program, you know, the winners of Chicago, Booth NVC, our grub hub, Braintree tovala, I mean, you know, hundreds of millions, if not billion dollar companies that have been enormously successful. So it’s it’s really nice to see that the academic academic institutions have structured themselves in a way to really promote true Entrepreneurship, that is the challenge when you get into academia, you know, is this going to be more of a research or learning exercise, there’s this really, you know, a capitalist endeavor. And I think what we found is the Chicago based institutions have figured it out, and, you know, created some really transformational, you know, large scale tech companies. So we’re looking forward to meet and some more tomorrow at the competition, and at a future Northwestern event as well.
I think it’s really interesting, Nick, I’ve been building software companies, either as an was started off as an entrepreneur, and then an investor, the last, you know, I don’t know, 15 years, but 25 years as entrepreneur, all in Minnesota, and really, you know, from when I got started, there was very little support, there weren’t organized, you know, communities for startup competitions, accelerators, you know, maybe there was one or two venture funds, you know, now there’s, you know, just in the Twin Cities market, there’s well over a dozen early stage funds. And then we have, you know, it’s a little different in Minnesota, the University of Minnesota, I think it’s a little over 10 years old, we have a Minnesota cup, which is actually kind of built for all startups in Minnesota, it sort of lives, you know, on the campus of the University of Minnesota, but it’s not just for the U of M students. So it’s kind of interesting, I think it’s, it’s evolved a bit differently. But in many respects, I think the last decade is really brought just incredible wealth of support for entrepreneurs starting to build things. Of course, I think one of the main areas that entrepreneurs that are looking to get discovered are looking for support is on fundraising. And you know, despite the emergence of what 1500 plus venture funds around the country, you know, getting that first round of capital for many is still really challenging. And I know you’re, you’re one of the few funds that you know, invests in kind of pre seed, and then also what I’ve called, like, really early seed stage companies in the Midwest, I know you invest all around the country, what are some of the signals you look for? Or what are some of the things that you would in terms of advice would pass along to founders, you know, in terms of raising that first round of venture capital?
Well, first of all, you need to know where to aim. Right? Like before you launch a process, and before you start pitching. And before, you know you do your dog and pony show with a bunch of investors, you have to understand your ICP. Just like if you’re launching a product into a market, right, who’s your ideal customer persona. And for a fundraise is the same Rob, you just mentioned, like in the Midwest, there are seed stage investors series A investors pre seed, some will do pre traction, some won’t. Some will invest in hardware, others won’t write some, like consumer, some have a preference for b2b. We’ve got a whole crop of Life Sciences folks, right? There’s a lot of shapes and sizes to these investors. And if you just roll out of bed with a really cool product, and you know, a little bit of sales, and do your rounds in sort of Minnesota ecosystem with whoever you can get an intro to, you’re probably going to find some mismatches, right? It’s like the dating app. And you know, you’re you’re dating somebody from a different culture that doesn’t speak your language. And it’s like, where do we even begin here? So you kind of have to know where to aim. Figure out what type of startup you’re building, right? What are the sectors you appeal to? What are the technologies that you’re building around, you know, Ai, blockchain, etc? Who are the markets that you’re serving? Right? Are you serving certain demographics with your startup, let’s say, the boomers or Gen Z, for instance, or you know, maybe your startup is focused on women. And then the stage, of course, the stage is important, the geo is important. So there’s all these filters and structures that investors use to kind of think about your startup. Here. Again, it’s like sector, market technology, geo stage. And if you are honest with yourself about which boxes you check, you can find the ideal set of investors that is just well designed for your startup. Right. There are generalists that just invest in Minneapolis startups, there are specialists that just invest in AI powered startups, right, you need to know who those investors are first. Rob, you and I have discussed this tool that we built VC dash rank.com. It’s a simple questionnaire that startup founders can fill out in five minutes or less about their startup. And they generate a customized list of all the ideal early stage investors for their startup. I think we have somewhere from 15 to 30. Startups filling that out every day. So it ends up being you know, you add those up over time, there’s a lot of startups out there looking for investors, but if you’re aimed in the wrong direction, you know, you’re gonna waste a lot of your own time. In founders time is the most important thing when you’re building an early stage startup.
I think that that’s a lot a source of a lot. VC hate that you see, I mean, there is plenty of legitimate criticism about VCs, there’s there’s bad behaving VCs, don’t get me wrong. But I think that that point you just made, that it just being a mismatch, that people going into every what should be a speed date with the intention that they want to get married, without actually realizing that they need to make sure that that’s going to be a good match. I think that that manifests itself and justly so in people getting incredibly, you know, frustrated by that process, and then taking it out against just the industry in general. It kind of obfuscates a lot of the legitimate criticism of the industry, though, and and makes people you know, it makes it harder to uncover. Because when the problem is that source, what’s the real problem? It’s hard to uncover when it’s just simply a mismatch from the beginning.
100% Joseph, and I’m getting a taste of my own medicine, right, because as we embark on on raising our next fund, we’re not raising currently, but as we do that, we need to meet with the right investors for us, right. In our industry, we call them LPs limited partners. But I need to know who are the institutions that like to invest in emerging funds, right? Who are the institutions that like funds in the $50 million size range? Who are the institutions that have an interest in the middle of the country investing versus coastal, right or international, right, if I don’t do my homework, on my own ICP, then I end up spinning my own wheels with a bunch of folks that you know, want to cut billion dollar checks in the multi billion dollar funds that are focused only on San Francisco, and I’ve just wasted their time in my own. So, you know, this, this has got many different levels of extra abstraction, whether you’re a startup selling a product, you know, founder trying to, you know, sell your business, sell equity in your business, or a venture capitalist that’s, you know, trying to raise a fund.
And just some advice to anybody out there who’s going to turn around and Google ICP to figure out how to proceed, ignore the first results, or any results with pictures of crazy clown makeup. That’s the wrong result for you. Wow, flashback there. Now we’re showing our age.
It’s really interesting, Nick, when I was a sort of founder turned investor, you know, I was like you as an angel investor for a while, while while I was sort of founder, took the success as an angel investor became a VC. And the number one request we have, from founders we back is, can you help me complete my round? Or can you help me connect other capital sources, and to me is like a founder turned investor, it’s like, the least interesting thing I could help a founder with, is just finding more capital, I’d rather go deep on like product goes to market, you know, human resource and operations, like how do you scale the growth of the company? Not so much like, Hey, can I i’ve this spreadsheet, I started with 200. Plus, it’s just people in the last four years that I’ve talked to you that are involved in the VC game, and I did use the VC dash rink comm tool that you built for internal startup we had been incubating called next jam, it’s really, really useful to kind of filter down across these different dimensions, who are the funds that we should be talking to? And I think a lot of founders, it’s not even so much as like getting an intro to the funds, like, I know that a lot of the funds that we should be talking to, but they weren’t necessarily the ones top of mind for me. So just having a filter to say yes, these are the ones that based on, you know, some kind of database are probably the ones that are right for you and make some ton of sense to me. So I think it’s super valuable. I’d love to see more startups using this. And it wouldn’t solve this, like signal and noise issue when what you really want is like relevant deal flow that can make right you know, the speed for fundraising faster, right. 100%.
I mean, it’s, it’s amazing to your point, how network driven and opaque the whole fundraising landscape still is, it’s always based on referrals. And you have to have the right networking etiquette. I mean, if you go back to the origins of VC, it was a little cottage industry, you know, country clovers, and people that were insiders, Sharon deals. And that’s kind of where this industry began. But, you know, as we move forward in time, it’s institutionalized. I mean, tech is no longer, you know, a footnote in the asset class universe tech is sort of leading and driving the returns, both in privates and publics. And so I think we’re gonna see our industry, our asset class, really professionalize and become more tech fold. Right? It shouldn’t be this old insider game of who you know, and who can I get an intro to and, like, you know, can I can I get the royal treatment from the investors at benchmark I mean, amazing, firm, right benchmark, but they they don’t have a website, right? You have to know somebody to kind of get in there. And honestly, I think that’s the model of the past. I think it’s gonna die. The future is about you. Technology Solutions media, you know, having a systematic process, it’s it’s not about who you know, it’s about what you can build.
And increasingly, it’s not about where you’re located either. I mean, that’s starting to not matter at all, which used to be hugely important for VC. And even when you look at VCs who do business all over the world or across the country, you know, that geography that they do more deals, where they’re located, then states further away, like if you’re based in DC, or even if you’re based in Chicago, you know, there might be a way more deals in Silicon Valley, but you’re going to be doing more deals in Chicago, just because that’s who you run into. But increasingly, that’s becoming less and less important.
Well, I think, you know, one of the effects of COVID is no longer do I have discussions with investors that say, oh, middle of the country, investing the Tam’s too small, like the outcomes aren’t going to be big everyone? Well, not everyone, but the vast majority of folks out there realize, wow, there’s talent everywhere, you know, whether it’s talent that left the coast that moved other locations, or just the reality that great, huge, multi billion dollar tech companies are being built everywhere. We’re seeing that more and more every day, which is, it’s nice not to have to face that objection anymore. Oh, Minneapolis. Oh, yeah. No good tech companies are gonna come out of there. Chicago. Yeah. You know, you guys have your strengths, but it’s not technology. Yeah. Okay. Let’s look at you know, the cameos of the world and, and you know, these other huge successes. So it’s no longer an objection, we really have to face which is nice.
So Nick, I know, you take a very systematic approach to venture capital, kind of pioneering how to use tools and technology to make the process more efficient. I saw this survey a few months back that ranked from founders seeking capital, the number one criteria or attribute that they cared about the most was speed. Yeah, and I know you’ve interviewed a lot of funds, are there, you know, from a systematic standpoint, are there certain things you found to really speed up the investing process? Or is there any any other venture funds that, you know, obviously speeding, making a quality decision that times are enemies of each other? Right? Like, you know, how do you have you? Have you found ways to move faster in decision making, or across the VCs that you’ve interviewed? Any that really stand out to you on this dimension of speed?
Wow, that’s a tough question. Yes, we have implemented a lot of systems and processes, I can talk about that when to your ladder question on any VCs in particular, I would say that the VCs that stand out, as being great at making decisions quickly, are solo capitalists, largely, you know, when an individual is doing the meetings with the founders and can decide at first meeting or second meeting. Look, this person has the right ingredients, you know, like you’re taking all these data points, they’re mixing up in your head, we talked about this abstract concept, pattern recognition. But honestly, a lot of at bats in this industry over time, you start to figure out here are the things that I like, and you process all these data points, and you make decisions. So it’s the solo capitalists that can move quickest, because, you know, there’s no infrastructure, there’s not multiple people, there’s not, you know, a whole series of diligence. When it comes to our firm. We are not that, right. So we have a number of people at our firm that can do deals. It’s not just Nick Moran, right. And I’ve been very clear with my folks here in New sec from the beginning, this will not be the Nick Moran show. This is newstagged ventures, we are building a scalable venture capital firm. And so what we’ve had to do is get very, very clear about what we’re looking for. We kind of divided up into three segments. So when we’re looking at a deal, we look at the who, the what, and the how. So the who is the foundation, that’s the people behind it, the talent, their raw capabilities, their you know, their raw mindset. The what is kind of the business is the business, the industry, the sector, the product, is it, you know, scalable? Is it venture scale is an interesting does it have tailwinds and then the How is sort of the framework that the founders are using to access that market, build the right product. Think about you know, how we wedge into the market? How are we focused on customer needs? To that point, we did you know at the top of the interview or are we tech first. So the How is like the process that the founders are going about to access the opportunity. And then you know, at New stack we think very specifically about what are our must haves. What are important to have and what are nice to haves and across each of those three, the who, what and the how we’ve been very specific about what those three are. So we have must haves on every deal. If a must have Isn’t there we pass, we have our important hands on every deal, if a certain percentage of important to haves aren’t there, we pass. And then we have our nice to haves as well. And so that’s our attempt at taking all these patterns and all these factors that we’re vetting for, and actually codify them into a process that can be taught to young folks, you know, as we have this fellowship program of 20 young folks across the country, undergraduates, and it’s too hard to spend the next you know, five years with all of them and try and teach them all these abstract patterns, we have to codify them, we have to get very specific about here are the factors to be looking for, so that their learning curve, you know, moves quicker. And the end effect of that, Rob, is that we should be able to make a decision on a founder, and investing in that founder in less than two weeks, hopefully, less than one week. But if we know what we’re looking for, and who we are as a firm, and you know, what types of founders are positioned to succeed in a partnership with the SEC, then we can move more quickly.
I just said one more kind of a more narrow question around this process and system you have I know, one of the things they talk about in venture capitalists kind of decision making is this notion. It’s like a psychology notion of, they call it confirmation bias. And I know I’ve experienced I’ve had to sort of fight myself against is that time where I see it, even in our partnership, like the more time you spend on a deal, there’s a tendency to look for evidence to support, you know, your initial interest in that deal. And so you have this self fulfilling kind of confirmation bias to do a deal as you dig in more and more and more. Have you had any, you know, with this sort of more in this sort of system that you have? Do you have any sort of guardrails against like confirmation bias? Or have you ever felt like you’ve experienced that? And, you know, or how do you avoid confirmation bias?
It’s a good question. I don’t know, if we have an answer to that, if I’m being honest, I do know that we’ve gotten incredibly late stage in diligence on deals. I mean, I even flew with, with my deal lead to Colombia, the country to do diligence on a deal and spent two entire days, you know, in the field, like meeting with customers and whatnot, we ended up passing because something came up late stage and diligence that violated my staff. And we had to have a real honest conversation about that. And, you know, as I think about scaling this firm, I think about, you know, we need to use these moments as teaching moments of how we got to make decisions. And even if it’s even if it’s so much easier to proceed with the investment at that point, because the sunk cost is there. And the confirmation bias, is there. the right decision, if we really want to build a best in class firm, that’s going to produce great returns, and teach folks how to say no, even when you’re over committed, is you got to say no, when, when it’s right to say no. And I learned that the hard way working for dinner for years in m&a, a very aggressive acquire My god, I would do diligence on 1000s of companies, I would spend, in some cases multiple years, getting to know founders of different companies and visiting them in Spain and Italy and all around the states. And then those deals would fall apart. And so yeah, that was a painful reality in our business. I mean, we’re meeting with founders, you know, for weeks or months. And so to pull the plug on those for me is like, you know, that’s nothing. It might be harder for the younger people. But for me, it’s nothing compared to multi year. relationships.
Yeah, totally. You bet that your prior experiences is super helpful in that regard. So I think Joseph, you had a kind of a final question, right? Oh, yeah.
Yeah. So our last question here, like to ask all of our guests who come on the show, can you tell us about someone or a startup that you’ve observed executing at a really exceptional level, maybe someone in your portfolio or someone outside of your portfolio, but someone you’ve seen maybe who isn’t getting recognition for that, but who’s really killing it? There’s too many to choose from.
Maybe I’ll pick a couple that were slammed hard by the pandemic. I mean, terrible categories for the bat pandemic. One is Jude chewy, he runs a company called Flamingo. Flamingo serves the multifamily property industry. And it’s a it’s an events focused platform. And that thing, I mean, the events out of the business went to zero effectively last, I think, April or May. This guy is just a rock star. He built a SaaS business alongside his events business during the pandemic, grew it to the size of the events business. I mean, remarkable MRR and now the events have come back and so now he’s got I mean, it’s kind of amazing but he’s got a you know, two sided, you know, dangerous multifamily software business that does both events and, and software as a service, which are super complimentary for what he’s working on. And it’s just been amazing to see the resiliency. I mean, it would have been very easy for him to shut it down. And many of my LPs reached out and said, Is God gonna survive? And I said, if you ask him, there is no quit here. There is no, you know, pulling this business up and just super proud of him. Another one is Conrad Wallace Xu scheme in MDX at at a business called trip scout. This is a travel business that serves consumers and just got crushed, absolutely crushed by the pandemic. Many travel companies went out of business, many large travel public businesses just are on the ropes like the TripAdvisor is of the world. And these guys have just made magic of, of the situation. It’s, it’s unbelievable, how they doubled down created more content and special guests. You know, created a almost like an Anthony Bourdain, like series on travel during the pandemic, travel from home, you know, everyone’s stuck inside. How do you get the experience of being on a trip when you’re at home? And coming out of the pandemic? they close? I think they recently closed 4 million bucks from accomplice, I mean, tier one VC there. I mean, they are on this upward trajectory, like I haven’t seen. And it’s it’s kind of amazing. You know, there was never quit, there was never hesitation. There was optimism, despite a really tough situation. So those are two I would, I would just, you know, tip my cap to them. I’m glad and proud to be an investor in people like that more so than than anything. Trip scout and Flamingo. We’ll have to check those out. All right. Well, thanks
a lot for joining us today, Nick. It’s been a pleasure and best of luck as you continue to grow, you know, new stack and thanks for you know, launching VC dash rank.com. And the other work you do to support entrepreneurs and founders and of course, the podcast, which is one of my faves. So thanks for joining us today.
Yeah, thanks, Nick. Make sure you check out the full ratchet, visit the new stack website. They’ve got some great tools for founders on there.
Such a pleasure to be here guys. Thanks for having me and love the pod Keep it up. Can’t wait to see who the next guest is.
In Episode 1, Rob and Josef kick around bucket list ideas and shattered Vikings dreams, then dive into the interview with the former Co-Founder and CEO of SportsEngine.
Justin Kaufenberg shares his path to venture from childhood brainstorming sessions trying to make his dad rich, to the realization and creation of the “atomic unit” central to SportsEngine’s success. He talks M&A, and how he hit the road running as Managing Partner at Rally Ventures. Rob shares what he misses about creating startups, and relates to Justin’s experience.
Full Transcript Below:
Welcome to the execution is king podcast. This week I’m joined by Great North managing partner, Rob Webber, and our guest is Justin coffin Berg, Managing Director at rally ventures, which is a venture capital firm focused on early stage enterprise technology companies. Justin was previously the CEO of sports engine. Welcome to the podcast, Justin. Thank you. Glad to be here. Appreciate it. Joseph.
It’s great to connect with you today. Justin, I know, you know, I’ve known go back many years and you know, just for our audience, can you pry a little bit of background, you know, what you’re doing before rally ventures and kind of walk us through your entrepreneurial journey a little bit? And then maybe that can take us into what you’re working on at rally?
Yeah, glad to rob good to talk to you again, too. So yeah, quick background, I was I grew up in Shakopee, Minnesota, and had a very entrepreneurial father. So we used to have to have family meetings sitting around the table once a month as kids. And it was a it was the same agenda every meeting every month for 18 years, which is what can dad invent, to make them rich. So because dad’s a little sick of sitting on 169, and traffic commuting to and from the office every day. So myself and my three brothers, we’d sit around the table with my dad writing down, you know, what I can only imagine was a series of, you know, truly awful ideas. But you do that every month for your entire childhood. And by the time you go off to college, you know, it’s kind of a foregone conclusion, you’re not going to go work for somebody else. So it was, you know, was fortunate just to have that, you know, deeply ingrained in me my whole life, and went to college in Eau Claire, Wisconsin, and along the way, actually started a college pro painters franchise, which, you know, I will say to this day is about as good entrepreneurial training as you can possibly get, you know, when they effectively say, you know, you got to go hire a couple of dozen people, you got to pay him every week, here’s a credit card at Home Depot, here’s a credit line at Sherwin Williams figure it out. That’s, that’s, that’s kind of into the deep end. So you start, you know, running around, you know, knocking on doors, you know, 1000s and 1000s and 1000s of doors, begging people to let you paint their home, and interviewing new employees. And you basically figure out how to become an entrepreneur or you don’t in about 90 days. And so that was terrific training. And along the way, started a company in our dorm rooms called third north, which was third floor North Wing of Marie Hall, Carson’s dorm room, Carson’s bedroom. And that was effectively custom design, custom development, we were building ecommerce applications for for companies. And eventually that led to sports engine, which went through a series of you know, terrible names before we settled on sports engine, which is, you know, when you and I met along the way,
yeah, it kind of reminds me of a little bit of my own entrepreneurial journey, you know, kind of building websites for others, and, you know, and then kind of deciding, like, you know, that’s not the best business model like services and deciding to build like an actual software company, like a product company and or platform company. So I know, there were, you know, you grew sport engine to quite a success, and ultimately sold it to Comcast, NBC Sports, you know, like any entrepreneurial journey, there’s inflection points along the way, can you walk us through to some of the, some of the inflection points for you and for the, you know, for the team and, and talk a little bit more about the business model? And just kind of the evolution along the way?
Yeah, it’s a good question. So, you know, for us, it was definitely an evolution. So we were running third Northwich Exactly. To your point, we were building, you know, ecommerce solutions, checkout tools, you know, websites, things like that. And one of our customers at third North was a sports organization. So we built them a proprietary CMS system. And along the way, came to realize that sports organizations, you know, the hundreds of 1000s of them that exists just the United States, all needed CMS and e commerce and checkout and payment tools. So it was the very first time when we thought that building a services business building a software development business, you know, wasn’t the right way to do it, that you had to build a recurring revenue model, you had to build a real software product. So we started doing that. So there was this early inflection point just as entrepreneurs, where we decided to take the business that was, you know, paying us I mean, building third North was, I mean, it was hard. I mean, it made you know, $0 for years, we got to the point where we finally at customers, we had customers that were giving us big projects, we were paying ourselves, we had a nice office, we had a good staff, and we had to make a big strategic decision to just simply shut it all down and transition entirely to the product company and to the software company. We tried to do both for a while. You know, we tried to basically work eight hours a day at third north, then take a break and work eight hours a day on sports engine, what was called Puck systems at the time, actually But it just, it just didn’t work. I mean, there was a time when we physically had, I mean, this is a long time ago now, but you know, two cordless phones, and one of them had a third North sticker on it, and one of them had a puck system sticker on it. And they both sat on my desk, and I would just answer them, you know, and change who I was, and change what company I worked for, and change the entire story, depending on which of the two of them rang. And, you know, eventually, we just decided you can’t, you know, it’s it’s a good idea to build a services business and transition it into a software company. But in practice, it’s really difficult not to just wake up and spend 100% of your hours on the software product and on the long term company and the long term vision. So that was probably the first major inflection point where we had to shut down third north, and start back from total zero, you know, Puck systems had $0, in revenue, zero customers, we had $0, in the bank, we had no friends money, no family money, no safety net, no investors. And we just decided that this was going to have to be a multi year product development process. And we were just going to have to make ends meet with no money, and no safety net, and things got awfully awfully skinny. That was the first really big inflection point,
I got to ask, did you ever mix up the phones?
Oh, plenty of times. I mean, we were we, you know, one one business, you know, had management that I needed to check with, you know, the other business had a sales manager that I needed to consult with, you know, all of whom were, you know, imaginary people. So not only did I screw up the name, I mean, I screwed up all of it. So, yeah, it’s probably more often than not,
you must have gotten pretty flexible at troubleshooting those those relationship issues.
Yeah, I mean, it’s, it’s hard, you know, large businesses, you know, are skeptical, you know, of a two person, you know, company. And so you do everything you can to, you know, try to, you know, engender just a little bit of confidence.
Kind of a follow up question. I have kind of privilege of getting to know you throughout this time while you’re scaling your company. And as a founder who, you know, really bootstrapped a company, in particular, not being very acquisitive, and are in the business I started. I always thought it was really interesting. I know, your team made you guys made a number of acquisitions over the years. And I think that’s something I see with a lot of founders kind of struggle with that. And I’ve always been impressed by kind of your vision is, obviously a lot of people really fail at m&a. And it seemed like it was a, you know, became a part of a growth strategy, a sport engine, quite frankly, before you guys, there’s a really fragmented market. Right? And can you talk a little bit about maybe some of the lessons you learned as a founder and CEO kind of driving overall just market strategy and kind of m&a? And how did you wrestle with, you know, which kind of targets to go after as you were scaling? And I think it’d be really interesting to, you know, maybe to hear a little bit more about, you know, some of the lessons learned there?
Yeah, I do think it’s an area that that doesn’t get enough focus. And I think it’s an area that’s, you know, underutilized as a tool by most founders. You know, for us, we had those early days, when the company was still called pucks systems were mean, frankly, we were making a lot of mistakes when it came to kind of pure architecture, pure software design. But they were, it was a good time to be making mistakes, we were learning about what a sports organization was going to need from their software solution. We had, you know, I think the time and the space, you know, because we were bootstrapping it, because we didn’t have any outside investment. We had a couple of years there, where, frankly, we could, we could experiment. And we did, and ultimately, you know, Puck systems came to market, we changed the name actually along the way to TST media, and then eventually team sport technologies, and eventually the sports engine. And you know, along the way, we raised four rounds of venture capital financing, or one Angel round and three rounds of venture capital financing. But it was back in those very early days when we were having those architectural decisions, where we decided on what an m&a strategy would look like. And what we came to believe is that if you architected the core platform in such a way, where you had a single instance of an athlete is what we call it, or kind of a true atomic unit where one person, one asset existed only one time within the system globally. So there was a single version of an athlete, a single version of a coach, a single version of a referee, a single version of a sports facility. And to that single instance of a person to that single profile, you would append additional data depending on what they did. So your soccer life, your hockey life, your softball, life, all of those things became data points added onto your single core profile over time. And because of that, the system was going to be very, very intelligent about understanding who the user was, what their credit card was on file, what was the single aggregate family calendar for all the sports in which you participate. If you have that type of technical architecture, then you get very smart at the profile and the identity level. Our belief is that if we always own the identity, and we always own the profile, and we always own kind of the things that go natively around Like the FinTech stack the credit card on file, the calendar, then we could add on acquisitions that were complimentary on a sports specific basis. So we came to believe that you didn’t have to build the soccer statistics engine, you could go buy a company that did that you didn’t have to build the volleyball tournament management engine, you could go by that you didn’t have to build the wrestling, meat management engine, you could go by that, as long as each of those things were integrated deeply into the core identity at the sports engine level, so that you were never duplicating an instance of a person, you are never creating a second login for Mom and Dad, you were never creating a second credit card on file. So as long as that core identity remained true, and always was the identity, even for the acquired entities, that you could build a really effective m&a strategy, where the end user didn’t see any degradation of usability. It truly felt like native applications, even though they were acquired. I think the actual technical architecture and the strategy of m&a was why it ultimately became a success and a financial success.
In my experience of, you know, observing other startups and growth companies, you know, where usually things kind of go wrong, or kind of twofold. It’s either the cultural fit is just really bad. And, and or, you know, you just never have a really strong integration. You know, many of your acquisitions that with sport engine over the years, where there are large teams involved, or was it generally more you requiring this, this kind of a Jason, functionality that you could plug on the platform, but it wasn’t a lot. There weren’t a lot of people and cultural issues. I don’t know how many employees did sport engine have no through the eggs, it was got to be a pretty large group. Right. And I’m just kind of curious how you maintain a strong culture, you know, throughout these acquisitions?
Yeah, it’s a good question, Rob. So yeah, sports engineers, we did have more than 500 full time employees at the company. And the way we thought about m&a was that, you know, it was kind of like a layer cake, like a series of priorities. So So priority one, don’t even consider acquiring a company unless it can be technically integrated in the way we want to integrate it. As long as that’s true, then the second consideration becomes, you know, who are the people? You know, the people are critical to successful m&a. So, are they a cultural fit? Are they good people? Do they want to be part of the combined entity, you know, what are their respective skill sets, so we spent a ton of time on that. And we were really fortunate in the sense that we had a HR team, and an HR leader at sports engine, who was exceptionally bright and exceptionally thoughtful and smart around that topic. So we were going in and meeting with the teams during the m&a process, we were really spending a lot of time looking at what our current company organization chart looked like. And then what the potential new org chart would look like, we were talking about how people who might come with the acquire entity plug into that org chart, or how they don’t fit into that org chart. So we were spending a lot of time on the people. And then what we tried to do is following an acquisition, we tried to just be, you know, really forthright, and talk to the staffs that had been acquired, and talk to them about what the vision for our businesses, what the vision for that acquisition is, you know, how we see them fitting into that, and trying to just be, you know, really frank with them. And I think that built a lot of trust. It also forced us to get comfortable with our remote work environment. You know, we had some acquisitions where there were, you know, five employees, we had other acquisitions where there were 50 employees. But it doesn’t matter if there’s five or 50, you know, you have to do it the same way. They have to have a good onboarding experience. They have to feel like they’re part of the family, they have to feel like they’re not off on an island in a remote office. They don’t they can’t feel like a second class citizen because they’ve been acquired. You’re right. It’s as long as you can integrate. Then after that the other 90% of the work is people.
It’s great to hear the background on sport engine and some of the lessons learned. I like to commend change gears and talk about more about what you’re doing. Now. I know you have joined rally ventures, being on both sides of the table. I think it’s already it’s very interesting. You know, how is your entrepreneurial background kind of shape, the kinds of investments you’re looking for at rally? And maybe some of the other activities that you get involved with working with startups?
Yeah, you bet. So the background with myself in rally was that the firm founded by two partners, Jeff pink and Charles beeler. And they actually prior to rally they were running a venture capital firm called Eldorado ventures, and Eldorado ventures led sports engine series A in 2011 $3.5 million. Series A and Jeff and Charles led that investment. Jeff joined our board at that time, and he was an immediate impact board member and immediate impact investor. So 12 months later when we went out to raise a series Be, they had decided to start rally formally. And they shared with me what their vision for the firm was, which was to not just have a, you know, set of great partners, and to have a set of great, you know, investors, but also to have this concept of tech partners, where they would have, you know, up to 100 other individuals, all of whom would be investors in the fund, all of whom would be available to me as a CEO gratis, to help with marketing or engineering or sales. And it was just a model that really resonated with me. So you get like these big VC firm resources in a very small agile firm, so kind of the best of both worlds. So they then also led our B round, which I think technically was the first investment ever out of rally ventures fund one, they then participated in our C round in 2014. Also, and after we sold the company, I began talking to Jeff and Charles about joining the firm. And the reason was that we had some other terrific investors at sports engine, we were very fortunate, we had good investors and good board members. But rally and Jeff and Charles just stood out. You know, one thing, at least for me, when I was a CEO, on the other side of the table, the thing that I most wanted, and most rarely got was just very, very specific advice and very, very direct feedback. And I just absolutely couldn’t stand you know, when an investor would parachute into a board meeting, and start just generally opining on the state of our business or on the state of the industry. Or you’d ask a question, and they’d give generalist advice or compare you to a different portfolio company, that was just the most worthless shit. It just I hated that advice. And take that same question and pose it to Jeff. And you know, we’d say Alright, we’re thinking about hiring a VP of sales, you know, what should we do? You know, some of the investors would give kind of more generalist advice, Jeff would say, Well, here’s a spreadsheet of the last 50 VPS of sales we’ve hired within our portfolio, I’ve broken them down by west coast, Midwest, East Coast, I broken them down by stage, I’ve categorized them by base salary, commission, compensation, equity grants, all broken down by stage. I mean, they were just ridiculously specific answers. And when you’re a first time CEO, that is so empowering, you feel like you’re making a decision with confidence for the first time in your life. And that’s how Jeff answers every question. So by the time I decided to go into venture capital, I was just really passionate about being the type of investor to other entrepreneurs, that Jeff and Charles were to me.
You know, in my prior experience, before starting our fund, I did a lot of angel investments. And through those experiences, saw a lot of the same bad advice or generic generic advice that, you know, it’s it’s great when operators, you know, start a fun and great when a when you have talented people like Charles and Jeff, who can really share, you know, true wisdom that comes from actual experience and not just, you know, speak in generalities, and whatever. And I think it’s really special, what, you know, what they’ve been able to build. And now with you there, I noticed, why not? You have this new also this new venture studio called rally build. Can you tell us a little about, you know, why you started that and kind of compare and contrast that to maybe, you know, starting a business outside of a venture studio? Since you’ve done both?
Yeah, no, glad glad to it. And I’d actually love to hear a little bit about what you’re doing. at Great North, also, with with your studio, from a rally perspective, kind of the way we think about it is that, you know, the overwhelming majority of our time is spent on traditional investments. For us, that’s, you know, seed or we call it kind of late seed, or early series A, and typically, it’s about 1/3, into cyber security about 1/3 into what we call SAS plus, which is basically like a core business software plus FinTech and then about a third into what we consider kind of deep tech, typically, it’s AI or ml, but applied to a given vertical industry. And so we’re pretty, we’re pretty narrow, really, it’s kind of 1/3 1/3 1/3, but only late seed early a only enterprise software. So that’s still the overwhelming majority of our time. But what we’ve come to believe is that in a couple of situations, not often, but in rare situations, maybe once a year, maybe a couple of times per fund, there’s a particular problem that we have unique insights on. And we feel like we might have an unfair advantage in that specific area. In those situations. We believe that based on our networks, based on the other, you know, entrepreneurs, we know the other executives we know and want to work with, again, that there’s an opportunity for us to actually incubate that business inside of rally. And it’s an opportunity for us to bring our whole tech partner network to bear our whole networks to bear early capital to bear and to help a company be created, build it inside of rally, and then ultimately spin that out and invest in it as a proper fund investment. So we done that now three times, at rally, we’ve done that once in a company called yard stick, which is in what we call the human security service space, which is background screening, certification management and verification management, all bundled as a pure white label pure API platform that can be consumed by other platforms. So if you’re running a hospital system, software platform, or your school system software platform, or a four H or Boy Scouts, software platform, or a delivery or b2b logistics platform, you should have a platform like yardstick deeply natively integrated. So all of your employees, all of your drivers, all of your gig workers are not just being background screen, but their certifications are being verified. Their verifications are being confirmed if they need ongoing training that happens natively within the platform. And that was all inspired by my experience at sports engine, where we background screened millions of coaches, which had a direct impact at the safety of youth athletes. So that’s the first one, we did another one in the cybersecurity space, that we’re not quite at liberty to talk about yet, but that one is going to be kind of getting public here in the coming months. And then we’re working on one right now, in what we generally refer to as kind of the kind of deep FinTech rails space, having to do with payments optimization kind of deep, deep at the interchange level. So that’s a company that we haven’t begun to talk about yet, but it’s going through the process now. So we won’t do this terribly often. But we’ll do it when we believe that it’s a space, we have a lot of passion around, we have a lot of insight into, and there’s not a suitable traditional investment to make.
I think it’s, it’s awesome. And when I hear you describe how you use your tech partners, to provide this high level, you know, this really top of sort of the tier support to a startup, I’m a huge fan of kind of fractional support in the startup, I think it’s, you know, so important that you build a, you know, a strong foundation from the beginning. But you cannot a startup can have, you know, super senior person in every functional role, or every technical role at the beginning. But also the the thing that kills startups, and I think a really common mistake is, you know, you end up hiring, like really Junior people who don’t have perspective, and then you can end up you know, creating all this technical debt or, or just make, you know, too many mistakes, and that can kind of kill a startup. And I think the beauty of the model, you described it, the way I sort of kind of come to understand it is getting these fractional experts to kind of really set up the company for success. Without you know, having these sort of periods, we have to go back and make corrections due to some kind of technical debt or something that you know, something wrong with a business model, or what have you. That seems super compelling in I think, for a founding a company outside of such a platform, it would be very difficult not to probably pull in, you know, that sort of bench of tech partner relationships that you guys have. So it gives you some huge advantages, right?
Yeah, we really think so, you know, when we talked to the portfolio companies, especially those that are being incubated inside of rally, you know, we really ensure that they know exactly who the tech partners are, where their expertise is, we make those connections. If you’re building a cybersecurity company inside of rally, you know, you should talk to our tech partner, you know, Julie Bushman, the longtime CIO of three m, you know, you’re not going to find somebody that has deeper experience, in terms of choosing cybersecurity solutions for some of the largest fortune five hundreds, or you should reach out to Ben freed the CIO at Google, and other one of our tech partners and bounce these ideas off people like that, before making important decisions. If you’re thinking about building a sales organization, don’t just blindly build it, you know, talk to our tech partner, Jean DeWitt, who runs, you know, all of North American revenue for stripe, for example, you know, one of the brightest minds and go to market strategy. So it’s really important to us that those people surround these companies with love and advice, which, you know, we think just give them you know, tremendous advantage.
Totally. So you mentioned earlier about the types of business models that you’re pretty focused on with rally, typically, you would have been more probably SAS in the past. And now it’s more SAS plus, as you described, and then, you know, you’re heavy, you have a lot of background and kind of payments in in that side. Have you seen these kind of markets evolve? And, and I guess, also, I’d love to hear what you think about like, you know, the newer ways to finance SAS companies like pipe and how does that change the way? You know, venture capitalists used to maybe may have looked at typical SaaS companies in the past knowing there’s these other competing kind of capital sources?
Yeah, no, yeah. It’s a good question, Rob. So I think for our portfolio, it’s been pretty consistent across funds, one, two, and three, and now four, but with some nuance. So I think we’ll, we’ll continue to have roughly a third of the portfolio in cybersecurity. My partner, Charles is an expert there. We have a number of tech partners, you know, kind of deep in that industry, you know, and it’s just like this enormous looming threat of Our economy, I mean, one of the biggest. So we just think there’s, there’s great businesses to be built in cybersecurity. My partner, Jeff has, you know, some real expertise in what you’d consider like applied AI and applied ml. And these kind of hardcore business software solutions that can transform the market. And then for myself, I concentrate a little bit more to your point on companies that we generally call SAS plus. And typically, that’s a CRM in a given vertical market, teamed with payments and other revenue streams. And, you know, in terms of like the big themes and software, you know, I think that’s one of the big themes in software, the idea that a verticalized software solution is almost always going to be the horizontal solution. So just increasingly, we see that most companies are willing to move away from like a Salesforce, for example, to go to a platform that’s been very specifically built for their industry, with all the tiny little nuances that makes it better for their industry easier to implement easier to integrate handles all the edge cases that Salesforce just never will. So we love those vertical platforms of record. And one big theme is that we’ve seen these vertical platforms of record just earn incredible trust with their customers. So if you’re the vertical platform of record in sports, like we were at sports engine, or like, some of our other portfolio companies are in their respective areas, your customers want to use you for more than just CRM, they want to use you for payments, they want to use you for background screening, they want to use you for their lending needs and their borrowing needs and their revolving credit facility needs. They want to use you for their insurance needs, they frankly, want to use you for everything because you know their business, well, you are already a trusted vendor, you already are controlling their funds flow. So we just think that having the vertical platform of record approach and then adding on top of it a FinTech layer and a payments revenue stream, and additional revenue streams is just one of those big themes that you know, we happen to have some experience in. So it tends to be where I spend a lot of my time.
Excellent. Excellent. So I know, obviously, you’re super passionate about supporting entrepreneurs, and you know, have this great success. Woody, do you ever find time for any, any hobbies or anything else that, you know, that you can squeeze in there these days?
Yeah, well, you know, I’d ask that ask the same you it’s, it’s not easy, you know, I, I will say that, I think I you know, I had kind of a personal epiphany. And, you know, after we you know, sold the company sold sports engine, you know, NBC Sports was, you know, just a terrific buyer. Like, they were awesome, great parent company, great partners, great people just had an awesome experience being part of NBC. And I think in some ways that shaped my personal epiphany was that I don’t ever want to stop working, like ever. I love what I do. I just love it. I love being part of starting companies, I love being part of supporting other entrepreneurs. I have a huge amount of pride in our economy here in Minneapolis and our startup ecosystem. And I want to do it forever. So that was a big, just personal decision. And then the moment that you decide that, then it just becomes an easier question, which is, well, what’s the best way to do it? What’s the most impactful way to do it, and I came to the conclusion that being on the venture capital side, and being on the capital supply side, was the most impactful way to do it. Because I thought it’s one of the biggest gaps in our ecosystem, which is access to early stage capital, and access to you know, seed and series a capital. So, from a business perspective, that was a big revelation, because that is my biggest hobby. Like, you know, when I’m not working, I’m basically like, thinking about what else I can do to impact my work. I love it. Like, I just, I just love it, I feel super fortunate. And I know you feel the same way. But I’d like to hear you talk about it too. And as far as other hobbies are concerned, you know, in the moments when you do wind down, I mean, my family is just, you know, my kids are super important to me. They’re 10, eight and five, coach, all three of their hockey teams go to their baseball teams, we play golf together, fishing is my passion. Like, that’s my, that’s my single largest personal passion. So I’m desperately working on each one of them in their ability to, you know, get to get the leeches on the hook themselves.
You know, we are so similar. It’s, it’s, it’s just crazy. I know, I think it’s something about, you know, once you have a chance to reflect like, Look, we’re all living in America, we’re in, we’re in like the greatest industry in the history of the world. And the wealth sort of comes to the people who our true builders, like, if you get to a point where it’s, it’s, you really don’t do it because of the money. You know, you do it because you love to build. That’s sort of how I kind of like, that’s how it sort of evolved for me, like building. I was really happy building startups in the mid 90s. Like, you know, just publishing websites and, you know, experimenting with things and trying out ideas. And, you know, that’s the beauty of like, you know, software based businesses is just being able to build something and see if you can create value for people and there’s something just so rewarding about that. And I think the reason I really became attracted to investing is a lot of the same reasons that you mentioned is, and I guess, for me, especially early stage, I really liked early stage. You know, we didn’t quite get to 500 employees at our company, but we had 170, across Minnesota and San Francisco. And I have to say, like, I lost a little bit of a joy over time, you know, it’s still it, still enjoyed it. But like, I don’t really like love all the, as the company’s company gets bigger, and you have middle management, and then there’s just a lot of it’s sold leadership. And I’ve always really, I know about myself, it’s like, the customer empathy, the sort of product engineering, and then just a sort of go to market strategy. Those are the things that I really enjoy about entrepreneurship. It’s not necessarily like, there’s great managers out there, I think I became a better manager, but and I guess, in running an early stage fund, I felt like, Wow, what a perfect opportunity to just ensure that I can focus on that combinate, that sort of entrepreneurial discipline and that early execution, that is I just feel so much of the magic there. And then, you know, I think he didn’t, if that man, if you become so passionate about that, you know, I’m definitely a family guy too. And the beauty of this COVID period is I can be working at my cabin, and I can take the kids out fishing for copies or doing something. And then I can be hopping right back on a call or something. And, you know, and I think that’s been, it’s, it’s pretty incredible. Well, we, it’s, it’s great to have you on our podcast, I’ve been a huge fan of everything you’ve been able to achieve. And you know, super proud of all your success and what you guys are doing at rally. So thanks for joining us today.
Yeah, thanks. Wow, that’s kind of you to say, I feel the same way about you guys. It’s you know, we’re, we’re fortunate to have some co investments together, you know, excited to do a lot more. And I just think the way you guys approach the business, you know, the way you approach these entrepreneurs the way you surround them with support and operational expertise, you know, it’s just super inspiring. So yeah, we feel the same way. Thanks so much.
before we let you go, Justin, I just have one last question. You know, I like to ask all of our guests, if there’s someone you’ve seen lately, that’s executing at a really high level that are you know, our listeners might not have heard of somebody who’s been flying under the radar, or maybe it’s a startup?
Yeah. Good question, Joseph. Let me think about that. Well, you know, I’ll mention two of them. Two that come to mind. So one of them is a rally portfolio company locally here. One of them is not. So the rally portfolio company, located locally here is a company called parallax. And parallax is it’s founded by a gentleman named Tom O’Neil, who prior to this was the CEO at the nerdery, you know, was part of a you know, team that built a very, very successful business there. And, you know, we talked about this concept of founder market fit. And Tom has extreme founder market fit. So he saw very, very firsthand the needs of a large scale software engineering firm and a large scale outsourcing firm. And he saw that there was no software that could truly help them manage their capacity, maximize their hours work, understand what their incoming work is, understanding what talent they had in the building, understanding how that influenced you know, what they needed to recruit for and hire for to match the people to the work. And he built an incredible software platform, one of the better tools I’ve seen built in yours, beautiful UX, super usable, called parallax. And now I just I mean, I’ve just like find so much joy in watching how they operate, like they grind, like grind. I mean, nobody out works this team, he and Dave and Amanda and the rest of the team there. And to now see them go from just grinding and grinding and grinding for the first year and a half, to now sales look like they should look like they deserve to look which is a really steep curve, you know, they’ve got from zero to more than a million in ARR quickly. Now they’re just you know, accelerating beyond that. So that’s one that you know, we get to see day in and day out operate as part of the portfolio. And they’re just the type of people that you want to see rewarded because there’s such executioner’s and such grinders. And they are there, they’re just doing a fantastic job. The other one that’s not a portfolio company, but I met recently, gentleman named jazz Hampton over a company called turn signal. And I got introduced to jazz a few months ago. And we talked at that time, a little bit about his vision for turn signal being effectively an onboard application, you know, in your car as you are driving. And in the event of a traffic stop, you can effectively turn on turn signal, have an attorney or have a lawyer instantly present in the car, talking to both you the driver and the officer who may be approaching the vehicle, ensuring that it’s a traffic stop where everybody knows their rights. It’s a traffic stop that doesn’t result in unnecessary violence, a traffic stop that’s handled the right way by everybody involved. And I thought just a super smart way to approach that problem. I was really blown away by jazz and by his co founders and then to see their updates, you know, a couple weeks later and a couple weeks later And a couple weeks later and to see the progress they are making, I was just really inspired by the way they’re executing. So they’re not not part of the rally portfolio company, at least not at this time, but I’ve just been super impressed with them.
Great. Thanks for sharing and again, thanks for coming and visiting us and being on the podcast. Yeah. Glad to do it.
It’s not what you know. It’s not who you know. It’s knowing how to put it all together.
Execution is King.
As founders, investors, and builders, we think execution is key to success. In our new podcast, we go in search of insight and lessons. This takes us to people who have been there before, where the rubber meets the road.
Hosted by Josef Siebert, each episode features Rob or Ryan Weber and a guest who can offer best practices to startup founders building the next great global startups from wherever they may be.
Our first episodes available August 12th feature investors Justin Kaufenberg of Rally Ventures and Nick Moran of New Stack Ventures, founder Mynul Khan of FieldNation, and professional ecosystem builder Molly Pyle of the Center on Rural Innovation.
Great North Ventures is an early-stage venture fund that invests in startups using technology to innovate industries dominated by analog processes. We invest early across categories and industries, and leverage a large network of advisors to help startups scale.
Over 10,700 venture-backed companies received a combined $136.5 billion in funding in 2019, and the year saw double the exit value of 2018.[i] As stocks, real estate investments, and venture capital reach record highs, what are investors thinking about where to invest?
The answer depends on the type of investor:
- Large funds such as university endowments, pension funds and funds-of-funds have been allocating a part of their portfolio to venture capital for many years now and have seen success. Universities like the University of Minnesota[ii], Stanford[iii] and Yale[iv] have done very well with venture investments. For the fiscal year ending June 2015, the University of Minnesota invested 26.1% of its capital in private investments, with 14% of the private allocation invested in venture capital. The overall fund returned 5.7%, private capital returned 16.1%, and venture capital returned 28%.[v] This has increased the appetite for venture investments among endowments.
- High net worth individuals who have built their wealth in tech are reinvesting in tech venture funds.
- High net worth individuals who have traditionally invested in the stock market, real estate, or private equity, are warming up to tech venture investing.
- Family offices are increasingly doing the same. In a recent tally of the attendees of a US family office event, 35 out of 60 firms expressed interest in venture capital.
Is this a good time for venture investing?
If the economy continues to do well, venture investments will do well. If the economy falters or if there is a stock market correction, this may still be a good time to invest in venture capital.
This is because stock market corrections (and corrections in the real estate market, which usually follows the stock market) follow business cycles, which can last 4-7 years. Venture funds usually invest over a 9-10 year investment cycle (i.e., a 5-6 year investment period followed by a 4-5 year harvest period). A slower business climate or stock market correction ahead could well be bracketed within the life of a new fund. And if needed, with due approvals from the limited partners, venture funds can extend their term to time their exits better.[vi]
Is there benefit in investing in venture funds in down cycles?
Let us look at the dynamics of different asset classes in downturns.
- Real estate – During the 2008 financial meltdown, real estate crumbled. As people lost their jobs, renters could not pay their rents, and property owners could not cover their mortgages. As defaults grew, real estate prices dropped. The Case-Shiller index dropped from 195 in 2005 to 116 in 2011.[vii] Considering the leverage of real estate investments, the losses for investors were much higher.
- Stocks, ETFs – The stock market similarly took a serious hit. The DJIA dropped 54% from 14,164 to 6,469 over 17 months.
- Venture capital – From Q1 2008 to Q1 2009, venture funding fell by 50% nationally to $3.9 billion (Dow Jones Venture Source).
Why did venture capital fare better than real estate or stocks?
First, lean times promote capital efficiency. As is often heard, recessions are the best time to start new companies, which is where early-stage venture capital is focused.
Second, venture capital firms mark up or mark down their investments over their life cycle. However, as actual valuations are pegged only by liquidity events, the real IRR is not known until the investments achieve liquidity. During the holding period, capital-efficient companies, and venture companies that focus on capital efficiency, do well, i.e., are counter-cyclical. They suffer fewer dislocations during downtimes. They can maintain their strategies, continue to do business as usual, and get ahead of those that slow down. Employees of such companies are more secure and loyal. And if needed, high-quality talent not available during good times can be hired, with loyalty that again pays dividends over the long term.
The capital efficiency of the upper Midwest
Companies in the upper Midwest inherently tend to be capital-efficient because there is less capital available. Similarly, smaller funds such as there are in the upper Midwest are inherently more capital-efficient, as they have less to invest.
44% of venture capital flows into Silicon Valley.[viii] This sets the consumption set-point of Silicon Valley companies at much higher burn rates than in regions where availability of venture funds is limited. The relative lack of available capital in other regions, including the upper Midwest, instills caution in spending.
While most other expenses are comparable across the US, with legendary real estate prices, Silicon Valley employees cannot survive at less than Silicon Valley wages.
This is not true in the upper Midwest. Though other expenses are comparable, housing costs may vary from 1/3rd to 1/10th of the Bay Area, enabling much greater capital efficiency for employers. For example, Google employees can buy 5 houses for the price of one by moving to one of Google’s locations across the country.[ix]
Figure 1. The real estate cost advantage of the upper Midwest compares well against not only the most expensive regions in the US, but also against what may be incorrectly perceived as lower-cost overseas regions (e.g., China). Seven cities in China and an equal number of cities in the US are listed above Minneapolis.
Fold? Hold? Or double down?
Not only can capital-efficient companies continue without disruption during slow times, given the lag between investment and market benefit, those that increase their investment can emerge even stronger in a recovery.
Intel applied this counter-intuitive strategy across many recessionary cycles, and invested several billion dollars in down cycles.[x] When their new semiconductor fabrication capacity resulting from these investments came online a few years later, their timing coincided with market rebound. On the other hand, competition (e.g., Atmel, Fairchild, Intersil/GE, IBM, Motorola, Raytheon, and several others) weakened from retrenchment and lost market share. As the industry consolidated during down cycles, Intel gained market share, and cumulatively over several cycles, emerged as its leader.
Some investors may feel that liquidity is useful during a downtime. Others argue against it, as getting out of the game when entrepreneurs are especially capital-efficient has a higher opportunity cost, and to use the Intel analogy, puts the winners further ahead of the losers. According to a prominent Silicon Valley investor, “you got to stay in the game”. At these times there are opportunities to go one step farther and double down.
Are smaller funds better than larger funds?
The statistical odds of a unicorn (company valued at over $1B) are lower than, say, of a ‘deci-corn’ (company valued at over $100M). Larger funds invest larger amounts per deal. To return high multiples, they need unicorns, which are rare. Smaller funds invest smaller amounts and can get the same multiples from ‘deci-corns’, which are much more common.
Advantages for Midwest venture capital
There are other tactics used by, and attributes common to, small Midwest VC’s that safeguard against downturns:
- Global investments that require skills available in the upper Midwest. While staying abreast of the latest trends in Silicon Valley to stay competitive, Midwest VC’s can take advantage of expertise available in the upper Midwest to serve global markets. In so doing, they avoid the valuation markups and early-round dilutions of Silicon Valley yet seek global parity in later rounds and exits.
- Local investments, global exits. An emphasis on the upper Midwest inherently allows investing at a discount compared to the investments in overheated markets such as Silicon Valley. This roughly translates to a 60% discount in term sheets offered on companies in the Upper Midwest. Global businesses rooted in the upper Midwest still attain exit valuations that correlate with global valuations. Thus, if a down cycle may require 50% markdowns for some Silicon Valley funds, Midwest VC’s can still record a 10% (=60-50%) markup at the bottom of the trough, emerge stronger from uninterrupted progress from investees’ capital efficiency, and exit with a markup brought to parity with global valuations in strong economic times.
- Emphasis on product-market fit. With the reduced capital investment now possible in many tech businesses, the barrier to entry has been lowered. Smaller venture funds can adjust criteria to focus investments on product-market fit, early revenue, and early break-even and profitability, instead of being limited by the number of affordable investment options. Nothing demonstrates product-market fit and staying power than paying customers and profit; for customers, employees and investors alike, there is nothing more powerful than profitability. Judicious investment in such businesses and mentorship to focus teams on profitability facilitates survival in lean times.
- Operators as investors. Small venture funds are often started by former operators with past successful exits, and the Midwest is no different. Many Midwest VC’s have a history of building profitable businesses the old-fashioned way, a dollar at a time. This experience of running a company, of managing payroll through good times and bad, of knowing the revenue and cost management discipline required to make money operationally and sustainably (i.e., not with short-term financial engineering), is invaluable for VC’s to have. So much so, that even accomplished operators will supplement their teams with experienced industry advisors.