Looking for Startup Capital? Meet Early Stage Venture Capital General Partner Jeff Bussgang

Your money may be working hard, but is it working smart? Welcome to the Capital Gains podcast presented by capitalism.com this is your source for powerful investment strategies from top professionals who have actually done it. Move beyond affluence and achieve real, lasting wealth. Now your host, real estate investing expert, Jonathan Twombly.

Hello, everyone, and welcome to the Capital gains podcast on capitalism.com I'm your host, Jonathan Twombly. Are you an investor who's seeking information and ideas on creative and interesting ways to invest money other than stocks, bonds and mutual funds? Then you've come to the right place. Each week, the Capital Gains Podcast features guests pursuing the most innovative alternative investment strategies, ranging from real estate to early stage tech to art, entertainment, and maybe even assets you didn't know you could invest in. We'll also speak with successful entrepreneurs who now invest their own money full time and learn about their biggest wins, worst losses, and most important lessons learned along the way. Today's guest is Jeff Busgang, co founder of Flybridge Capital Partners, a $600 billion venture capital firm based in Boston. They provided capital to such firms as Code Academy, Jibo and MongoDB. In our interview, Jeff describes how he came to be involved in venture capital and how he approaches early stage investing. With no further ado, here's Jeff Bustg.

Jeff, welcome to the show.

Thanks, Jonathan. Great to be here.

Would you tell our audience in 30 seconds who you are and what you do?

Sure. I'm a venture capitalist, co founder and general partner of flybridge Capital, and I also teach at Harvard Business School, a class in entrepreneurship.

What kind of investments does flybridge focus on?

We invest in seed and early stage series A companies, typically in the software and technology sectors. And we have a bias geographically to invest in companies near our two offices, Boston and New York. And we also have a bias in general to invest in companies that we think can be massive, massive winners. Something on the order of billion plus companies. We rarely hit that target, but at least going in, we want to know that it can be a massive opportunity.

Yeah. How do you evaluate that? That was one of the questions I'd wanted to ask you. When you're looking at a company, how can you tell? Obviously, you can't. You have no crystal ball. You can't predict the future. But what are the telltales that you look for that signal? Hey, this is a potential billion dollar opportunity.

Yeah, it's hard. You have to look at a couple of things. One is, is the market that the company is pointing at? A massive, massive market. Huge dollars flowing high Quality business model, recurring high gross margin network effects. And then also, is the entrepreneur themselves ambitious and have the capacity to grow into building a very large company?

And how do you evaluate the market size?

Well, it's very tricky. When you look at a company like a Twitter or an Airbnb or an Uber at their very earliest stages, they look like small ideas. Airbnb looked like an idea about staying overnight on the couches of people while they were still in their apartments. Uber was all about black cars and getting cars after a night of drinking and partying with friends in San Francisco. I mean, these are really niche ideas at their onset. But what you have to do, and we're not perfect at this by any stretch, but we try our best, what you have to do is see the vision of where it can be. One of the things we say to ourselves in the middle of a meeting is, okay, let's dream a little bit and just talk about where this could go. What do we have to believe to believe this could be a 1 billion or even $10 billion company at that stage?

Is it the founder who's suggesting to you that this is a potentially billion dollar company, or are you looking at it and saying, this is right now a niche business, but we could imagine it as being bigger?

So that's a very tricky question. And as a former entrepreneur, I sometimes found myself falling into that problem. You know, my previous companies had grown to large scale. I'd been an executive at a company that had a two and a half billion dollar market cap post IPO and another company that sold for $300 million. So I had seen a couple companies as an entrepreneur, scale successfully. And so sometimes I would put myself into the company and think, wow, if I were running this company, if I were this entrepreneur, what could I do with it? Where could I take it? And that's a very, very dangerous thing to do as an investor. So what I have learned to do, through the scars on my back from having made a bunch of mistakes, what I've learned to do is really not try to infuse our vision into the company, but really listen carefully to the entrepreneur's vision. And if the entrepreneur doesn't have that big vision, you can't force it on them. And so we have to see an entrepreneur who themselves has a very, very big vision.

I'd love to learn about some of the lessons you've experienced over your investing career that taught you how to invest. Are there some poignant examples of that that you can share?

Sure. I mean, look, in our business you make a lot more mistakes and have a lot more failures than you have success, and that's what makes it a hard business. And I've had plenty of failures and I've learned a lot from those lessons. And I try not to make the same mistake twice. One of the mistakes that I made early on and we made as a firm is that we convinced ourselves that if we could find a niche market where we could make three times our money or five times our money, that that would be a high quality investment opportunity. And unfortunately, in the venture business, the way the returns work is defined by the power law. The successful venture funds, you have to have some really outsized returns, 20x50x100x type returns in your portfolio. And it's very hard to build a successful fund when you're aiming for 3x or 5x, because if it only happens 20 or 30% of the time, you end up just returning capital. And so, even though we had seen a lot of success as entrepreneurs and VCs previously, we lulled ourselves as a small fund manager, we lulled ourselves into thinking that niche opportunities were somehow lower risk than large, massive market opportunities. Unfortunately, that's proven not to be the case. Many niche opportunities who are run by entrepreneurs who are comfortable with niche opportunities, by the way, which has a little bit of an adverse selection problem embedded in it. Niche opportunities are themselves, when you're starting from scratch, equally risky. You might as well go for the very, very massive, large opportunities when you're investing at this earliest stage, because you need to get paid, in essence, for the risk you're taking.

What are the kinds of, again, I'm sort of returning to the question, what are the kinds of telltales that you look for? So in addition to the potential market size, when you're evaluating a company, someone comes to you and pitches you for capital, what are the boxes that you're looking to tick that at least make it a possibility for you? Maybe that's not the end of the process, but if you're winnowing firms as they come in the door, what is that winnowing process like?

There are a few things that help us filter. One is we have to love the market opportunity. It's not just, can we see a massive, massive market being created, massive business being created, but it's also, is it a market opportunity where we have a thesis, where we believe through our own research, through our own work, through our own experience as investors or entrepreneurs, is it a market where we believe that there is indeed a massive opportunity? So we have sort of a top down thesis that we might be pursuing. And then we have to intersect with an entrepreneur from a bottoms up standpoint who has a similar thesis. And then we have to know that that entrepreneur has the potential to be very special and has the potential to create something amazing from scratch. And we use a few filters for that. One is we refer to as the Pied Piper effect. You know, can this entrepreneur attract people to them in a way that allows them to attract future investors, employees, partners, customers and what have you in order to make the company successful? And so they have that ability, even though there's nothing that exists yet they have that Pied Piper ability to recruit, retain great team, great partners, great investors around them. The second thing that we look for in our founders is do they, we call it see around corners. Are they the type of people that have vision for not where things are today, but where things are going? Because when we invest at a very early stage, we have to envision that we're going to hold on to this company and build this company over 6, 8, 10, even 12 years. And so we need to believe that we are working with a founder who has a vision for how the world will evolve over that time period.

I've heard this frequently that investors in your position look very, very hard at the management team itself, not just the idea for you. What is the balance between great concept and team that you're looking to strike?

It's an age old debate in venture capital. Do you emphasize market or do you emphasize team when you make investment decisions? And there's some firms that have a strong bias towards team and they figure a good team will figure out the best market to be in. And there are other firms that have a strong bias to market and they figure they'll attract a great team in order to pursue an amazing market. I would say we try to look for both, but if anything, we have a baseline team that you need to be able to build around. So we don't need to see the complete team, but we need to know there's a Pied Piper magnetic single founder or a pair of founders that can attract people around them. Once we solve for that, we make sure that the market opportunity is massive and attractive. But we would not back a weak team to pursue a massive market under the assumption that we could just swap out the team. We want to back people who we think can be there for the full distance. Their roles may change. We have a company in the cybersecurity space called BitSight, which was founded by two recent MIT Sloan MBAs who are spectacular entrepreneurs, spectacular thinkers about how the cybersecurity market might play out. This is an information security company, but we knew that they would not be the long term CEOs, but we also knew that they would form the nucleus for a great culture, a great team and a great company. And indeed they have. And after we seeded them and co led the Series A, we were able to attract an amazing CEO who had a ton of experience in cybersecurity to join them and have now gone on to build a great company.

What is it that signals to you that a person is a Pied Piper?

Well, you can see from the beginning who they pull around them. Advisors, seed investors, team members. Maybe they've brought people they've worked with in the past to the table. Maybe they have former employers or former professors who are seed investing in them. Maybe they have former investors who are following them in this round. So it's not just our judgment from spending time with them and meeting them, but also the pattern recognition that we look at as to how the people around them treat them over time. Like you and I know and your listeners know, there are certain people in our lives that if they came to us and said they were starting a company, you would be leaning in and say, how do I invest? How do I get involved? Can I help you as an advisor? And there are certain people who, if they told you they were starting a company, you would lean back and it's almost irrelevant what they are doing. It's completely dependent on your judgment as to whether they're amazing, special, exceptional entrepreneurs. And so that's the type of person we look for.

Is there anything else about their background that you look for? I'm wondering specifically about whether it's important to you that the startup that they're leading is in a business that they've been in before, as opposed to just a great idea that they've come up with or general entrepreneurial experience.

You know, we've had good success with both. We have a company, Datazoo, which is run by and was co founded by Mike Baker, who was a longtime advertising technology executive, had a lot of experience in the world of ad tech and has built an amazing and very successful large company in the world of programmatic advertising. And Mike was someone who had a ton of domain knowledge and who brought domain knowledge and vision to the table. And then we've also backed Total Outsiders. Code Academy was founded by two Columbia University students who had no experience in the world of education other than them being students who had no experience building companies. One dropped out of college, one barely graduated college as they started Code Academy. But they had a huge passion and vision for online as the new educational medium and teaching the world to code. And they've built an amazing, valuable company based on those premises. And so it can be young or old, it can be people from the domain, people from outside the domain, it really doesn't matter.

So I'd like to back up a little bit to one of the things you alluded to when you first started the interview, which was being an early stage investor. What does that mean for people who are not familiar?

We invest in companies that are often pre product launch, pre revenue, right at inception, two people and an idea and 20 great PowerPoint slides, or maybe not so great PowerPoint slides. And those are typically characterized as seed investments. And so we do predominantly those kinds of investments. And then we also invest in folks who have maybe progressed a little bit and gotten some traction and sold a couple customers, shipped the product, gotten some early product market fit signals, and then they're raising a series A and we will invest in those companies as well.

One thing I'm curious about is you identify yourself as an early stage investor. I've spoken with a number of people who characterize themselves the same way and I'm just wondering, does that imply that there are people who specialize in late stage investing?

Yes, there are many very talented investors who specialize in growth stage or late stage investing and we welcome them into our companies. Our model, since we're a relatively small fund, we have about 600 million under management across four funds in our 13 year history. We want to attract other investors later on. So for example, MongoDB is one of our investments. We co led the Series A at Mongo and have been a part of the company since very early on. The company has gone on to be a very large and valuable company and has attracted capital from Sequoia and NEA in the later stages. And that's been a terrific fit for them because they needed to raise hundreds of millions of dollars, which they've done and even more recently from some of the mutual funds like T. Rowe Price and Fidelity. So there are a lot of folks who are excellent at late stage investing. Growth stage investing, we try to be as good as we can at the early, early early stages.

What was it that attracted you to early stage as opposed to late stage?

Well, I'm an entrepreneur. That's how I started my career. First thing I did out of business school is join a series A startup and wrote it through five amazing years in an IPO and then went on to co found another company out of my partner's house, which we then rode to build a big company that was you promise that was acquired by Sallie Mae. So as an entrepreneur, I always had the experience of coming in at inception or co founding a company or near inception and then trying to scale it. And I just love that early early stage. And my partners, two of my early founding teammates were former investment partners at Greylock out of the Greylock Boston office, Chip Hazard and David Aronoff, both of them have huge passion for early early stage investing as well. And so that's just what we love. It's not necessarily where you make the most money. It's not necessarily where you have the lowest risk, that's for sure. We work really hard to put a million dollars at work in very high risk companies, which probably sounds crazy for some of your listeners, but that's what we love to do. And every now and then we hit it and that's tremendous fun.

So is that your minimum bite size a million dollars or what are you typically looking to put into a company when you invest?

We'll invest even less. We'll put in $250,000, $500,000, $750,000 in seed, seed companies that are really early on to help lead or co lead a one or two or $3 million financing. And then we'll put in two, three, $4 million to lead a Series A for a company that's a little bit further along. So for example, Jibo, which is a robotics company out of MIT's Media Lab, founded by Cynthia Brazil, a professor who's an expert in social robots. Jibo is shipping this holiday season what I think will be the first and most amazing social robot for the home. It'll be something that all of your listeners, I think, will want to buy if they're at all interested in the future and having a robot who can be a companion and an assistant in the home and a playmate for your kids. And so Jibo is a company that was already reasonably far along and hadn't yet sold any products per se, but they had a crowdfunding campaign, they had a demo unit, and we put a $3 million investment in the Series A to co lead the Series A. So that was a little bit further along in a sense. And then just recently we closed a $500,000 seed financing in a company that was just two people and a big idea and a couple PowerPoint slides and a vision for Building a next generation machine learning software company that we're very excited about.

So typically, what is it that the companies are going to be spending the money that you invest in them on?

Well, at the stage that we invest, because these companies tend to be pre product and pre revenue, they typically invest that money in running some experiments to determine if they can build a product that the market will adopt. And that's what we call pre product market fit. So they invest in hiring an engineering team, they invest in hiring a product manager, and they invest in some space and put their heads down and with a five or seven or ten person team, try to build the initial product and try to get some early feedback from the market with that initial product, whether it's beta customers or the first shipping customers. And then they come back and having hit that what I'll call valuation inflection point, after having proven out some of these milestones and reducing some of the risk, maybe it's technical risk, maybe it's market adoption risk, they then come back and raise more money to invest in sales and marketing to begin to advance the go to market strategy for the company.

Are there particular silos or categories of companies that you tend to invest in?

I know you said tech, but that's.

Sort of a broad category. Is there anything within that that you particularly focus on or are you agnostic and opportunistic? What is your approach?

Yeah, each of the four partners at Flybridge tend to have a top down thesis or handful of theses or sectors that they're particularly interested in at any given time. And we do research and go to conferences and talk to experts in those areas and try to find companies that we think fit those theses. So for example, we've had a thesis for a number of years in what we call the developer driven model, which is that we believe that products that are designed for the developer adoption, for the development community to adopt those products can be very powerful as the world is investing more and more in it and as the world is becoming more and more of a distributed computing environment and as APIs are more accessible and developers are jumping into those APIs to stitch together interesting services and software platforms. So we like those kinds of companies like MongoDB and Crashlytics, which is another company that we seeded and led the Series A and sold to Twitter very successfully. So we like those kinds of products, but we also are always open to amazing entrepreneurs. When we met Cynthia Breazeal and her teammate Steve Chambers of Jibo, we were not thinking social robots. We had spent a lot of time in machine learning and had made a number of investments there. We spent a lot of time in AI, but we were not thinking about social robots for the home. But after meeting with them and thinking about what they were doing, we were very compelled by it. So we each think about sectors and strategies and review those strategies with each other. But we're also always open for out of the box amazing entrepreneurs.

What are the sectors that you focus on?

Particularly over the years, I've spent a fair amount of time in the edtech space, hence my investments in CodeAcademy and another company, OpenEnglish, which is an online English language platform for the Hispanic and Latin American South American market. And I'm also on the board of edx on behalf of Harvard University and my role on the Harvard Business School faculty, which is a massively open online course platform for universities. So I spent some time in the education market, some time in the marketing automation and advertising technology market, hence my investment in Data Zoo, sometime in machine learning and sometime in financial technology investments. I'm an investor in a company called Zest Finance, which is a next generation underwriting company founded by the former VP of engineering from Google, Douglas Merrill, which is an amazing company focused on really creating the next big data approach to underwriting. Far more effective than the way underwriting has been done historically. And it's grown into a big company and very successful company. So I've focused on those areas. Right now I'm spending still more time in machine learning and AI and also spending some time thinking about Millennials and new services and new offerings for Millennials.

What kinds of things are on the horizon that you see that are particularly aimed at and interesting to Millennials? Whether you've invested or not, there are certain sectors that you think are particularly ripe for exploding or what are your thoughts?

Well, what's so interesting about Millennials is that they are accustomed to having their phone be the remote control for their lives. And so they expect everything to be on demand, mobile and designed beautifully. And so you can almost imagine any category of the industrial world that is currently done in a way that's not mobile, not beautifully designed, not on demand, and reimagine it. So some people are doing that in the insurance industry and we've spent some time we have not made an investment yet in one of those companies, but we spent some time with a number of companies who are doing that, which I think is intriguing. We invested in a company that is doing that in the storage industry, physical storage called Omni, which is basically a physical cloud company where you can use your phone to throw things into a physical storage facility that gets picked up from your apartment and then delivered when you swipe it back in. And so we think there are some really interesting kinds of services and ways of working that are really unique for Millennials. One of our recent things that we've done at flybridge, which we're very excited about, is we've added a new partner named Jesse Middleton, who had been one of the founding executives at WeWork and has spent the last five and a half years helping build that company into an amazingly successful multi billion dollar company. And WeWork really is a phenomenon, a cultural phenomenon for Millennials about how they want to work and how they see their professional lives evolving. And we sort of are trying to take some inspiration from that in our investment theses going forward.

Yeah, what kind of inspiration are you looking at?

Well, some of the things I said about reimagining how work is done, reimagining how services are delivered, reimagining the kinds of things that Millennials expect from their companies and service providers.

You mentioned earlier that you have a geographic bias towards Boston and New York. Can you talk about that? Why would you have a bias towards where companies are located?

Yeah, it's a great question. Because on the surface it seems kind of odd, right? Because the world is flat and technology investing should be global. But we are very hands on in the way we partner with our companies. We're very active investors. There are some investors in the early stage that are passive. They write a check and they ask the company to update them every quarter, every year, and sort of sit back. We tend to be very active. We sit on the board. We tend to be the largest or second largest shareholder. We tend to be the consigliere for the founder. And so we like to be close. And it's hard to do that 3,000 miles away. It's also the case that we're very humble about where we have advantage. You want to invest and you know this and your readers know this. You always want to invest where you have an edge. And if there's an entrepreneur on the east coast, in Boston and New York, where we have deep, deep ties and deep, deep networks, we believe we have an extraordinary edge. If there's an entrepreneur in Silicon Valley, there are some amazing venture capitalists around them. And we're not convinced that we have such a great edge, and therefore we fear adverse selection. So we tend to stay focused on companies where we believe we have an edge, either a relationship edge or an information edge to make the investment.

Yeah.

Can you talk about how important the relationships are?

Yeah. When we invest, we're signing up to be partners with the entrepreneurs for the next 10 years, 12 years for life. We care a lot about that interpersonal dynamic and the entrepreneurs care a lot about it. And when they sign up for an investment with Flybridge and they become a part of the Flybridge family, that means something. It means something to us in terms of our loyalty to them, and it means something in terms of the way we treat them. We try to view our entrepreneurs as our customers. In the end of the day, the best entrepreneurs have choices. We want the entrepreneurs to feel like we're there to serve them and to help them be successful and to help them grow and navigate all the challenges that trying to create an amazing company from scratch entails.

Do you find that the local bias and local routes help you in sourcing deals and doing due diligence on the companies that you invest in?

It does. It allows us to have insight into the founders because we either know them deeply personally or we have one degree of separation from them. It allows us to have insight into the markets that they're pursuing and where they came from and what their perspectives are. And importantly, when you ask founders what they want out of their investors, what does value add mean? What they list off very quickly comprise of all the things that we focus on and we can focus on most effectively with local founders. Things like recruiting, things like providing strategic advice and being there when you need them on demand. Things like connections to advisors and business development partners. All the kinds of things that if you're close and you have deep roots in the community, you can provide easily.

The warm introductions from your network provide a substantial percentage of the deals that you ultimately invest in.

It does. I wrote a blog post a little while ago called the introduction algorithm for VCs. And all VCs have their own introduction algorithm, but it tends to be that at the top of the highest ranked reference are folks that you have worked with before, you have backed before in successful companies. So if there's an entrepreneur who has made us money, we are likely to jump all over an introduction. So, for example, BitSight, these two MIT graduates I mentioned, one of them had worked for the CEO of one of our top performing portfolio companies, Digital Lumens, which is an smart LED system software company. And one of the co founders of BitSight worked for the CEO of Digital Lumens in a previous life. He made the introduction to us, we jumped all over it and we immediately were leaning in because of that. If I get a cold email or a cold phone call, even worse, or a cold outreach over social media, then that has a certain association with it. VCs are big data decision makers and we are pattern recognizers and so we apply data to everything that we see. And so if you can't get to me through a mutual connection, then that says something about your inability to network effectively, your inability to be strategic and how you come in the door. And so what does that say about how you're going to do with partners and key employees that you're trying to recruit and customers and future investors? And I know some people find that off putting because they say, well, it's an inside game and you are therefore have the subtle discrimination against folks who can't play that inside game, who maybe didn't go to the right schools or didn't work at the right companies or didn't have the right social connections. And there is some truth to that. But there is also a wave in the last five to ten years of incredible transparency. And it's my job and other VCs jobs to be open, to be on social media, to be transparent, to be accessible to a very large number of people. And it's my job to have many input points from many different pools of society. And so if you can't find one of those input points in my full range of networks and experiences, then it just says something about your navigational skills.

I find that really interesting. I mean, real estate, which I do, and my listeners know that's my business, is a highly relationship driven business. It's very difficult to come across really attractive deals if you are not known in the marketplace, if you don't have the relationships already existing. But I think the perception amongst laypeople for the VC industry is that, you know, those initial relationships are not very important. What's important is that is the big idea and that it's even, you know, possible for people to have a fantastic idea and just go pitch it cold in a shark tank style environment where they don't know the VC before they approach them. So, so I think this is a very interesting sort of revelation, certainly for me and I'm sure for a lot of my listeners too, yeah, it's more.

Than just a big idea, as you say, it's your ability to execute on that idea, your ability to convince people that you can execute on that idea. And I think it's also a lot having to do with your ability to envision that big idea, to create A big business. There's some people who have a big idea but don't have a clear view of how to translate that into a big business. One of the things about Codecademy that I really loved was even though the service was free for life, like learn to code for free and the lessons and the online interactive tools were all open, they had a vision for how to turn it into a very, very big business. They were just focused on adoption first, monetization later, and that's proven out as they've continued to evolve their business strategy. But if those two founders had come in and just had the vision, but not the how to make it a big business and not the execution exhibiting the early execution skills, I don't think we would have been nearly as interested in investing.

Can we take a little step back and talk about how you wound up at Flybridge? What was your path there?

Sure. Well, after graduating from college with you, I went on to New York City to follow my classmate, then girlfriend, now wife, who was an aspiring professional Broadway performer and spent a couple years in New York with her. I worked at the time at the Boston Consulting Group. And then after I did my two years of penance at BCG in the world of management consulting, and after she decided that the world of Broadway wasn't all that she had dreamed of, we came back to Boston. I went to Harvard Business School and then embarked on an entrepreneurial career. I'd been a computer science undergrad, my father had been an entrepreneur, had started a company that I worked at in the summers in middle school and high school. And so I always had this vision of being a tech entrepreneur even before that was really a fashionable thing and before I even really understood what it meant. And after business school I met some venture capitalists. I didn't know anything about venture capital, but they were swarming around Harvard Business School and many Harvard Business School alums had gone into venture capital. And I met one group and they offered me the opportunity to join them. And I said that sounds really interesting after I learned a bit more about it, but I'm really focused and passionate about entrepreneurship. Could you please instead introduce me to some of your portfolio companies? And so they introduced me to a number of them and I joined one of them, a series, a company that as I mentioned before, ended up being an amazing company called Open Market that went public a year after I joined and had a very successful five year run with them. And then I left Open Market to co found another company, Upromise. And both companies were backed by Greylock and Greylock was the firm that introduced me to OpenMarket originally and then fast forward a few years later and one of the Greylock partners, Chip Hazard, was co founding Flybridge and invited me to join him to start the firm.

When you started the firm, how did you go about raising your first fund as a new fund manager? I'm sure that's a big challenge.

Well, we had a very unusual situation in that there was a local billionaire in the IT world named Pat McGovern, who had been the founder of IDG International Data Group, who was an experienced investor in China and on the west coast in the world of venture capital and had the experience of helping start funds in each of those geographies. And he was interested in starting a fund in Boston and, and so he pledged $100 million to start a fund and that comprised of our initial capital. So we were blessed in that we had the opportunity to have one single LP get us in business with a terrific initial fund size of $100 million. And that sort of set us off on a good path.

But starting out with $100 million kind of poses its own problem, doesn't it? I mean, now you've got to somehow allocate $100 million to early stage companies. And how did you go about starting to source those deals?

Well, it had a lot of problems in addition to the ones you mentioned, which is having one LP also has some complexity to it. And eventually we evolved out of that. But to answer your question more directly, we had experience. You know, my partnership had been at Greylock and I had been a two time entrepreneur in two companies that had been fairly successful and had employed thousands of people. And so we had good networks that we had already walked into when we started the firm. And then we just kept pumping those networks. Deal sourcing, it's a funny business. No matter how senior you are, no matter how successful you are. Deal sourcing is all about hustle. In the venture capital world, you've got to keep hustling. My partner likes to say, a shoe leather business, you got to get out there and just meet people and network and hustle. It's one of the reasons I love teaching at Harvard Business School, because I get to every year meet new young, very talented, very smart, very ambitious people who are thinking about new ventures, what's next, what the future holds, what their future holds, what markets are hot, and I get to learn from them. So that's the essence of our business, is trying to hang out at the right universities, get to know the right executives, the right technical executives, the right up and comers and figure out where the world is heading and try to follow their vision.

There's definitely an issue, I think, generally speaking, where you have to allocate a lot of money maintaining your discipline. Right. You're under pressure to allocate the funds, but you've got to look for investments that really fit and that tick all the boxes that you mentioned earlier. I mean, that must be its own challenge, right? To not be biased in favor of companies, but to maintain your discipline in investing.

Yes, staying disciplined is important. I think that we made a lot of mistakes early on. You asked me earlier about mistakes. One of the mistakes we made early on was we put too much money in our initial checks. We had conviction in certain companies at certain points in time and we wrote a big check into those companies and then that proved to be a mistake. It's okay in our business if you make mistakes. We all make a ton of mistakes, but you want to make small mistakes. And so over time we have learned. And also the world has evolved to entrepreneurs wanting less capital and being able to allocate smaller and smaller checks with the early stage entrepreneurs who you're exposing less during those points of risk. And so capital allocation in our business is all about trying to get more money behind your winners and trying to minimize your losers.

I wanted to return to something else that you mentioned. You said your father was an entrepreneur. You grew up in an entrepreneurial family. Are you one of the people who believes that there's an entrepreneur gene?

No, I don't. I believe. Look, I'm a professor, so I have to believe you can teach entrepreneurship because that's what I try to do year in, year out. So no, I don't think there's an entrepreneur gene. I do think there are certain characteristics that great entrepreneurs have. I think those characteristics can be taught. I think some of those characteristics are native or have the roots and native attributes. But I don't think that some people are. I don't think anyone is unable to be an entrepreneur just because their parents aren't entrepreneurs or if they don't have a certain gene of some kind.

Yeah, I mean, I guess gene is probably a little bit strong. What I really was getting at was it seems to me that a lot of people who are entrepreneurs come from families of entrepreneurs. So it's something that they can imagine themselves doing. This is obviously not true in all cases and certainly not in mine. My parents aren't entrepreneurs, but I look around and I see a lot of people who who are entrepreneurs came from families of entrepreneurs. And I think that maybe the reason for that is simply that it's something that you can imagine yourself doing. It's within the realm of your possibilities. Whereas if your parents are constantly telling you you must go get a job somewhere, it's a little bit harder to imagine taking a leap into starting your own company.

Yes, there's truth to that. In fact, it's sort of interesting when people don't. There's a lot of glamorizing entrepreneurship nowadays, and I'm probably in some ways a part of that, so I shouldn't speak too poorly of that. But I think there is something to being a joiner of an entrepreneur, being willing to follow an entrepreneur, and being one of the first 10, first, 21st, 50 employees of a company. Not everybody can be the founder. Not everybody wants to be the founder. Not everybody has that brilliant idea or that brilliant vision. But many people want to be a part of the excitement of entrepreneurship and can do so by joining. And so there's, I think, a certain nobility to being a joiner that maybe we don't talk enough about.

You've talked about some of the mistakes that you've made and the lessons you've learned. I'd like to turn that on its head and ask you about some of the successes you've had and what you've learned from them.

Sure. I guess the things that I've learned with regard to the successes that we've had are the following. One is that if you're in a hot market and if you get the secular trends right, you can make a lot of mistakes and still have a massive success. When I look back at my entrepreneurial ventures, when I look back at the investments that I've made that have been successful, it's not that we didn't make mistakes. We made a ton of mistakes. In fact, I've seen some very successful outcomes come out of execution paths and strategies that were inferior to. To some very unsuccessful outcomes. And what I attribute the difference to is that the secular trends, the markets, the momentum, the tailwinds were so powerful that they get it right. The reason you get it right is because you predict the future. You predict how the future will evolve in the right way. The old saying, the future is here, it's just unevenly distributed. When you look at things like autonomous cars or drones or artificial intelligence or robotics, there is a future where those things will become prevalent and mainstream. And if you can hit the micro segments at the right time and the micro markets at the right time, then you can build very large, valuable companies. So it's hard to do. More often than not, you don't get it right. But when you do get it right, it covers a lot of sins.

Is that something that you have any way of predicting when you're going into a company or is that again.

Learned a lot in my 13 years and I'm still learning. That's what makes this job so fun and invigorating is I feel like I'm learning still every day. And as an investor, as I said, you're a big data machine learning algorithm and you're always getting more data, you're seeing more outcomes, you're seeing more patterns and you're always trying to tweak your model and the investments that you make. So, for example, I've covered a few of these, but one, avoid niches, pursue massive market opportunities. Two, make sure you're backing founders who you think can be the nucleus of the team end to end, not a team that you need to replace wholesale over time. Three, allocate a small amount of capital in the early days when there's a lot of risk. Don't put too much capital in too early. There's always going to be plenty of opportunities to put in more capital. Then fourth, try to get those big secular trends right. Don't just invest in great teams if you don't think that they're playing in markets that can be massively exciting, massively disruptive, exceptionally large markets.

Before we go, I'd like to ask you if there's anything that you're particularly excited about. Now.

I'm excited about a lot of things in my life and at flybridge, the one I'll pick, as I mentioned before, is having a new partner, Jesse Middleton, based out of New York city, the former WeWork executive. The three flybridge partners, David, Chip and myself, we've been together for a long, long time. David and Chip worked together at Greylock. We all went to business school together. We've known each other and have been close friends for over 20 years. And so it's fun to have a new partner around the table who has a different perspective, who has a different experience base, who brings fresh thinking. So that's been a ton of fun.

That's terrific. Usually at this point of the interview I ask the guest how people can get in touch with them, but since you've already talked about the fact that they shouldn't cold call you, they should figure out how to get in touch with you through a warm introduction, I'll leave it at that and let people figure out how to get in touch with you. Well, Jeff, I really appreciate this. This has been a really fun interview. Thank you so much for your time today.

Hey everyone. Jonathan, again, I hope you enjoyed today's interview with Jeff Busgang. If you'd like to contact Jeff to learn more about his fund or to.

Pitch your company to him, you can.

Find him at www.flybridge.com. but if you're looking for capital, remember.

To go in with a warm introduction.

If you like the Capital Gains podcast, please subscribe on itunes, Stitcher, or wherever else you listen to podcasts so you don't miss a single episode. Please like us on Facebook and recommend us to your friends. And if you write us a five star review, we'll be eternally grateful. If you'd like to learn more about passive Real Estate Investing and my company, Two Bridges Asset Management, visit our website at www.twobridgesmanagement.com. that's Two Bridges spelled out and MGMT for management. You can also follow me on my real estate investing blog, the mortar@www.themortorblog.com. until next time, this is Jonathan Twombly for the Capital gains podcast on capitalism.com.