Eric Frost - Managing Partner at Demos

Welcome to another Founder Wisdom podcast. We have Eric Frost with us. He's a managing partner at Demos, which has an interesting story in itself. CEO also at Nostos, previously partner at Zeus Jones. She's a fairly big and important agency, quite creative. Love the website, the logo, everything. And yeah, Eric is sort of building a venture studio nowadays and has an interesting So Eric, welcome to the podcast. Tell us a bit more about yourself and what you're up to.

Yeah, thanks, Charles. Thanks for having me. Yeah, I think when we broke off from Zeus Jones, which we'd run for about 20 years, I was one of the founding partners there. We worked with the best brands in the world across categories, the Nikes, the Apples, the Mayo Clinics, the Fidelities, the Nestlés, you know, so on and so forth. I think we originally thought our advantage in the sort of venture world, the startup world, was gonna be our connections to these big strategics. And what we quickly found out, it was bringing the brand expertise, all of our sort of category creation experience that we've done with both startups, but also some of the largest companies in the world to these early-stage startups. And I think even we were surprised what an unfair advantage and an amazing accelerator. Applying that branding expertise to a seed-stage company that's about to go for a Series A, helping clarify their story for the market, the new value streams they're creating, the amazing technology that they're bringing into the world, that, that was just a huge unlock for these early-stage companies. So we're really focused on that now and going to market as an accelerator first, where we're engaging in a zero-cash way, equity, as equity partners with those startups first and foremost, and providing all those services for equity.

Interesting. And if we start with the story of Zeus Jones, because you were a Lead web developer before that, a creative director, right? Frontend developer. How did, uh, Zoot Jones happen?

Um, yeah, so I really started my career in San Francisco in the mid to late '90s at the very dawn of the internet, the Web 1 world. So I worked at an agency that built the very first patagonia.com, the very first online car configurator with the first Land Rover website. We built the first apple.com where Apple was selling websites. So really the dawn of the internet. And I think people were just starting to understand participatory brands, what it means to co-create with consumers. A lot of those things were just emerging. What happened is I went from that company to a large advertising agency here in Minneapolis that was doing very creative work, a lot of branded entertainment stuff like BMW Films and a lot of very cutting-edge stuff. But still sort of thinking about brands and branding in a very traditional way. And it was the people who came from that sort of interactive world who were sort of bringing a new philosophy of branding that consumers were creating content and the Web 2.0 and social media landscape was emerging. So we really saw that there was an entirely new way as we were moving away from a mass media world where consumers were encountering brands and very few channels to a much more fragmented media world and that there would be an entirely new model for branding and the way consumers wanted to engage with brands. So we broke off, 4 of us, and started Zeus Jones from there and have always sort of been like a brand innovation lab, a brand innovation studio, constantly sort of pushing not only the theories and practices of branding, but how consumers or those brands are creating products, thinking about services, and thinking about the futures of their business. So we did that for about 20 years. That taught me tons of skills, both on the creative and the strategic side of brands and business. We're working all the way up to the C-suite with some of the largest companies in the world, helping them not only totally transform their marketing departments and their marketing initiatives, but thinking about their sort of holistic business as well. That's where we sort of started to eye the idea of creating a venture studio. As well, because we saw M&A was a huge part of the future of these big companies, that they weren't going to be able to build these features themselves. They were going to be acquiring them or partnering with smaller startups. Um, and we had no way of participating in that world at that time. So that was really one of the original inspirations for creating Demos.

Interesting. And how successful was it? You stayed there for 25 years or something? 20 years?

20 years. Yeah, it's still going. We transitioned to the next, still an independent agency. We transitioned to the next generation of ownership. So I'm still an owner board member, but I'm, you know, spend all of my time on the venture capital fund and the accelerator now. But yeah, it's still going, still working with amazing brands, still doing amazing work. One of the big things they're doing right now is helping brands transform their entire sort of marketing department initiatives around AI. So we create something on that side, what we call the brand brain, which is not just using AI for marketing efficiency, using AI for marketing robustness. So it used to be in the old world, only brands like Nike that had a marketing department of hundreds, if not thousands, could go into communities and create bespoke content and experiences. You had to be a Red Bull or a Nike to do that. Now with the power of AI, with the right sort of brand intelligence and the brand frameworks and foundations and strategies, any brand of any size can sort of create a much more rich experience for discrete audiences or discrete communities. So we're sort of advocating for brand and marketing richness around a sort of coherent center and using AI in that way to really transform your brand and marketing. So that work on that side is interesting, and we're leaning in and still partnering with them. I think we're going to take that brand brain and create a startup offering. So after, you know, we do these projects with portfolio companies, we can also hand them sort of like a brand brain light that they can use to take all the work that we've done and continue a high bar of quality as they continue to execute and build and create new content and new experiences around their technology or their audiences.

And what happened with that one? You told me it sort of merged into something else. How did that lead to Nostos and Demos?

Yeah, so Nostos we created just because when the 4 of us started Zeus Jones, we had come from that startup or that digital studio I mentioned that I worked with in San Francisco, that sold to a big technology company called Sapient. That Sapient then sold to a big global network. When we were at Fallon, one of my partners, Rob, was the president when they sold to a big French advertising network. So we had sort of seen what the aftermath of selling to one of these big companies is like. So one of the things we wanted when we started Zeus Jones 20 years ago was that Zeus Jones always stay independent. That we didn't just build it and then sell it to one of these massive networks for a big cash grab, that we always wanted to be in the hands of the people who wanted to keep pioneering and doing innovative work and who cared first and foremost about the agency and the work and the quality of the culture and the work. So we started Nostos as an independent agency network to bring other skills and technologies together because honestly, A lot of our big clients were very unhappy with the agency partners they had. They were constantly asking us for recommendations of other partners, a go-to-market partner, a media partner, a PR partner, an event partner, a technology partner, so on and so forth. So we really curated a best-in-class network of agency partners so we could build a bespoke team around any business challenge and come to the table with values-aligned, best-in-class partners that we felt really good about recommending to our longstanding relationships. Because a lot of our clients, we have decades-long relationships with. They're very trusted partners and we don't want to betray that trust by recommending a partner that we don't believe in.

Right. But Demos is like a venture studio, right? So how did that lead to all of that? Why pivot to this?

Because we were, like I said, we were working on these 5, 10, 15-year strategies with the C-suites of the Nestlés, the 3Ms, the General Mills. the Nikes of the world, and looking out at the massive amount of category disruption that was coming. So we were tracking trends around changing demographics, changes in science and innovation, changes in technology, changes in environment, changes in the political aspect of everything. So tracking all the trends, you can see that there's enormous disruption coming to the way we create food, the way we grow food, the way we manufacture food. For example, and when you look at all that and the enormous amount of change that's coming, we just saw that M&A and partnering with these startups was going to be a massive part of that. And honestly, we had conversations with some of our clients who were saying, not only is it harder for us to innovate, but I, my innovation budget compared to my M&A budget is like a fraction of the budget. It would be way easier for me if you just went and found me startup partners who were creating the things we know we need for our future and bringing those to us so we could either partner with them or acquire them.

Uh, what were your, uh, best quote-unquote investments so far, your biggest breakaway companies/startups you work with?

Yeah, so the, uh, I think the early winner and the big winner out of our first fund was a company called Dimensional Energy. So what Dimensional does is they pull carbon dioxide out of the air. They use a proprietary reactor and process to transform that into what they call a barrel of syn crude. So it's basically a drop-in replacement for a bottle or a barrel of crude oil. So anything that you're making out of oil— plastics, cosmetics, fuels, lubricants— all of that can be made in a carbon-neutral way, and it can be made anywhere. It could be made at point of use. We don't have to go dig dinosaur bones out of the ground in someone else's country and create a conflict or, you know, misaligned interests. We can just create energy and these products anywhere. So that was really the first big company. It's obviously a very hard tech company. I think they spent almost 10 years developing the technology in the laboratory. Then they went to like a demonstration scale and then they've been scaling up. And I think they ultimately thought along the way they were going to have to build like a billion-dollar facility to producing and be producing thousands, if not tens of thousands of barrels a day of this syn crude material. And what happened is As they were scaling up, other global energy and lubricant and materials partners started coming to them and licensing parts of their process. So they're now like a new technology process partner. So they're going to market through all these other partners and helping them basically transform into carbon neutral and supply chain resilient technology. You know, when we're looking at the climate today with the Strait of Hormuz and all the sort of supply chain disruption and things that's creating, I think people are much more interested in supply chain resiliency, sourcing different ingredient streams, and eventually energy independence as well.

And the model precisely, how do you get your clients to come to you? Do they have to pay something or do you invest in all of them? How's the model different than most venture studios that usually aren't super successful?

Yeah, so the way it works, um, the way we used to do it is we just would invest, we would write a check and, and part, a portion of the checks, say we'd write a $500K check, $100K of that would be the service for equity and $400K would be the cash component. So in our first 2 funds, that was the model that we operated under. We just tied the 2 things together, the services for equity and the cash. And the move that we've made and the change we've made in the last 6 months is that model only works if we're deploying. So we have to be actively deploying a fund in order to be able to engage with a startup. And we had startups who were seeing the work that we'd done for some of our other portfolio companies. And to answer part of your question, you know, we work with a lot of SOSV companies, especially out of HAX. And we had done work for a HAX company called Lura Health. They make the world's smallest continuous health monitor. It's about the size of a traditional braces bracket, sits in your mouth. It can read up to 100 different biomarkers in your saliva. And you can measure anything in saliva that you can measure in blood. So we helped them develop their whole sort of go-to-market presence, the brand, the story, the investor pitch deck, all that good stuff. And the other SOSV companies were seeing the work that we did and really loved it. So they started approaching us and said, you know, we want basically the same package that you gave to Lura. We want the whole same brand experience. We weren't deploying at that time. So it was actually one of the— Founders who pushed us to innovate the model and basically said, well, can't you come up with a different model? What's the least amount of cash you could take? Could you take zero cash? Would you do it for 100% equity? And so we basically arrived at a model where we're separating the work for equity from the investment and keeping those 2 things separate. So we're doing the work for equity first, which gives us, you know, a really good glimpse inside the company as well. So we use that as sort of like That's how we create conviction. That's how we do due diligence. We're working side by side with these founders, seeing how they execute, seeing how their team works together, learning the market, learning the competitors, learning the cultural opportunity, and helping shape the future ambition of the company. So we get to launch all that together and see how the market receives it. And then we have a fund now where we follow on to companies that come through the accelerator. So the companies that are doing well, tracking, you know, like we think that they should, where we have aligned ambition, where we really enjoyed working with them and they enjoyed working with us, we're doubling down and writing that, you know, $200K to $400K follow-on check to companies that come through the accelerator.

The new fund, I believe the Fund 3, is in manufacturing and energy and stuff like that. When I go on the website, I also see you do like chocolate brands. So like, what's the— do you have like a niche you specialize in, or?

Yeah, I would say, uh, for the third fund, we really realized where we sort of, uh, where our expertise makes the biggest difference is with companies where there's the biggest delta between them doing something incredibly innovative, uh, and creating something entirely new and the market's understanding of what it is they're creating, the market's understanding of the value or the potential new markets they're creating. And that's what we really call category creation. So instead of slotting into an existing category, you might be pulling value from multiple existing categories and then stacking new value on top of that. So we really specialize in helping these companies articulate that, give it a name, give it a vision for that category, and getting partners, future employees, and obviously other investors to enroll in that vision. So where we feel like the biggest delta between that Really impressive innovative technology and the market understanding is in hard tech. So we've gravitated more and more to hard tech companies. So a lot of AI infrastructure, a lot of next-gen energy infrastructure, robotics, quantum, you know, a lot of these sort of bleeding-edge, very emerging things. And we're really investing in the infrastructure layer of all those, what we call like bottleneck technologies that are unlocking, you know, future platforms that other companies are building on top of and using as key technology. I, in the space ecosystem, I feel like satellite is a really good example of that where they're for the first time allowing people to use edge compute. They're already running Google AI edge compute models on existing satellites and connecting satellites and providing more functionality and basically almost like a TCP/IP of space that creates sort of a technology and software agnostic orchestration layer. Those are the kind of companies we're looking for.

Got it. How do you actually filter your founders? Do you have a list of criteria and how do you measure potential product market fit so that you know that it's a good investment for you?

Yeah, that's a really good question. Um, I would say when we first got into the space, it was a little bit like starting our careers over because we're coming from the marketing branding world where we had established ourselves very well. We'd spent 2 decades building the reputation of Zeus Jones. We came into the VC world and no one had any idea who we were. So we leaned a lot on other, you know, other VCs in the community, people that I had known from my previous career who were at places like Initialized, and really tapped into their expertise. And they were always talking about that sort of the magic of the founder and the importance of the right founding team and betting on the founders. And I would say, I think there's a lot of wisdom there, but there's also some intangibles. So I think we look for people who are going to break down any barrier no matter what, because, you know, these companies always have to pivot. No business— and I've started enough businesses to know what you think the business is, the business will change multiple times within the first 2 years, and it will generally transform into something you totally didn't expect. I've certainly experienced that in all my businesses, and I think that's true of all these very early-stage startups. We're working with them very early on. They're going to have to pivot. Their go-to-market plan is going to be completely different. So you can look at their financial models and you can analyze all that, but you know, it's all going to change. So it really then comes down to the founder. Is this someone who has the tenacity and the grit to power through whatever adversity? Do they have the vision and the curiosity to be able to really find their fit in the market and to be able to pivot towards that thing? Are they someone who's charismatic? Are they someone who can make other people believe and that they're the ones to do this and get them enrolled in that mission and really bring them along? And I think one of the things we look for as well is someone who, you know, some of these are very emerging domains, but someone who has either domain expertise or has connections in that domain that they'll be able to really enroll either other partners or other people as they pull other experts in to sort of move things forward. So those are just some of the things that we look for. I'm sure there are others that I'm not thinking of at the moment or that we're missing, but we're constantly sort of learning and refining how we think about and evaluate the the founders that we're working with.

And what about the product market fit? How do you measure if the market actually wants what they're building?

Yeah. So a lot of the work that we did at Zeus Jones was either taking old brands or old products and sort of reinventing or revamping them to sort of better fit with current culture. So we've developed a lot of expertise over the last few decades in our branding work of understanding cultural opportunity. So I'd say, you know, other people, and we definitely lean on other partners to do like technical due diligence in some of these areas, but what we can bring to the table that I think is unique is really that understanding of what is the cultural opportunity here. And technology adoption is part of that product-market fit that I think people don't talk about enough is cultural engineering. You know, unfortunately, we don't live in a world where the best technology always wins. It's the one that can aggregate belief around it as well. And I think that's where we can provide a unique advantage as a partner and bring our expertise to the table as not only helping the best technology succeed, but accelerating belief at the speed of innovation.

Right. Makes sense. The priorities this year, what are they like? What do you want to work on this year?

I think we're super bullish on the space ecosystem and we feel like not enough people, You know, outside of the VC world, I should say, not enough people are talking about space. I think if in general people realize that investing in the orbital economy or the space ecosystem, whatever you wanna call it, is the equivalent of investing in the internet back in 1997, which is where I was in San Francisco, like at the epicenter as it was happening. I feel like that's a massive opportunity now. So we're definitely prioritizing that. I think all of the bottleneck problems around AI, obviously AI is massively accelerating everything, accelerating things in biotech. I think even quantum computing is coming on faster than people originally thought it would. Quantum, I think, is a little on the horizon for us, but we're still looking for biotech and energy and any of the sort of bottleneck unlocks in the AI world. We're definitely very interested in not only energy and how, say, cooling, for example, can be cracked. You know, energy for AI and data centers can be cracked in about 7 to 10 different ways. We're looking at all those various angles. And all the approaches to that as people continue to innovate. Some of that is, you know, just smarter software and logistics around even getting these data centers stood up much faster and much more efficiently.

And why quantum? I was listening to Martin Shkreli on the All In show the other day, and he was shorting quantum. Why are you bullish on it?

I mean, I think when you look at For sure, long-term, the technology is just— Google's already proven that quantum can solve problems that traditional computers can't even solve, and they can do it in a fraction. They can do either existing issues and problems in a fraction of the time, and they can solve things that existing computing can't even solve. So I think it's gonna be a transformative part of the massive kind of disruption. sort of liken the business and cultural environment we're in right now to the Industrial Revolution. I think we're going to see as much change. It's— the Industrial Revolution wasn't smooth. It was a very bumpy road, which is why we see people, you know, there were Luddites during the Industrial Revolution. We see resistance and cultural resistance to AI and the disruption, and certainly it needs to be approached in a responsible way. And we advocate for that as well. But we're in a massive point, probably the biggest point of cultural and business disruption that we're going to see in our lifetimes. So, and I think quantum will sort of come on at the tail end of that and sort of keep it going even more and advance things even more. So I'd say, like I said, we're looking at it on the horizon. We've been having conversations and talking to some interesting startups and people that are doing stuff in that area, but it's tough. It's challenging because when you talk to a lot of those startups, their revenue starts in the mid-2030s. And as you know, through the lifecycle of a fund, our investors are expecting, you know, a return in a different timeline than that. So like I said, we're keeping an eye on it. I think it's more on the horizon. I think it will happen faster than people anticipate. So I think that's why we wanna keep an eye on it, but we may not even end up investing in this fund in a quantum startup.

Interesting. Well, thanks for being on today, Rick. Where can people find out more about you?

Yeah, you can go to demoscapital.vc. is our URL, or demosfunds.io. We're in the process of transitioning to that demoscapital.vc URL. So yeah, people can check out there. Otherwise, we have a Substack where we post a lot of thought leadership and things about brands and startups as well. That's called Brand Capital. So if you search that on Substack, you'll be able to find us as well and some of our stuff. But yeah, if anyone's interested, please feel free to reach out. We'd love to hear from you if you're a startup or an investor who's interested in what we're doing.

That was Eric.