The Operator Approach to Venture Capital with Chris Van Dusen (Part Two)

Forbes Books presents the Startup Science Podcast with Gregory Shepard, brought to you by startupscience.io. Greg is an entrepreneur who has built and sold 12 businesses. He's a recipient of 4 private equity awards and is a featured TEDx speaker and Forbes author. Here's Gregory Shepard.

I'm back with Chris Van Dusen, the senior partner at Selaico Capital. He's been giving us a fascinating inside look at the firm's differentiated model, where the firm's partners are actually former operators themselves who get deeply involved in helping portfolio companies execute and scale. So Chris, I have a question for those investors who got burned during the post-COVID overvaluation bubble by investing into firms like Tiger Global that did bad deals, obviously. How would you advise them in approaching investing in the startup ecosystem now that they're scared off after losing millions?

So I think it's twofold. One, I mean, this isn't new. Now, the pacing of free money to the pacing of extremely expensive capital, I won't say is new, but that the quickness at which it happened was pretty abrupt. You know, you had companies in '21 raising gobs and gobs of money at a huge valuation and then hitting High interest rates, focusing on revenue over yield, which I'll speak about here in a second. And then they hit every single KPI they were supposed to hit during that period, and their value is nowhere close to what it would've been on an extension. And, you know, the interesting thing is for investors, what I talk to them about today is understand, A, that This investment is a long-term investment, right? A lot of these companies will still be around and they'll have their opportunity to get back up, right? As long as they got capital in '22 and '23 and had really good growth plans. Anytime you have cheap money, you're going to have high value. And the problem is, if you look at the capital markets, you saw the exact same thing, right? There was a focus on scale and revenue, non, you know, no profitability. Right. And those growth stocks, the minute capital became more expensive, plummeted. Right. Like we have to look at it and we are very quick to forget the early 2000s. We're very quick to forget. It's human nature, right?

I was about to say the dot bomb. It's like, we learned this. We learned this, people.

We've seen this. This record has played before, right?

Yeah. Yeah.

But we forget about it. And so there becomes this race to just deploy capital. Right? Because I need to be in the hot thing and nothing's going to stop. And so, you know, my advice is be conservative, look for value, make sure the valuations are prudent, right? And I think that there was a level of recklessness in '21, uh, where those valuations were prudent and they're not going to hold, right? And so if it's one of those where it feels too good and you think capital's going to be free forever, like, I don't know that that's the best assumption in the world, right? So like, that's usually when, for me, my, you know, My radar goes off and says, hey, this is a great company, but like you're doing $1 million, $2 million in revenue and you have $150 million valuation. Like, I don't know that that's actually a pretty good thing.

Never going to happen. I don't think so. Right.

And it's a little bit of my issue with AI in general today, right? Is people—

I mean, that's a bubble for sure.

I mean, people are raising money at $100 million pre or post with no revenue and an idea. And you're going like the totality of companies. And by the way, as early stage investors, we look on kind of, you know, multiple invested capital as much as we look at IRR, but we're not an IRR play, right? We don't go and say, here's our stated goal IRR. We look at it as our goal is to get you this multiple over an X period of time. And so the quantum of companies that go from a $100 million seed round To a billion dollar exit versus ones that are in the $25 to $30 million that may exit in the $250 to $350 million range. There's a very, it's a very different ratio of companies, right? Very different totality of them. And so we want to be more early stage. So a lot of the reason we haven't spent a lot of time in AI, I give it twofold, right? And I'll talk only about myself, which is I don't know that I am smart enough to understand which model is going to win. And then which middleware these models just haven't gotten to in their product roadmap yet, right? I'll be the first one to say, I just don't know that I'm able to understand that yet. So why would I go to a middleware company who's maybe building something wonderful, but is on one of these large models roadmaps? They get up, give me a nice, you know, 3, 4x here quickly in 6 months. Then the model releases the product and they're Done. Right? Like, yeah, no thank you. Right? Like, I really want to return capital to my investors. So like, for me, I'd rather let this, the dust kind of settle and be able to pick different things that are doing something unique and not get on this gold rush. I mean, a lot of people made money during the dot-com, right? A lot of people lost a lot of money. And so there's this piece of, you know, for us, we want to be good, prudent fiduciaries, you know, investors for our clients and for our investors. And we really, other than this one company that was doing something with AI, but outside of what we're hearing kind of in the media today, doing it uniquely, that's really the only play we've done thus far.

Yeah, I mean, I think, like I look at, I think that industrial transformation, which obviously will include AI, I think that's like the biggest thing. I mean, we have to redo all our, everything has to be, it's like the Industrial Revolution again. Right. And then you have these emerging markets like Africa and a lot of these other countries where they're doing it the first time and they need— they want to do it the first time with the stuff we're transitioning to. And I think I like— I was thinking what you were saying about AI and how, you know, it's the application of AI, right? So if you're doing AI as a general practitioner level application, the big guys are going to do that. But if you're using AI inside of some existing play, Then you're going to benefit massively. You know, that's the kind of— I see it that way. Like, how are you applying it? You know, are you applying it to grow margin, grow growth versus is this your entire business? And if it is, you're going to get on the radar of Microsoft, you know, and Apple and everybody else is going to say— and Google, who's, you know, hasn't come out yet, but, you know, they're going to come out with teeth— is just going to hurt a lot of these, a lot of these places.

You saw it in iOS 18. I don't know if you've seen that.

Yeah.

Yeah. I mean, if you look at a lot of the new features coming out in 18 and having Siri actually a little smarter than it is today, a lot of things that people use today through these models, they'll be able to use in a form factor and in a very integrated native way in the device they carry around with them everywhere they go. And that becomes a very interesting thing. But I couldn't agree with you more on utilizing AI for operational efficiency and things like that. Our firm does a lot of that with our portfolio companies is work to look at how to bring down burn utilizing AI and not just from an employee reduction, but like how can we be more efficient? Again, using the, how do we go faster on less fuel, right? Can we do things that can allow us more output for the same or less cost overall, which only helps the growth trajectory. So there's a lot of that, you know, kind of utilizing it internally for the products that are already there or being able to adapt something off the shelf to be unique for that company's data lake. Very different than going to invest in a company that's building something new.

Yeah.

Yeah.

Like, you know, Tesla, I have a Rivian, right? And it's got Alexa built into it. I can drive to my house and say, turn on the lights, do whatever, right? That's an application of AI that an entrepreneur should stay away from because they're already either doing it or planning on doing all this automotive stuff, right? Yeah. So I agree with you. I always, I see a lot of deals from founders and they're like, all right, we're doing this AI. And I'm like, okay, first of all, is it actually AI or are you just running an algorithm? Are you— is it actually AI?

Yeah, there was a, there was a great one. I hate to just give Apple these props, but I was blown away by it, right? Being native in phone. So I actually downloaded the beta version because I'm one of those guys who likes to do it for my, for my iPhone, right? And, you know, the woman's up on stage and goes, you know, hey Siri, what time does my mom land? And it comes up, can you give me directions to the airport? Like, and it's a natural conversation all done by one prompt. And you're like, Do you know how much easier this is going to be than, you know, fumbling through trying to find the email, copying the address? And I realized maybe I'm on the backside, even though I outed myself downloading the beta, right? But I'm still not that fluent in working through all the ways to use Siri. But if it's that easy and native in my phone where my own data here with emails, texts, photos, everything else is the data lake, well, that's a game changer. I don't have to load into a new app to do it. It's just in the phone.

Yeah, imagine in business being able to talk to your machine, you know, and say, can you tell me the performance of the top 5 companies I have in this vertical over this time period? And just do a whole paragraph and then have the machine go back and go, okay, here you go. I mean, like, yeah, I mean, like, that's some amazing stuff. I, I always look at the AI thing and I tell people that, you know, a lot of people are freaked out, you know, they're like, oh, it's good, you know, robotics attached to blue collar and AI is going to attach to white collar. Uh, you know, workers. And I'm like, yeah, to a certain extent, for sure. But it's more of an assistant than anything. It's a helper. It's like having a personal assistant. You're like, hey, go do this for me. Tell me what you come up with.

What there was— someone said it, I think I'm gonna butcher it in totality, but it was around the idea it's gonna make the really good employees better and expose the ones who aren't willing To do the things to get better. Meaning like, it's not a back to the zero sum, right? Like, just because AI isn't just like 50% of the workforce is gone, right? It's more like I said before, the quantum of output will go up so much higher, right? Which means they'll go faster. They're going to enjoy that kind of static overall cost. But if you're not able to get to that output utilizing these tools, that might then cause some, some jeopardy.

Yeah, top grading, right? It'll just top grade everything. Which if you're an entrepreneur, thank God, right? Because sometimes good people can hide and sometimes really bad people can hide.

Yep.

You know?

Yeah, it's a fascinating space. I mean, I'm certainly paying attention to it, but I think moreover, like I said, we're tiptoeing in. We do a lot internally with the companies. We've made that one placement and it's really doing AI scouting. And it started in soccer. And so there's this technology where you can upload a video of yourself doing a drill and it compares you to benchmarks, which means—

That's so cool.

Democratize scouting across the world because you can be in Africa, you can be in India, you can be in Europe and just don't have exposure. And if the benchmark is close to being met, you may get a Premier League deal, meaning like a developmental deal. And if you think about that across baseball and football and cricket and all sports globally, basketball, basketball, right? Like you're building models against the best players in the world doing those same drills. And then you have a 14-year-old who's never played organized soccer, go do those drills. And by raw athleticism, benchmark really well, you go, wait a second, I would never have seen you. You don't play soccer, but you, what is that? And you bring them in, right? So, uh, and there's a lot more to the company than that. But my point is like, if you think about utilizing it for democratization, that's a very interesting concept. And it's all driven by AI and performance modeling and benchmarking. And it's a, it's a fascinating tool that is being used by a lot of the major sports, Across the globe today.

So a couple more questions. I don't want to use too much of your time. I know you're a badass and I want to respect that. How does your investor base of family offices, institutions, you know, high net worth individuals, celebrities shape the investment criteria process in a syndicate format? You know, like you have where investors are investing in specific deals, that you raise?

Yeah, I mean, what's interesting is, um, when you do the fund, right, a traditional fund, they like the idea of what it's going to be, but they have no clue what the assets are. And the problem is most investors want to touch, feel, see, visit, do something around it. And when you can bring them there, and that's traditionally how I've done most of my private investing before, They start to understand it truly. And so in my mind, it becomes a lot different, a lot, I don't want to say easier, right? Any raising capital or finding capital for deals is always a challenge, right? No matter what. But having them see and feel and touch an investment is very different. And so when you can go through the full model, when you can show them the vision, when it's not just fingerprinting up in the sky that this is what we're endeavoring to do, you could actually show them something tangible. We find that process to be a lot different. Family offices like it because for them, they want to invest traditionally in the ones that I work with, certain one-off deals, certain one-off private venture deals, private equity deals, and they'll do some fund work, right? But traditionally they want to have these assets that they have in their portfolio that they can see. And so for us, we have those assets, those one-off deals is what you would call or consider an independent sponsor. And so they very much like those type of deals. When you look at the athletes and celebrities and things like that, it's very much the same way. If you are, and I mean no disrespect anywhere through this chain, but if you are focused on athletics, you are focused on being an amazing actor or celebrity, chances are you are not really deep into understanding You know, true industrial manufacturing, you know, optimizations downstream. But if you can see something, whether or not it's, uh, you know, a pallet company, and you start to understand that pallets drive the entire world and that this is new and novel, and one of our other portfolio companies, we've built their technology into the pallet, and here's how the ecosystem— like, they're like, oh, I see that now.

Yeah, they get it. Get it.

And so that has been a big differentiator for me as someone who did raise 2 and 20s, right? So I'm not 100% innocent as I went through my conversation earlier. I did that in the, you know, '18, '19 in the cannabis funds. But that again was a much harder sell to say, we're going to invest in companies who are doing these things instead of here is this one company doing this one thing, or here are these 8 companies in a portfolio SPV. And here's how you're hedging against industry. Here's how you're hedging against seed versus B. Here's how you're getting hedge inside of the portfolio. And here's what we look at as what we're expecting to be, you know, a 5 to 7 year blended return. And they're like, oh, I see that now. And I see how they work together and I see how that provides a natural hedge and how this one should exit earlier than that one if all things go towards where the forecast goes, right? And that becomes a much Again, different. I hate using the word easy because nothing is easy, but easier thing when they can touch it and feel it.

I totally 100% understand that. I have a few celebrity investors, professional athletes, and although they are smart, they're not in that world, right? So, you know, it's like T-boning them with some tech and they're like, what? How does this even happen? Like what? You know, they can't wrap their head around it even though they're really smart investors. You know, they're just like, look, man, I play football. You know what I mean? 100%.

And ultimately it does come down to, you know, do they trust the haircut in front of them? And that's a lot of this whole world. And people forget, right? Are you, you know, a trustworthy, honorable human who's going to do right by them? And, you know, for us, We absolutely are. And that's why we're out doing this is because we love these deals. We put our own money in the deals and we want to have this great ecosystem of people that want to participate in helping this next generation of entrepreneurs build wonderful, amazing companies that could transform the world. And when they feel that and see it, I mean, it all comes down to that relationship as well.

Yeah, 100%. So in closing, maybe we could close out with something that you guys are excited about, you personally or The company's excited about in terms of what, like, what exciting is happening this year?

So, you know, I mentioned that AI company. We closed that investment about 2 weeks ago. I joined the board. I couldn't be more excited for this one. This is a really big opportunity. You know, we're evaluating different companies in different spaces right now. One of them's, you know, doing, think about building a network, sorry, a platform for alternative investments. If you think about the, The robo-advisors of the world, they really only have a few different products they give you. Imagine if you could potentially work in the alternative space, right? That becomes very interesting as you understand how investors are, younger investors are investing and starting to take more control than the traditional kind of financial planner wealth management market. We're looking at different things in logistics, which I find fascinating, right? Moving people. Moving things, you know we're closing our portfolio SPV one, which is a raise that we did. We've launched portfolio SPV two, and about three quarters of that is already filled. And so you start looking at that. We're evaluating six other companies to fall in there. We're excited a mostly right about momentum, and that momentum is coming off some great successes we've had. But moreover. Things in the capital markets, things in our economy.

Yeah, it's changing, right? It's starting to warm up again. Finally.

It's like a finally ice cold winter there for a while. And what's, what's great is, you know, we, we talked about a little earlier, you had these overvalued, you know, companies that have been, I'll just say, hurt a little bit over these past couple years. But if they found a way to survive, either by raising capital, Fine, right? Or putting operational rigor around their company, not focused on revenue, focused on yield, right? Focused on living off of actually what they're making. You actually have a stronger crop of companies at a better valuation than you had in '21 to look at.

Sure, 100%. Yeah, I agree 100%.

So there's a lot of value out in the marketplace to go grab. I wouldn't say if you know where to look, just in general. And as you're evaluating companies, you're seeing some that just have unbelievable kind of forward-looking 12s, forward-looking 18s, unbelievable kind of pacing that are at a reasonable value. Something I would not say we have had in many years. And it's a good time to pick them up because if they've weathered, if they've put in operational rigor, if they've streamlined the company, They're ready for their next glide path of success. And we get to, as professional investors, participate in that. And I think that's a really good time today to have capital to go deploy in these companies that are ready for, you know, to break through.

Yeah. Well, listen, I have to tell you that this was probably one of the top podcasts over the last almost 4 years that I've done because I'm a serial founder and also an investor too, right? So I have a very, unique and it's so refreshing to talk to somebody else that understands both sides, you know, because you talk to academia, you get a picture, you talk to investors, you get a picture, you talk to founders, you get a picture, you know, but it's very rare that you have somebody that has actually built businesses and been a practitioner inside their operating and then went over to investing and understands the, you know, the struggle and pain and stress and anxiety and You know, self-doubt and all the stuff that goes into building a company, you know, as an investor, they just don't have any empathy.

Yeah.

You know, and you're sitting there going, dude, I'm doing the best I can, you know, and, you know, but you have that perspective. So it's very, very unusual. And it's a real pleasure to talk to you. Thanks for being on the podcast.

Thank you very much for having me, Greg. Appreciate it. This is wonderful.

And that's it for another episode of the Startup Science Podcast. If you leave a 5-star review on Apple or Spotify, I would sincerely appreciate it. And for founders, as a thank you for leading the changes in our world, I'm offering free access to the startup science platform called Visionaries, a one-stop shop for founders. It has everything from a startup academy, investor match, grant finders, pitch finders, and a whole lot more. Go to gregoryshepard.com, click on Visionaries, And use the code FOUNDERS in all capitals.

You'll be able to check it out for yourself.

Until next time, namaste, my friends.

The Startup Science Podcast with Gregory Shepard is brought to you by startupscience.io. Founders can log on to startupscience.io and use code FORBES to get free access. To connect and find out more about Greg, Go to GregoryShepard.com. The Startup Science Podcast is a production of Forbes Books.