Holiday Highlights: Kanyi Maqubela, Managing Partner Kindred Ventures

Hey folks, before we get started, I wanted to tell you about the Consumer VC Summit. The Consumer VC Summit is a 3-day virtual event that is focused on e-commerce, retail, and innovation. This is all happening February 23rd through 25th, 2021. Mark Nathan and I have really poured our souls into it. During the day is a mix of talks and panel discussions with some incredible founders and investors that focus on these sectors. In the evenings, we're going to be throwing networking events. And if you're a founder, you'll also have access to mentoring sessions, which means you'll meet 3 investors or industry professionals for feedback about your business. All of our talks and panels will also be available for replay with a ticket. Please check out summit.theconsumervc.com and enter Consumer VC for a 20% discount. This is also located in the show notes. We look forward to seeing you there. Now on to the episode. Hello and welcome to The Consumer VC. I am your host, Mike Gelp, and on this show we talk about the world of venture capital and consumer-facing startups. Over the holidays, we're gonna be releasing highlights from past episodes from this year every morning of Hanukkah and each day during the 12 Days of Christmas. If you're a founder or investor and looking to meet more folks in the ecosystem, each week I host a networking event on my Upstream channel. The link is in the show notes to join on mobile. Looking forward to seeing you there. I'm excited to share highlights from my conversation with Kanyi Maqubela, one of the general partners of Kindred Ventures. Kindred Ventures is a seed-stage venture capital fund whose mission is to back visionary and dedicated founders who want to solve the most important problems vastly improve people's lives around the world. Some of their investments include Uber, Poshmark, Otis, and Blue Bottle Coffee. Without further ado, here's Kanyi. What compelled you to drop out of Stanford, you know, founding Doostang, and what initially attracted you to technology and entrepreneurship?

So when I joined Stanford, it was right after the dot-com bust, and which is going to date me a little bit, but that's fine, uh, and I always like to point to this stat, which is that the number one major at Stanford today is computer science. And of the, call it, 1,700 graduates of undergrad in 2019, 300, I think, of them graduated with a computer science degree, maybe 350. The number two degree, I think, is human biology, and then four is biological sciences. When I started at Stanford, the number one major was econ, and the number two major was some bio, the number three was bio, the number four was international relations, the number five was psych, the number six I think was general engineering, and then somewhere down there was computer science. And San Francisco and the Bay Area more generally is a boom and bust town, which means that the tide comes out and all of a sudden all the enthusiasm is gone. And so I joined Stanford and moved to the Bay Area at low tide, which meant that anyone going into technology were people who were engineers' engineers, or true software people, or were kind of the gadflies and gadzooks on the margins of society in some way or another. And so I fell into the latter category, and I felt like college at the time wasn't quite a fit for my expectation for how to live a life and how to do identity formation, how to be creative and be a free thinker. I got inspired to take the startup path in part because the CEO and one of my co-founders at Doostang was at the GSB and was looking for a co-conspirator who had a large number of Facebook friends, because Facebook was a little bit less than a year old at the time and I had a lot of Facebook friends. And so I started inviting my Facebook friends and their friends, the next thing I knew I was doing customer acquisition and product marketing and performance marketing and all these things and I was in the technology.

Wow, that's cool about how your customer acquisition came from the amount of Facebook friends that you knew. Tell me a little bit about some of the early mistakes you made as an entrepreneur.

You know, I made a lot of obvious mistakes, and the truth of the matter is there's a lot of obvious mistakes that are very easy to make because when you're in the moment of being an entrepreneur or trying to create something from nothing, or when you're in a high-pressure environment where you need to move fast, one relies on lizard brain a little bit and some of the tropes that have entered your subconscious instead of thinking strategically and truly thinking from first principles and trying to do the right thing with more of a rational mindset. Some of those obvious mistakes at our first startup, we hired a suite of C-suite before we hired just about anybody else. We had a very, very top-heavy culture. We had a hierarchical culture, because it seems to make sense to have hierarchy, because when you're high pressure, you try and push that downwards. We were focused on vanity metrics, because those were what got us into Mary Meeker's slide deck. Those were what got us into Time magazine. Those seems to be— the hockey stick seems to be the way that we were able to to continue to create forward momentum around the business. We were focused on capital raising as an input that was indicative of the value of the company rather than capital raising simply as a strategic vehicle among many other vehicles to move the business forward. And so we were slightly obsessive about capital raising instead of around value creation and focusing on profits and focusing on our return on equity and some of these things which a fundamental business needs to think about. So we made a ton of mistakes, even at the technology level. We originally built on the wrong stack. We built on a LAMP stack in 2006, which in retrospect is laughable. And part of why we did it is because Facebook was using PHP. And so we thought, okay, well, Facebook's working. And all the developers that we knew at the time were interested in Ruby on Rails and gem-based infrastructure, and we were saying, "Well, no, we're going to stick with our approach because that's what Facebook uses." And so even in the stack design, we made what was an obvious mistake. There's a lot of obvious mistakes to make typically around team. So at the very beginning, there's only two things to do, build and sell. And so hire builders and hire sellers, and builders and sellers are often people who can do the really sort of ungratifying things like cold calling and debugging. And so, so-called management only makes sense if you've got a lot of cold calling and debugging that's already happening in your organization, you have a culture of it. And similarly, you know, when you think about a stack, you want to think about a stack that will optimize you to move quickly, that'll optimize for stability, that'll optimize for scalability, and also that'll optimize for your ability to recruit. Because one of the most important things to define a startup is it's an engineer ingestion engine. Can you create a solution that really attracts a lot of high-quality engineers? And so building in a stack that's relevant to the talent pool that you have access to is super, super important. So these are a lot of obvious mistakes that if I were advising a startup today, which I do for a living, so I suppose I certainly am advising a startup today, I would start off with those and I'd say, make sure to steer clear of these things. I know from experience.

I wanted to also just talk about why you switched to the other side to become an investor.

So I used to think, and this is a bit of a leading comment, and so there's a natural follow-up question to it, but I used to think that there were only two appropriate sufficient conditions for being a founder. One, you had a problem that you were uniquely well-suited to solve, or two, you had a problem that you absolutely had to solve, you had such intense intrinsic passion for. I since now think there is a third path, but at the time, I didn't have either of those two paths going for me. There wasn't a problem I felt like I had the right blend of experiences to really tackle with unfair advantages, and I also felt like I wasn't inexorably drawn to any specific problem. I've now come to believe that there's a third credible input for entrepreneurship, which is if you're unemployable. And I honestly believe it, if you're unemployable. And some of the vectors for unemployable are if you are from a demographic where you're less likely to get a job on the same resume as somebody else. And so there's a higher rate of entrepreneurship among Black women than there is among white men in the United States. Another input on being unemployable is if you happen to think you are a lot more right than the next guy, if you have, you know, maybe an inflated sense of ego, which oftentimes is a driver of entrepreneurship. So much of why people become entrepreneurs is just fear and ego. And so I think that's a God's honest incredible reason. And then there's another reason of like you're a little bit too free of a spirit and/or had a non-traditional path or some of these things which, you know, which will predicate entrepreneurship. And so I've now really widened my aperture around why somebody should be an entrepreneur. But at the time I thought, all right, well, I don't have A and I don't have B, so then how do I support entrepreneurs? Maybe I can support them by investing. And so I was fortunate to get linked up with a gentleman that was just starting a new investment firm, and I helped him with sourcing and with deal evaluation and with working with some of the portfolio companies. And then I realized that I might actually have a knack for it. And so I took the plunge full time after about a year of that.

Thanks for spelling out those kind of 3 different things about how you look at entrepreneurship. I know we were talking before about how venture capital has changed in the past few years. And I remember that you were saying how there's kind of 2 poles now of either going very, very late stage or going really early.

The way that I'd recap our conversation is that venture capital used to used to have a normal distribution, like a bell curve, and most firms were reasonably mid-sized and invested in companies at a reasonably similar stage at entry, and there weren't that many firms, and so it was not unreasonable to imagine that. As there became an explosion of firms, which I'll describe a little bit, but Also, an explosion of startup activity because of the amazing set of tools that are out there now to allow you to start a company, from technical standpoint to recruiting to consulting to you name it, they're moved to a different kind of distribution. And they're moved to more of a distribution where you've got concentration around some of the extremes. And so at the very, very earliest stage, you've seen an absolute Cambrian explosion of new venture activity. And so you've got micro VCs, of which there are something on the order of 1,000 to 1,500 that were created over the last 7 to 10 years alone. And then you've got angels and pseudo-angels, which have been enabled by platforms such as AngelList to run syndicates, and then also have been encouraged by the liquidity in the market and the culture around paying it forward by becoming an angel investor once you get an exit. That has resulted in there now being thousands upon thousands of options for investors, institutional or individual, that you can go to at the very, very early stage. What there's also now been at the sort of late, late, late, late stage in the market is there was a realization, I think driven by Wellington and Fidelity and T. Rowe Price, which were all traditionally investors that were not participating in what would be thought of as venture capital in almost any sense, dipping down into Series Ds, Series Cs and investing in the late stage. And then, of course, there's the likes of SoftBank, which were doing it too. And I think that those two things made it such that if you were in the middle part of the bell curve, somebody would pick off a deal before you. And if you were not a big enough fund, somebody would outbid you later. And so you had to either go earlier and smaller and more intimate, or you had to scale your fund up to be able to sort of play the— keep up with the pricing and keep up with the chip stacks from some of the bigger players who were entering the market. And so you've seen a little bit of a bifurcation based on that.

That's really helpful. The first check, of course, you don't, you don't have a ton of data. Wanted to know what kind of qualities you think about founders and just when you're investing in founders and also a bit of your due diligence process.

So the due diligence process is totally bespoke to the opportunity because there's the different risk shapes. And so the common risk shapes are having to do with the founder, having to do with the market, and having to do with the strategy. And so on the founder, what I try and due diligence are, A, are they the type of person that other people are going to want to work for? And so I can't overestimate the extent to which being a talent ingestion engine is such a powerful feature of building a really transformative business. And so is that somebody who either has an inspirational quirk or has an amazing network of people who are excited about them being a founder, who are willing to take below market rates or are willing to take a risk behind this leader. So that's first. And I can diligence that, you know, in first person by asking the person and by understanding them and looking into their psychology. And I can also diligence that by talking to folks in their network and hearing about their past experiences and learning about what makes them tick and how they've been effective in the past. The next thing I try and learn about is, on the founder, is whether or not they have domain expertise. And I want to say a thing about domain expertise, which is that if you don't have domain expertise or do, that doesn't mean that you're good or bad or that you're fundable or not. In fact, domain insight is the most important thing. And so a lot of people who have a ton of domain expertise are less likely to have domain insight, and if anything, are less likely to bring a beginner's mind and have sort of calcified thinking around how a market is supposed to work. And so I think about domain insight as my version of domain expertise, and I try and assess that in the founder, which comes again to the quality of the go-to-market. So I think that strategy is also pretty underrated. I think that having a really, really good strategy is a keystone of a business being able to succeed. And sometimes it doesn't have to be a very well-articulated strategy immediately as much as your ability to create strategy quickly, your ability to create frameworks and ways that you create feedback loops that actually close, that you can build a learning machine, right? And so I try and assess their strategy and their strategic thinking in one. And then on the market side, I think about the shape of a market. And so Peter Kaufman, who's the CEO of Glenair and a close friend of Charlie Munger's, talks about how one of Glenair's approaches is they want to build stuff that nobody else in the world can build by definition. And so they want to build— if something is too hard to build or too uneconomic or too bespoke, And they'll build it, and they'll charge an arm, a leg, and a foot for it. And that's because they understand that there's— they understand the nature of the elasticity. If they're able to build the plugs that connect the supercomputer that's developed by IBM to the enclosure that's built by JPL and in a NASA rover that's going to Mars, and it has to be a 4-foot connector and only one company on Earth can build That is him having a really differentiated understanding of the market shape. I also think to the point of a market shape, the Karlsen brothers are another interesting example. Stripe is not the biggest payment processor. Stripe isn't even close to the biggest payment processor. First Data is way bigger, Fiserv. There's orders of magnitude more processing volume happening among legacy players, and it was a pretty crowded market when they started working on payment processing. But they had a point of view that the shape of e-commerce being developer-led was going to change the entire tenor of the economy. And you look at, again, post-COVID, and you look at the shape of the economy today, and you realize that they had an instinct on the shape of the market that was really, really compelling. And so I try and understand the shape of the market as is, and then the directionality or the trajectory of that shape changing, and those things become important inputs on whether or not I'm excited about it.

I'm glad you brought up how you think about markets and the shape of the market and how it develops. For new markets, how should an entrepreneur think about a market size if the market doesn't exist yet?

The addressability of a market, in my view, is to think about leverage and externalities. Leverage in the finance world is debt, but leverage in the engineering world is if you pull a lever, can you move something of much higher weight than you would otherwise be able to move? Because that lever can, whether it's via torque or just the nature of the lever itself, can move higher weight. And the externalities, again, in economics are the things that happen because of some market activity., but the layman's way to think about it is like, what's the implication to regular people? Or what's the implication to society? Or the what could go right? Like think about, like write the newspaper article for what could go right and the newspaper article for what could go wrong in the best case scenario of your company. And so on both of those, what I try and do is I try and imagine where there could be leverage. So if there is an extreme amount of leverage and a small market today, that's more interesting to me than if there's no leverage, but a lot of dollars already flowing through it. And if the externalities are not that interesting culturally— and that's actually important— and they're not that provocative culturally, then I'm also less excited. To the point about what interesting and provocative mean from an externality standpoint, I want to question the fundamental nature of a certain market with a startup if that startup becomes really, really successful. As I reflect on that question, I'm going to find myself either emotionally drawn to it or emotionally repulsed by it. If I am left without any feelings, then somebody else can invest in that business. And so that was a matter of preference and taste for me. I think the leverage one is universal.

I think that's really helpful. Thank you. We were, we were talking before as well about how there's lots of tropes about why something is fundable and, but you were more interested in learning about why something is not fundable.

One of the impacts of the last 10 years that I'm still trying to digest, but the best way that I can describe is is startups have become a meme unto themselves, which is to say that mimetics are increasingly driving a lot of the intellectual architecture around startups. And mimetics being I'm copying that other person and I'm copying that other person's idea, that other person's point of view, that other person's worldview. The hive mind rules all today. And so what that means is there's certain tropes that start to become sticky and certain ideas that start to become viral, and those start to enter our collective subconscious as fact. And I think that's happened a lot more lately because of the fact that we're all hyperconnected, because of Twitter, LinkedIn, Facebook, AngelList, because of the Social Network movie, because of the market caps of venture-backed companies being the biggest market caps on earth. I think startups have become more of a meme. Where that has had a negative effect is there are certain expectations for how to start a startup, and there's certain expectations for how a startup should look. I think at least some of those are driven by memetics rather than driven by truth and driven by fact. For example, this notion that you need to be highly risk-seeking to be a startup founder is highly driven, in my judgment, by memetics. Anytime I do any level of true research or underwriting into the fact pattern there, it doesn't hold up. I actually think that if I had to choose between people who are highly risk tolerant and risk seeking versus people that were risk averse, I choose the latter every time because I don't want you to run out of money. I don't want you to go bankrupt. I don't want you to take on inappropriate levels of debt. I don't want you to— for reasons that are obvious. And so sometimes I think that the memes themselves just need a little bit of for further investigation. And even this meme of the bootstrapability of a startup as an input on its fundability, I look at Tuft Needle and Casper. Casper raised tens and even hundreds of millions of dollars to build the exact same business that Tuft Needle did. And does that make one better or worse than the other? Not necessarily. And there's a lot of strong views on either side of that. And so I don't think that bootstrappability has a direct input on fundability. I also think that the lack of bootstrappability is not necessarily a damning detail against a company being worth funding. If I can't bootstrap, either because of the nature of a business model or because of my personal circumstance, then sure, maybe I should take venture capital, and maybe that's appropriate for venture capital. And I think that the fact there is actually a lot more fluid and context-dependent than any meme could adequately hold. And similarly to that, as it relates to startup teams, there are a lot of companies that have been started and gone on to be quite successful, which were started by a non-technical co-founder that were building in reasonably technical markets. I know of a number of companies who outsourced outsourced their initial version of their app, companies that we've heard of that are at massive scale and that may not publicly talk about it, who outsourced the initial version of their app because the co-founders were technical. And so this notion that you have to— and we funded some that are working with dev shops today, and I'm okay with that. I've also funded two engineers that are just working on engineering, and that's okay too. And so I think that if you're willing to break free of those tropes and allow yourself to do context-dependent assessment of some of these inputs, you'll find that a lot of these memes don't hold up. That's what I'm really, really interested in.

Wanted to talk about maybe some consumer trends as well that you're right now focused on.

One of the consumer trends that I'm really interested in is— and this is pre-COVID, but I think post-COVID is going to be intensified— is the idea that If you are somebody who is environmentally conscious and is somebody who wants to make a positive impact on the climate and have any appetite or comfort in the apparel or fashion industry, you're dealing with some pretty intense cognitive dissonance right now, because sustainable apparel, sustainable fashion is a very, very, very tiny sliver of what's a double-digit billions dollar industry that has not fundamentally changed for the benefit of the environment or for the benefit of the changing sensibilities of the consumer at all. And if anything, it's changed for the worse with the rise of fast fashion. So I do think there's going to be a change in how people shop for clothing, how they wear their clothing, how they use clothing as an aspirational storytelling around their values. That's going to be dramatic. It's everything from the fact that there have been protests in Southeast Asia, where so much clothing is manufactured today, because of unsafe working conditions relating to personal protective equipment in the era of COVID to the fact that retail's— Nordstrom is trying to figure out how to move into rental, and Lord Taylor is preemptively shuttering all their stores before shelter-in-place even comes out because they know— and Barney's went out of business and so forth. And so I think that one of the consumer trends I'm most interested in is in fashion and apparel because it's a massive industry that just hasn't really changed. And it hasn't been one that venture capital has been able to crack particularly well with an exception of Rent the Runway, which I think has done a good job in the business. But I think it's poised to do so dramatically today. And where I think it's going to go is we're going to move towards more of an access model where there's a lot more peer-to-peer, and there's a lot more rental, a lot more peer-to-peer and a lot more rental than there has traditionally been. And so we're looking actively and have made some investments there. Another category that I think of as an interesting one, I think that there's a functional food movement that's starting to emerge. And so one of the things that has happened post-COVID is the plant-based foods have surged their stock prices and the demand for them. And a part of why I think that's the case, even though ironically in the plant-based foods, in some cases it's misguided, is that individuals want to be more, but they don't want to know where their food comes from only. They also want to know where their food is taking them. And so they want food that has real sort of functional health inputs that are really well described. And the reason why that's ironic plant-based food is a lot of it is very processed and it's unclear whether or not it has all of the health characteristics that a lot of consumers are looking for, but we're investing in that. And so adaptogens and natural supplements and ways of thinking about food products as having medicinal qualities is something where I think that there's going to be a lot more consumer interest. And then finally, one that I think is exciting more on the software and pure technology side is is we have been trapped under the paradigm of pictures under glass for about 16 years now or something like that. And pictures under glass is the only UI that anyone can really imagine. And you and I right now are engaged in pictures under glass, and the vast majority of consumer technology is consumed in that way. But we have so many other senses, and we have ability to sense via haptic signals, and we have audio senses that are so incredibly tuned and sophisticated and personal and intimate. And we have olfactory senses that are so intimate. And so what does it look like to build a consumer and a human computer interaction that takes advantage of more of our senses and that takes advantage of more of our sensory capacity? I think that it's notable that it's about every 10 to 15 years, give or take, that there's a new massive platform that emerges. That completely changes the consumer technology landscape. And the iPhone is now 13 years old. So sometime in the next 2 or 3 years, there's going to be an iPhone competitor. That really breaks the paradigm. And we've been investing against that hypothesis for a while and will continue to. So those are some that I'm interested in.

Yeah, those are some great consumer trends to focus on. Thanks so much for naming quite a few. I've had past investors talk about the future of apparel and moving towards sustainability rather than the current climate of fast fashion. That's also a really good point. I never really thought about that before, about building new interactions using different senses and focusing on different senses rather than just pictures under glass. So what's one thing you would change when it came to venture capital?

The thing I would change when it comes to venture capital is actually not particular to venture capital, but I would change how venture capital funders allocate. And so venture capital only exists because of other people's money, and it's typically pension funds, endowments, foundations, and there are some other vehicles that are also insurance companies and other vehicles like that. And the allocation principles and discipline and approach for these big, big, big institutions is the thing where I think there could be the most innovation that would really change venture capital. Because ultimately, the thing that I think is going to change venture capital the most is if venture capital is more demographically representative of the interests that it serves. And I think that is if there are more people who aren't already gajillionaires that are investing as venture capitalists. I think if it is people that are much younger, people that in theory are much older, If it is people that are Black and Latino, if it's people that are queer, if it is maybe most urgent of all, women, then I think that technology is going to be so powerfully benefited because more and more ways of thinking about the world are going to be rewarded with cash, with risk cash. And so what I would love is a world where limited partners have more flexibility or have more responsibility to put in business emerging managers that don't fit the pattern. And at the end of the day, if venture capital is an asset class which has performed in aggregate a little bit worse than the S&P, then it's pretty low-hanging fruit to take a little bit more risk and try and improve that. And so I think that there's a real opportunity there. And so I humbly exhort my colleague from the other side of the table to take more risk.

I agree. I think that there needs to be certainly a lot more diversity in venture capital and also that you're right, this is the riskiest asset class that, you know, folks shouldn't be afraid to take on more risk. And there you have it. If you enjoyed this, I highly recommend checking out Kanyi Maqubela's full episode.