#17 Founding Partner of Ascend.vc: Kirby Winfield on all things Venture | Startup Project by Nataraj

This episode of Startup Project is brought to you by Bear Tax. Bear Tax compiles all your crypto transactions and makes it easy for you to file your taxes. Check out bare tax, that is bar tax. Hey, Kabir, welcome to the show.

Thanks. Happy to be here, Nalarash.

So I'm excited to talk to you for, you know, a lot of different reasons, one being, you know, you're based out of Seattle, I'm based off Seattle. But I think few people can say that they're part of four exits, personally. And you are obviously part of, I think, four exits, if I'm not wrong. Two IPOs and two acquisitions. One of the things I want to start the conversation with is what was that through line in all the four exits that sort of drove you into making that decision into joining from one company to another? Just when you're looking at your own career as a point of view.

Yeah, it's a great question, I think. And I think what you said is important. Joining companies. I didn't start any of the companies. I mean, I was on the founding team of a couple of them. But if we're going to sort of peel back the onion, a lot of what folks position as founder is really someone found them and asked them to come work with them. And so I'm very, I try to be transparent about that. But I think the through line to me was just picking, just picking the right teams to bet on, to bet my career on, really picking the right leaders and people who I thought could do one of two things. One, either financially engineer a capital structure that could allow a company to scale and grow hyper rapidly and create outsized value and take market share, or the second is just a company that has incredible technical talent and, and the ability to simply outperform established competitors by creating magical products. And so the latter example would be Adam Doppel, who I was fortunate enough to work with as CEO of Dwellable. And Adam was a guy who'd created a number of incredible technologies. He created one that ended up being the home screen for TiVo. He created open Table. Sorry, Open Table. That now that now we'd be talking. Not Open Table. He created Urban Spoon, which was a huge hit and a great success. And so he always had this knack for just having a new take on kind of an existing problem. And so when I had the chance to work with him, I was like, it was a slam dunk because I knew then my job would just be to sort of execute and make sure that we had the resources to, to give Adam and His team, the space to create the magic. And then in the case of Marchex and Gotonet, it was really Russell Horowitz, who was the CEO of both companies and had a strong background on Wall street before he came into tech and knew how to use public market equity to rapidly create value. In the second company, Marchex, we did a $200 million secondary like a year and a half after we went public. That sort of 5x the valuation of the company and allowed us to buy a huge amount of virtual real estate in the form of domains which, you know, which is so, so it's, I guess, but by sort of coming back to the question, it's just, it was about picking people who I thought could give just an unfair advantage to the business and then hopefully give me a lot of leverage on my time, my investment, my opportunity cost, you know, because obviously, you know, I wanted to make sure that I'm spending my time doing something that's, you know, something worth doing.

The reason I was asking that question is because that's a well known strategy right now. A lot of, you know, early, you know, growth stage employees often do is, you know, you join a pretty early stage company, series B, series C and you know, you work and you know, sort of develop your own zone of excellence and just replicate the same thing in multiple companies. You know, over the next couple of decades, like that has been pretty provable career paths. I was wondering what your take was working across these companies.

I don't know, man. I never had really a plan. I thought I was. I graduated in 1996 and I thought I was going to work. I moved to Manhattan, I thought I was going to work in advertising, which I kind of did end up working in advertising, but just on the Internet, funny enough. But I didn't have a career plan. I mean, I think I visited the career planning office at my college once. Like, I just was fortunate that I'd done some copywriting one summer for a guy who ended up co founding an Internet company and he asked me to come be the marketing person. But I kind of. So I was on autopilot for most of most of the decision making. And then when I did decide to do the third company, I was recruited and I guess the fourth company too. So by that time I was taking C suite roles and so was like rightly or wrongly, I felt like I had my zone. No, that's not true. I guess the third job I had was chief revenue officer briefly at a startup that raised $18 million. And then the CEO left and I got to be the CEO for better or worse. But I made that move because I did want revenue responsibility direct. I'd had it as a gm, but I wanted to have the vertical experience, you know, and it was so that. And then the fourth company, I mean, I, yeah, I think I wanted another shot at being CEO. I kind of the third one I, I took over, it was a battlefield promotion. And the fourth one, I was like, okay, now I can do this from day one. And you know, I was wrong. But that's okay. Like we managed. Thank God for the team being super acquirable and building something that was really cool. Yeah, I mean, and that's kind of the thing is sometimes if you're, you know, the story doesn't always end the way you think. Like if you're running around chasing your zone of genius, you might end up just realizing all you've discovered is the things that you're not suited to do. You pick up a lot of skills, you know, working as long as you're diligent. Like I always say, I worked really hard and that got a lot done, but I wasn't necessarily really great at too much. But even just getting those skills over time and then figuring out that you don't really want to apply them to a startup, that's valuable.

One of the things about acquisitions is you hear it for a couple of days in the news cycle and then everyone forgets about it. But there's almost a lot of activity that happens before it and after it. What are some of the things that you think since you're also now in early stage investing, what was your vantage point tell you about why companies acquire? And at least from the couple of months you see.

Yeah, I mean I can speak to that. So typically companies are either they're buying, I guess let's leave out Aqua Hires because those are sort of not that interesting except for if you're on the team and even then. But typically like good exits are happening because companies want one of three things. They're either buying revenue, they're buying, and sometimes that's a revenue slash book of business. So you want to have those customers because they're an adjacent industry that maybe you're not already playing in. The second reason is for strategic evolution. So you think about IBM, having done a lot of that historically, buying their way into categories where they couldn't necessarily build a valuable beachhead position in an emerging technology. And Oracle's done a lot of that type of acquisition in the last 20 years. So companies that just they see the cloud coming and they're like, well we can't create the cloud so we need to buy cloud company. So sort of, I would say strategic evolution is another core support. There are companies that are playing offense or defense against competitors. So we were acquired by HomeAway largely because their mobile app sucked and they were getting their ass kicked by Wall street over it and because their competitors were outpacing them on mobile. And we had an amazing mobile dev team and amazing mobile app and so we filled a hole for them. Same when we sold to comscore two companies ago, they were constantly getting beat up about their lack of ad tech adjacent solutions or ad tech plugin. And we sort of read those filings and we said, well gosh, we fit right in there. And sure enough, they reached out, we launched a product and it was doing $100 million to years later. And so sometimes it's as simple as that. Yeah, I'd say, I don't know if that's a great answer, but do you.

Think companies strategically can position themselves for great acquisitions? I mean startups or companies, however you look at it?

Yeah, absolutely. So I would say as you get past your 0 to 1 phase as a startup, you start picking your head up a little bit. You should definitely have a, you should make your own sort of market map of the value chain in whatever market that you're playing in and who are the players and which layers of that value chain do they live in? And can you augment what they do? Do you compete directly with them? And then you can start to research. If they're public, you can look at their filings and look at, looking at filings is painful, but listen to their conference calls and there's always some sell side analyst that's needling them about something in their business. Just pay attention to that. And look, I've always been a long game kind of relationship guy anyway. It costs you just a little bit of time and focus, by the way. It actually doesn't cost you because it's worth the investment. But if you're a CEO of a startup, especially in B2B, you should be talking to the public company analysts who cover all of your competitors and potential acquirers. You should be briefing them, they want to talk to you because you have information that could help them do a better job of covering their companies. And so it's a symbiotic relationship if you can build it over time. I built great relationships with Wall street analysts doing tiny startup. When I was doing tiny startups, they start to Whisper to the companies that they cover, hey, have you heard about this? Why are they doing this? And you can't do that. You can start to plant ideas in their head and that often leads to inbound from acquirers where if you're just quietly minding your business and hoping that the best product wins, you won't have those avenues. And the second thing is in the unfortunate case that you do have to sell the company, you'd much rather have relationships built. People, it's all people, all the time, right? So if you have a relationship with a human and you know they know about your wife and kids and you know, whatever, vice versa. And you know, you've kind of, you've met at some conferences, you've had a couple cocktails or you've gone to dinner, you know, when year three comes around and you can't get your series B or whatever, now you can make that phone call and they're not going to be generous with their offer, but like it's warm, they know you, they trust you, that you can shoot straight with them as much as you can ever do that. I think that's so I think relationship building direct is also really important. I think relationship building outside of corp dev is really important. I think product people generally make the right, they make the buy decisions and deals that go well. Some people are always chasing corp dev but really you want to have an excuse to get to know the product folks. I think also this is a place where your board really can make a difference. So you could have a board member who only shows up at half of the meetings and is asleep the other half of the time and won't introduce you to any investors and is, you know, dead weight. And if you're trying to sell the company and they can make three back channel calls to get a process to appear to have spun up for the sake of sort of stocking your main, your main offer. They've just paid for themselves 20 times over. And you need people on your board who can do that kind of work. Ideal.

I want to talk more about the board dynamics, but before that, since talking about acquisitions, do you think any companies right now are really good or attractive in terms of acquisitions for larger companies?

You know, I don't spend a ton of time thinking about it anymore. Odd as that may be. I'm so focused on, you know, really we write at Ascend, we write the first check into your company, right? And our goal is really just get you from like first check to institutional seat or a, you know, we're we're very happy when our companies matriculate to a point where their decision is should we sell or should we go public. But by that time I don't have, you know, I'm not, I'm not, I would say I don't do a lot of like fantasy, fantasy growth stage VC thinking where I'm like, oh, what's going to happen to name the unicorn? You know, could, I mean, could, could Oracle Marketing Cloud buy on Parity maybe. Right. But maybe not. I don't know. I don't have great thoughts around any of that stuff. And I think the other thing you want to be mindful of is probably the best acquisition targets are going to be companies that are struggling. And I would never want to speculate about companies struggling or not.

I think I would like to get your take on this is one of the things is because of so high valuations that are happening in early stage or whichever stage you pick, I think we're going to see a down on pretty much everywhere.

Right.

But the side effect I see for really high rounds, especially for example in Indian companies, is you are pricing yourself out of acquisitions.

Yeah.

Right. So I just wanted to get your thoughts on if that theory holds true for you in your vantage point.

I mean, that's why you don't want to have investors who can block. I mean you really want to make sure that you're, you know, maintaining as much control of your destiny as you can as a founder. And you know, that's difficult to do after Series C and that's typically where the valuation inflation becomes prohibitive for acquirers. So I don't know, that's kind of a non answer. I mean, I do think it's a real problem and I do think you're going to have, it's going to be an interesting 12 to 24 months. Yeah, so I don't, I don't, you know, again, I don't have a ton of speculation on that.

So I, yeah, I want to talk more now about Ascend and what you're doing with it. Can you talk like what was the thought process initially? Because I mean there are so many seed funds. There's so many, you know, pre seed funds.

Right.

There's, there's no depth of capital right now, you know, and it's pretty competitive to start something right in the VC space. So what was your thought process, you know, to start?

So I mean I started by just realizing that I was done, done operating, done being a startup operator or founder if I ever had been. And for the first time in my career, I kind of stepped back and I said, well, what do you actually think you're good at? And where does that overlap with what you actually like to do? And I was kind of surprised when I did that because I realized I hadn't ever done it. And I don't know that a lot of people do, but I think a lot of us just make decisions based on momentum and what the outside world tells us or what we, you know, what we think will make our parents or our wife or our, you know, whoever love us more. Like, it's a real psychological sort of minefield. This. This idea of chasing esteem needs, you know, through. Through career. And that's not news. I mean, it's used to be doctors and lawyers, whatever, right? But. But I really did kind of realize that that's all I'd been doing. I was just trying to chase I should be a C level executive now. I was on the founding team. Now I should be a C. C. I should be a CEO. CEO. I should be a founder. And I kind of never stopped to ask why. So I think the big step for me was, you know, asking myself that question. And I kind of found out, well, you know what I like, I like, I like doing deals. I like, you know, I like Emanac. I like, I like marketing and content and people and network and kind of realized that. And I had an investor tell me this once when I was a founder. He said, you think like an investor, which is not a compliment if you're trying to raise money from investors. But, you know, I kind of have that mindset and I'm a gambler and all that kind of came together. And I said, oh, man, I think I might be able to do something for founders. And you say it's crowded in the Pacific Northwest. It's not. And maybe it is more so now, but it certainly wasn't in 2016. And so I just started angel investing and I took a chunk of change off my balance sheet and was like, I'm going to go. It was like going to business school five times in terms of how much money. But I think that was. The investment was like, let me see if I like this. Let me see if I'm good at it. Just from a standpoint of like, am I doing something unique? Is the way that I interact with founders and the things that I've learned and the things I share with them and the way I can be supportive and help them grow a company is that unique. And if it is, and if I like doing it, and if it's unique and people actually value it, then maybe I'm onto something that I could spend more time on. And I never thought I need to start a venture capital fund. But after a couple of years, it was apparent that there wasn't product on the shelf necessarily here like the one I was offering. And I had some investors who I'd put into some deals previously that had done really well and they said, hey, why don't you just start a fund? And I like to work a lot and I thought I'd be pretty good at it. And so I became my own first investor and then brought on a bunch of LPs and we raised $15 million and that fund is now almost fully deployed. And yeah, it's the best, certainly the best experience I've ever had in terms of just being happy and thinking I'm doing the thing I should be doing in my career. But there are certainly lots of sources of capital. I would argue there aren't that many that are able to truly plug in and be helpful at that first check phase. And I can't necessarily be the most helpful person after series B. So I don't hold myself out to be the best investor in the world, but I think in a lot of cases I'm the best investor for a set of founders who are starting their journey.

How do you differentiate your check from, you know, someone else's first check? Because you talked about, you know, there are not a lot of people who do this and, you know, help companies from zero to one stage. How do you like, you know, maybe if you have a playbook of doing it, like, how does it look like for a new company that is, that has taken a check from Ascent?

Yeah, so I mean, typically we lead a lot of the rounds that we do, which is it's usually a pre seed and usually on a safe note, but we'll do the diligence and negotiate the term, at least the price of the safe. And what comes along with that is a pretty intense commitment to bringing on incredible co investors because my check size is like 250 to 750k. So usually that's not enough to cover a full round. And I don't want it to. I want to have a diverse, robust group of people around the table who can help. And so for a lot of founders, maybe they're coming to me and they've got a couple angels that they've talked to. A lot of times they'll have like their, you know, the CEO of whatever startup they were at previously is backing them and but they're especially up here often under networked when it comes to investors. So there's a great group of folks up here that I like to partner with on deals and there's also a really great group of folks in California that we like to bring into, into our pre seed rounds when it, when it makes sense. And so it's initially just a flurry of activity with dozens of introductions to investors. Usually the first thing I do after I commit is say, okay, now this is how maybe evolve the pitch in the deck a little bit. So we work on that after someone's onboarded. We do things like offer pitch coaching and fundraising support through a couple of folks that we've worked with in the past. We have a discord where now it's like 55 founders and their co founders can all interact across the portfolio. So they're sharing notes about hiring, notes about how do you outsource SEM and what agency is good. We have a database of investors that's proprietary to us where we actually keep notes on interesting information that people might want to know about investors before they engage with them. We're looking at pulling together a pitch deck repository so that. And when we've got companies that are going out to raise their first Series A, we've got five companies have already done it successfully. Here's their pitch decks. So I think there's. I have a chief of staff who is incredible and does a lot of work. She's been a startups ops person in the past. She actually runs a local Slack group for ops folks. So she does HR and ops support as a service to our portfolio companies. And I think a lot. But if it comes down to it, I think a lot of that's differentiated. Right. But I think a lot of firms can say similar things. I think for me it's. I've literally gone out to. I've had. If there's an experience that a founder is going through, the odds are really high. I've been through it. Whether it's like writing your IPO docs, whether it's laying off half your staff, whether it's having to raise a bridge, whether it's recapping your cap table, whether it's going to raise your A, whether it's getting an aqua hire done, whether it's spending $5 million a year on marketing or whether it's hiring up a sales team or whether it's pivoting. I just kind of look back and I'm not trying to. I'M uncomfortable tooting my own horn. But I think it's just a matter of I survived and I got old and I looked back and I'd done all this stuff and maybe that'll decay in value a little bit over time. But as I look around right now, again, I see a lot of investors with 20 years of experience investing, which is really, really important and useful for companies as they move beyond seed. But at that first, first stage I just don't see it as frequently folks who had the length of and diversity of experiences as maybe I've had. And I'm probably wrong about that, but that's kind of where I hang my hat.

I mean it makes a lot of sense because right now there's so much information for every topic like going to just one person who's an investor or co founder and just getting the best practice answer for any question when you're at that early stage. It's just a 10x time saver is what I feel like. For example, what is the right way to start a company if you're an Indian founder and starting a company in the us what the right people to connect with. If you are going through that as an individual and exploring, you could lose a couple of months just doing what that one single task. So just that curation of the right people and the right sources can be really helpful at the early stages because time is of their sense at that point. And today in the world where information is so dense and available everywhere, the real advantage comes if you can really curate what to take and what not to. So I think all these small, small networks which people create actually even though they're not big, they tend to be a lot more powerful in terms of what is accessing them. But I wanted to ask you about since you done the first one almost entirely deployed it did you had a thesis change when you look back when you're starting and now did you have preferences in terms of sectors? Preferences in terms of. I know obviously big part of investing is investing in people, removing that factor because people always if you like person and you know that they're great operators even. The idea is you can say that with zoom, right? Like Zoom is not a new idea. But if you know some Eric and then you're just investing in him to create a new tech that is 10x better essentially, right? Those kind of bets, if you ignore those kind of bets. Did your thesis change in terms of the markets and the spaces and just ideas where you started and right now.

I mean not really. I knew I wanted to focus on the Pacific Northwest because I felt like there was a real gap here. And I still feel that way. And I'm more bullish than ever on where we are as an ecosystem. I mean, now, for decades, people said, oh, we got $2 trillion tech companies, but where are all the entrepreneurs? And moreover, where are the people who can scale companies? And I think the biggest difference between now and even five years ago is you have the tableaus and the docusigns and the. And all of these gigantic exits which, yeah, they've created millionaires, but more importantly, those companies have created a squadron of talent, business talent that knows how to scale. And we've always had great technical talent here. But now you can go find someone to do growth, which, I mean, you literally couldn't. There were five people who could do growth in the city of Seattle than five years ago. I mean, I'm not kidding. And it's just so much better now. And you can see it being 10 times better in 10 years. And that's why I'm doubling down on the geo strategy, I think, category. Yeah, I mean, certainly like our most successful investment was an e commerce SaaS company. So we do e commerce, we do SaaS, we do marketplace, we do AIML. I don't think AIML has even begun. It's like the first pitch of the first inning for aiml. So I think that a lot of money got deployed there quickly early into, you know, stuff that, that we're kind of figuring out. Like ML for ML practitioners is probably not the best thing to build a startup around because there just aren't that many ML practitioners. So, you know, but. So it's early days there, but like still super long the space and, and so. And you know, these are all places where I've operated successfully or, you know, tripped and fallen into some success. So I kind of know what a good pattern might look like or what it takes or we've invested successfully or again, luckily probably is a better word. And so, yeah, the category thesis kind of remains the same. And there's stuff. I was talking to founder earlier today and I said, I like the founder. There's stuff that I just don't want to spend my time on. And if I don't want to spend my time on it, I'm probably not going to get smart enough about it to discern whether or not someone's going to be successful or whether if they're successful, it matters. And so I still feel that way about cannabis, I feel that way about health by and large, although I'm getting a little better at that. Medical devices, biotech, hardware, none of that interests me. And there will be great outcomes created in those categories, and those are great for other investors.

What do you think of MeToors?

I mean, I think I said earlier, we bought $200 million worth of Metaverse real estate in 2006, 2005. I mean, it was just domain names. Websites are the Metaverse, The Metaverse is Fortnite. The Metaverse is. I am less of a believer in the sort of. I don't even know how to understand what the Facebook ad is about. I don't even know how to understand how to conceive of how that is somehow unique to Fortnite. Fortnite's literally the Metaverse. Put some goggles on it. But you can already sell ads. You have concerts, you see your friends. My son is 15. He's been on the metaverse for five years. So I think it's hype.

Actually, the closest thing I would say to Metaverse is one is Fortnite. But if you look at the game engines, they are really the Metaverse. What else do you need? If you put a headset you're already in and you can generate. And they can be generated, right? Because you can program them to evolve, you know, as a real estate or whatever, you can evolve those universes because you just click and there's a new building or a new tree or.

Right, yeah. There's a reason that, like most conceptions of the Metaverse, like, somehow Channel Ready Player one, like, it's. Humans are human.

I think there's also the hardware limit of, you know, what you can perceive. Right. So I think that's a big part of where the limitation is, because the software, I feel, is already there in terms of.

Yeah, yeah, right. But also, like the. Our brains are very difficult to solve for, and people still get violently ill when they work out with. In VR for more than 10 minutes, they get violently ill. You know, it doesn't mean that at some point we all won't all be like, you know, hardwired in via wetware to, like, some, you know, Fortnite 10.0 version, where everything. Where many of the behaviors that we, you know, engage in and the things that we like to do become virtual. It's probably inevitable. But the idea that that's going to happen in some, like, you know, tectonic shape shifting, like, immediate way is ridiculous. That's what I think.

I think. I mean, the rebranding is quite interesting, right? Because we Rebranded everything into Metaverse. Pretty much every game is now non game. It's a metaverse.

Right.

So that's an interesting aspect. And I think meta. The company has its own reasons for doing it, right? Probably the brand reasons, I would think, because right now I think their biggest reason is.

And I mean, yeah, they're chasing a multiple. So I mean, it happens, right. People get tired of. I think they realize that the value has been extracted from social and that it's a dying category and you need to stay ahead of that. You have shareholders, so that's understandable.

And also the fact that now, because of the scrutiny they faced over the years, they couldn't acquire their way to the next thing. Because if you want to pivot to make it a gaming company, you can't acquire a big company. Right. So now they have to build it internally. And this is a great rebranding to set the stage that, okay, we're going to invest tens of billions into building whatever we want to build because we can't acquire. Right. I think that's also one of the reasons I feel, why they're, you know, heavily branding into Metaverse.

That's really insightful. I mean, you kind of call back to your earlier, earlier question about why do companies acquire companies? And that's right, right there.

Yeah, I thought, you know, when you're an investor, you're consistently getting pitch decks, right? You're getting pitch decks, you're in founder calls. It can feel overwhelming, at least for me. You know, it gets overwhelming to continuously see pitch decks. And after a point, you start to develop certain, you know, criteria. You obviously mentioned the, you know, you don't like hardware, you don't like help. But do you have certain rules that you, over time develop that you focus on in terms of. And by the way, your startup toolkit that you've written is so exhaustive and so very well written because you almost frame the pitch deck that you expect, which is actually very useful for anyone who's trying to pitch you. I think more investors should do that or just copy that in their website and put it there. Because what happens often is the first time founders usually have this understanding of what a picture should be and what the investor is often looking for and like. And I'll probably replicate your idea and put it somewhere in one of our websites.

I think that's great. I think it's great. I mean, I think you're right. I think everyone should do it. I mean, because you're, if you're, look, if you're not Plugged in. And you don't come from the Valley and you haven't, you know, don't have like 5x startup teammates who've raised their own, you know, money for their own. Like, I feel like it's in the water down there, and teams down there just know how to build a deck and they know how to pitch, and that's just not the case in any other market. And so you do have this just huge disadvantage for folks who haven't been through it. When I did my first deck, I mean, my investors ripped it to shreds, and there's a valuable experience. And again, I can relate to. Whenever I had talked to founders earlier today who were pulling together a seed deck, and I was like, I'm going to channel that feedback I got 10 years ago around things like put numbers on your slides. Things like, you can only land one point per slide, so make sure that it is a breadcrumb that leads down the path of the narrative that you want them to end up with. Now make sure that, like, when you're landing that point, you're giving them the opportunity to engage thoughtfully, and they, if they have questions, they can ask them or they agree and you move on. The idea is to get through the whole narrative with, you know, thoughtful, engaged agreement. And there's just so much that you kind of pick up over time. But coming at it as a founder, if you're an engineer, you might think, like, why would I put a competitive slide on here? Doesn't matter. My thing's way better. Why would I say how much money I'm raising things? That's. I mentioned the market opportunity numbers. I have a bunch of different revenue numbers, and they're in three different slides. And you're just like, oh, boy. The great thing is hard part sometimes is that to give people the kind of feedback you need to give them at that stage of their pitch development, I was very fragile. I had a real hard time taking feedback. And so I'm always super empathetic. And I think you need to have a trusted relationship. It's kind of like I always try to meet a founder for the first time wherever they want to be. Not at my office, which is a silly little thing, but, like, that's how the relationship starts, right? Is kind of. I'm not the important person here like you are. And, you know, we spent time together. We initially do bi weeklies and, you know, a lot more frequent than that. Sometimes when we're doing the round and over, you know, course of time, you know, a Year in, when they're raising seed now and they need feedback on the deck. Like you can say, okay, hey look, I'm not going to tell you all the good things because you know, I love and appreciate you. I'm just going to focus on the things you got to fix. And it's, you know, always caveat is like it's one person's opinion informed by my biases. But you need to have a, you know, unit economic slide. If you're a marketplace, you don't get to not have that. You need to do these things and it's so much more efficient to be able to communicate that way. But most investors don't want to do that because A, they don't want the person to not like them or to think badly of them or to be turned off so that if the deal gets hot later, they can't get in and B, they just don't have the relationship. So I'm betting that doing that stuff is going to really help our founders and help our funds return a lot of money.

I think that's also the advantage of playing in the pre seed stage. You get to do that and there is a little bit of time to actually develop that relationship. But when you move into seed and because how crazy the market is right now, you don't have that time to even establish trust because things are moving on a weekly or daily basis. So that's a good transition to know. Talk about valuations. I was looking at the precede, I think crypto company at 100 mil valuation, right? What do you think is driving this crazy valuations? At the same time we are seeing correction in the public markets.

Right.

And why hasn't that behavior still not moved into private?

Right. So privates trail public's two years minimum and that's because that's the venture capital funding and deployment cycle. So if I just raised a $2 billion fund in fall of 2021, I'm not going to be out raising again for three years, two years, whatever, probably three. And I have to deploy that money. I can tell founders and trust me, the narrative is trying to get out there like, hey, well, times are going to be tough and the valuations are going to be. But the money talks and the money still wants to be in the hot deals. And so valuations are staying high for a certain kind of deal and certain kind of founder, a certain kind of stage and a certain kind of category. And that may or may not adjust depending on how good or bad a job the macro economy does of adjusting. To inflation and what happens with COVID and supply chain and myriad and sundry other sort of challenges and headwinds. And you would think that we've been due for a correction. I mean, 50% off of things trade at 100 times earnings instead of 200 times earnings. That's probably safe, probably not a bad thing. So I'm not a prognosticator. I can't say it's going to depend on a lot of factors. Assumably, things will get tight in a year and a half, probably next year because people like to do things on an annualized cycle. So let's assume things founder in the macro economy. Inflation continues to rise and some other bad shit happens, then, you know, investors will. Investors always want, you know, cheaper prices. So it's been a founder's market for a long time. Investors will actually have. They'll be able to. Right now they're just paying lip service to this concept, but they'll have to actually have price discipline starting in 23 because they're going to be. Because they're going to be finishing up those funds. Those funds and they're going to be raising their next funds and they're going to be raising them from LPs who may have to rebalance their portfolios because their private equities, sorry, their public market equities are cut in half and their overweight venture. So now they can't come back into the fund. So the fund size shrinks, but the person still wants to run the same strategy. So I mean really, 24 is when you'd see, I guess, the chickens come home to Rooster. 23, 24, because there are a bunch of funds that were raised in 20. So I guess that's a long winded way of saying, yeah, I think the market would have to just go back on an insane tear for two years for there not to be serious, serious impact on valuations for privates in the next 18 months. This is sort of the calm before the storm.

I think also it could also reflect, I feel like later stages might get impacted a little bit faster than that because a lot of.

First of all, the IPO window is closed. So guess what that means. I mean, one of two things. I guess when there's a lot of money, that means that you'll have the Uber scenario where they keep on raising at higher private valuations. But at a certain point when that money starts to cool, what it's going to mean is that those companies are going to have to take painful rounds. I mean, I don't See any other way around it? If you're not acquirable and the IPO window is closed and you need to keep growing, you're gonna have to give it up.

So in such scenario, where do you think the so called alpha lies right now in venture?

Well, I mean if I said anything but precede, I'd be in the wrong job. Right. I think that it's true though. I think three places, I think first check is still the best place to return. Usually first check means you're a micro fund sub 100 million. The data will show you that it's. Those are by far the best performing funds because it's easier to return on 30 million than it is 300 than it is 3 billion. Right. So you catch a winner at pre seed. Game over. So I think that's one factor or that's one way to slice where the alpha is. I think another source of alpha is geographic diversity and specifically investing outside of the bay. So the prices are so high in the bay, but up here we're still paying 60% more than what we were paying before. But compared to the bank, I mean like you said, there's pre idea stuff funded at 100 million and we're still for our craziest deals 15, 20 and we're still able to get great deals done at 6 to 8, 8 to 10. So I think geographic diversity is another source of alpha. And then I think the third is, I'll just call it under invested founders. And that could be, you know, it tends to. People tend to want to talk about it as diverse founders or founders who aren't just white dudes. And yeah, that's part of it. But you know, I mean, I think, you know, whatever your race or gender is, if you're, if you're a Stanford computer science major who just, you know, was the 20th employee at Uber, like that's. That alpha is arguably much less easy to achieve and that person is regardless again of their race or gender going to get money. Like now I'm sure you could say, well yes, but not as much or it'll be harder for a certain type of person. That's true and I'm not minimizing that. But what I'm saying is backing people who have different academic backgrounds or come from different socioeconomic backgrounds or our first generation Americans or whatever it is. I think that so many investors still just stay in a comfort zone of investing in patterns that there's a lot of value to be captured in investing in folks who don't fit that mold. And there are a lot of emerging venture managers who focus on that. I was talking to someone today, actually another investor about it, and we don't have a DEI filter on our funds, but we're both big believers that diversity creates returns. And I think the challenge is for us as emerging managers to implement that kind of portfolio strategy. We need the downstream capital to show up and back our founders of color or our female founders at the same rates that they're backing our other founders. So that's the thing that really, I think needs to happen for that alpha to truly get captured. Because at the end of the day, as a precedent investor, I just need my companies to raise more money from good investors. And I don't always see it happening like I'd like to for everyone, even on when the merits are the same. Does that make sense?

Absolutely, I think. Are there any investors who are doing that better, especially in Seattle area or like Pacific Northwest in terms of either there could be solo GPS or, you know, micro funds who are focused on, you know, finding. Because now that we're in global, like. Because you're not often going to find these founders, you know, in a metro or in the same places that you previously found. Right. So how do you reach out to those guys?

Yes. So I guess I can't answer for other funds and I hate talking about other funds because I don't know what. I have no insight into their strategies or how they treat people or what they do. And I always assume everyone's doing the best they can in terms of finding founders. As far as I can gather, being relatively new at this, there seem to be two ways to get deal flow and one way is inbound and the other way is outbound. So outbound is you hire a bunch of associates and you send them to go and stalk everyone on LinkedIn who says that they're doing a new thing. And you know, you write scrapers to figure out like who's, who's moved jobs or who's, you know, who's, whose earnout is up from the last company they sold. You're super data driven and you chase those people and then there's inbound. And that's my strategy, which is I just try to do a really, really all the time that I could spend like chasing people on LinkedIn. I instead I just try to do a really, really good job for our founders and then I try to put helpful content on my website and that's my strategy. And I believe that over time, if I do a good enough job of that And I make that the goal. And I do that for every founder, not just the ones that are successful. That the reputational network effect of that and the referrals that come in that will put me at the heart of the right type of deal flow, both from a diversity perspective, be that geo or otherwise, or certainly from a qualitative perspective. And that's the bet I'm making, I think a part of it too, by the way. I've had so many because we have a relatively diverse portfolio for any way you slice it. And people have asked me, well, how do you get. I have so much trouble getting good deal for founders of color. How do you do it? And I said, well, invest in some is a good way to start. If you can model, if you can show folks that hey, someone like me, someone who looks like me is on that VC website, as silly as it might seem, it apparently makes a difference and you got to be about it, not talk about it. And, and I think that really helps. And I think a lot of, and I will say I hear a lot of, I can't speak to it, but I hear a lot of people from underrepresented backgrounds who try to raise venture, speaking about firms that will make big commitments to BLM or to Black History Month and make a post on Twitter or whatever. And then you go to the portfolio page and there's literally not one founder of color. And so again, I'm not a social justice warrior, trust me. But I do think that I do trust people and their experiences and that's the type of thing I hear. And again, I just think it's good business, not to mention the way I want to go about my life to focus on one thing when I focus on a founder. And that is, is the problem that you're trying to solve a $10 billion problem and are you uniquely suited to create a $10 billion company around it? And that's it.

We talked about being part of a board and the board member decision making. When we're talking about merchants and acquisitions, you're obviously part of I think four or five companies. As a board member, I'm curious, how do you decide in terms of being part of a company's board? Are they always natural extension of being an investor? And what do you see the main function of a board member?

So I don't take board seats anymore. It's not scalable. I think it's really important for later stage investors to have board seats from a fiduciary perspective. And so I think that's One of the big roles that a board plays is making sure that companies are deploying the funds that have been invested in them in a way that is in line with the strategy that the investors invested in and certainly that there's no malfeasance and that companies are making their best efforts to be diverse hiring managers and create a culture that's positive and welcoming and all those things for my money. And I think it's important for companies to have boards relatively early because. For a couple reasons, I think. One, it just sets a tone and a cadence for how you need to be honest with yourself about what you're doing and what your business is doing because it's easy to go hide and build. And the second thing is it's a great way for you to hold your team accountable. Maybe when the footing has shifted, you've raised your first round of capital and the CEO now is different than just the other co founders. But the co founders all feel like their co founders. The technical co founder may say, well, I don't need to give you a roadmap. It's going to be done two weeks. Classic problem, right? Well then for me to use the political capital, the relationship capital with that technical co founder to convince them that they need to be accountable, that's the number one cause of technical co founder breakups. If you can bring it to the board, you say, hey, hey, hey, listen, Jennifer, I know that you're tearing your hair out trying to build and we're going a million miles an hour and you don't want to do this, but my board has got to have a roadmap. Like our investors need this. And so, and you got to sign up for when you're going to deliver X, Y and Z. That's a huge, that's, that's huge. Right? It can save a company. And if you don't have a forum for that early on, it's really hard. So you know that. So please have a board. Just don't ask me to be on it. But I, but I mean, I think you can get joking aside, you know, I'm an invited guest to a bunch of boards, which is great because there's no official standing, no fiduciary, extra fiduciary responsibility, but I can still be a voice of support and help, hopefully.

What is a good time for a company or for at least a startup to think about forming a board? So we're almost at the end of our conversation. I want to end the conversation with one final question, which is what your favorite investors you try to follow, admire or emulate over the years.

See, I'm not a career investor, so I'm not like, I'm not going to say like Warren Buffett or John Doerr or. I tell you what people, I know who I try to emulate. I have Bill Bryant from Threshold, formerly Draper, Fisher Jurgensen. Bill values founders, time and values. He is so thoughtful about giving direct feedback. It's not for everybody, but it cuts out all the tap dancing I learned from Bill. You just give it to people street build a relationship where and that's the thing people don't understand is like you need to build a relationship. But when you build a relationship where you can be direct with people, it's insanely valuable. I think about other investors. I think Jeff Richards at ggv, just an incredibly smart. He's an investor's investor. He just spends so much time thinking about that journey from Series A to ipo. He knows the markets he invests in cold. I don't know how he does it. He spends so much time talking to founders, sharing that. Talking to founders on a podcast or on video interviewing them, sharing insights with people who've built $20 billion companies and at the same time still has time to talk to our founders who are raising Series A and be helpful. And so I think I learned from Jeff, just love the game. I didn't always think about it that way, but now I Listen to Patrick O' Shaughnessy's podcast, I listen to 20 Minute VC, I follow Josh Wolf from Lux on Twitter and he's fantastic. He's a down. I like Josh because he's a down ass guy. He was a skate punk or whatever growing up and is just wicked smart and has become this basically one of the top deep tech investors in the country, not the world. His ability to be his authentic self and also just be hugely intellectually curious and just have such a broad range of knowledge about so many different markets and topics. But all of that package makes me a real big fan of Josh Wolf from Lux Capital. Yeah, I mean I could go on and on, right? There are a bunch of people I tried to just take either inspiration or sort of channel the approach of a lot of investors, people I've known personally and then and folks I know I hope to be on a cap table with one day.

Patrick's podcast is probably one of the best out there. And it's almost like listening to his podcast is almost like you can do multiple MBAs by just listening to that podcast.

I mean, I was listening to him talk to. I'm going to forget the guy's name because I'm bad at this. I'm really not an investing geek, I promise. But he was talking to the guy who coined the phrase crossing the chasm. He wrote the book. I'm just blanking on the guy's name. He's a great investor, and it was fascinating. But he brought up the term trapped value as a heuristic for evaluating a company's ability to create value. And he's like, look, for Airbnb, the trap value is the spare room, and for Uber, it's the backseat. I guess for Quest Networks, it was train tracks, and they decided to lay cable and become a fiber company. So what's your trap value? And I've been sharing that with founders. They're probably sick of it, because anytime you get a new thing, you want to take it for a spin. But I think it's a really interesting way to think about opportunities, because at the end of the day, if there's not trap value, then what are you discovering? Why do you have to exist? You have to be unlocking something that was previously unable to be sort of.

Yeah. That's one of the great ways to look about if the idea and the opportunity is actually large or not. Thanks for taking time, Karvit. This was a fascinating conversation, and I had fun and hope you had, too. Thanks for being on the show.

Yeah, it was awesome. I enjoyed this immensely. You're great at asking thoughtful questions, and. And so thank you for having me.

Thank.

You.