Defy’s Madison McIlwain on breaking into venture capital

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Pedro, this is a very cool episode since we have two new things going on today. For one, we had our first investor guest speaker and second, you got to sit down with them.

That's right, Tara. It was amazing. I was super honored to talk to Madsen McLean, partner at DeFi VC. Madison shared with me how she broke into venture capital, launched her podcast Their Room, and is helping founders build their startups.

These topics are so important, especially when it comes to conversations about how capital is invested in early stage companies. Are you ready? Let's sit down and start up.

Madsen, I'm super excited to have you on Sit Downstairs Startup Podcast. You're the first investor that we have on our show. So every episode we ask our guests what are their favorite coffee shop drink because we want to bring those good old days that I imagine I had a chance to connect with you in San Francisco. We will be on maybe Phil's Blue Bottle, but unfortunately we are all locked in our homes and doing this through a virtual zoom. So what's your favorite coffee shop drink?

Oh my gosh. Well, first of all, thank you so much for having me on, Pedro. I'm really excited to get to be here, sharing a little bit more about my background and defy with you today, my favorite coffee shop drink. So even though I'm from Seattle, I actually don't drink coffee, which is funny because that's the coffee capital of the world. So my favorite drink is actually a matcha latte and I'm lactose intolerant, so I usually add oat milk to that. It used to be almond, now it's oat. Very California of me. So. So that is my go to beverage when I'm out doing coffee chats.

That's amazing. We used to have chai bar on the bottom of our office on Market street, so I definitely miss my chai latte. At the end of the day they have the tiger one, which is. I feel like if I drink it those now I'll not sleep for days.

Oh my goodness. Yeah, I miss the frequency of fun coffee chats. The noise, the smell, all of it not the same anymore.

All of the good things that soon, soon we are going to come back to that. Right. So Metsio, you are an associate at Defy VC and we are super excited to have an investor on our show for the first time. So maybe for the ones that had had the pleasure to connect with you before, can you walk us through who you are and your journey to become an investor?

Yes, I am happy to start there. So like I mentioned, I grew up in the Pacific Northwest, which was defin always a hub for technology and innovation. It's really right in my backyard. For undergrad I went to Dartmouth College in New Hampshire. Very, very cold. Didn't quite know what I was getting myself into, but there I fell in love with history and human centered design and bringing together the world in which we understand what happened in the past. How to build for the future is something that I really started to love. And building product and leveraging this platform of design thinking to help build was something I really fell in love with and then combined personal passion for the future of E commerce. I grew up in a time when buying things on the Internet was starting to become more normal and the way in which we shop has always been really interesting to me. And so I had interned at companies like Rent the Runway and a virtual closet startup that was trying to create image recognition software so that you and I could take a photo of your sweatshirt and say this is a red sweatshirt. This is going to look great with those jeans you have in your closet. And then, oh, but maybe you should buy these new sneakers. And that was a little bit too early for the time, but that really got me excited about the ways in which technology was underpinning new consumer experiences. And so right out of undergrad I joined Gap Inc. Where I worked as a product manager on their global supply chain team. And for those who don't know, Gap is quite a brand. Everyone knows, but they own actually a number including Old Navy, Athleta, Banana Republic, and all of the technology that helps to make that purchase seamless for you online is run by a team of engineers. There's 600 of them in India, a couple dozen around the country in America who work to power that consumer experience. And so I had the pleasure of sitting on the team that actually worked closely with post purchase engagement, much like Zendesk does for support. I helped our customer service teams, our returns pipeline and other sorts of post purchase communication, building our first chatbot and so really got to know what's going on in supply chain infrastructure and how that whole world is really being taken over by the increased in demand for E commerce. And so over a year ago I joined the Defy VC team. That decision was really coupled with my love of early stage companies and the perspective of wanting to understand how to build an incredible business at all different types of sectors, not just in E commerce infrastructure. And so we're a generalist venture capital fund, which means we look at anything with core technology innovation focused on three sectors, enterprise, SaaS, consumer and deep tech. And I can share a little bit more about vc. But yeah, my main role is supporting our investing team.

That was a question that I was gonna ask you now for our listeners that usually see the point of view of a founder and most of them are also operating in a startup. What is a VC and what is the role of a VC on the process of building a company?

Yes. So entrepreneurs are the heart and soul of the technology and entrepreneurship ecosyste and venture capitalists. We kind of work for the entrepreneurs honestly at the end of the day. But I think it'll be helpful to take it up a layer on how I like to think about the ecosystem. So visually I think of it as a three legged stool that exists with three key stakeholders. The entrepreneur who you mentioned, venture capitalists defy and limited partners who are oftentimes endowments, pension funds, funds of funds that their role is to invest money so that their businesses and their nonprofits can continue to thrive and grow in an asset class called alternatives. That's typically very high risk types of investing and we're not quite sure how it's going to return. You might look at some of these tech funds today and say, oh well, they've returned quite well. And so it's becoming more and more popular to invest in them. And that's how venture capitalists get our money. We have these incredible limited partners who partner with us and say we're going to commit millions of dollars into what is, what is called our funds and that is the capital that will fuel your investments. So that's one leg of the stool LPs. Then there's US VCs. And we commit to our limited partners to invest in certain types of companies at certain stages for certain ownership. And that's what was called equity investing. We give you a million dollars and we take 20% of your company. And so as a result we are creating a partnership that can span over decades, really and helping to build and inspire entrepreneurs with the lessons we've learned for building sometimes north of dozens of companies over the years. And so that takes us to the final leg of the stool which is entrepreneurs who more frequently are on Zendesk, because what Zendesk gets to do is help power many of those startups. But yeah, we get to really work for the entrepreneurs through investing our LPs money.

On the journey of a startup, you have the entrepreneurs, the founders, they have a vision that they're starting to build MVP or some sort of product to put on the market, collect customer feedback, understand traction. And on that point, the ones that are fooling that growth are the venture capitals that they are raising funds from. What you mentioned, the LPs and based on their knowledge of the market. Especially when you're talking about early, early stage, which is more of an art than a science. Right. Because you were there day to day and you don't have any financial metrics yet to evaluate the company. So you're evaluating most of the time the total market that they're going after, the team. Right. So can you, on that point of early stage investment, what are the things that you look into on an entrepreneur when you're evaluating their business? Right. Since they are maybe pre market. Right. They don't have a lot of traction. What do you look for when you're making an investment?

Yes, that's such a good question. And really it does vary by sector, stage and firm. So I don't know if I can speak blatantly to the entire ecosystem, but at Defy, we really believe in the authentic entrepreneur. Someone who is probably working another job and wakes up one morning and says, if I don't solve this problem, I am not going to be able to sleep at night. And the kind of people who have had a user experience that is so frustrating and upsetting and totally can be done better, that they leave whatever they're doing and have to go solve this problem if it's the last thing they do. And I think that that blueprint for the entrepreneur journey is really what has empowered Defy to build our fund. You know, we were founded four years ago by Neil Sequeira and Trey Vasala, who had been at Kleiner Perkins and General catalyst, Neil at GC, Trey at KP for 11 plus years combined. They have over two decades of investing experience and they seen really the venture ecosystem grow up from the early 2000s and become what it is today. Now there are hundreds of funds and lots of capital out there. But at Defy, we really are looking for these entrepreneurs that, what we like to say, defy expectations. Because really at the heart of entrepreneurship, what you're doing is defying the norm and challenging the status quo. And Working to reinvent the way that a user does whatever that core task is. So pulling back to your original question, which is what do we look at to evaluate at this early stage? It is a lot about the people and their grit and their intentionality, about the problem they're going to solve and why them? And then the other half of that is why now? Right now we're in a time where disruption is happening left or right, whether we want it to or not. And it's a really powerful time to be building new systems and technology. And so the combined nature of that why you and why now oftentimes fuels venture capitalists decision to invest in a company. And of course, there's numbers and all that important stuff which we can dive into. But I think at the high level, that's the most important part.

That's super, super interesting. We ask a lot of our founders here how the pandemic impacted their business. Right. And if you are investing so heavily on people, how are you evaluating all those set of skills through Zoom before making your investment?

Oh, my gosh. Well, you know, we're learning as we go, right? This is typically an in person job. And so to have it go remote was quite a shift for all of us. I think when this is all over, we will go back to a version of in person because it's fun seeing you over Zoom, Pedro, but I'm sure it's not as fun as seeing you in person. I can't tell how tall you are. You know, I can't get a feel for that energy that like organically springs out through meeting people in person. And so we've been adjusting, right? We've found socially distant ways to meet those who are local and really, hopefully had someone who knew someone or could really give us a colorful representation of the entrepreneur that we've been backing in a remote world because it is a lot about the people. So I'm confident that what has happened in terms of allowing us to have these first conversations over Zoom will hopefully streamline some of the processes that existed prior. But go forward, we'll have this hybrid model of both virtual and in person. Get to knows with entrepreneurs, because I actually think that's the most fun part of the job.

Right? I think that's true. Getting the energy from a person that is probably obsessed by that problem, that gives you a good sense of like, you're going to go above and beyond, wake up every day to build a business to solve that problem, which at the end of the day, that's why you want to see on a founder, right? If they're doing that for only the monetary benefit or the status. Because more and more startup plan is getting close to Hollywood. So you're getting more and more people stories like I want to be a founder, I want to put on that on my LinkedIn or Instagram because I have the status of that in the reality. Taking out all the bells and whistle is a very hard job that even if you are able to raise a lot of cash to fool your growth, you need to sell your vision and build trust on your investors. You need to build trust with your first customers, you need to build trust with your employees and you have to share. You need to sold them into something that doesn't exist yet. So it's a a hard job for sure to have that vision and be able to have the resiliency to wake up every day and through everything breaking. Don't give up and still build your business on that. The venture capital industry has been changing a lot since I moved to the US I was able to see a lot of the traditional firms changing the way that they work right from the early 90s. It was not always a good reputation that venture capital had and since maybe for me it was since I started following more Andreessen and others that they were starting to invest on. What happens beyond after I sign you the check, right. What are the value adds that I can offer to really help you grow your business? Right. Building a community for my members, helping you hire your first executive or put you in contact, all of that. And recently, since last year, with all of the massive changes that the world seeing, more and more venture capital firms are realizing that the way that they distribute their funds are not equally right to different types of investors. And the last research that I made only 2% of the venture capital investment additionally to female founders. And if you go on other minority groups, those are even go to 1%. So what is your personal take on this shift that the venture capital companies are doing? And many of them are raising their own minority lad fund. So I'm just interested to see your point of view on this and what you actually saw from the last few months that people are actually putting their money where they are talking about?

Well, just to start off, I'll say there's no way around it. That's a really depressing number. And when I read things like that, I can't help but feel slightly discouraged at the progress that we could have had already. But I was reminded recently that when Twitter went public almost nine years ago, they didn't have a woman on their board and just today that wouldn't be acceptable. Right. And so although there is such a way to go, I really do look towards the next couple years and with a lot of optimism because things have changed since 10 years ago. And certainly when Marc Andreessen was starting a 16Z, things have changed. And so I feel really encouraged about what's to come. And at Defy, I think the nature of our fund is such that we are looking for those types of entrepreneurs who defy expectations, like I already said, and that is women and underrepresented minority groups because people underestimate them. And actually that's a great place to be. It's a good place to be underestimated by the market because there is more opportunity that can come out of that. Right. And so I would say to your question about my personal perspective is I'm encouraged by the women I'm seeing coming to pitch us at Defy, my friends who are leaving their companies to start businesses and looking towards the future. And I think we're going to continue to have more and more of that and it will grow as we have more women in represented minority groups, groups on both sides of the table. Because originally, as you alluded to, in the early 90s and the early days of venture, the investors were all white males. And that's honestly, there's no problem with that. But then what happens is you have their friends who they want to invest in and they know and that's in the ecosystem and that begets who they're going to see more of. And that just doesn't create a network effect that has all types of people. And what is going to be a better, more thriving ecosystem down the line, having everyone involved. And so now that we have people like you and me on either side of the table, who gets to have this conversation, we're naturally going to connect with people who share our story, share your journey coming to America, share mine. Being a female investor and working in tech and sometimes being the only woman in the room. And I think that is how this transition is going to continue to grow. And investors, whether they be men or women, can value those unique perspectives. Perspectives and really help to empower those entrepreneurs. And so lucky for me, I felt that empowering journey through my partners at Defy who've really supported my journey into being an investor. And then as a result, I've just noticed we've continued to invest in really amazing women. And so I'd love to highlight a few of them who have really inspired me in our portfolio. Is that okay?

Yes, please do.

Okay, so a couple that are just so cool that knock my socks off every day is Sheila Kim Parker. She is the founder of Thrilling. This is a online e commerce store that helps to enable local businesses and local vintage retailers actually to digitize their inventory and sell secondhand clothes online, which is a passion of mine because I really believe in the future of sustainable supply chains. And she's doing that not only by supporting local businesses, but also saving our planet. Double check.

Yeah. Amazing.

Super cool.

Yeah.

And then another woman, you know, Padmasi Warrior, she is just left working for an electric car company in China. And the name is escaping me, but it's basically the Tesla of China. And she's also on the board of Spotify and Microsoft and just started Fable. And I don't know if you're a reader, but I am an avid reader. I read 30 books last year and I've been looking for a social media app for reading since Goodreads got bought by Amazon. And totally, they tanked it. Sorry, Amazon. And so Fable is the future of social reading and social sharing stories. And I just think that is so powerful. And so there are women like this who are just totally kicking butt and I'm grateful that with defy I get to work with them, but there's no shortage of cool women like this starting companies.

That's super a good point of view and I'm super excited to see that. And even in terms of exits, right, seeing Bumbo IPO and the iconic photo of Whitney holding the baby there, it just, this is going to change so much the landscape and bring a more optimistic future for that industry. So you are more and more removing the bias and empowering investors like yourself to go above and beyond to see that. Because as we mentioned before, raising a startup is a team sport, so you need to have all the right pieces in there. So hopefully more and more female founders who find funds like yours, they'll believe in them and support their growth. So changing a little bit on that topic you receive, I can imagine tons of pitch decks every day and I couldn't not talk about customer experience on this podcast. So a question that we always ask our partners, investors, our what are the set of metrics that you evaluate on the customer experience side when you make an investment? And have you ever went through a process of checking up their customer support to see how active they are or react or how the good experience they provide to lead your decision?

This is a great question. I'm going to default back to my earlier answer, which is it depends on the stage, it depends on the company, the type of sector, especially if you're a consumer versus an enterprise SaaS solution. The metrics that we're going to evaluate on are going to vary. As someone who used to work closely with our customer support teams at gaap, I know NPS was a number and CSAT scores that we really cared a lot about internally because it really helped to understand customer sentiment. And as investors, we care about those numbers too. If you're creating, building a service that is changing people's consumer behavior, we want to know if they're happy with that change. And so we look at NPS scores as well. A lot of times our numbers that we look at are driven around revenue and how fast you're growing. And if you're growing, kind of growing, well, in a healthy way. And so perhaps not over indexing on paid marketing, but rather having organic growth and some value to the numbers that we specifically look at in a consumer company are CAC to LTV or customer acquisition cost versus lifetime value. And these metrics are just helpful for us to understand. If your customers love you, are they obsessed? Are they advocates of you all day long? And is that going to help to empower and build a really cool business?

That's the thing that we talk a lot, a lot with our community. Right. Building that strong sense of trust on your consumer, your brand. You are empowering yourself to get that network effect of every happy customer. We invite a friend and recommend your brand. So that's really good to see that investors are also looking on that because it's very easy to focus on growth, growth, growth, grow that dependency on performance channels. And at the end, sometimes you're pushing a product market fit that you might never had if you didn't have like millions to burn on Instagram channels, which is a lot that we see especially direct to consumer brands.

Yeah, well, and it's funny, you know, I loved the nod towards have I ever tried a customer experience before? Before investing? Absolutely. I mentioned thrilling. And before we invested, I shopped on their website and, and received my items and I was so blown away. I actually got my order confirmation email under 10 minutes after placing my order, which I didn't know you could do that so fast. But it was because these like wonderful vintage store owners are just at their store, it's Covid. And they were able to pack and ship my package so quickly. And so I use that absolutely as a sign that this is really powerful because frankly, at Gap, it can take days before we ship out your order confirmation status. And that's not bad, but it goes to speak to the power of the consumer experience and how that does showcase what you're building is powerful and there to stay.

Yeah. And for Zendesk, right when the company was founded, it was all behind consumers having a say on the process because it was alongside the launch of the iPhone. So more and more people had social media in a way to elevate bad experience that a lot of the brands were just default to. Right. And now we saw generations of companies that grew with customer experience on DNA, that they were using that experience a way to go against household names and develop that, such as strong sense of community and customer love, that they were growing organically and developing more and more products. And teaching the next generation of founders that now is not only about the product that you build in, sometimes in a vacuum, but how is that solving a problem for your customers and how you are growing with them and developing a relationship in an experience that they can feel happy that they can refer you to other customers. And it's been great. Madsen, to wrap us off, I have two questions. One, you have a podcast too, that's called the Room. So you want to tell us about your podcast and give you a shameless plug here to get some of our listeners to stop by and listen to your interviews.

Yes. Thank you so much, Pedro. Yeah, plugging my own podcast. Another podcast. This is fun. So I don't know if any of you are musical theater nerds, but I happen to be. And if you love Hamilton as much as me, you know that many of us want to be in the Room where it happens, but a lot of us aren't to doors closed behind age, race, gender and experience. And my co host and I, Claudia Laurie, are two young women in the tech ecosystem and realized that at a young age we had answers to a lot of these questions. What is venture capital? What does a first pitch deck look like? Things that we alluded to on this podcast that we could share a bit more about those important first moments in an early entrepreneur's journey through interviewing some incredible founders who are post series A people like Shashir Marotra, the founder of Coda IO, or Jessica Lesson, the founder of the Informationer. You know, more recently, Jesse Draper, the founder of Halogen Ventures. These women and men who have incredible stories that are willing to come on and share what it was like to be a founder when they were starting that journey. And so, yeah, check out the Room if You're interested in learning more about those first moments and hear us talk to some really cool people. Much cooler than myself.

I doubt it. But we're gonna put a link on the bio and in description of the episodes. So listeners, you can go in and check Medicine podcast. And my last question before I let you go. When you are contacting customer support or service from a brand that you usually buy from, what is your go to channel that you ask for help? Are you a phone person? Are you read a SMS, you go on their website and filo4 what is your preferred channel?

So for the person who built the first chatbot at Gap, you wouldn't think that this would be my answer, but actually I'm a sucker for the phone channel. I just love how efficient it is for me because every time I open a chat I always forget and then it times out and I'm just like, oh, I never finished that task. And so I'm too busy. So I just. What happens is I call, five minutes, hopefully it's done and it's done and it's like there. However, recently I have been doing more SMS for emerging direct to consumer brands who empower that on their platforms. And that asynchronicity is actually as helpful to me as the phone call. And so those are my two extremes. Either I call or I text, probably nothing in between. Email is a graveyard. I loathe using email.

Yeah, like in my seven years working on customer experience, we've been talking about the phone is dead. The phone is dead, but I don't think it's never gonna die. But we believe now that the emerging channel of messaging, right. WhatsApp, Facebook messaging, asynchronous chat that you don't need to be on a website, that if you leave you lose the whole conversation. That's the future that consumers are going for that and we are seeing a lot of our users already moving towards on providing that experience that I can start a chat like a text, my friend, whenever you're ready, I'll be there because I already use that platform so I don't need to come back to your website or my email graveyard or anything else. So that's really good to hear. That applies to investors as well. So Edson was a pleasure. Thank you so much for joining us on Sit Down Startup podcast. Hopefully I see you soon in San Francisco for extra coffee.

I hope so too. Pedro, thank you so much for having me on. It was a pleasure to get to share more about DEFY today.

Thank you so much for sitting down with me Madsen. I really like hearing about how Defi is making a dent on the startup ecosystem. Early stage investing is more art than science and you made some really good points on what you look for when making an investment. The authentic entrepreneur, the person who has to solve that problem is who defy is passion about why them? Why now? These are great questions for company builders to think about.

So true. And from one Seattleite to another, I'm personally inspired by your journey from E commerce to product management at Gap to breaking into Silicon Valley VC world. Your experience gives a lot of insight to what makes the young company work. It also gives you a great perspective on metrics and why metrics like CAC matter because it tells you how much a customer loves a company. And I'm definitely going to listen to your podcast. I am a huge musical theater nerd.

Thanks again for listening to another podcast with us. If you have a minute to help us grow, make sure to subscribe wherever you get your podcast and leave us a review. Stay safe and hungry.

SA.