#205: Rick Smith, Co-Founder & Managing Director at Crosscut, One of the Top Venture Capital Firms in Los Angeles, on Helping Founders and Becoming the Firm of the Future

Welcome to Just Go Grind, a show that focuses on helping you launch and grow a business and navigate the ups and downs of entrepreneurship. I'm your host, Justin Gordon, and in this episode we have Rick Smith, who's the co-founder and managing director of Crosscut, one of the top venture capital firms in Los Angeles. And Crosscut's a seed-stage venture capital firm looking to invest $1 to $3 million in early-stage companies with hypergrowth potential. In this episode, we discuss how the global pandemic has impacted Crosscut's Crosscut Ventures, how many meetings an entrepreneur ends up having with Crosscut before they get a term sheet, what that process kind of looks like for each meeting as well. We go through how Rick and his team are seeing 5,000 or so business plans per year, doing 500 meetings, making 10 investments, and how that process goes, and why they're looking for a chief of staff now at Crosscut, really to help them build the firm of the future. We also talk about Pledge LA. and diversity inclusion initiatives in venture capital, Rick's advice for hiring for startups and thoughts around equity splits, deal flow at Crosscut, Rick's first exit at Crosscut, and so much more in this episode. As always, the show notes are at justgogrind.com/podcast, and you can support the show by leaving a rating and review over in Apple Podcasts. I would really appreciate that as well. This episode is brought to you by Hawk Media, a full-service outsourced CMO based in Santa Monica, California, providing guidance, planning, and execution to grow brands of all sizes, industries, and business models. Hawk Media is recognized by Inc. as one of the fastest-growing marketing consultancies, and their collaborative process, à la carte offering, and month-to-month fee structure give clients the flexibility they need to boost digital revenues and marketing ROI. Hawk Media, the company, has serviced over 1,500 brands of all sizes, ranging from startups like Tomorrow Melon, SIO Beauty, and Bottle Keeper to household names like Red Bull, Verizon Wireless, and Alibaba. And also, I had the founder and CEO of Hawk Media, Eric Huberman, on the podcast in episode number 23. If you want to take a listen and to get a free consultation, head on over to hawkmedia.com and be sure to mention Just Go Grind. Without further ado, here is Rick Smith, co-founder and managing director at Crosscut. Rick, welcome to the show.

It's good to be here. Good to be chatting.

Yeah, great to talk with you again. It's been a little while. There's so much to go through. I always like to start with context on the company. So with Crosscut, what areas are you kind of focused on now?

Yeah, so, you know, Crosscut based in Los Angeles, early stage venture fund, seed stage. A typical deal for us is going to be a $2 to $4 million seed deal of a company, potentially with some traction of some kind, but not necessarily. The categories in which we're investing these days are pretty broad and sort of match, I think, what you find generally in venture capital, in tech investing. But we're doing a lot in enterprise SaaS, software as a service, We're still doing some consumer investing. We are doing a fair amount of fintech, insurance tech. And to be honest, I like to say we really will go where great entrepreneurs pull us. And, you know, our number one goal is to find great entrepreneurs going after big problems and solving them in ways that can generate some outsized returns for our investors. And that really hasn't changed in the 12 years we've been doing Crosscut.

Yeah. And now with, with COVID I'm curious as to how that's affected Crosscut, your deal flow, any of that. I'd be curious to see like your opinion on how that's impacted you guys and how you kind of operate on a day-to-day basis.

Yeah, I, you know, it's been, it's been a big change on one hand and, and things sort of new normal on the other hand. So If you talk to most VCs at— in January of this year, they would have said, look, the most important thing we do at the early stage is back entrepreneurs. I think we need to know who the entrepreneurs are, and the only way we can get to know entrepreneurs is by meeting them in person. I would have said that same thing. If you replay my last 5 podcasts, I probably would have said exactly that. Yeah. Turns out I was wrong. It turns out you can get to know people over the internet. I don't know as well as you can get to know them in person, but you know what? What the difference that we have seen is that instead of having sort of one or two big meetings where you're kind of organizing everybody and and okay, we got you know six people from Crosscut come in. You bring your three people in. Oh wait, we got to move that because you're going to be in. Seattle. Okay, we got— instead of that, we can have a series of Zoom calls and, and, and Google Hangouts, and we can be— we can get to know them, the entrepreneurs, in some ways. Yeah, better than we could before because we're just having more conversations. We don't need the infrastructure around that. We don't need to make sure you can get to the office at a certain time. Um, and so In some ways, I would say we're, you know, we're getting— we're still— we still have to know the entrepreneurs, but the nature of the beast these days has changed where I think we're getting to know them as well or better than we did before. And I would not have ever guessed that was going to be the case.

And on that note, Rick, you mentioned kind of having, you know, more frequent potentially. I mean, how many meetings— it's not going to be a one-size-fits-all thing, but I mean, how many meetings are you having with founders before an actual check or even just a term sheet is brought to them?

Yeah. Yeah. I mean, in the old days, That answer may have been as little as 4 or 5, you know, um, meeting 1 or 2 in-person meetings and then, you know, some follow-up phone calls. But a lot of it was email and stuff. You know, today it may be 5 to 8, you know.

Yeah.

We're just setting up Zoom calls with different people in the office and, hey, let's, let's talk about this particular issue. And it's sort of, uh, It can be a deeper dive just virtually rather than in person.

And with that as well, Rick, I mean, take me through it. I'm thinking of the founders who are listening, what a first meeting may look like versus 2, 3, 4. How's that progression or what are you trying to figure out within that for founders who may get a first meeting with Crosscut? But what does that kind of process typically look like then?

Yeah. So, so I, I think the, the normal cadence and, you know, very few deals are actually normal, but, but yeah, I think the sweet spot is you somehow have gotten in to meet a VC. In this case, it's Crosscut. And, you know, we see 4,000 or 5,000 business plans a year. We meet with 400 companies a year. So it's not easy, you know, just from a time standpoint to just, to just, you know, see all the companies we want to see. So if you get a meeting with a VC, that's, that's Step 1, and that's success. I would say that first meeting is now a half-hour introductory video call in which you're just trying to convey some sense of the passion you have for the business and the opportunity that's before you. And it's probably a one-on-one call with someone here at Crosscut and the entrepreneur. It tends not to be a group call. From that introductory call, virtual meeting, then we will spend time, you know, talking about the company and figuring out, okay, who, you know, who may be best to kind of co-pilot this deal with us. We generally like to have 2 professionals on every deal, but we bring everyone in as far as diligence goes and thoughts and views and concerns. And then we, you know, then it's going to be a series of Okay, I want you to meet with this, this person, maybe just with them individually, or maybe with me listening in, you know, this person at Crosscut. And then, you know, after 2 or 3 of those potential meetings, and it's like, you know what, I think you've advanced to the point where you really want to get the entire group thinking about this and giving the nod yes or shake the head no. And so let's schedule a group meeting. And And that will be with the entire group of Crosscut on a Monday or Thursday. And, you know, we go, we take it from there. And then it's follow up with questions and diligence and concerns and everything else. So that's a typical process, I guess, for us. And that can be anywhere from 2 to 4 weeks, I guess, you know, overall.

Yeah. And you mentioned the 4,000 to 5,000 companies you hear of at least a year, and, you know, seeing maybe 400 to 500, then How many investments are you roughly making in a year then?

10.

10. Okay. So all that for the 10 solid companies you're hoping for, which is the world of venture capital. And I know the team, you mentioned a little bit about that as well. I know at one point you were looking for chief of staff. I'm curious if you found a chief of staff, just for people who are interested in getting involved.

Yeah, well, we are interviewing now. It's— we're down to the finalists at this point. We have an unbelievable set of people that we're talking to. And I will tell you this, I'm a big fan of Los Angeles. I'm a big fan of venture capital here. The quality of the people that want to get to Los Angeles and work in the venture community is outstanding based on a lot of things we've seen in the last few years, but based on this—

Yeah.

In particular, Uh, I'm, I'm, I'm really, uh, excited for what it can mean to Crosscut, but I'm more excited what it can mean for LA long-term because a lot of these people we're gonna, we're gonna have to say no to, but I would love to get them involved, uh, with other firms in town or, or other companies in town. It's just a— all eyes are on LA venture right now, and I think that's obviously a good thing for, for LA.

Yeah, it's exciting, and there's that There's definitely a lot of opportunities in that world to get involved with as well. And on that note of the team at Crosscut, I mean, a lot of venture funds either run pretty lean in terms of the number of people at the fund and everything. How did you decide that you wanted to have that chief of staff? It's only relatively recently. I know you have a relatively small team. How did you decide on that side of things? I know startups are always thinking about hiring, but VCs want to hire too. How did you get to that point then, Rick?

Yeah, I think we looked at how can we make ourselves better. We've had a very good run at Crosscut over the last 12 years. But are the things we're doing the last 12 years the things that are going to keep us, um, on top of our game for the next, next 12 years? And one of the things that we decided was, look, we— there's a lot of stuff that we do as a venture firm, right? We are a company, right? We are a company. We sort of think about ourselves as investors, but we're a company.

Yeah.

A lot of things we do as a company, um, can probably best be done by someone whose focus is that. Whether it's the, you know, the, some of the platform initiatives we have going on, whether it's the, you know, events that we threw back in the day and we'll throw again, we'll be virtual in the meantime, you know, whether it's marketing, whether it's just, you know, some operations, a lot of that stuff is, you know, every second and minute that I spend doing that is a second or minute that I'm not spending Looking for the next great entrepreneur to back, and yeah. So we made the decision. Let's let's you know bring someone in who can consolidate a lot of that. Not investing; it's everything else. And by the way, that's a big deal. The other the big driver for me though, Justin, is we're in a service business. I don't care what people say. Yeah, we're investors. We're in a service business. We are servicing our investors and we're servicing our CEOs. Yeah. And and so how can we do that better? And I think we all do that at Crosscut individually. That's great. We do it, we try to do it as a firm. That's great. But this person is going to be worrying at night, how can we be even more of service to our, to our companies? And how do we, you know, that may be talent, which is generally the number one issue our companies have. It could be fundraising, it could be a lot of things. Um, but we want someone who is worrying at night, how can we do our job better in relation to our connection and our help to our companies?

Yeah. And you see a lot of venture firms, I mean, there's a mix of them, but some are, you look at Andreessen, maybe even like M13 and how much they've invested in the platform side. To your point of like the next 12 years for Crosscut, it's like, yeah, what is that? What who you've invested in to help them as much as possible? And obviously, there's a mix between how much help an entrepreneur wants versus how much they get, of course, all the time. But to have more of that capability on staff seems like such a value add. I like what you mentioned as well with just being focused in terms of what your strengths are as a VC, like you need to find deals, you need to find these investments. And I think founders out there can take that to heart as well with their, like, what do they need to be focused on in their business?

Because that's kind of the new normal, right? Yeah, I think that's a great point.

name of the game, because there's always going to be an infinite amount of things you could be doing. But to survive, it's like, what are the things you should be doing to help your company the most? So I really appreciate you mentioning that. And one thing that I know you had, at least on LinkedIn, posted about a bit ago was Pledge LA and being involved with them on their Summer Lab Fund. How did that come about, Rick?

Yeah, so we— well, Pledge LA, I guess the genesis of it was probably 3 years ago now when the Annenberg Foundation approached me and said, you know, we want to find a way to get this next generation of successful entrepreneurs thinking about how to give back to the community like the entrepreneurs of the prior generation did, Eli Broad being the number one example. And a guy I worked with at Sun America, you know, Eli has the Broad Museum downtown and the Broad Stage in Santa Monica and has given hundreds of millions of dollars back to charity. How do you know, how do we get entrepreneurs to give back? That was the original sort of genesis of it. And then we brainstormed on it a little bit and said, you know, what we really need, uh, you know, we really need some help in, in the startup world, uh, both firms and companies, of, of tackling this problem of, of, you know, lack of access to capital by, um, you know, a large swath of folks out there, um, lack of representation in companies. And that's sort of evolved into Pledge LA, which is— I've been, you know, proudly involved with now from the start. And, you know, we do a lot of things for— we were fortunate the last 2 summers to hire interns that we sourced through them from underrepresented minorities. And, you know, there's just a lot of initiatives that we're doing. We're actually doing a total remake at at Pledge LA to, you know, kind of how do we better serve, you know, the goal of improving the tech community and increasing diversity and inclusion throughout. Yeah. So we're kind of, you know, how do— because we've got a lot of resources. The Annenberg Foundation doesn't do anything lightly. And we've got resources, we've got a lot of people, we've got a lot of companies involved. And but one of the initiatives is, you know, giving back As in, you know, on the investing side. So there's a couple of things that Crosscut was involved with. Um, one is, is, uh, is a fund that, that, uh, we're doing through Pledge LA that is going to invest in South LA, um, which is great and is going to be, you know, we're putting the final touches on that and, and, and, uh, encourage people to sort of follow that if you have a company in South LA. Um, we're gonna I think, be able to effect some real change there by directly investing dollars. We also did something this summer with some of our sponsors who had given us some money to have events, including Cooley, who said— and First Republic saying, hey, let's— we're not gonna have events, but we'd like to give grants to some underrepresented minority companies. And so, and so we did, we did that as well. So we're, you know, I, what I, what I really want to try to find— those are, those are, those are helpful. Pledge LA is helpful. But I still, you know, we're eager to find ways to leverage, you know, those things in even bigger ways. And, you know, we got a long way to go as a industry, uh, and finding leverage points and ways to accelerate it and, and have the industry— by the way, we're not— we're just trying to have it reflect the diversity of LA. We're not, you know, it doesn't have to be a lofty, loftier goal than that of just to have it look more like what we see in LA. One of the things that attracts me to Los Angeles, I think a lot of people to Los Angeles is the diversity that we have here. I mean, it is, and you take it for granted until you go somewhere else and like, wow, you know, we really are lucky.

Yeah.

From what we have in LA. So, you know, it's the first inning of all this stuff. There's, I'm sure there's better ways to do it. And we got a lot of smart people sitting around the table trying to figure that out. And we're certainly open to hearing from anyone out there who's got, you know, suggestions of, you know, how do we, how do we continue to improve access to capital for those who have historically not, not had it?

Yeah, and it's such an important, obviously, issue. And with Pledge LA doing some great things there, are there any other organizations you know of or any other initiatives in particular you want to shout out on that note, or, and even just that crosscut of thinking of how we can, you know, give more people access to capital from diverse backgrounds? I'd be curious to hear anything you have.

Well, you know, there's, um, there, there are some funds being formed out there to do that. I think that's great. Um, I think what, uh, you know, Upfront has, has championed, um, with their kind of, uh, you know, making sure their, their, their companies have representation, I think they're Upfront's taking the lead on some of this stuff at a company level. I think all that is— all that's helpful. And it's— all won't be successful in some ways, and some will be more successful than others. I think we just need to take the attitude of, you know what, we gotta— we know we have a problem, now we gotta figure out the solution. Not unlike our companies that are trying to solve this problem. Let's figure out how to solve this problem. You know, AllRaise, I think, is doing a great job. So there's smart people trying to figure this out.

Yeah, absolutely. And on the note, going back to founders, and you mentioned one thing with the hiring being the most difficult thing really, even potentially besides raising capital. On the hiring note, I mean, what are some things you tell founders you're working with at Crosscut about hiring and how to hire resources around that? I'd be curious to hear that because it is such a challenge. And even the number of founders I've talked to are going through that same thing right now, figuring out hiring or hiring as they're scaling. What have you seen or any advice on that side, Rick?

Well, you know, I think in, in general hiring, when a company's small and starting up in that primordial soup phase of things, it's just the people you hire are really important. And, um, it, it, it is difficult. Uh, it is largely done, um, you know, in an ad hoc manner and people that, that the founder may know or the people they know know. And that's, you know, that, that can work, you know, to an extent. Um, and, and I think, uh, we encourage our companies earlier maybe than they always feel like it to, to hire, you know, a recruiting firm, um, to help them, you know, do a broader search. than that. We do encourage our companies to, you know, keep diversity in mind. I know sometimes it's harder for some, you know, entrepreneurs to kind of, with all the things they're juggling, like, okay, you know, I'm just trying to get a good candidate in here. But I think it's like, well, that's great. But, you know, as you think about, I think that the choices you make early and how a company looks is set early.

Yeah.

And so it's kind of easy to say, you know what, I kind of get a pass on the first 10. And by the way, it's not malicious, not anything. It's just like, hey, I'm just trying to, you know, I know this, uh, you know, guy I worked with at Stanford, whatever. I'm like, okay. Um, but just beware that the path that we set early is gonna impact the ability to kind of, you know, I think reflect a broader community longer term. So I, I, you know, that's a discussion we have. Um, and, you know, giving people resources and, and, you know, like the Annenberg Foundation coming up with some of these, uh, candidates that I'm telling you would not have been in our, uh, you know, wheelhouse, um, because of, you know, the work that they're doing. All those things matter. All of that matters. So, you know, all that said, hiring is the hardest thing our companies do. I mean, it's just, I feel for them. I know it's painful and, you know, it's less competitive down here than it is up north, but getting people to come in, stay long-term, you know, not just want to jump after they vest after a year, you know, that's been a problem up north for several years now. We haven't seen a lot of that down here, but, you know, it's hard to put a team together that's gonna stay together. And that we are here to be supportive to our entrepreneurs trying to do that and offer any advice we can.

Are there any particular companies that have done a great job of cross-cutting companies that have done a great job on the hiring side that you wanna shout out or, you know, examples as to, you know, how they've done it well? 'Cause we hear about it, it's definitely so difficult to hire, but any examples of who's doing it well or characteristics or anything around that that will be helpful for others kind of going through this as it is such a difficult thing to do?

Well, I think the companies that do it best do take some time and it's got to be an effort. I can tell you in this— and we're eating our own dog food here— in the chief of staff hire, We are first and foremost looking for a broad group of candidates to bring in, a broad group of candidates. And that means that that's not, that's not relying on the same networks that we have in place. And it's got to be, it's got to be a goal. It's got to be, that's got to be a, that's got to be one of the parameters. It can't be, you know, the way we've— a lot of companies have historically hired is, well, we ran across a good person, we want to hire them. And so I think the companies that do it best are the ones that have that as a goal in mind, because then you automatically start with a broader group of candidates. We've done that. We also, you know, work with consultants who will tell us things like, you know, hey, Rick, when you put in you're looking for a rock star, Which is— that sounds like a normal thing to say, I'm looking for a rock star. You know, that can have a connotation that may cause some people to say, well, that sounds like you're looking for a white male or whatever. And so it's, you know, bringing in people that can help us see things that we can't see because of You know, hidden biases. That's an important part of it too. All that, Justin, all that works together, right? It's not one thing that you do. It's gotta be, you know, continuing education and challenging yourself to say, and we say this to our companies, you've gotta challenge how you're hiring. You've gotta challenge how you think about this stuff. Otherwise, the change ain't gonna happen fast enough.

Yeah. I like that you mentioned you had a consultant to help on that. So how did you find that? What was the role of them in helping you with this kind of process of hiring? Because language is super important, obviously. I'm curious about the consultant you brought in.

Yeah, well, you know, so we have Nick in here as head of platform, and he's got, you know, one of his tasks is to make sure that we're becoming the firm of the future. And one of the things to become a firm of the future is being more hyper-aware of how we come off and how we present ourselves. And so He was able to find someone who could help us. We just finished our, you know, online training to become more aware of potential, you know, workplace issues like sexual harassment. And so it's— look, this is not— this is available today, right? And there are people out there who can do this. There are people— there are online, you know, classes to take and Um, it is, uh, an important part of, of who we are and who we want to be, uh, going forward and how, and how we think about ourselves. And so I'll give Nick, uh, Nick Kim here, my colleague, a lot of credit for, um, you know, he came out of Warby Parker, head of product there, and, um, has brought a lot of best practices to, to Crosscut. And it goes back to what we were talking about earlier. Look, we may not be thought of as an operating company, But we're a company, right? We're— we are.

Yeah.

We have a mission and vision and we have goals and we have hiring needs. And, you know, that kind of looks like a company. And even though we spend a lot of our time thinking about it as an investing firm, um, we are the tip of the spear for venture capital in LA.

And, um, I'll give, uh, you know, Nick a lot of credit for having us think of ourselves that way, not just as some Yeah, and there's a bit of accountability and pressure on being, you know, one of the leading venture capital firms in Los Angeles and having done this since 2008. I mean, that people are definitely looking to Crosscut, looking to other firms that have been around a while and doing things, and, you know, people model that as well. And so I think it's important that you've done that.

And I love that you've been able to do that. Yeah, I Love mean, I think it's important.

hearing that. And then the kind of initiatives you're involved with as well is big. And on the helping founder side, just to go a little bit deeper with different things, on the side of like early on founders, obviously investing in the seed stage, anything around equity splits, just anything around the equity side with the founders themselves that you would mention to them as founders are kind of going through this side of things?

Well, there's probably a lot to unpack there. peel back there. But I think the, um, I, I, we generally— I generally like to see, uh, you know, founders have equal stake, uh, or near equal stake. I think one of the things to be aware of, if you have a radically different, uh, stake from your, from your co-founders, it will be, um, scrutinized differently. Um, it's not the end of the world for us, but, um, it will you know, make us look at, well, maybe there's really one founder and then, you know, kind of a recent hire.

Yeah, yeah.

And, you know, and maybe there's— that doesn't seem like that big a difference to outsiders, but I think, you know, it's so hard to be at a startup. It's so hard to, uh, you know, be told no so many times by, by VCs. And it's— you're trying to get your first customer or your first partner uh, uh, you know, company in there. You're trying to get people to come work for you for less money they can work at a more stable company. Uh, you're trying to get your spouse or significant other to give you a break when you're making a lot less and you could be somewhere else. All that's really, you know, difficult to do. Um, and, and it takes the founder passion and, and, and mojo to kind of make that happen. And so having multiple people with founder, uh, you know, angst in, in the, in the group is, is nice to see for us. We will back one-founder companies, but it's, it's, uh, you know, most of our companies are founded by 2 or more people. And I think the more parity there is among the group, the better. On the other side of that though, I will say, Justin, the, the, uh, uh, having, you know, clear roles among the founders is key.

Yeah.

I don't like having people come in and saying we're both CEOs or, you know, we're both what— it's like, no, you know, I think to build this company, okay, someone's got to be CEO, someone's got to be maybe VP of Sales, someone's got to be whatever, uh, maybe business development. Um, I think setting a company up right early on is important for the, for the long-term, uh, potential success for the company. And so early on, you know, the, the equity splits, the roles, all that stuff is, is important. We pay attention to that. We certainly help our With the experience we've had, at least show them and let them know what we think has been successful in the past. And we've certainly let them make the decisions on that, but we will lend our 2 cents in. We are also always worried about the next round of financing and say, look, you know, you can do it this way if you want, but I think the next round of financing will look at it differently and may have a chilling effect on our ability to raise more capital. Yeah.

Yeah. And on that note of raising more capital, I mean, how, how are you looking at deal flow, sourcing deals, and even like, you know, getting other venture capital firms on deals? How does that go cross-cut?

Yeah, so our strong preference is to, is to co-invest with other like-minded investors. So we like having you know, someone from Bonfire worrying about the company alongside us at night. We'd like to have the network there, the experience there, or any other firm.

Yeah.

But we tend to not like to go solo. And I will say a more subtle point too is if you have one investor, even though you may have Mr. or Ms. Founder have you know, 80% of the company and they have 20%, it still kind of feels like you're working for that one investor.

Yeah.

And if you have 2 investors, they can offset each other. And if one investor is going off the rails a little bit about something, the other investor can act as a, as a buffer there and, and, and maybe, uh, you know, bring them back to earth a little bit, uh, easier than you can as a, as a CEO, which, you know, because you have this kind of you know, tenuous relationship where you're serving at the pleasure and direction of the board, which may or may not be controlled by the investor or influenced by the investor. So you're trying to, you know, maintain some relationship there. It's easier and I think better to have at least 2 investors around the table in most of the companies in which we're investing, at least at the seed stage. Pre-seed may be different, but, you know, seed stage and later.

Yeah, absolutely. I think it's an important thing. A number of of VCs do that. I mean, they do co-invest and have those relationships with other firms as well as they're investing in these different companies. And one of the things too, I know you mentioned multiple founders, typically not typically one founder investing in. What about first-time founders versus repeat founders on that side of the investing for you?

I always go back and forth on that. So I think on the one hand, several of our Crosscut investments have been— and we've made over 100 investments now at Crosscut over the last 12 years. Several of our investments have been in serial founders that we've backed before. So not even just, you know, it's their, their second go-round or third go-round, but it's people that we've backed. So it's always nice to know the founders well and know what they're excited about and know how, you know, we can be most helpful to them because they're all going to be, you know, different personalities and different, and different sort of tendencies. So I think that's nice. And, you know, it's easier. I'm thinking about one of our companies, you know, Nine Count. Alex Hoffman drove Musical.ly to a billion-dollar exit, and he comes up and says, hey, this is what I want to do next. And it's, you know, there's a high comfort level that we have there. We just backed Spencer Rascoff in his latest investment and company, and the founder of Zillow.

Yeah.

So, you know, it's— those are nice and great for us, and we know them, and, and, uh, we'll do those all day long. But I, you know, first-time founders, I'm fine. I am fine. I like the— I'm just trying to find someone who's passionate, enthusiastic, driven, uh, and going tackling a big space. And if it's the first time, it's the first time. We want to see people That we think are, you know, coachable, or at least listening to coaching. But, you know, for the most part, we're not micromanaging these companies. We are picking the right entrepreneurs and backing them. I love it when the entrepreneur calls me up and says, Rick, I'm thinking about XYZ, what do you think? I'll give them my opinion, and then she can or he can make the decision, um, and then go forward, whether it's what I said or not. I just like the fact that they're taking opinions in, you know, from the board or other investors. Uh, but at the end of the day, they're, they're the one that has to live with the decision, and, and we back, we back whatever, wherever they decide, even if it's something that we don't do. But it's nice to have that ability. Jason Nazar, uh, is great. Uh, he runs Comparably now, ran DocStock for as our very first investment. He's a first-time entrepreneur. He came out of Pepperdine. He was a hypnotist and whatever. We just liked his passion and drive around documents back in 2008. It was the very first investment we made in our very first fund. And then we backed him in Comparably. But so, you know, I guess there's an example of great first-time investor and great repeat investor.

Yeah, and that's, that's awesome to see. One of the things, just to shift gears to a little bit more on the investing side as well, uh, I'm just curious as to— just gonna take it back a little bit— your first exit as an investor at Crosscut. Take me through that.

Uh, the first exit— well, one of the first was DocStock.

Yeah.

Um, well, I guess it was probably ShoeDazzle, uh, the very first one to return significant capital. We had invested in— so, it goes back to your prior discussion here, but Brian Lee is one of the most prolific entrepreneurs in town.

Yeah.

He's started multiple multi-billion-dollar, multi-million-dollar companies. And, he came along to us with the idea to to sell women's shoes on a monthly subscription basis. I still remember telling that to a group of VCs I was talking to. We're going to make the investment. We had room and everyone stared at me. I don't know if they laughed. They were laughing under their breath, but they stared at me. But that's an investment we made solely on the strength of the entrepreneur. We got to love the entrepreneur. We got to like the opportunity. I liked the opportunity and I liked the story behind it. But we were able to sell our stake in that at a very nice multiple for our investors. The company ended up at another one of our investments, Fabletics. But, you know, that was one that we had a pretty quick turnaround on. And, you know, it's— you think about the people that put money into Crosscut One You know, they took a leap of faith on us the same way we take a leap of faith on our entrepreneurs. They backed us for the same reason we back our entrepreneurs— grit and hustle and desire to create something new and big. And that's how Crosscut started in August of 2008. Every time the bell rings, that means that we got another, another great entrepreneur somewhere out there.

No.

Sorry, sorry for that. Um, well, I, I, you know, we had, we had that backing from some, some great folks and friends of mine back in Crosscut 1. So when you get that first exit, you kind of feel like— and that was a big one for us— that, uh, okay, uh, we weren't doing this just for an exercise of, uh, intellectual stimulation, you know, to return capital to them. And, and I will say, a couple of my friends who do leveraged buyouts that invested in that first fund They were shocked. They don't really understand what we do. Our companies are cash flow negative. They don't really understand how— why they want to pay money for that. But, you know, when they got multiples of their dollars back, they started to see the light that, you know, there's a whole different world of investing out there that's not quite the black box they think it is. It certainly seems that way for them because it's not as quantitatively driven as as, you know, buying a company with a history of EBITDA-positive, um, financials in front of you. But, uh, you know, we, we still are, are relatively systematic what we do. It's just not a strict financial model that, that drives the decision-making for us.

Yeah, and it can seem like that black box though, right, at times, especially initially back then. I mean, there's been so much more written about VC and talked about in VC since then, but 2008, I mean, that's, that's taking it back just a little bit, and people weren't as familiar necessarily with At that time, I'm sure. And I wanted to hear that just for the context of having that experience. And then also, I mean, any advice you'd give to anyone who's either thinking about starting a fund, whether it be a rolling fund or even going the route of an angel investor, just starting to get into investing, anything you would tell people, Rick?

It's much harder to do than it seems, I think. And by the way, not that it's— not that this is a hard job in the sense, you know, my dad was a plumber and he did repair work in central Illinois. in 95-degree heat and 95% humidity. That's a tough job.

Yeah.

So it's a tough job in that sense, but it's a— I think it seems like it's easy from the outside. And the reality is it's a long slog. It is a business where the feedback comes really slowly. And it's like any other craft, you'll get better at it over time. And, um, and so you're going to make some mistakes early and, you know, crash a lot of aircraft before you learn how to fly these, these crazy things. So I think, uh, conversely, I think it's the best job in the world. I, I, you know, to have some of the smartest, most driven, most passionate people walk in our door every day and walk into our computers screens every day and say, this is how we want to change the world, and this is where we see the gaps. And it is Business 101 to me. It's, it's what's the product, what's the service, how are you going to price it, who's competition, um, how are we going to get there. It— that, that battle and that, um, you know, that challenge is— I, I just, I just can't imagine better, a better job. So it's a It's a, you know, the world doesn't need more investors right now in many ways. Uh, you know, there's a lot of capital out there, but if you're bringing to this the passion and drive, uh, and desire to, you know, help entrepreneurs, then there's room and, and there's, there's, there's market share that you can get. And just have patience and, and have, you know, a long-term view on this and make sure you get investors that have a long-term view because I see a lot of high net worth individuals that get into venture for a couple of years and then get out because they're like, wow, it's just, this is a long slog. You know, it's a 5 to 7 year horizon before we would expect to get liquid on any investment we make. Right. And truly could be much longer than that.

Yeah, I was gonna say with that, though, Rick, I mean, how do you then stay patient? You just doing what you can, trust your investments and move to the next one? Or how do you kind of mentally go through that? As an investor?

I think it's the hardest thing. It's the hardest thing that we do. I mean, I think the, you know, we all want, we all want quick feedback. We all want to know we did the right thing. We want to know if we made the right investment, and we just won't know for a long time. So I think it's helpful to have, now having had, I've done it for 23 years.

Yeah.

Knowing that, you know, you rely on, you rely on your, your your technique and your system and your process. And if you're out there hustling to see the best deals coming in the top of the funnel, if you're backing great entrepreneurs, if you're going after big— trying to solve big problems, and you do that 30 times in a portfolio, which is a typical number of deals for us in one portfolio, you do that 30 times in a portfolio and, you know, most of them are gonna fail, meaning 1, 2, or 3x or less maybe. But you'll get 1 or 2 winners in there that drive the returns of the fund and several more that will add to the return. So if you rely on that process and you do your work and do your diligence, it's going to work out over time, but it will take time.

Yeah, the patience required is definitely big on that side of things for any investor, especially people just getting started and They see this and they want to get involved. It's like it's going to take a lot of time to even know then if you're good as well. And you having so much experience, I'm sure we could ask you a thousand other questions, but we don't have any time. So Rick, where can people go to learn more about Crosscut?

Well, we're on we're online. We can always do a better job of touting the successes of our of our companies. But crosscut dot dc and. You know, we're always looking for new, uh, new innovative companies, looking for great founders. Our doors are always open online for that, whatever the equivalent is. Um, and, you know, we, we just, uh, started investing Fund 5, Crosscut 5, this week.

Oh, congrats.

That's, uh, that's, uh, we're making our first investment in Crosscut 5, uh, Thursday, I think. We have 2 or 3 more deals lined up there, so we are open and eager for, you know, the next— to build the next portfolio over the next 2 or 3 years of great entrepreneurs and hopefully great companies.

Absolutely. Rick, thank you so much for taking the time and coming on the show today.

Awesome. Thanks, man.

Thank you for listening to this episode of Just Go Grind. I really appreciate you taking the time to listen. The Weekly Grind, which is my weekly newsletter, comes out every single Friday. You can find it at justgogrind.com/newsletter. This is filled with tips, tools, and strategies for growing your business. If you wanna know how to launch a business, how to grow it, how to get it off the ground, find employees, all these different things, there's a few tips, tools, and strategies every single week I deliver right to you. justgogrind.com/newsletter. Check it out. Thank you so much for listening. Talk to you in the next episode.