Rick Smith -- Crosscut Ventures

Hello, and welcome to the LA Venture Podcast. This is Minnie Ingersoll, host of the podcast and partner at 1010. 1010 is a seed stage fund here in LA. All opinions expressed on this show by me and my guests are solely our own. If you are interested in LA venture, go to 1010.net/podcast, where I've made a sortable list of all of the great LA VCs who've been on this show. Rick Smith and I are here live. No, no, we're not live. We're in person. Rick Smith and I are here in person in Venice, California. Rick is a pillar of the LA tech community, having started Crosscut about 13 years ago. They're now investing out of Crosscut 5.

Correct.

Rick, I kind of buy into this whole notion that startups' cultures are really set by the early employees, and I think the same applies to cities or to communities. And I think LA tech community has been so warm and so welcoming. So I feel like I would like to thank you and others who have set the foundation here.

Well, I think you're right about that on, on the early employees. And I think that's one of the hallmarks of the LA community, I think, is the warm openness and still the belief that we're all in this together and the rising tide will lift all boats. We're still in that phase of LA, and I love it.

So I want to go back. Like, when I met you, I thought, okay, smart, successful, Harvard Law School. But really, that's all wrong. No, no, but give me— like, start me from sort of Illinois, right?

I was born in Illinois, given up for adoption at birth.

Really?

That's right. Luckily for me, adopted by 2 of the best parents a kid could have. Both high school dropouts for different reasons. My dad was a plumber and had to drop out of high school during the Great Depression. He was older when he adopted me, but to put food on the table, his dad was a plumber and said, you got to, you got to help us. We're having troubles. My mom dropped out of high school and married my dad. And so, you know, she was 17. And so they got married at 21 and 17, were married for 66 years, had a great relationship, but they couldn't have kids.

Oh, wow.

And so they had adopted my sister a couple of years before me, and then they were walking down the street and ran into the adoption person. And basically they asked how my sister was doing. My dad says, great, but she could use a little brother. And apparently got very upset. The adoption person got very upset and said, you know how lucky you are to have one. Just accept it. And so he did. And then a week later, he got a call saying, you know, we have a boy if you want. So if he hadn't been walking down that street, hadn't been there at that time, you know, I'd be sitting somewhere else right now. So, you know, that was, that was the early, uh, formation for me in— that was Decatur, Illinois, soybean capital of the world. It was, uh, I worked with my dad. I did, I worked at a nuclear power plant as a pipe fitter. I, I did do the typical shovel driveways, mow lawns, detassel corn, worked at a restaurant, worked in a supermarket. But I had all, you know, all kinds of You know, we define entrepreneurs as tech, boom, boom, boom. 99% of the entrepreneurs are whoever, like, is running the dry cleaners at the corner and my dad the plumber. And those, you know, those entrepreneurs aren't going to make the money and aren't going to have as big an impact as some of the— hopefully some people we're backing. But those are entrepreneurs. Those are people that, like, no one's paying them a check. So a lot of that, I think what I do now was influenced by that, even though I didn't really realize it. Like going downstairs in my dad's basement and He's like paying bills and stuff. And just like, I never thought of going to work for a big company. That just never, you know, just wasn't on the radar.

And so both of your parents had dropped outta high school?

Yep.

And how did you go from the soybean capital of the world to Harvard Law School?

Well, I don't, I think partially it was seeing my dad. My dad's plumbing business was called A&A Plumbing. Anytime, anywhere, which was repair business. So 2 in the morning, he'd get a call and we'd have to go, you know, unclog a toilet somewhere. They don't call you when things are going well. So he, you know, he worked really hard. I think watching him work really hard just was a motivator. I think, at least for me as an adopted kid, I just felt like I was given a gift of just life, you know? And for me, just like, you know, making the most out of life was really important. So, excuse me. So I think when I went to college, I went to Illinois. That was 45 minutes from home. That was the place to go. It was, in retrospect, given my background and grades, you know, I potentially could have gone to a different kind of school, but I loved Illinois, University of Illinois. It was the only place I applied to and I got in. But once there, I really wanted to take advantage of the opportunity. I felt like, you know, my parents had sacrificed to put me into college. pay for it. It wasn't a lot, but pay for it. And I wanted to make the most of it. So I just, I worked harder than anyone. Academically, I was, I was crazy. I mean, I was known to leave the fraternity at 11 at night to go to the library when the parties were starting. So I just felt driven. I wanted to get into the best law school I could get into. I got into Harvard. And so, you know, it didn't hurt probably. My dad was a plumber and, you know, it was a good story. I never thought I'd practice law. I was one of those kids that wanted to be a senator. And really help the most people I could and to show how unjaded I was back then. I thought politicians were the ones that could actually help people. I still think that somewhere in there, but I really wanted to do that or, or get into business.

Do you have anything from your time at law school or being a lawyer that is applicable now in what you're doing today?

Yeah, I mean, I think I practiced law for 6 years. I was at a Wall Street law firm that had an office in Los Angeles. I think working 80 to 100-hour weeks for 50 weeks a year, maybe 52 weeks a year, we didn't have a lot of time off. I think that the attention to detail, the perseverance, the requirement to work hard, I think all that's helpful in whatever you end up doing. I think there's a— there was a lot for me to overcome because as a lawyer, especially as a transactional lawyer, which I was doing mergers and acquisitions, you're only really paid to think about the downside. You know, what happens if the debt doesn't get repaid on the LBO, or what happens if this, you know, contract falls apart, whatever. So I think as a venture capitalist, maybe my first instinct's always what happens if things go badly. And I think you have to overcome that. And I, I do a decent job of that. I think my partners do a much better job at that. I've always said, I don't know if I would invest in any of us individually, but I would invest in us as a group because my What I call realism, they call pessimism, is overcome by their optimism. And I think, you know, you need to have a healthy dose of pessimism of the intellect, optimism of the soul kind of thing. I'm still— that's still a struggle for me. I still— I'm considered the hardest sell at Crosscut, but it's a role that I play and others play different roles and it's worked for us.

I didn't know that you were the hardest sell. I like that. Actually, I really like the pessimism of the intellect, the optimism of the soul.

Yeah.

It's deep, Rick. I like it. Okay, so then you practiced law for a while, or you were doing M&A, and decided to start Crosscut?

No, like most stories, it took a few more turns than that, but I ended up going to work for one of my clients, which was a small buyout shop of sorts. We were actually helping other M&A firms buy these little mid-market companies, and we were raising debt for them. But we also started to look for companies ourselves. We ended up buying Steinway Piano Company with, uh, with no money down and, and borrowed like 101% to, to buy it. Uh, we bought a company called Selmer, which makes bands and orchestra instruments in Elkhart, Indiana. But I ended up getting a call at the end, near the end of the 2 years there from Eli Broad, who is really LA's original entrepreneur.

Hmm.

He started 2 multi-billion dollar companies. Well, the first one is now called KB Homes, home builder. It was called Kaufman and Broad, but that's a multi-billion dollar exit for him. And then Sun America. And Eli's name is on the Broad Museum downtown and really all over town. He was a great role model for giving back. And he really had a civic responsibility, civic duty he felt to give back to town. But not an easy guy to work with, but he was driven. He was a great first, I guess, entrepreneur for me to sit across the table from and really see how he operated. I don't think he was smarter than the rest of us. I don't think he had more testicular fortitude than the rest of us. But I think he was the combination of taking big risks, seeing big tailwinds, and he's willing to kind of put money out there. And that's what we started to do. And we're looking at buying all these great companies like Transamerica and Bear Stearns and a lot of names that were household names at the time. But I, I know in my heart he was preparing the company for sale. And so the M&A job was, was nice, but I was looking for a little bit more. So I basically put together a plan to say, I think we should start investing in Series investments in Silicon Valley. I was not on the investing side, and I wrote this memo and said, if we do one, we should do 10. You know, it's gonna be risky, all this stuff. And I was basically just reading Wired magazine. I mean, I did not know anything about tech. I didn't know anything about venture capital. I didn't know anything about anything. So with Marc Andreessen's help and Jay Winthrop, who's the vice chairman, kind of provided cover for us, I went out and just started looking for deals in Silicon Valley and started investing in funds. And when you invest in funds, you create friends. And that's how I got started in venture. Our first investment did like 18x in 9 months. It was crazy times. And then I left to join another firm in LA called Palomar Ventures. Was there for 6 years, hired Brian Garrett, and he joined us as an associate and became partner in like 3 years. So he and I have worked together for 20 years and is a good friend and colleague, and we ended up leaving Palomar to start Crosscut. It was August of 2008. September of 2008 is when the world fell apart. So, you know, we had a $5 million first-time fund, and, you know, we put that money out in 18 different deals, and basically none of those companies could raise money in 2009. 2010 was tough, and—

Yeah.

I was trying to farm Brian out to other VC funds in town and no one was hiring. And I was like, you know, we can't continue on as Crosscut. But things changed and I think there are maybe 4 unicorns in that fund. But it took us 4 years and Brian, we couldn't find a home for Brian anywhere else and I didn't know what else to do. And we ended up getting lucky enough to raise Fund 2 in 2012, which is $15 million. Steve Case of AOL was the lead investor in that and he certainly had a vision that's come true today, that technology and innovation was going to be happening outside of Silicon Valley. And he was looking to only invest in folks outside of Silicon Valley. He now has Rise of the Rest. He didn't have that then, but that's what he was looking to do. And we were the first investment he made. And so he led our second fund in 2012, and we've been off and to the races since then.

Yeah. Now that you're Fund V, it's kind of amazing. You started as a $5 million Fund I. So let's talk about Fund 5. Do you still co-invest? Do you still like co-investors? It's a self-interested question.

Well, we love 10-110, if anyone's, uh, no question about that. Yeah, we, we still— we haven't changed our model much. I, I mean, 95% of the deals we do, we're, we're still syndicating. We're, we're hoping to syndicate. I'm still convinced that having more smart people around the table that care about your company is the best way for entrepreneurs to go. And, and maybe I got a little jaded, if that's the right word, several years ago when I was an investor in a deal, but we were a very small investor and there was a much bigger investor, a Midas Touch top 10 investor and stuff. And I would say the company was not served well in that arrangement. It felt like the company was working for that VC fund. And that's true if you're a PE fund. If you're a PE fund, you buy it, you own 100%, you don't even think about syndication. Boom, you own it, you do work for them. I don't think that's the way VC is best done. And I think when there's an outsized owner in it, it's subtle. It's not written in a It's still a minority ownership, but like all the attention tends to go to one person. And if that one person is not necessarily paying attention or isn't maybe the right fit for that entrepreneur, I, I don't think companies serve well in that situation.

That's interesting though, that notion that having maybe a couple different VCs sort of balances things a little bit.

Oh, many— I, I, many times I have played the role of jumping in front of a CEO who's about ready to Shoot one of the VCs and say, "Hey, well, let me run interference here. I speak VC speak. I know what they're saying. Let me go soothe this over a little bit." And we keep each other in check. And and if a VC sitting around this thing drives me crazy, sitting around a board meeting is like, "Hey, have you thought about XYZ?" Sort of drop the turd in the punch bowl and then leave the party. And then they leave, and they haven't really thought it through, and they don't really care. And they're jumping their Tesla and driving off to play golf. And and the CEO's left to like. Wait, what am I supposed to do with this? So I think having more than one VC around the table is actually good for everybody.

Yeah, that's great. What are some of the active discussions? What are you guys talking about with the, let's say, $30 million post, $40 million post, pre-product companies that we're seeing?

So we've adapted. I think like a lot of people, when times are like this and capital is flowing more freely, we'll invest earlier. We're still trying to keep our pre-money down. We're not gonna, for the most part, invest in a $40 million pre-seed, pre-revenue, you know, pre-second employee company, but there's always exceptions. But I still think since where you guys at 1010 Investors, where we invest at the seed level, we can at least somewhat influence the price. There's only 3 things that affect IRR: beginning valuation, ending valuation, and time. And the only thing we can really impact is the beginning valuation. So we are valuation sensitive. Yeah.

What are you doing in your later-stage rounds? Are you guys participating raising SPVs for a company that now is at $100 million-plus and you invested 6 months ago?

Try $1.3 billion-plus.

Picasso?

Invested 9 months ago. No comment on that. But yeah, we have— we are offering up SPVs to our investors with Sort of no promises on our side saying, look, crazy markets, but this is top name-brand funds investing. If you guys want a piece of it, great. We love the entrepreneur, we love the company. We just don't, you know, we can't vouch for the price. But, and we, so we've been doing this, we've done 3 or 4 SPVs the last month.

Yeah. Couple million dollar check from you guys?

Yeah, yeah. Anywhere from half a million to $2.5 million.

Yeah. No, it sounds like a good place to co-invest. Can we talk about Pacaso?

Yeah, sure.

Is it public? What was the post-money when you guys invested?

Well, I probably shouldn't say too much on that, but we invested in, I think it was February of last year. I think the first dollar revenue may have been October of last year. And about 6 months after that, we announced a raise at $1 billion. Yeah, it's— now look, you got a great management team there. They are poised to be a category killer in fractional homeownership. And it's a pretty attractive model. You can buy a second home or you can buy 1/8 of a second home for 1/8 the price of the entire home, have someone else manage it for you. All that's great. You got the founder of Zillow, Spencer Rascoff, as a founding member of that company, executive chairman. It's poised for great success. I'm just too old school to know sort of what the right valuation is on that. But it's been popular among investors.

Yeah, you're the realistic one. So when you're evaluating teams, Spencer's an easy one, like known quantity. You know, what do you look for? What sort of questions are you asking?

I have nothing new to offer here on, on the sense of it's all about the team and whatever we do. We've also taken a pretty broad approach on, on verticals. We have a satellite up in space right now. We have women's shoes, we have spend management software. So I think part of that diversity desire comes from having been through a couple down cycles and knowing that We can't necessarily defend against the cataclysmic drop in equity valuations that happens from time to time, but we can mitigate the effect somewhat by having bets made in different areas. And hopefully space isn't as correlated with women's shoes as it's correlated with, you know, real estate, fractional homeownership.

Anything else you guys are doing, you know, initiatives? I think you mentioned a few things. You're trying to be more proactive. Did you say that?

Yeah, definitely trying to be more proactive. We're casting a wider net. We started in Crosscut 5, Oh, really? As you know, this business is all top of funnel. I think we're really, really good at looking at deals and figuring out which ones are good ones, but we can't do that unless we see them. And the Scout Program is a group of 13, 14 folks, mostly entrepreneurs around the country, that will add to our stable a lot more pre-seed deals that we get some favorable look because we, we put some money in early, but also geographic diversity. And we invented nothing new there. We're just You know, other firms do scouts, but we had not done it before. And we said, you know, how do we really charge up the engine a little bit? We had the luxury in LA in 2008 to sit back and say, you know, everyone come knock on our door. It's great. But things have gotten more competitive and we need to stay on top of it.

The scout program is interesting. And are you giving the scouts money to invest sort of on behalf of Crosscut?

Yeah, we're giving them about $200,000 each. We'll increase that if they need, need more and we're happy. We also tried to add a little diversity to our group through the Scout program. And we're also encouraging Scouts to go for it. I mean, don't call me for everything. If you guys like this entrepreneur and you like it, that's— we're trying to get some uncorrelated returns. I don't know if it's going to work. But I, but I'm really excited about the Scouts. We also— so we're giving them carry in the deals they're doing. But we also— every deal they do, they take a little bit of it and throw into a pot. So they all share in each other's success.

Yeah, yeah. Anything else crosscut-wise? A little bit more about you and Brian and Brett working together. You know, how does the process work? Do you guys need consensus to get stuff done, or is it, you know, can you do whatever you want?

I was gonna make a snarky comment, but I won't. No, no, please. I'm sorry. No, no. So, yeah, no, we, I would say, When asked by potential investors in our fund, I'd say it's consensus. And then we put— we really do put a team effort on it. And all of us will be doing diligence on a deal. It is not a person's deal. We don't track it that way. We don't think about it that way. It's our deal at Crosscut. And so it's our deal with diligence too. We added a second meeting during the week. We used to just meet on Mondays. And now I had suggested, let's have Thursday as just a deal meeting. because we just, you know, Mondays weren't enough. And so, you know, in that Thursday meeting, if the company presents on Monday, by Thursday you better have the answers to the questions and, you know, let's go.

I wanted to re-listen to my show with Brian. You guys had just done some personality stuff and it was like, he's a peacock and you're a lion or something. I don't remember though.

Yeah, yeah. So we see, uh, uh, tiger.

No. Were you a tiger?

No, it was a different scale. But we, we, uh, do personality assessments periodically.

We do offsites periodically.

couple times a year, and that was really helpful to us.

Mm-hmm.

We all got along, and we're all nice guys and gals, and we knew there were differences. But, you know, who knew there was actually ways to define those differences and put labels on them? And it was really helpful to me. And, and find out that Brett, Brian, and I, the 3 founders of Crosscut, were all very different people. Very different people. And I just remember, you know, some of the— like, I'm a 10 out of 10 on details and quantitative, and Brett was like a 1 But he, he was in the positive zone on optimism, positivity. And I was like, you know, they make this little tornado of whatever. This is where, you know, when Rick goes off the rails, this is what's triggering him. So, you know, we knew we were different, but it's like, oh yeah, I will say all of it made sense. I mean, this was 20 questions that we answered in 20 minutes. It creates this personality assessment. And I would have thought the person was in my brain for the last 3 decades. It was fascinating. But understanding each other in that sense, and has it made us better investors? I hope so. But it's definitely made us appreciate each other more and have more fun doing what we do. Because this is a privilege of a job. This is, especially when things are going well as they have been, this is one of the top jobs in the world if you ask me. And this is what I would do if I was retired, you know, just keep investing and helping entrepreneurs.

Yeah. So let's stay on this And maybe even going back to where you started, which is recognizing the privilege and wanting to make something of it. I know you were one of the founders of Pledge LA. Tell me about how that came about and how that all started.

Yeah, so the, um, Annenberg Foundation approached me a few years ago and said, we really want to try to figure out how to get this current crop of entrepreneurs to give back to the community like Eli Broad and that generation did, the older generation, that when they made money, they plowed it back into museums and zoos and whatever else. That's how it started. And I said, that's great, but there's a more pressing issue in our community, which is just diversity inclusion. I mean, we're fighting a struggle right now in venture to really kind of open things up, and it's top of mind. Annenberg Foundation has been absolutely incredible. And they throw talent and resources and intelligence at anything they do. But they've been the driver, and they— I've just been lucky enough to help them get other VCs involved. So we have many VCs involved in Pledge LA, and we have hundreds of tech companies involved in Pledge LA. Because we started off by just looking at VCs, and I said, look, we, you know, VCs are, are changing, but it's going to be slow to change. We don't hire that many people. It's harder to have an impact, although it's important. It's really important. But we also need to look at companies. And so we came up with the idea of a Pledge LA where companies pledge to at least share their numbers with us so we can at least begin to measure how diverse or not diverse LA is and how inclusive it is. And so that's how it started. It's evolved now into things like the internship program. I happen to be chair of that part of the Pledge LA right now. And I'm a big fan of that because I've seen the impact that has. So You know, we're really happy with what Pledge LA's been doing. I'm on the executive committee there, and it's a great group of folks. Again, props go out to the Annenberg Foundation. They are the driving force behind it.

Yeah, that's great. Okay, we're almost out of time. So, Rick, you had told me that one of the questions you like to ask the candidates is, what do you do for fun? Or not the candidates, when you're talking to founders.

I do.

So, so great. So we have to turn that around.

Oh.

What do you do for fun? I have no idea. I don't know what you do in your hobbies.

You know, I'm gonna stop asking that question. That's, that's really, uh, I don't— because it makes me feel like I'm not that fun. I have a lot of fun in life. I don't watch TV unless it's the Dodgers. Well, almost all my free time these days is Hank, my now 7-month-old golden retriever puppy. My kids were most of my time. They both are kind of off and running in college, and one just graduated. I like to exercise. I love doing yoga. I love going to the mountains. There's something very meditative about just getting back to nature.

Do you wanna go jump in the ocean?

I could jump in the ocean.

Awesome, done. Well, Rick, I guess we're running out of time. Thanks so much for coming on the podcast and for being a pillar of the LA tech community.

Thank you for having me on.