Gamechangers

Okay, welcome everyone. Welcome to Refraction and to Game Changers. My name is Esther Lee. I’m the c e O of refraction. We’re a nonprofit innovation hub, co-working space. We provide programs, mentoring events like these for startups and high growth businesses. We help them grow. We introduce ’em to customers, great investors like John, our special guests today and partners. So our partners are amazing companies like Cox, Amazon Dominion, Virginia Tech, US Department of Commerce and others. And we do great competitions and pitch events, things like the Smart City challenge, and so we have a great community of startups. If startups are looking for a great community to join, please let us know. Game Changers is something that Catherine and I came up with together. It’s a great opportunity to showcase incredible innovators and leaders in our region doing amazing work to help grow the ecosystem. I know all of you are a part of the wonderful ecosystem that is the D M V and I grew up partly here, but also worked in Silicon Valley, and I will say we are the best kept secret.

(01:13)
There’s a lot going on in the D M V. Not everyone knows about it. And so this is part of our effort to do that, to showcase everything we’re doing. In a previous life I served, I led the White House Startup America Initiative under President Obama. I think you all know that in the last 20 to 30 years, almost all net new jobs in this country were created by startups, which is why the work that we do every single day to help startups is critical and something I’m very passionate about. So with that, I want to turn it over to my partner in crime, ahe Park with Cox Business. Thanks Esther,

And good afternoon. It’s our distinct pleasure to welcome each and every one of you. Today’s game changers featuring Illuminary in the field of business and technology. John Backus Cox Business is thrilled to be partnering with Refraction to bring you this speaker series of innovation like refraction and many businesses here this afternoon. We believe the value of technology and innovation as prime drivers for economic development. With access to the perspectives and foresight of our region’s leaders, we want to ignite ideas that will help propel businesses further promote economic stability and enrich our quality of life. To this end, we thank John BCUs for being here today as our special guest. With more than 20 years of history serving Virginia’s telecom needs, Cox business is poised and eager to help businesses reach even greater success. Over the past few decades, we’ve invested billions into building a nationwide network serving urban commerce hubs from San Diego to right here in Northern Virginia.

(02:47)
Our ongoing investments in our people, our networks and our products are tailored to help you and our regions flourish and meet the technology demands of tomorrow. After all startups, fortune 500 companies, military installations, higher learning institutions and healthcare providers to name a few all leverage our network to spearhead innovation and economic growth. Let’s get on with the program. I’m honored to introduce our host, Catherine Faulk. Catherine is Cox Communications Market Vice President for Northern Virginia. She’s currently on the board of trustees for Inova Health System and she’s the past chairman of the Board of Directors of the Northern Virginia Chamber of Commerce. Continues to serve on the board and chairs the Northern Virginia Chamber of Commerce Foundation. Catherine is a proud product of the Fairfax County Schools and was inducted into the F C P SS Hall of Fame this year in recognition of her outstanding contributions in the field of diplomacy, business, philanthropy, and education. I won’t be surprised if everyone in this room already knows Catherine and is part of the six degrees of separation chain that links you to her in one way or another. She truly is one who believes in the power of connecting people to enable the greater good. So ladies and gentlemen, I give you Catherine Falk. Thank you so much,

Amy. The check is in the mail. Thank you so much. It’s so great to be here with you. Thank you all for coming out on the night after Columbus Day, indigenous People’s Day and being here with us to talk with John BCUs. John, come sit down. Take your seat. Thanks, Catherine, sir, it’s great to be here with you. We are thrilled to have you. Thank you mean really, you’re a legend. I mean, that just means I’m old. No, I’m fortunate to have known you for many years, but really legendary in your career and you have this bio on John. He’s done a lot of, please don’t, amazing things. Don’t read. I’m not going to read it, but he’s helped launch many amazing companies and so what we hope to talk about today is really his insight on innovation and growing companies and why the startup world is important for our ecosystem and all kinds of questions that you might have. So first, you’re the co-founder of Proof Now and Managing Director. Tell us what proof is and what it does. Sure.

So PROOF is a venture capital fund. It stands for the Pro Rata Opportunity Fund. The idea is we want to work with small, early stage venture capital groups that catch a tiger by the tail. And when that company sort of takes off and hits escape velocity, that early investor has something called a pro ratta, right? Which is the legal right, which means they have the right to put more money into the company, but they’re usually out of capital because if you wrote a check in the pre-seed round, the seed round and the A round, at some point mathematically you run out of the amount of money you’re willing to put into any one company. We step in, we write the check, they’re entitled to write and we share half of our upside economics with them. So we’re basically buying our way into some of the best companies around the US in the venture ecosystem.

(05:57)
So it’s an innovative model. We’ve been doing it for about seven years now. We’ve invested in 85 companies. I think the combined market value of those is about 50 billion. I think 27 of those today are valued at a billion dollars or more. Wow. We didn’t do all the work on that. We just chose well, and that’s really our job in the venture business. Our job is a pattern recognition job. If you’ve been doing it long enough, you can sort of see, I’ve seen this movie, it’s not going to end well or this looks pretty good, we should pay attention here.

So what sectors do you focus on or is it just open to great ideas?

So we want to be able to do pretty much anything that will be funded by US venture capital, by us venture capitalists. And the only thing we don’t do is stuff that frankly we’re not qualified to understand. So we’re not going to do drug discovery. We don’t have a PhD or doctor on the team, so we can’t understand it. I look at one of the like, oh my God, it’s going to cure cancer. Oh my god, it worked in mice. It’s going to work in humans. And of course that’s wrong. So we don’t do that. We don’t do project finance type companies. So if someone wants to roll out solar to a hundred thousand acres across the Midwest and it’s going to take 18 billion to do it, our couple of million dollar check isn’t going to really help with that. So we’re going to do stuff that is capital efficient, but we’ll do things that sell to businesses, hardware and software, things that sell to consumers. We’ll do FinTech, we’ll do healthcare, you name it. There’s just a couple of areas that are off limits

And technology is big.

Technology is big

And

Not getting smaller

(07:44)
Despite what you might read in the headlines every day out there, innovation continues, and I would argue that the pace of innovation continues to accelerate. It’s lumpy. It’s not linear, but I’ve been doing this for 25 years and when I started, it was all about the web. That was sort of the nineties. Then it was like, oh my God, mobile is a brand new thing. It’s like we have to invest in mobile. It’s like, no, just most businesses are going to be online and they’re going to be present on a mobile device. And then you had a couple of, I’m going to call ’em mistakes where everyone says, oh, we got to invest in clean tech, and that was kind of good idea, wrong time. Then it was like, if you remember that, let’s invest in everything small. That didn’t work out real well either. Now the big thing is ai, I’m sure we’ll talk about that.

(08:38)
The duck dropped. So I said the word, and to me AI is something that up until OpenAI launched Dolly and chat PT a year ago, we all kind of called it machine learning. And that’s been around for a long time and we’ve been investing in that space for half a dozen years. Already had a couple of exits in that space, but that’s something that we’ll talk further about it, but that really is going to be a game changer. I actually see what’s going on there. It has a lot of the feel of what I saw in the early days of the internet, the early days of mobility.

You said game changer. So everybody take a drink.

There you go.

Yeah, there

Is wine and beer over there.

Yeah, I know. So congratulations this summer. I guess you raised another 135 million for the next big fund. Tell us about that.

Sure. So this is our third fund. So proof is a brand new strategy in venture capital. And so when we first set out to raise our first fund, we thought everyone was going to be like, oh my God, that’s brilliant, and throw money at us, and it didn’t work that way. And so we raised a small fund. What we found along the way was that our investors who early on were mostly high net worths and family offices, loved co-investing. So it turns out our first fund, which is 35 million, our investors put 135 million of co-invest where they got to pick and choose, I want more in this company, or I want more in that company. And then second fund, we said, we’re going to move some of that co-invest into the fund became $120 million fund. The third fund we set out to raise a bigger fund and then 2022 hit and we’re like, yeah, if it could be bigger than the last fund, we will declare victory, which we did.

(10:20)
And fundraising’s hard. It’s hard for startups, it’s hard for venture funds, and it’s actually in a lot of ways harder for a venture fund because if you’re a startup going out there trying to raise money, you are explaining to people, here’s what I’m building or here’s what I’ve built and here’s what my market is. When I go out to raise a venture fund, I can say, look what I did before. We have a really smart team. We can’t tell you what we’re going to invest in, but it’s going to be 30 companies and we can’t really tell you what industry it’s going to be in because we’re going to wait and see. And so it’s a blind pool. So you’re asking someone to give you money for something that they can’t touch and feel. So fortunately, we have a pretty good track record, and it just took a lot of perseverance and hard work, which is kind of a metaphor on life.

Got to have a lot of trust and credibility to gain those dollars

Hopefully.

So let’s talk about the startup ecosystem. Why are startups important?

Well, I think as Esther said, it, startups create jobs. A couple of statistics for you. It’s not technically a startup that creates all net new job growth in the us. It is a young company. So basically the Department of Commerce came out and said, companies less than five years old, you can call ’em all startups, created all net new jobs in the last 25 years.

All net new jobs, all

Net new jobs,

All net new jobs. That’s huge.

Young companies.

(11:45)
So young companies, they make a difference. They’re meaningful. Then if you take that group of young companies and parse it down to venture-backed companies, venture-backed companies, the pool of, if you took a thousand venture-backed companies and a thousand non venture-backed companies started at the same time, five years later, the venture-backed companies will have created eight times the number of jobs as the non venture-backed companies. So it’s not just startups or young companies. The venture-backed companies over index to job growth, and I was on the board of the National Venture Capital Association for a while. I stepped off three or four years ago. They’re based in dc, great organization. And I’ll tell you that because I was the local VC and most were in New York or Sandhill Road in California, I was the one who they trotted out all the time to Capitol Hill to talk to elected officials.

(12:38)
There is not a single elected official I have ever met who doesn’t want more of what I do in their district or their state. So it’s a pretty easy to pitch to basically say, look, you ought to do things that encourage this entrepreneurial ecosystem. And so our job was not really about do more of this. It was like, Hey, when this big company is telling you they need this, that’s really bad for us over here. So think about the little companies because the little companies don’t have a voice on Capitol Hill. We are their proxy voice effectively as sort of the stewards of that entrepreneurial financial ecosystem.

And how does our region do compared to other places across the nation? What are the best ecosystems for the young companies?

So there’s good news and bad news in the region. The good news is we’re top 10 in the US as far as startup formation. That’s the good news. The bad news is we’re a few orders of magnitude away from being number one. And for those of you who weren’t math people, that’s like a hundred times away from number one. So to put it in context, last year there was, I think about 250 billion in the US that was deployed in venture. We had 3 billion deployed here, that’s top 10. So venture is primarily a California thing, although that market share is shrinking, California has gone from 70% to 60% of all venture dollars. If you look up and down the West coast and you include Seattle, you include Portland, you’re probably back up to around 70%. The I 95 quarter is probably 20%, mostly in New York. Now, ironically, 25 years ago, it was mostly in DC that it moved mostly to Boston.

(14:28)
Now it’s mostly in New York, and the rest of the country is about 10 or 15%. Now, that started changing. If you listen to Steve K’s talk about what he’s doing at Revolution and Rise of the rest, it sort of talks about startups can happen anywhere, which of course is true, and they do happen everywhere. The real interesting question I think for us as investors and for policymakers is how do you create those outsized startups? Because it’s very different to have 10 startups that each create five jobs versus one startup that creates 10,000 jobs. And those mega startups really tend to still be situated on the coast, and there’s a whole bunch of reasons for that. The money is there, so it’s easier to get started if the money’s there. You probably have alumnus of people who started companies who are there to give back and share their expertise. You’ve got an ecosystem that’s developed with lawyers and headhunters and people who can sort of make raising the next round of financing successful.

(15:36)
You’ve got customers out there that are local companies that are big companies that are willing to take a risk on a startup. And we don’t have a lot of that here. Quite frankly. We have a lot of big companies, but not a lot of big companies that are going to say, I’m going to take a risk on that 15 person company. But in Silicon Valley, they do that all the time because the person who started the company used to work at Cisco and Cisco’s like, I’m going to try that out. If that works, I’m going to buy them someday. And then last to sort of keep that virtuous cycle in the ecosystem going, at some point companies either go public or they get sold. The problem is with companies in our region, most of the times when they get sold, they get sold to someone who is not local. They get sold to someone in California, maybe someone in New York. What that means is that talent, both the financial talent and capital and the job growth goes elsewhere. So we love companies like Appian in this complex who started locally and went public and have become a job growth engine locally here in the greater Washington area. So to keep that flywheel going and to move from 3 billion out of 250 billion up, we need to have more companies either sell to a local company and keep the talent and job growth local or go public locally.

That’s great. And what can we do? We’ve got leaders from government, from business, from chambers, business organizations. What can we do here to help foster that ecosystem to support that ecosystem and help it grow?

It’s a great question, and I get it all the time. And frankly, the answer sometimes to people in government is, don’t do anything. Just get out of the way and let us do our thing. I mean, companies, an entrepreneur wants to start something and doesn’t want red tape. So the first thing you can do is just don’t make it hard. Make it easy to get something off the ground. Don’t inundate people with forms of, oh, did you fill out this tax return? Did you do this? Do you file for this license? You got to wait 90 days. Just stop it. And the second thing I’d say is we live in a weird area here. The only other area I would call as weird as here is sort of the New York, Connecticut, New Jersey area. And what I mean by that is we’ve got, we’re in the D M V, it’s dc, Maryland, and Virginia.

(17:57)
An entrepreneur doesn’t know a political boundary. They don’t care. I mean, I know I’m going to insult a bunch of people in the room. They don’t care if they’re in Fairfax County or Arlington County or DC or Maryland or Virginia. They want to start a company that’s probably convenient for them based on where they live. Okay, that’s selfish. They want to be able to start a company in a place where they can attract good people, generally young people, because more young people than not are starting companies. Because when I was graduating college, being an entrepreneur was not exactly on the career planning and placement center board. Today I have two college graduates. One started a company, one’s working for a startup company around here, but that wasn’t the choice back then. It is a choice now, and you just need to encourage that. And people want to hire their peers. Their peers want to be, I hate to say it in an urban area, they don’t want to be in a suburban area. So you’re not going to see as many startups in Ashburn as you will in DC just because if you’re in Ashburn, you’re probably hanging out at your parents’ house. If you’re in dc, you’re hanging out with your friends. So I call ’em as I see ’em.

Cool factor lounge a little. Yeah, cool. Some people are getting offended here. Wow, we know where you live. We know where you live. So what makes a winner? What characteristics do you look for in a winner?

So look, no one puts this in a marketing presentation when you’re going out to raise a venture fund, but okay, we have pattern recognition. We can be really smart about some stuff, but if we’re batting like a really good baseball player and batting over 300, we’re doing pretty well, which means seven out of 10 of our companies we invest in are going to be, let’s say unspectacular. So there’s a professor at Harvard Business School named Josh Lerner. Professor Lerner basically oversees the venture capital, the buyout, the investment banking program at H B Ss. And he’s the one who’s probably the most well-written and researched person out there in the venture ecosystem. And Josh is the person who pointed out how the 80 20 rule works in venture. And the way the 80 20 rule works in venture is that 20% of the companies in your portfolio drive all of your return.

(20:36)
The rest collectively return the money that you raise. So if you raise a hundred million dollars fund and you invest in 25 companies, that means 20 companies together will return that a hundred million dollars. The other five companies are going to determine if you return to your investors 125 million, 150 million, 200 million, 500 million or a billion. It’s a small number of companies. So no one really markets that. But what we found is what makes a really good company is it’s a good idea, duh. But it’s also got to be a good idea for a business. And the biggest mistake I see a lot of entrepreneurs doing all the time is they have a good idea, but it’s a feature or it’s a product, but it’s not a business.

And

So you have to have a good idea for a business. You’ve got to have that idea at the right time. My biggest mistakes, and I would say anyone in venture who is honest would say that the biggest mistakes they’ve ever made are investing in the right idea at the wrong time. Because damnit, you know that thing’s going to work, but you can’t keep putting money into it forever because it might take five or 10 years for that ultimately to be successful. And if you’re the only believer, you keep writing check after check after check saying it’s just around the corner. It’s always going to be just around the corner. And at some point it may be around the corner, and then you’ve got to have a team that can pull it off. And so the team matters. The market matters. The idea matters. I’ll say one last thing, which is, it’s interesting, it’s anecdotal for us, but I’ve heard other venture funds have seen this as well.

(22:21)
So we have four partners, and most of my firms have had three or four partners. We always have a voting system. When you vote on doing an investment, and there’s always a lot of debate about, well, should it be unanimous or should it be a majority? And I don’t think there’s a right answer, but what we’ve found is that the investments that did best across half a dozen funds across 25 years are the ones that were not unanimous. The investments that did best are the ones where at least one person in the room said, oh my God, this is the dumbest idea in the world. I hate this idea. This is stupid. Why would we do this? And we thought a lot about why is that the best ideas are not consensus ideas. And I think that’s the answer. Because if it is a consensus idea that we all look at and say, wow, that’s a great idea, it probably means we’re not the only people looking at a company like this. There’s probably a hundred other obvious teams that we don’t know of that are out there doing something similar because it’s clearly a good idea. And then it becomes a question of who’s going to win. And you kind of never know that because that takes a lot of luck.

So you raised 135 million earlier this year. How many times a day do people come and ask you for money?

Well, they don’t come in person that

Often email you

Thanks to Zoom. And remember, we actually don’t generally take things over the transom.

We’re

Getting our deal flow from smaller VCs generally that we know pretty well. But let’s see, we get about, and we get about 40 companies that sort of come into us through our VCs that are generally pretty well vetted. These are, I’m going to say, of all of those 40 companies, every one of those is going to raise around financing. They’ve already raised a seed round, probably raised an A, they’re raising a B or a C. They generally have good VCs. They’re going to raise a round. The question for us is, are we going to participate in that round? So the 40 that come across to me or Jenny or Fanasis or my partner John Burke, we advanced half of those, about 20 of them to our investment committee where we talk about ’em collectively, meaning one of the partners who gets one of the deals. We kill off half the ones before we even talk to our partners about it.

(24:45)
Just because our job is not to critique every business that walks in the door. Our job is to make money for our investors and to find the ones quickly that we think are going to make money and are worthy of discussion and investment and discard the other ones quickly and not spend a lot of effort on those. And that of the 20 that we talk about, we’ll invest in one of those. So we had our investment committee today, and we probably talked about seven or eight different companies, one of which we voted to invest in. We’ve been talking about this one for two or three weeks. So it’s not like, oh yeah, let’s invest in that one. But it was ready for us to sort of make that next decision.

But if there’s anybody in the audience or listening who wants to pitch you on something, the way to go is through a smaller go through vc, go through.

Yeah. If you’re trying to pitch me on something and you haven’t raised money before, we’re not going to invest in you. So if you’ve raised money before from one of your venture funds, have them talk to us. So our model, again, remember, we’re sharing half of our economics with the group that brings us the deal. Why are we doing that? We’re not doing it because we want to be the Charles Schwab of Venture capital and offer the cheapest fee structure out there. We’re doing it because we think we can build a better portfolio, a portfolio with a lower loss rate by investing in better companies. And it starts with the mouth of the funnel has more high quality companies in it. So at about the five-year life in a venture fund, your loss rate’s probably 35, 40%. It might be 50, 60% overall, depending on the stage of where you’re investing.

(26:25)
Our loss rate across our first three funds is 16%. We have a lower loss rate. We’re getting our deals from other VCs that are bringing ’em to us. They’re almost all raising funding rounds. What we’re looking for are companies that, I know this sounds like a high bar, but believe it or not, we get a lot of these are companies that have, number one, it’s called product market fit. It means they have a product that works that they are selling to customers who are paying for it right now. It does not mean the science works in the lab. It does not mean I have a prototype. It does not mean I have 10 million of pre-orders on Kickstarter. It means I have working product that people are paying me for right now. To us, that de-risks us a lot from sort of the startup landscape, sort of the killing fields of pre-seed and seed rounds.

(27:13)
Second, we’re looking for rapid growth. So we want to see a company that grew its top line revenue a hundred percent last year to this year and is on track to do the same thing next year. So growth to us does a lot of things. It tells us that, okay, this is probably the right time for this product. If it’s growing quickly, it means that there’s clearly demand for it. We’re probably not going to make the mistake that I mentioned before of right idea, wrong time. So growth is also, I’m going to call it valuation insurance. And what I mean by that is the market corrected in January of 22 in the private markets and valuation multiples have gone down by half or two thirds or three fourths depending on the sector. So if you have a company that grew four x over the last two years and the valuation multiple went down by half, you’re fine.

(28:06)
That company is probably going to do a markup round in the next fundraise as opposed to a markdown round because even though the market went down by half, the company’s four times bigger. So growth to us is good. We want to understand the metrics that drive the business. We want to understand what does it cost to acquire a customer? How long does it take to basically pay that cost back? What do you think the lifetime value is of a customer? How big is the market, the marketing channel that you’re using? Okay, you’re on Google, you’re doing search terms, great. Can that build a hundred million dollars business? How big is that market out there? We want to see are you on a path to profitability? We want to see the round that you’re raising, the financing round that you’re raising, we one that gets you to profitability.

(28:53)
So we don’t want to take follow on financing risk. Everyone’s like, well, VCs, aren’t you supposed to take risk? And I’m like, well, I want to understand the risk I’m taking. Then if I understand it, I can underwrite it and decide if it’s a good investment to make or not. And then that kind of to us defines is it a good business? But we have a second lens we look at it through, which is, is it a good investment? Because a good business at a bad price is a bad investment. So the first thing we do is we look at public company comparables and we sort of ask ourselves, is this company, how’s it going to compare to a public company comps? We saw a company today that we approved that it’s in the logistics space. And what they’re doing is something that Amazon and Walmart do really well is when a package is going out, they know how to route it through the chain of U Ss P s or u P s or FedEx.

(29:48)
How does it get delivered? Does it get delivered by our own carrier service to find the least cost routing? Smaller merchants don’t know how to do that, so it’s an interesting company. But as we looked at it, the big knock on it was they’re trying to price themselves at a tech company multiple. And we’re like, it’s a logistics company. Sure, they use technology to do it, but you go out there on the market and U p s is trading at one and a half times revenue. FedEx is trading at 0.8 times revenue. You’re not going to pay five times revenue for this company even though it’s growing quickly. So you have to have some discipline when it comes to pricing and how you’re going to value the business. And then we like to come into rounds of financing that have a brand name VC leading the round. So we want to see the Sequoias or Excels or greylocks or Benchmarks or NES or Union Squares, whatever leading around to financing. And we like to see a situation where it’s oversubscribed, where the company’s got four term sheets. Everyone wants to invest in this company. It’s hard to get in, but we can get in because the little group that’s already on the cap table is an insider, and that’s how we get into those deals. So that’s a long way of answering your question of what

We look for. Wow. Wow.

It’s a lot of words per minute.

Sorry about

That.

Hey, Marissa, can you get him a bottle of water asking him to talk so much?

Okay, thank

You. Tell me, let’s talk about some stories. You’ve got great stories. He’s helped launch Beyond Meat Bird, scooters, masterclass, zip line. Tell us about Beyond Meat and zip line. Give us two stories about some of the exciting companies you’ve helped to launch.

So Beyond Meat, we were not an early investor. Again, we don’t come into the seed rounds. We come into the later rounds. We came in, I think of the seed round of this one and Beyond. Meat actually came to me from one of our investors. It was an investor in Saudi Arabia. He’s a vegan, and he’s like, John, you got to check out this company Beyond Meat. I’m like, I’m like, what is it? He goes, oh, they make a vegetarian burger. They don’t kill animals. It’s gray. I’m like, oh my God, Collin, it’s a veggie burger. Come on, we’re not going to invest in this.

What beans

Like? Oh. And he thought, no, seriously, dude, you got to check this out. So I’m like, okay, okay. So I sheepishly bring it up in our investment committee meeting and my partner John Burs, like, oh my God, I’ve been hearing about this company for three years now from my buddy Greg Boland, who’s been in there. He’s like, this is going to return his fun. I’m like, seriously? And we’re like, okay. And he’s like, you really ought to take a look at it. I’m like, oh, kind rolled my eyes. Okay, fine. So I check out on PitchBook like who’s on the team? And I see that there’s this guy that lives in Bethesda that I knew that’s chairman of the board. I’m like, oh, I’ll give Seth a call. So Seth Goldman’s the guy’s name, and you might know Seth, because Seth started a company called Honest Tea

Back

In the day, and I actually remember this was back in 98. Seth was just getting out of college or business school or something, and it was one of the first pitches I saw. I’m like, damn, I like this entrepreneur. I’m like, but it’s tea. I mean, we’re a tech company. We’re not going to invest in this. And of course, he went on to sell this Coca-Cola and made a ton of money and we missed out on that one. And so I called Seth up and I’m like, Hey, Seth, tell me about this. I went down and met with him in Bethesda, and if you don’t know Seth, he’s like a brilliant marketer and he’s a vegan as well. He now has a plant burger if you’ve gone into Whole Foods and a whole bunch of other things out there. But he’s like, no. He goes, if all our product is positioned in the frozen food section, we’ve lost.

(33:23)
This will never be a mainstream product. He goes, we are only, this is when they only had the Beyond Burger. He goes, we’re only putting it in the fresh meat case, and so we’re only selling the grocery stores that are going to put it in the fresh meat case next to regular meat. I’m like, damn, that’s a good idea. And the thing that finally sort of tripped my greed gland, or I think this is going to work gland, was he said, yeah, we’ll do 30 or 40 million this year. We would’ve done 70 or 80, but we just couldn’t ramp the production up fast enough. I’m like, okay, there’s something good going on here. So we invested in that and that it quickly went public and we distributed the stock out to our investors. I think we did a five or six X in two years on that one, which that works.

(34:06)
And we sold off all of our stock. Most of our investors did. The stock then plummeted because unfortunately the company followed the playbook that a lot of companies did in 2020 and 21, and they said, let’s put a lot more money into r and d, and they turned a profitable business into an unprofitable business, which is generally not good advice. So the little piece of advice to take away if profitable businesses are good, I’ve never seen a business fail because it had too much cash. It generally works the other way. So cash is good in these situations. So that was a fun story. And then Zipline was our first investment in our first fund, and Zipline came to us through a guy named Paul Willard who used to work at Boeing. He has a little VC in Silicon Valley, and he’s like, I’ve known Paul from years before.

(34:54)
And he’s like, oh my God, you got to check this company out. And this is before, this is seven years ago. This is before people were talking about having drones deliver pizzas on quad copters to your doorstep, which I still kind of roll my eyes at. And Zipline had this 50 pound, seven foot wingspan fixed wing aircraft that was operating in Rwanda. I’m like, seriously, Paul? We’re going to invest in aircraft company that’s flying in Rwanda. He goes, no, no, no, no, no. He goes, it takes off like a jet on an aircraft carrier. It’s a catapult launch and it’s a tail hook landing. It can fly 175 kilometers round trip. It can fly through the rain and all this stuff. I’m like, what are they doing over in Rwanda? And it didn’t land when it delivered things, it dropped down to 30 feet and dropped the stuff down by a parachute and it could drop within a spot the size of two parking spots with like 95% accuracy.

(35:54)
And what they were doing is when the light bulb went on in my head, I live in Great Falls. I have pretty much everything I need within a 10 or 20 minute drive, and if I don’t, Amazon’s going to deliver it to me that night or the next morning. So I didn’t really care. He goes, Rwanda has 28 field hospitals with no electricity. They lose a thousand women a year in childbirth because they have bleeding issues and they can’t get fresh blood to ’em in time, and there’s no way to solve it because the infrastructure is so bad. They go from the main city and the main hospital to get blood out there on the back of a motorcycle just takes too long. He goes, we can with a fleet of 12 zips, as they call ’em out of the main city in Rwanda, he said, we can get anywhere in Rwanda in 30 minutes or less.

(36:37)
And it was like, oh, that’s a good idea. I kind of get that. And so we underwrote it for, it’s just going to work sort of for urgent needs healthcare kind of third world countries. But the real plus if it works out is at some point there will be commercial deliveries in the US and it’s going to start in rural areas. Because if you think about it, if you’re a U P Ss or FedEx or Amazon and you’re delivering packages in Tyson’s Corner, it’s pretty damn cost efficient. But if you’re delivering packages to a little city between here and Blacksburg, that last mile is really expensive, and that’s kind of where this is going to start. And so Zipline, they started out, they started working with Walmart. They’re now launching off of seven Sam’s Clubs in Arkansas, and I was kind of like, what are they delivering with a parachute drop?

(37:34)
Is it like prescription medicine? It’s like, no, no, no. It’s like cinnamon. Like huh. It’s like they’re offering 15 to 30 minute delivery windows. People are basically ordering things for dinner that night that they forgot. And it’s an experiment for Walmart, but Amazon’s out there, a bunch of other people are out there talking about all these quadcopters that are going to drop down and deliver these things. It’s going to be a long time before that happens because a quad coter that’s going to carry two or three pounds is going to be about 110 decibels at ground level. It’s not going to be a quiet thing. It’s going to be like a lawnmower. It’s going to have spinning blades that are kind of a threat to small children and animals out there. But what Zipline came out with, they raised 350 million in March of this year at about three and a half billion dollars valuation because they came out with what I think is kind of a breakthrough on what they’re doing.

(38:24)
And if me and probably most people in here don’t follow a guy on YouTube named Mark Rober, but your kids probably do. And so Mark has like 27 million followers on YouTube. He started out doing prank things like you’ve got a box at your front door and it explodes with glitter and stuff like that. About once a year or twice a year, he actually does something on a company, and he did something on Zipline that I encourage you check out Mark Rober, YouTube Zipline. It’s like a 30 or 40 minute piece. It’s unbelievable. He didn’t get paid a thing from Zipline. It’s not a commercial. He did it all himself. He went to Rwanda. It’s unbelievable. But what they’ve come out with their new zip, which is like, oh my God, that’s brilliant, is this big quad copper quadcopter sits about 300 feet above the ground and it drops on a wire a small about that big delivery bot that has just enough power to be able to maneuver 3, 4, 5, 6 inches this or that way, drops it down that has the package in it can drop it within about a one square meter area with like 95% accuracy, and it just zips right back up to the parent ship up there.

(39:36)
It’s fascinating. It also can change logistics because all of a sudden you can retrofit one of those windows. For example, if we were a pharmacy or someone that had products to ship, instead of putting ’em in a central warehouse, you have a window that slants open 45 degrees, that little thing can drop in, you can load it and off it goes. So watch the video. It’s pretty fascinating. But I actually think for the first time I’ve now seen a product that can probably deliver to 95% of households when you include rooftops of apartments and condos.

Amazing. So let’s talk new technology. Is there any other new technologies besides ai or should we just go to that? I think we should just go to that.

Well, there’s always something new.

(40:19)
We’re not in the crystal ball business. All of our, we work with the 150 small VC funds. We let them have the crystal balls, and we only want to invest in the companies that are already taking off. So we’re kind of cheating. We have a cheat code for venture is what my son Ben calls it. But there’s a lot of interesting innovation happening out there in places that you wouldn’t think. So for example, the logistics company I mentioned, I never would’ve thought that you can sort of streamline this delivery the really big companies are doing and offer it as a solution for all the small groups out there. U p s doesn’t want to do that for you. They want you to ship everything u p s, so you kind of need an independent group to do that. So innovation’s happening all over the place.

(41:04)
AI is something that, I don’t think it’s a sector or a space. I think it’s something like the web or mobile that every business is just going to incorporate. And ai, AI is a word that became popular about a year ago when Open AI announced chat, G T three. They announced Dolly before that, which I think is actually cooler than chat g T three or four plus. And before that, we kind of called it machine learning. In our world, it’s how do you train a machine to do something a lot more efficiently? And we’ve been investing in machine learning companies for seven, eight years now. Ever since we got started with proof, we actually just sold we of our first companies, a company called Case Text, which brought machine learning to the legal space was an early adopter of chat. GT three developed this product called co-Counsel where you could put in, here are the facts of the case.

(42:04)
It would write your brief for you. It would write the opposition brief so you knew what the other side was likely to say, and it would write your response to the opposition brief. And Thompson just bought them for $600 million. So this is something we’ve been doing for a while, but it’s now been popularized, but just like in the late nineties, it was all about the web and it’s like, oh, we got to invest in this web development shop. And they got crazy valuations and it was just today, it’s okay, I’m going to go pay $199 and get a website done. It’s not that complicated mobile. If you are online, you probably are visible on your mobile device, but it’s just, it’s ubiquitous. And I think AI is something that it’s going to be ubiquitous, but I don’t think we can even imagine a lot of the use cases.

(42:56)
I mean, 25 years ago, we could not have imagined the use cases of the internet today. It was only 15 years ago. If you think about it, that Steve Jobs unveiled the iPhone before that the cutting edge was the Motorola flip phone or the Blackberry. So I don’t think we can imagine all the use cases, but it’s going to fundamentally reform tons of industries out there. I think if you are a programmer, a lot of your job’s going to be automated. If you are a writer, if you are a designer, if you write music, if you do film, a lot of that’s going to be automated and it’s going to be better and faster than stuff that you can do. And those are just some obvious things out there that are going to happen really, really quickly. And there’s just a whole ton of stuff that we can’t even think about.

(43:52)
I actually think we’re kind of on the verge of what I’m going to call sort of the fourth wave of innovation and creative destruction in America since the country was founded. And if you think about it, when we started out, we were an agrarian society. We moved from being an agrarian society after a couple hundred years to becoming a manufacturing society in the agrarian world was like 85% of the population lived and worked on a farm. When we moved to manufacturing is 60% of the population that worked in a factory. We then moved into sort of a, I’m going to call it an information economy, call it a computing economy, starting in post-World War ii, moving more into a broad-based technology economy where people are working in technology-based jobs. And I think AI is going to be the next wave, I think at a very high level in something that I think is going to be good for humanity.

(44:51)
It’s going to swing the pendulum away from specific technical skill sets to human skillset sets. How do you manage people? Because people at the end of the day, have to develop a lot of the stuff and managing those people and figuring out how we manage a team. How do you instill in this AI algorithm, I’m going to call it human-like ethics or personas of what do I do in this complex situation, the classic situation of your car, you’ve got a crosswalk. Do you kill the old person? Do you kill the kid in a stroll war? Do you kill yourself? What do you do if you only have three options? So I think that that human element is something that is going to be, I think, ascendant, and I think that skillset is going to be ascendant and it’s really been pushed down in the last 20, 30 years.

Yeah, that’s great. It reminds me of what you said at the beginning that you could, with your choices at proof, use machine learning and you’ve learned from the companies you’ve invested in, but you’re still not going to let a machine actually make the choices for you. You’ve got to have a human

Making that choice. Choice, yeah. There’s a judgment thing because at the end of the day, even though an entrepreneur might have a great idea and the market’s the right time, if you just look at this person, say, I don’t trust them,

Or

I’m not sure they’ve got the drive to pull it off, or little things that you don’t automatically think about, we found that the worst startups are off. Well, there’s a lot of worst startups, but one category of bad startups are companies that are started by one person and they own 80% of the cap table, and the next person has 4% of the company. And the message that tells me is, okay, this is not a person who believes in a team. This is a person who believes in himself or herself at all costs. The best companies on the other hand have two or three people that started ’em and they split the equity equally. You’re like, okay, you can see a team dynamic there. Sure. Could you code for that and look into it? Yeah. But then you got to come up with how do you translate all the heuristics of all the stuff that you’ve thought about? How do you translate? I mean, little tiny lessons that I’ve learned over the years that can probably code. And there’s probably a thousand people like me who have different jurisdictions, and we all have different reasons for ’em, but lawyers, sorry for all the lawyers in the room tend to make awful entrepreneurs.

(47:28)
Why? Because their entire job is to avoid risk. That’s what they’re trained on. So to have them embrace risk in a company is a hard thing. Companies with spouses or kids all working in the same company, it creates potentially a complicated dynamic. Not always, but it can create a complicated dynamic. Sure, you could put that in there, but there’s all sorts of stuff that’s sort of the human element, because I joke all the time that business is easy. It’s the people part of the business. That’s hard. And a big part of our job is not just understanding the business, but the humans that are actually going to run it and figure out when Jane’s company over there does something and unveils the product you are going to unveil in three months, what do you do? What’s your human that’s running your company going to do in response?

That’s great. We got a couple of questions submitted before we started, so I’m going to go to those. We live in a high wealth region and a region with many startups and entrepreneurs. How can we pull wealthy individuals into angel networks and convince them to take exciting risks where they live?

Well, first thing is I would never present an investment opportunity as I want you to take an exciting risk. No one wants to take a risk.

(48:49)
So that’s bad marketing. So what I would say is you want to convince them that you have an exciting investment opportunity for them. And they’ll understand that any investment is risky. I mean, investing in the stock market is risky, risky. But it’s a really interesting question of how do you convince people who have built up some wealth to allocate a part of their investment portfolio to private investments? Because private investments are murky. I mean, if you’re going to invest in Apple, every analyst in the world covers Apple. You can touch and feel the products. You kind of know what you’re getting, and you can make an assessment of, do I want to own that stock or not? But if you’re investing in Sally’s company that has five people in it, how well do you know Sally? How well do you know the other people? What if she’s not giving you the real information?

(49:46)
Do you have a little problem like they had at Stanford with Theranos? How do you know? So it’s murky out there. And what I tell people all the time, and I think this is kind of the answer to convince people to invest in private companies, is you have to think of it like a portfolio. And I tell all my friends who want to invest in a company, a private company, I say, if you’re not ready to invest in 25, don’t invest in the first one. So I say, you figure out what you want to invest over the next three years. If it’s a hundred grand, if it’s 500 grand, take it, divide it by 50, and that’s the first check you ought to write into the first company. Because if you’re going to invest in 20 companies, you better have an extra dollar to invest when that company raises another round of financing.

(50:33)
So all of a sudden that changed the calculus because that person was like, oh, I’m going to give Sally’s company 50 grand. All of a sudden you do the math on that, that means it can only give her a thousand dollars. And that’s a buzzkill for Sally who was trying to raise a couple hundred grand to get her business off the ground. I think the answer is we need to build up more networks where people can see a lot of deals where they can learn from other people and where they can build their own private portfolio.

Awesome. Are there questions from the audience one? Oh, great. Yes. We always get great

Stories. I was wondering, do you have a story of a company that you thought had every chance in the world but then just flopped?

Oh, yeah. Yeah. I have lots of those. I have more of those that I have the good stories just because by definition, you have more losers than you do winners. Remember that you’re batting 300, you’re doing well, 80 20, you’re doing really well on the 20%. So my Biggest Loser was a company called Return Buy, and it was, I knew, damn, this is the right idea. And now we have companies like Optoro and Channel Advisor and a whole bunch of other people that are doing this with a larger degree of success. But return by was back in the early days of eBay, we backed this in either 1999 or 2000. And the idea was all of these consumer electronics companies have lots of products to get returned. You can’t resell ’em as new. And there’s this new marketplace over there called eBay, and we can sell these things on eBay because it’s growing like a weeded and it’s going to be a great business.

(52:10)
And I knew Meg Whitman because Meg and I worked together at Bain and Company when I was right out of college, and I called Meg up and she’s like, yeah, that’s a great idea. We’ll invest in it. And I’m like, oh my God, I’ve caught the car that I was chasing. I was the dog chasing the car. eBay’s going to invest in this company. I was like, we’re done. We’re golden. So over two or three rounds of financing, we put about 10% of our fund in this company, which is sort of the max we were going to go. It had hit a 25 million run rate. They had built a great facility down in South Carolina where they’re getting all these palm pilots and all this other stuff shipped into ’em down there. And they were looking at ’em. They were figuring out, this is a quality.

(52:53)
I can sell this as new. This is like B quality. It’s got some blemishes, it’s missing some parts. This is C quality. It may or may not work. We can sell ’em at different prices. And they were at a 25 million run rate. I’m like, wow, this thing, we’re going to make a killing on this. And I remember sitting at one board meeting and Walt Shill, who was the C E O, who’s still a buddy of mine, even though as Walt jokes, he goes, I lost more money than any of your other CEOs did. Like, thanks Walt Walt, he’s an investor in our fund now. I think he realized it’s better to invest in a fund than put a lot of money into one company. I remember being in a board meeting and Walt’s giving this presentation on Palm with palm pilots, and he’s like, we’re selling 600 of these a day on eBay.

(53:38)
I’m like, oh my God, that’s unbelievable. I mean, eBay must love you, and Paul must love you. He goes, well, kind of, I’m like, what do you mean kind of? He’s like, well, palm’s getting back about 2000 of these a day and 85% of all the palm pilots being sold on eBay are from us. I quickly do the math. I’m like, oh, their piles getting bigger. And so we’re not really solving their problem. We’re solving part of their problem. And what I learned and sort of a lesson in solving a problem for customers is you either solve a problem or you don’t. Partially solving the problem doesn’t solve the problem because it means needed another solution to get rid of the other 1700 palm pilots that were coming in every day that we couldn’t deal with. And it was kind of at that point that I’m like, crap, this business may not work out. And so that story got repeated. We were working with Circuit City, we’re working with a bunch of the brands, and we just couldn’t solve their problem. And it was the right idea. It was just the wrong time because we relied on eBay as a marketplace. Now you’ve got lots of places to sell all these things, and now it would work really well, but we just didn’t have an effective, scalable distribution channel.

How about drone technology? Oh, sorry. How about drone? Hello. That’s fine. How about drone technology? There’s a lot of opportunity there. I was with the station manager of Dulles Airport and the day we met, we were talking about a company called Accelerated who is a drone pilot service. They provide train drone pilots and they’ve got a runway in Loudoun County. And the day before we arrived at the meeting, he said there was 6,000 drones outside the protective area of Dulles. You think of all the companies that have drones to siding companies, real estate companies, and the like. How do you see that unfolding knowing that the product needs to be made in the us?

Yeah, the question’s about drones, I think drones are fascinating. I’m kind of pissed off because I live in Great Falls and I’m inside the 12 mile radius from the White House, so I can’t fly a drone at my house, which is kind of silly because you can maybe have low powered drones that can only go a few hundred yards, but I can’t even fly those, so I don’t get to play with them at my house. Unfortunately. Look, drones are changing the world in good ways and bad ways. I mean, you’ll look at what’s happening over in Ukraine right now. I mean, a couple hundred dollars drone can destroy a multimillion dollar tank. We didn’t think about that five years ago. So it’s changing warfare. It’s going to change deliveries, it’s going to change logistics. I mean, we’re going to look back. I guarantee you my kids are going to look back in 20 years and your kids are going to look back and grandkids are going to look back and say, oh my God, mom and dad, seriously, you would get your meal delivered by a person in a truck burning gas to deliver a $6 dinner.

(56:38)
Seriously, that’s stupid. And we’re going to look back on that and just be amazed that that’s actually how we got logistics done. And you’re going to have drones that are going to do a lot of this stuff. They’re going to look and feel very differently than a lot of the drones out there right now to carry a payload. Have you looked at any drone companies? We’ve looked at a bunch of drone infrastructure companies. So the drone companies themselves, the hardware manufacturing is tough to compete with China. It’s tough to pick a winner in that. So we’ve looked at, we really, except for Zipline, which is the drone company, we haven’t done anything. We’ve looked at things in the air traffic control space for drones. We’ve looked at things in the collision avoidance space where they can talk to each other. We’ve looked at things in the swarm space where drones can swarm and act like a bunch of bees in a swarm.

(57:31)
We’ve looked at things for the US government that I’ll just say can involve countermeasures. How do you make sure that you’ve got a drone free zone, whether it’s at a football stadium or the National Mall on the 4th of July so that no one can fly anything there. So there’s lots of interesting ways to invest in the space if and when we deploy capital, we just haven’t found the right company at the right price at the right time. I think we’ll be more in the infrastructure world than we would be in the hardware world just because the hardware’s going to have lots of winners. The infrastructure world, a lot of those have more of a winner take all field to ’em. I mean, if you’re going to be the drone air traffic control system, there’s not going to be 20 of those out there, but there can be 20 people who make drones.