The Full Ratchet (TFR): Venture Capital and Startup Investing Demystified

Sarah Tavel of Benchmark joins Nick on a special Crisis Coverage installment to discuss Consumer Marketplace Investing; Why Aggregate GMV is a Red Herring; and Minimum Viable Happiness as the Key to Market Leadership. In this episode, we cover: Background and path to venture? Quick overview of the thesis and your focus at Benchmark What are your thoughts on platform VC? What tactics or approaches do you use in the process of "scaling your founder"? You sit on the board of some companies, such as HipCamp, that have been greatly affected by the pandemic -- What are some of the creative responses you've seen from portfolio companies? Is there anything fundamental to Marketplace businesses that you think will shift as a result of the crisis and changes in consumer behavior? In the food delivery space, we recently witnessed DoorDash unseating the larger incumbent: GrubHub, with the greatest market share. DoorDash started after PostMates and years after Grubhub... how'd they do it? Do you currently see or do you predict more situations where a startup capturing more supply will lead to displacement of a large tech company as mkt share leader?... if so, in what markets? Recently, you published a series of newsletters talking about the hierarchy of marketplaces... first off, what are the three phases that you've outlined here? Why is a push to aggregate GMV across many markets, less important than dominance in one market? What is Minimum Viable Liquidity? How do you define/measure happiness? At what levels do you know you've reached MVL or MVH? Level 2 of your Marketplace framework... Can you talk about what it means for a marketplace to "tip" and how do marketplace based businesses achieve this? Is there something specific that happens w/ the metrics of a businesses that show that the marketplace is tipping? Do different stages of fundraising map to these phases? The third phase you refer to is the 'Outrun' phase... walk us through the main focus areas in this phase. Homogeneity of the buy-side as a negative... can you expand on this? How does your evaluation of a marketplace based business differ whether it's a b2b company or a b2c company, if at all? Let's say you are approached to invest in a Consumer Marketplace company with $10M in GMV, a 25% take rate, and 20% MoM growth for the last 6 months. Catch is you can only ask for 3 data points to make your decision. What 3 questions do you ask for? To listen more, please visit http://fullratchet.net/podcast-episodes/ for all of our other episodes. Also, follow us on twitter @TheFullRatchet for updates and more information.

Beezer Clarkson of Sapphire Ventures joins Nick on a special Crisis Coverage installment to discuss Platform LP; Allocations in a Down-Market; COVID Strategy Drift; and Emerging Manager Selection. In this episode, we cover: Background and path to Sapphire? Overview of the thesis at Sapphire? You have relationships with many different funds and fund managers, how have you been managing the current situation from the LP side? Down years tend to be very good times to invest, what portion of institutional LPs do you think will view the current situation as an opportunity to deploy versus those that tighten up? Strategy drift of a venture firm can be concerning. COVID has impacted some strategies more adversely than others -- what have you seen as far as shifts in theses and deployment strategies among firms and what's your opinion on GPs changing course due to COVID/SIP? Changing gears a little bit, but I want to talk about OpenLP. What is OpenLP and why'd you launch it? There was a good article recently published by Kauffman Fellows talking about the relationship between LPs and micro-vcs and emerging fund managers. It mentions that most institutional LPs won't invest in emerging managers until they see them produce cash-on-cash returns, but at that point, they're no longer an emerging manager. What do you need to see from emerging fund managers to consider investing in their subsequent funds? As far as skills are concerned, which skills do you often see emerging fund managers have aside from having access to great deals, making good investment decisions and providing value to founders? Have there been any novel ways that you've seen smaller firms differentiate themselves that you can mention? Any other areas where you'd like to see more focus? Let's say you're looking at an emerging fund manager's existing LP-base -- what, if any, are the red flags or things that might give you pause? I know you place significant emphasis on the human aspect of working with people, how do you assess whether or not a fund manager has the people skills that you require when deciding whether or not to invest into their venture fund? How can a fund manager determine whether an LP has real interest vs. just being a tire kicker? You are approached to invest in a Emerging VC Firm. Their last fund is currently at 35% IRR 1.3 TVPI and is 2018 vintage. Catch is you can only ask 3 questions (for 3 additional data points) to make your decision. What 3 question do you ask? Granted this is not how investing works! ; ) Any advice for fund managers that are early in the career, planning a fundraise within the next 12 months? To listen more, please visit http://fullratchet.net/podcast-episodes/ for all of our other episodes. Also, follow us on twitter @TheFullRatchet for updates and more information.

On this special segment of The Full Ratchet, the following Investors are featured: Alex Osterwalder Scott Kupor Cheryl Cheng Each investor highlights a situation where they decided not to invest, why they passed, and how it played out. To listen more, please visit http://fullratchet.net/podcast-episodes/ for all of our other episodes. Also, follow us on twitter @TheFullRatchet for updates and more information.

Byron Deeter of Bessemer joins Nick on a special Crisis Coverage installment to discuss Why This is the Seminal Moment for Cloud and Lessons from 19 Unicorn Investments. In this episode, we cover: Background and path to venture Stage and focus area at Bessemer? You've said that many of the lessons learned from the 08 crisis are applicable today -- what are the top 2 or 3 lessons that founders can directly apply to their business during the current crisis? From a startup standpoint, how is this crisis different from the last? What are your thoughts on the dynamics of the PPP and the role the government is playing amid the crisis? We've seen significant volatility in the public markets, but Cloud has remained pretty resilient... what have been your macros observations on SaaS and Cloud businesses over the past couple of months? Why is now "the iPhone moment" for Cloud? We've seen a number of business models gain increasing momentum, such as freemium, low friction and developer centric to name a few -- what have you observed w/respect to evolving business models and which do you think will become more pervasive in the coming years? You've talked in the past about the importance of channel scalability for SaaS and cloud companies, define channel scalability for us and what some red flags that may reveal a lack of this? A lot of analysis that goes into these businesses and every situation is different, so I don't want to over simplify... but have you found some general characteristics that separate the winners from the losers? Trust is such an important part of a relationship between founders and investors, what's your approach to building relationships, and do you have a specific example/story? We saw substantial growth in the number of unicorns from the 2000's to the 2010's, what do you expect to see this decade? How do you feel about the trend of companies to stay private longer? From the 10 Laws of Cloud Computing... which are the ones most often absent from opportunities you're reviewing? Law 1: In the cloud economy, scale wins Law 2: Growth at optimal cost Law 3: Invest behind the cloud sales and marketing learning curve Law 4: Product as a competitive advantage Law 5: Master the 5 C's of cloud finance Law 6: Discover your secret KPIs Law 7: Customer success is company success Law 8: Impact through engagement or insights Law 9: Tone starts at the top Law 10: Map your fuel stops In the last State of the Cloud report, you mentioned 5 predictions about the future of Cloud, can you highlight a few you're most excited about? To listen more, please visit http://fullratchet.net/podcast-episodes/ for all of our other episodes. Also, follow us on twitter @TheFullRatchet for updates and more information.

On this special segment of The Full Ratchet, the following Investors are featured: Michael Cardamone Jim Kim Jason Calacanis Each investor discusses a portfolio company that did not survive and why it was that they failed. To listen more, please visit http://fullratchet.net/podcast-episodes/ for all of our other episodes. Also, follow us on twitter @TheFullRatchet for updates and more information.

Leah Solivan of Fuel Capital joins Nick on a special Crisis Coverage installment to discuss Building TaskRabbit in a Recession; COVID Effects on the Independent/Gig Economy; and Key Factors for Early-Stage Marketplace Success. In this episode, we cover: Background -- path to venture? How is the current climate affecting your investing? Differing viewpoints on how much runway to plan for w/ a new capital raise... are you suggesting founders raise for more than 18-months or does the standard runway guidance hold? This crisis has had a pretty profound impact on the sharing economy/the gig economy/the independent economy. As someone with experience working in this space, what are your observations? Key lessons learned from building TaskRabbit in 2008/2009 during a recession? What will be the big opportunities post-covid, given the changes to consumer behavior? What are the main 3-5 things your looking for in a consumer marketplace business at the seed stage? Are there GMV levels that you're looking for? How about take rate? Best advice on investing in marketplace businesses that you've come across and incorporated into your approach? I've seen a number of consumer marketplace business that start w/ an auction-style format where vendors bid for consumer business, like thumbtack... then they flip to more of an affiliate/referral model where the consumer enters the specs for their job, those leads are sent to vendors and the vendors reach out individually w/ proposals. Why have we seen this shift? Does the transaction interface/format between vendors and customers influence your interest as an investor? You've said that you think investor's should stand in a founder's corner, not their kitchen. What do you mean by that? How involved do you get w/ founders, and how has that changed as the portfolio continues to grow? Advice for founders that are approaching an exit process w/ strategics? I know you pride yourself on your efficiency... do you have any efficiency hacks or tips for investors young in their career? To listen more, please visit http://fullratchet.net/podcast-episodes/ for all of our other episodes. Also, follow us on twitter @TheFullRatchet for updates and more information.

Grace Isford of Canvas Ventures joins Nick on a special Crisis Coverage installment to discuss How Companies Can Maintain Growth Post-COVID. In this episode, we cover: You're an extroverted, people-person... how you holding up w/ the quarantine? Quick overview of your background and path to VC? Your focus (and thesis) at Canvas? You developed a 30 page GTM Playbook based on interviews w/ 10+ CROs/VPs of Sales across major B2B companies. First of all, is this publicly available and also what were some takeaways that really stood out? There's a segment of VCs that believe that one must be an operator to be a good VC... what's your stance? Examples of successful non-operators? You completed a comprehensive analysis of the portfolios of over 200 venture firms, looked at 100 successful GPs, and winning, U.S.-based investments w/ a valuation greater than $500M... what were your key takeaways? A bit about signaling... Many in the industry and those observing determine the value of a startup based on whether a brand name venture firm is in the deal... "If Sequoia is in the deal, startup must be great"... what are your thoughts on this common perception? What does your weekly routine look like and how have you prioritized the various demands of the job? What have you found to be most challenging in your career as a VC? What advice do you have for young folks trying to make an impact as an investor or board observer? You wrote a great piece that analyzed three areas where VCs could invest to address the societal challenges of COVID-19. Can you walk us through each of these and why the opportunity here is greater? What do you think the future holds for venture & entrepreneurship in a post-COVID world? The old playbook for winning deals is gone... Any idea on how one might win a deal virtually? To listen more, please visit http://fullratchet.net/podcast-episodes/ for all of our other episodes. Also, follow us on twitter @TheFullRatchet for updates and more information.

On this special segment of The Full Ratchet, the following Investors are featured: Minnie Ingersoll Scott Dorsey M.G. Siegler Each investor describes the most unusual situation or pitch that they've encountered as an investor. To listen more, please visit http://fullratchet.net/podcast-episodes/ for all of our other episodes. Also, follow us on twitter @TheFullRatchet for updates and more information.

Ash Fontana of Zetta Venture Partners joins Nick on a special Crisis Coverage installment to discuss The AI Investing Playbook; Why "Dev Tools" for Data Scientists is the Next Great Opportunity; When Fund Returns Don't Fit the Power Law; and Ash's Favorite Investment Heuristic from Naval Ravikant. In this episode, we cover: Zetta III was announced recently, a $180M fund for founders building AI-first companies. You went from $60M -> $125M -> $180M... how was the fundraise different this time around? Quickly can you give us your definition of an AI-first company? What will you be doing differently with the new fund and how does the pandemic affect your approach? Tom Tunguz just mentioned that in the data they're analyzing they are seeing a drop in spend on Machine Learning Infrastructure. How much of a concern is this to you and your portfolio companies? With the launch of the new fund, you outline focus areas both Applications as well as infrastructure and tools...Is the application-layer ready to leverage AI in a significant way or is there still a lot headway that needs to be made at the infrastructure level first? Carlota Perez has written about technology cycles and how new technologies typically go through this installment phase, w/ rapid development and heavy investment, followed by crash and subsequent recovery leading to the deployment phase... in your estimation where are we in the tech life cycle of AI and is it really ready (or will it be ready over the next 3-7 years) for mass deployment? How effective are the AI models today when much of the input data, generally speaking, is flawed? Talk about the next 3-5 years for Data Science... we've seen significant advances in developer tools and systems for software but I still feel like we're at very early stages in evolution, efficiency and scalability of data science tools/fundamentals. Does your fund returns follow the power law? Part of the advantage to AI-first startups is the supreme data moat that they can build, preventing others from gaining traction w/ competitive solutions. While this is an advantage for the startups that get a head start (and their investors) is there an adverse impact on other startups that are founded later and don't have the extensive data sets? Many of the startups you invest in are "deep-tech" and will not monetize and grow ARR the same way many familiar SaaS or transactional businesses will. What are the major gating factors to raise each of a Seed Round, a Series A and a Series B, in these longer cycle tech-first approaches? You've create a Playbook on how to build an AI-first company. It's evergreen with plans to update regularly as you work w/ companies... I wonder if you might give us the basics... What do AI-First companies have in their DNA and when building a company, what's the sequence and major building blocks required at the early stages? Last time you were on the show you mentioned you learned a lot of great heuristics and mental models from Naval Ravikant. Can you give us a couple of these that have been really valuable in helping you quickly frame startup investment potential? To listen more, please visit http://fullratchet.net/podcast-episodes/ for all of our other episodes. Also, follow us on twitter @TheFullRatchet for updates and more information.

Tomasz Tunguz of Redpoint Ventures joins Nick on a special Crisis Coverage installment to discuss SaaS Strategies, Sector Data, and the $ Ceiling for Deals over Zoom. In this episode, we cover: September of 2015 was the last time we had you on the program... bring us up-to-speed on major milestones and changes since then? Has your thesis changed at all? Aside from the effects of the pandemic now, what has been the biggest change in SaaS investing since then? Lots of varying advice from so-called experts... some suggesting to deep cuts across the board, extend runway out for a few years... others saying now is the time to lean-in, expand and take advantage of opportunities that are created by the crisis. You put together a pretty simple two by two decision-matrix for startups. Can you talk through this and how you're providing different counsel to startups in different positions? If you're vetting a startup for a Series A that has benefited from the crisis, how do you disentangle or segregate temporary or non-sustainable revenue sources from the steady-state? Have you adjusted your vetting criteria or expectations around metrics due to the crisis? What's something you look for and analyze that is less common? What's your take on situations where there is an agreed MRR but the contract is structured such that the bulk of the contract value is paid upfront. On one hand is a great boost to working capital but how do you look at that from an MRR standpoint? Any tactical advice for founders/sales teams w/ regards to structuring new customer contracts in this environment? Is there a maximum $ contract size that you think can be closed over the phone? To determine the sectors impacted most by COVID-19, you looked at Roger Lee's data on Layoffs. We've discussed a lot of the impacted sectors anecdotally here on the show... according to the data, what has been impacted most? Are there some sectors where we'll see a lagging effect... due to factors like sales cycles maybe we don't see the effects yet but will over the coming quarter or two? You've discussed sectors and categories that this crisis might accelerate... aside from the obvious like teleconference, telehealth, grocery delivery, video streaming, etc... what are some non-obvious areas that may get a big boost? To listen more, please visit http://fullratchet.net/podcast-episodes/ for all of our other episodes. Also, follow us on twitter @TheFullRatchet for updates and more information.