Invest Like the Best with Patrick O'Shaughnessy - Lauren Loktev, Kanyi Maqubela, & Craig Shapiro - Watching a Venture Fund at Work - [Invest Like the Best, EP.19]

Episode Date: January 10, 2017

This week’s episode features the partners of the Collaborative Fund, a venture-capital firm based in New York City.  This is a unique, group interview with Lauren Loktev, Kanyi Maqubela, and Craig Shapiro that explores all aspects of their search and investing process, including how they identify thematic change in the world and then build a portfolio around those themes.  The quality of a team is crucial to success in investing and this is a great example of a team with chemistry on a singular mission.  They all offer great advice on how to operate a business, build a team, and find interesting new investments.    Also, stay tuned to the end for a bonus segment captured while the tape was still rolling.   Please enjoy!   For comprehensive show notes on this episode go to investorfieldguide.com/collaborative/ For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag  

This podcast is sponsored by CFA Institute, the Global Association of Investment Professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals, working to build an investment industry where investors' interests come first, financial markets function at their best, and economies grow. The chartered financial analyst credential is the most respected and recognized investment management designation in the world.

The views expressed in this podcast do not necessarily represent the views of CFA Institute. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfield guide.com. Patrick O'Shaunisee is a principal and portfolio manager at O'Shaunacy Asset Management. opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect

the opinion of Oshamously Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaunity asset management may maintain positions in the securities discussed in this podcast. This week's episode is with the partners of the collaborative fund, a venture capital firm based in New York City. I know from experience that the quality of a team is crucial to success in investing, whether that be in public markets, private equity, or venture capital. But I hadn't heard a group interview of this sort before,

so I figured I would create one, and I'm glad I did. Lauren, Kanye, and Craig touch on all aspects of their search and investing process. We discuss how they identify thematic change in the world and then build a portfolio around those themes. I found the section on the various dimensions of brand and how to build brand to be particularly insightful. Above all, I think it's a great example of a team with chemistry on a singular mission. They all offer great advice on how to operate.

a business, build a team, and if you're a venture capitalist or angel investor, find interesting new investments. One more thing. Stay tuned at the end of the interview for a bonus segment, which was captured with the tape still rolling. For show notes, visit investorfieldguide.com forward slash collaborative. And now please enjoy this group conversation with the partners of the collaborative fund. On the episode with Craig, I started with a question that was based on the piece that he wrote about roots. And I've stolen that and used it as like a way to understand. people's backstory and I thought it'd be fun to do it with with Kanye and Lauren as well so maybe we could start with you Lauren some formative aspects of your background you know where you

come from and what your experiences and how that informs your worldview and how that got you here into as a you know as a venture capitalist yeah absolutely I grew up kind of all over the place when people ask where I'm from it's always a challenging question because I grew up in North Carolina Connecticut Kentucky and then Minnesota high school for me was Minnesota I went to undergrad in L.A., studied abroad in Paris, then moved to New York. I moved to Boston after that, and then moved out to San Francisco about five and a half years ago. So I've lived in a significant part of the country at this point. I've skipped kind of southwest, rocky mountain area.

But other than that, I've experienced quite a bit of it. And I guess because of that, my sort of worldviews, and home has been defined more by the people around me and, you know, family, friends, et cetera, than necessarily a physical place. Sure. And I think because of that, I've always cared a lot about solutions that address a significant part of the world. And so it's an interesting time to be in Silicon Valley because there's a lot of discussion

about Silicon Valley inventing for Silicon Valley. And that's a topic that I care a lot about because I have experienced a bunch of different parts of the world at this point, particularly the country. And so I'd say that's part of the worldview development. I think the other part of it for me was that my dad was running a clean tech company and I was working for a carbon trading firm while I was in undergrad. And so I came to really care about sustainability and wanted to work in that long before there was really a large sustainability related. industry or opportunities for people with a liberal arts background. And so the reason why I got into venture in the first place, about six years ago now, was because I wanted to work in sustainability.

I was not a scientist. And as I thought about ways to really impact climate and the evolution of the planet, it seemed as though private investment was a tool to do that that I could actually affect. When you, I know you're based out west, and I think most of the rest of the team is here on the East Coast, are you specializing in that brand of company? I mean, is that called a subsector that you are actively kind of leading on? Is sustainability, clean energy, clean technology? Not particularly as far as a strong focus. I'd say that's an ethos that defines our organization in the way that we evaluate companies. I started investing more in true.

clean tech when I started in venture, but I realized that the companies that I get most excited about are ones that I can kind of tangibly understand in my day-to-day life. So we do a lot of companies that are more consumer focused and think about using consumer behavior as a way to shift some of those broader issues as opposed to necessarily investing in a solar farm. So yes, but in a maybe more indirect way than I used to. Yeah, but you found somewhere where that is, like you said, in the fabric, right, in the knitting. So that's a neat connection. How about you, Connie?

I'd love to hear your background as well. I haven't lived in as many places as Lauren. Yet. Just you wait. I am South African by birth. I've lived in South Africa, Botswana, New York, Boston, and California, with a very brief stint, actually, in Las Vegas. I worked on a presidential campaign.

in 2008 in Las Vegas, and the candidate was successful, which was a fun experience to be a part of and was a rewarding experience and probably one of the most recent defining experiences I've had, if we're talking about roots, in that it reminded me that this is a very big country with a lot of different perspectives and personality types and socioeconomic statuses. it's something of a dice roll, which one you end up with, and ensuring that there's a pathway to success for every one of those is something that is at the center of a presidential campaign, but it's something that was very resonant to me

just as human being in the United States as well. And so that's been something that's really anchored me is making sure there's a great access pathway for everybody in this country. And it's personally relevant because I came here from South Africa with my parents as an apartheid refugee. And so we... I was little. I was two, one.

So we came here with nothing. And my parents had their undergraduate degrees and a lot of enthusiasm, but pretty much nothing else. And this is the country and the environment where they were able to make a life for themselves and make a life such that I'm here talking to you. So it's a place which has... has given us extraordinary opportunity in the midst of very trying circumstances. And so I feel a strong sense of obligation both to my parents and to this country to

pay it forward because of how much has been given to me. And I ended up moving with my parents from New York City when we first got here to New England, where they both became teachers. And so I'm the progeny of high school teachers. And in fact, I am a... progeny of four generations of high school teachers. So there's a big legacy of that in my family. And so education is also something that I really care a lot about and think can be a powerful vehicle for people's lives to be improved. And in the context of collaborative fund in our

investing, one of the things that, one of the themes that we've actually touched on as a firm is thinking about what education looks like in the information age and what education looks like in a world where it's not the traditional blocking and tackling of vocational school and or liberal arts and or technical education that a 20th century paradigm would bring to the vast majority of potential students. But thinking about lifelong education, thinking about alternative education, thinking about ways to share information for the purpose of preparing for jobs, for the purpose of broadening one's character for the purpose of even just fun.

And we've got a portfolio that I think is starting to reflect that. So that's something that we're really excited about too. Maybe we can just dive in there and use education as a jumping off point of, you know, one of your key kind of investment themes. And the way we'll do this, which would be kind of fun for two reasons, is sort of a day in the life, right, of what you guys do day to day. Because I asked that question for two reasons. The first is that the answer can serve as a sort of litmus test for those out there

that are interested in potentially working in venture capital to see if it aligns with kind of what they actually want to be doing day to day to day. Because I think when you dig into people's day to day job, sometimes it can be very different than what you think from the outside looking in. And second, just selfishly, because I want to understand your process. So, you know, Craig, Craig had a great phrase or line when we talked about collaborative funds broad investment philosophy where it's an unusual thing to raise money to invest in assets that don't exist yet. And so investing at the stage you do of businesses can be very conceptual, but also there needs to be hands-on valuation work and legal work and structural work. And so understanding kind of both sides

of that, the conceptual, the themes, but also the nitty gritty and your actual process for going through this would be fascinating. So maybe we can use education or frankly, any company that you feel is an interesting way of talking about this, but I'd love to just hear about what do you actually do every day? One thing I'll say with respect to education is a strange feature of being a venture capitalist, even if you are a sector specialist, is you have to find a way to sprint up the learning curve with a given company because you have to find enough context that you can unpack some of the risks associated with a given business and some of the challenges in going to market while starting from 18 months, if not years behind the founding. And so we have to learn how to pull out signals and learn how to educate ourselves about a given market extraordinarily quickly. And it's just super hard to do that in a way where you can really feel like you're an expert in what you're investing in, especially if it's in the future. And so it's the story is sort of still being written.

So in one way, we have to have the most intense growth mindset and be voracious learners to be successful venture capitalists because there's so much we have to figure out on the fly right away as we hear a pitch, which is, probably my favorite aspect of the business is just processing the information in real time and putting it in context that we're creating as we're processing it is something strange but fun. Yeah, it's funny where in your world, like growth is everything, right? Like if you don't grow, your toast. And in that context, we're so much of the value of the business is discounting future growth. It's not what's already in place. It's not existing lines streams of revenue or earnings. So how do you think about valuation, right? This is a, from what I can tell, again, outside looking in, it's a fairly frothy time. There's a lot. Capital is extremely cheap.

There's a lot of cash moving around. So how do you discipline yourselves on the valuation side, where let's say you've got, you know, five companies that you love, let's say the conceptual or the product side? How do you think about price and valuation? The challenge at the very early stage with valuation is that you can't really do a highly accurate discounted cash flows analysis of what's going to happen with the investment. And so while at a slightly later stage, you might apply multiples to current revenue or to projected profitability, et cetera,

those aren't really tools that are going to give you any insight at the early stage. So the biggest things that we focus on are, is the market big enough for this to be a giant, you know, billion dollar company? Is this a company that we think can grow large enough that if it's successful, our investment can make our fund. And there are a couple of things in that. So one is, can we write a check that gives us sufficient ownership in this company

that if it's successful, we get a large return. And then the other side of it is, can this company grow enough that it can be that kind of return. So it's almost like inverted, where it's almost sounds like it's more about the market than the individual company. It's very, much about the individual company in terms of us believing that this is going to be a transformative business that's going to change the world and along that journey is going to end up creating a lot of value and being valued accordingly. And so that's probably the biggest decision that we're making. And then the valuation is how do we set this company up for success and how do we get a large enough stake in this business that it can be, you know, a significant part of our fund

if it's successful. And part of setting that company up for success at the early stage is giving a company evaluation that has room to grow so that they can get a Series A done successfully. I think the biggest challenge with the frothiness at seed right now is that seed valuations are increasing at the same time that Series A investors are getting slower to deploy capital. And those valuation expectations are getting more conservative. And no one likes to lead a Series A downround. And so companies that have too rich evaluation at the seed end up in a really tough position because they have a lot more trouble raising a Series A.

And so pricing the seed is in large part about setting that company up so that they can be successful in their future fundraising. Because most of the businesses that we invest in are one. that are going to continue to need to raise additional capital. A couple of other thoughts as it relates to valuation. You know, as Lauren pointed out, you know, unlike, you know, businesses that have a whole lot of data that you can start to extract, you know, thoughts about how to price something. You know, we're dealing with things that are so nascent.

And so, so frankly, I mean, just being very open. The thing that really drives valuations is just the market. It's the venture capital firm up the street that is telling the entrepreneur, you know, I'll invest at this valuation and we're saying, gosh, we like it enough that we'll give it to yet a slightly higher valuation. And I think the challenge then becomes the supply side of that equation has grown dramatically over the past decade, right? the early stage venture ecosystem has just blossomed in a way that has had an impact on that marketplace. There's so much supply that when the thing that is really driving valuations are, you know,

are just the desire to kind of win the deal. It can screw up those dynamics a bit. And so I think, you know, that's something that, you know, as Lauren's pointed out, that we think a lot about as it relates to, you know, positioning the company for a successful series A. You know, the other piece as it relates to valuation is really just in the underlying asset, which is the people. And you hear venture capitalists talk about this a lot. But, you know, spending time to get to know the entrepreneurs, do you feel like they're capable, competent, you know, able to create value? The answers to some of those questions,

help drive some of the pricing. If this is a first time entrepreneur who's never done it before, but is smart, enthusiastic, passionate, mission-driven, it's probably going to be priced a bit lower. If this is somebody who just recently sold their business to Google or Facebook and is now at the rodeo for a second time, that's likely going to drive up valuation. One thing that we think about as a firm is kind of cost averaging that.

Right. So if you, you know, our investment period is roughly four years. And if, if we stagger our investments fairly regularly and it doesn't doesn't mat perfectly, then then you're able to kind of hedge against some of that valuation risk because the markets overall are going to expand and contract, right? And so, so, you know, if you were investing in, in 2008 when the market was contracting dramatically, valuations were way down. And that's a time that you wanted to be deploying a lot of capital. If you were investing in 2006 or 2010 or 11 or 12 or more recently, when valuations have been high, you know, you might want to be a little bit more conservative. But I think as a firm, we don't try to time that. We take more of the view of let's let the markets price those

valuations. And so long as we're consistent, we're going to kind of cost average. So what you don't want to want to happen is deploy a whole bunch of capital when valuations are high and not really have dry powder once things contract, if that makes sense. It does. Well, one additional quirk about valuations that we've seen is when a company is really appealing at entry, oftentimes the valuation is impossibly high. It's uncomfortably high. We look at it and we think, ugh, that gives me heartburn. And in so many of the successful outcomes, invariably, there was a point where one of the investors, many rounds before, had looked at it and said, this is almost too high for me to invest in. And it turned out to be way, way, way low. And we have a handful of examples of companies

where we looked at them and thought, I don't know about this price. I don't think this is going to be the right price for this risk, but it turns out that the market that they were building into was so much bigger than we could even have imagined that that ended up being, you know, ex post facto super, super low of evaluation. And so it's a quirky thing, which is really hard to have a large amount of conviction for, which is part of why we have to just cost average and try not to get too technical about it. Yeah, I love that. We're in Buffett line, obviously talking about public markets, but the idea that if you have to model it, it's not cheap enough, Like it has to be so obvious, and that's kind of this idea of margin of safety.

And the way I think about your guys' investment business, trying to apply that lens of margin of safety, is some sort of unfair advantage that you have a skill at spotting trends, brands, products, people. So I'd be curious to hear about that, maybe on the consumer side. Are there things, is it just experience? Is it just being kind of in the stream and seeing so many successes and failures, not just in your portfolio, but in companies you looked at and passed on and in other companies that you were involved in. How do you develop that skill? How do you know? Well, with consumer,

maybe I'll just make a comment about brand and then let others opine on it, but there's a couple of threads that one can unspool with respect to brand. One is the nature of the people that are already attracted to a given company because brands are at least to some extent about relationships. And so those early relationships actually can create a really powerful picture for what this brand is saying to the market. Two, there are some technical aspects to branding that we have some element of discipline about and points of view about. Seriffs are out, for example. I'm kidding. Well, I'm actually not kidding. But seriously, there are certain pieces of visual and graphic representation of a brand that are anchored in today and can even be anchored in the future,

which are to some extent subjective, but to a large extent, aren't that subjective, at least in terms of what we have strong instincts about at this point. Could you give an example? Can you give an example? Sarah said maybe as one funny way of thinking about it.

No, sure. There's a brand that we invested in. The company is called Simply Gum. And part of the brand is it's got extraordinarily beautiful design. And it's high quality images, big block lettering, and you look at it and it just feels clean.

And that is obviously a subjective description, but if you were to look at Simply Gum and for maybe a listener, pull it up on your website now and you can get a sense for it, it actually feels clean. And so there's certain technical execution that you can draw some threads across. And we've found that across our portfolio, there are a few of these threads,

which represent actual execution of the visual brand, which is important. But then the third, which is in some ways the most important for us to evaluate is indeed the experience. And so is the way that this company executes on product superior? Is the way that they communicate with a customer about how to get access to that product? Is the way they communicate around customer service? Is the product itself of higher quality than the status quo? Those sets of experience details are critical components of having a really well-executed brand. And so you add all three of those together

and you can actually pull out all those signals very early. And not a lot of people apply quite that level of discipline to doing that so early, and I think we do that. I take so much of hearing about what you're looking for in investments as also advice for small businesses, right, of ways of turning that around and thinking, even if it's a sole proprietorship, these are the dimensions along which investors are looking to find good companies. That probably means that that's what you should be focused on in your own business as well. It's always most fun to learn by example. So maybe Lauren and Kanye you could each give me one or two current companies or past companies where you've already made the investment.

And just talk me through the process, what it was about the company that was initially appealing, why there was like an edge there. So I think about this in terms of alpha in my world. Like what what's the asymmetry? What do I know that others don't? Or what structural aspect of the market am I taking advantage of? So that's how I always think about it is edge. So maybe through that lens of edge, you know, you're seeing something that others don't or just earlier. Maybe pick a company each and talk me through it.

I think one that's fun to talk about that we recently announced maybe a week or two ago now is Osmo, which is a company that is building, you know, hardware toys for kids, but that go way beyond that. They're effectively using the interaction between physical and digital to create a really magical play experience for kids. that's also educational for them. And so when we looked at trends in media and technology related to kids, which is an area that we think about quite a bit, there's been a lot of discussion about screen time and how big a problem that is. And on the flip side of that,

there's a lot that you can create with technology to create a deeply immersive educational experience for children that's good for them. but it has to be constructed in the right way. And so that's a theme that we've been thinking about a lot and talking about quite a bit. And so when we started talking with Osmo, we saw that they were fundamentally thinking about this problem in a different way than most people. And they have an incredibly capable smart team. Most of them came from Google. They've built technology that has been incredibly successful, mainly for adults.

And now they're applying lenses of how you can create a really special magical experience to draw somebody in in a way that engages kids in numbers and letter games and drawing better, et cetera. And so the other aspect of that that we found really interesting was that they are a really interesting fit into our fund with Sesame Workshop, Collab Sesame. because they're increasingly using character-based content as a way to create that kind of interaction. So they launched a game called Monster, where a kid draws a magic wand that the monster pulls in and starts playing with. So it feels as though the kid is directly interacting

with the character in the game. And I think the opportunities that that yields down the road are really exciting, especially when we can bring leaders in character-based content development to help them. So to use the villain test here, I have a three-year-old son, right? And so the villain test, he's probably a little young for the product, but let's say he was six or seven or whatever the target age is.

Seems like one way to do this would be get the product, stick it with the kid. You know, if my kid doesn't like a toy, it's a matter of minutes. It's a quick feedback loop, right? So is that part of your evaluation, like to see the kids actually like this? Like, how do you figure that out? Oh, absolutely. I mean, I think inventions for kids that are, you know, eating their broccoli are not what's going to work. They have to really love it. And so, yeah, we tested it with kids that we knew and they loved it. So using this company again, I love this one, just because it hits so close to home with the screen time problems that already, you know, you see it already, they're just so addictive.

even at three years old, he just, he wants the iPad, he wants the phone. And this integration of play with kind of digital learning. Like, I'm a big believer that the programming should replace some core curriculum element early on in kids' lives, which is really hard to shake up the core curriculum, unfortunately. But in terms of choosing this company to express this view, how do you think about competition? So how deeply do you go into other companies that are vying for shelf space or mind-trane? share or even, I'm sure there's other companies that are really close to what this does. So how do you map out the competitive landscape?

Yeah. Part of it, because we do have this sector focus, is that we are actively looking at and speaking with most of the competitive landscape. And so that helps us to move a lot faster when we do find an opportunity that really feels right. Yeah. And I would just add a couple of small things. So one is, you know, again, I think it's different. different from later stage investing, either growth equity or public markets, where it really is about the people.

And so while we do look at like, okay, do they have a distribution deal at Target, are they going to be able to get shelf space at this place? It's so much more skewed towards, you know, the underlying asset being these entrepreneurs. Because it's the, even, you know, in Osmo's case, they're still, you know, even though they're a little bit further. than the seed stage, it's still just very early. And so so much of it is just, you know, elbow grease and, you know, do they have the wherewithal more so than, you know, kind of the more traditional methods of like weeding out. So much of what we do is stress testing the entrepreneurs or the founders to kind of get a sense like, well, how are you going to deal with it when you get kicked out of a store,

you know, when another competitor launches. you do in those situations. And it's really kind of seeing how they perform, you know, under, under hot situation, you know, can they handle it? The other thing that I wanted to do actually, just for for one minute is zoom out. And it kind of gets back to your question about education, how we look for stuff or how we find stuff, is we do, we, we form kind of investment thesis around certain trends. So you mentioned consumer earlier. Lauren mentioned kids being a theme.

And that's largely based on the data that we have, right? So we've now made over 100 investments as a firm, and that generates just a lot of data. One of the data points that we've seen, which is really powerful, is you have a generation of entrepreneurs that, you have a generation of entrepreneurs that, you have. that we think of as kind of the first generation, right? So these are our folks that likely studied computer science or other curriculum that enabled them to launch internet or technology businesses that largely fulfilled their own needs.

Right. So you think about Dennis created four square, you know, so he could check into places that he found interesting. You know, the founders of Google created a search engine so that they could find websites that allowed them to, to, you know, to sort through and find the things that they were looking for, you know, Mark Zuckerberg created Facebook to connect with, with other people at his school. These generations, like, so that first generation is now coming of age and having kids.

And so they're seeing firsthand, as you just mentioned, you have a three-year-old, that these tools are incredibly powerful. And you're almost seeing that, like, the mind shift change from, you know, hey, how can I create tools that serve my needs to, you know, now I have a three-year-old, you know, how can I utilize the skills that I learned through creating a company like Foursquare to like have equal impact for this next generation? So part of our investment thesis is built on this like, follow that life cycle. Yeah, yeah. There's a, there's almost like a second generation of entrepreneurs that successfully built tools.

for themselves by and large and are now shifting their focus, whether it's Marissa Mayer had kids, you know, Dennis and Chelsea recently had a kid, like there's, there's just this, the second wave. And I think that plays into, for us, we thought about, you know, this is going to be Greenfield. This is a big opportunity. And something that is, is going to be difficult for incumbents to compete against, right? Because, you know, these are, these are sharp entrepreneurs that have proven themselves, that have built successful businesses that are now going to shift their focus and likely going to compete very heavily with incumbents. Anyone that listens to this probably watches Shark Tanker, knows the format.

And I like to watch it with my family. I just think it's a fun, it's great, right? It encourages this kind of thinking. And one of the things I've noticed, I know Mark Cuban has kids. And you see him sit on the edge of his seat when there's an entrepreneur that's doing something specific for kids because it's so. the context is so clear. He knows, well, my kid would like this or wouldn't like this. So it's a, and imagine when that whole generation, right, they're going to grow up with these

tools knowing how to code, knowing how to manipulate information in ways that, like, we're, part of the generation, it's like the first generation to get access to it. So maybe back to Kanye, I'd love to hear a company example, maybe not soup to nuts, but sort of how, how you found it and what, what you think it's taking, what asymmetry or what you think is taking advantage of in the market. Just for the sake of narrative coherence, maybe I'll tie the thread to one of Craig's comments, which is that we do sort of look for the way the cycle has changed and a totally different cycle, but that's also representative of a different category where we like to invest is the

fact that we now live in a world where more people than not live in urban or suburban environments for the first time in human history. And the implication there for how tools will be built around cities for the rise of a global middle class is something that we've been thinking about as a firm. And to that point, we met an entrepreneur named Shavani Soroya a couple of years back, and she was doing a very interesting set of effectively experiments focused on this new class of people who are moving into cities or moving into suburban areas for the first time and lack certain infrastructure that is key for them to contribute and to participate and to join the productive economies in the cities, the first of which being a banking infrastructure.

And so she noticed that there is a huge unbanked population to the tune of two or three billion people in the world and thought to herself, well, let me see if I can conduct a set of experiments to try and find the right problem set and solution set that matches to this population. And one piece about that, which I think is worth bringing up, is pre-product market fit, which is the seed stage where we invest. companies are experimenting and they're experimenting with different angles on the market. So they usually have a problem that they're very attracted to and or a problem in society, which is really calling to them,

but they don't necessarily know what the silver bullet is or exactly what the solution is that will say go viral or hit the market in a way that will be electric. And so she had a series of experiments that she was running concurrently, one in India, one in Kenya, one in the United States. And one thing that we found so appealing about it was that these experiments, had closed feedback loops. And so one of the most important things, pre-product market fit, is to experiment in such a way that you can actually learn from each experiment quickly. Because if you can learn quickly, then you suddenly start to build proprietary first principles-driven knowledge that will serve as the basis for ultimately being a really great CEO in your market.

And so as she started to build these first principles, she stumbled upon a realization that using M-Pesa in Kenya and eventually using mobile money was actually going to be a great catalyst for getting people onto the banking tracks, as it were, and letting that train leave the station. And so they hit product market fit probably two rounds after we had invested in them, but we continued investing and supporting them and being excited about it because we thought that with each feedback loop, it closed, and the learning was very powerful, generative, fresh, new to the market.

And so another thing that we often look for when we're evaluating companies at the early stage is have you learned something that nobody's, else in the market knows by virtue of this experiment. Have you created a new internet moment? Have you created a new insight in the market by virtue of this small experiment that you've run? And she eminently did that. And at this point, the company has hundreds and hundreds and hundreds of thousands of customers and they're building effectively an American Express for the underbanked and the unbanked. And that's a really unique approach to that only makes sense in a world where you've got a huge brand new population that doesn't have banking infrastructure, but is also not obvious unless you find the right wedge. And so she tried here, tried left and tried up and tried down and then eventually found her way in. And that is a really fun experience as a seed investor to get to watch happen. Sounds like you said earlier that one of your favorite parts of the job is this rapid learning. And it sounds almost like a source of edge is that you're trying to find other people that do that. You're doing it at the meta level, right? And you're trying to find other people that do that as part of the way they operate.

A thousand percent. The phrase I like to use to represent that is the pace at which you can uncover unknown unknowns. Yes. Right. So keep finding new, strange questions to ask that you didn't even realize were questions before. Yeah. And the pace at which an entrepreneur does that is a pace at which I feel like they're really getting deep into their market and stumbling towards insights. That can be valuable ultimately.

Let's talk, let's dive into that a little bit more. Do you think that the only way to do that is with sort of a tinker? mindset or do you think that there are people that can that can map this out ahead of time I'm always struck by the fact that you find more interesting things if you have if you're not going anywhere in particular if you're just committed to rapidly trying to learn but you don't know what you're going to learn what do you think about that idea well I think that also is a matter of growth mindset and part of growth mindset is in the face of data that has changed being willing to change your point of view and there are

some people who have extremely high conviction about what their end result is going to be, but still have a growth mindset. And so it can adjust and react and move their point of view as the data changes and as they learn more. But what often happens is it's somebody who has a knack for experimentation who's willing to actually not know a priori what they're going to find, but look in a very productive way. That tends to be the type of founder that stumbles into the really great insight. I think the one thing that we do look for, though, is extremely high.

conviction in some area. It doesn't necessarily have to be about exactly what the business is going to look like in five years. But fundamentally, I think one of the most important things when we evaluate a founder is what drives them and what's their underlying motivation. And sometimes that's a problem. Sometimes it's a desire to create something that they wish existed in the world. Sometimes it's a particular area of people that they want to work with to build something amazing. But I think that behind that tinkerer's mindset, there needs to be a be-all-end-all, I have to do this kind of drive because founding a company is very hard. And unless you just tooth and nail are like completely committed to doing it for for some great reason,

it's a lot harder to make it happen. It seems like it's the best time maybe ever to be launching a company in terms of access to capital, you know, Amazon Web Services, all the tools and infrastructure that's available to take an idea and translate it. With that in mind, I'd love to hear from Lauren and Connie advice that you have for founders or for just entrepreneurs more generally, not every small business owner or entrepreneur is going to be seeking venture investment. But from your experience working with early stage businesses, what are a couple things maybe that people should think about as they go forward? I think related to that point, yes, it's never been a better time in some ways,

but that also means that the barriers to entry are a lot lower. Yes. And so I think that one key piece of advice is to know what kind of business is this. Is this a winner-take-all kind of market where you need to grow as quickly as possible and bring funds behind you to just be the first one? to win that? Or is this more of a lifestyle business where you can grow organically and try to manage your cash flows, et cetera? And I think you have to be really intentional about which it is, because if you end up doing something in the middle, you're probably not going to end up in a

very good place. So define that middle, meaning it's something that's not going to be, you know, exponential rapid growth, but still needs a lot of capital infusion? Is that kind of the, would that be kind of the middle? Yeah, not being profitability-minded, but also not really going, for it either means that somebody is going to go ahead of you if it's the business that requires a lot of capital. And if it's not the business that requires a lot of capital, it means that you're burning a whole bunch of money for no good reason. Yeah.

Morgan and I were talking recently about this phenomenon of in the public markets asset light businesses. So businesses that are able to earn incredibly high returns on their assets that need less capital. There's less capital spending, which is in some ways great. But like you said, if you can build a business on so little, you can also lose a lot of business very quickly. It's very hard, you know, if you or I wanted to launch a mining company, like we wouldn't be able to do. That'd be very difficult to do, right?

You need tons of hard capital assets to do that. And in a way, even though that can be burdensome and take a long time, it's also a moat in a sense, right? That the barriers to entry are much higher. It strikes me that the vast majority of what I perceive to be the most interesting. businesses at the stage that you invest, the barriers are incredibly low and almost ethereal. Like brand as an example is so important and powerful, but it's very hard to quantify, to pin down, to define a value. So it seems like something probably like you're getting at, that you need to be careful

that if you're trying rapid growth, competition, even though it's a great time to launch, it's also a very hard time from a competitive standpoint. Any other things that you would offer to small business owners or budding entrepreneurs seeking venture money? Yeah. Two things I would add. The first is fundraising is not a business model. And so the amount that you've raised and the pace at which you have raised... You should tell that to a lot of asset management businesses.

They might beg the difference. Maybe it is for them. Maybe it is for them without most respect. It's a culture where there's so much dry powder in the private markets, as we've seen, and there's so much appetite for coming into companies that have some momentum, as we've also seen. But it's also an environment where figuring out how to be capital efficient and figuring out how to be disciplined about that, and the pace and path towards profitability being a direct heuristic to your ultimate long-term sustainability means that being abducted to fundraising, and fundraising for its own sake is not gospel by any means, if it is even good.

And so a lot of companies try and orient their entire business around the fundraise rather than orienting it around the business. And I would just remind, especially those who are on the tech side, to focus on that. And then for those who are not necessarily looking for funding from a venture capitalist or even from an outside investor, what I would say to them is don't underinvest in brand, because at the end of the day, brand is one of the most. resilient things you can have going for you as a company. And some of the biggest companies of the 20th century are ultimately just brands at this point. What they actually do is almost immaterial

as compared to how they make people feel. And so I think there's a way in which really over-investing in that up front, not just the visual and graphic design, but the set of relationships and the way that your experience makes a customer feel is something that can build a great culture for a company and can be really resilient over the long term. Let's talk just for a minute about brand, because it's something that obviously has always been important. Seems like it's increasingly important. What are the dimensions of it? It's so hard to define.

So you've mentioned two, right, which is the visual aspect of it. There's the experiential aspect of it. What else is there? If I'm dedicated to just building a better brand, what should I be doing? What are the dimensions I should be thinking about? Well, the only one that I'll add,

and then I'd love, Lauren, for you to jump into, is when you think about some of the most amazing brands, Nike is a great example. When you think about Nike, when I think about Nike, I also think about Michael Jordan. When I think about Nike, I also think about Steve Prefontaine. I also think about, and frankly, they even say we celebrate athletes. And so the extent to which the relationships and the community around a brand can be a powerful definition of a brand,

can't be understated. And Supreme, which is a brand we're a fan of right around the corner here in New York City, has young, black, Latino, and Chinese and Japanese skater teens lined up around the block once a week, and that brand is its community. Yes, of course, it's skate gear, but it's not just skate gear. It's skate gear with a viciously passionate community. And so investing in the community as part of generating the brand is just as important as investing in the logo. I think to that point, the best brands and the ones that that we get most excited about are movements

as much as they are individual brands. Because what we're trying to see and create are companies that fundamentally transform something. And in order to do that, you have to really change consumer behavior. And the only way to dramatically change consumer behavior is to really create a movement. to communicate something through your brand that would take a giant document to communicate in words. And I think fundamentally, consumers don't have patience to read a book to understand why they should change their behavior in a particular way.

They need something to be communicated in a much more simple and elegant way that's just as powerful. And so that's what we're really looking for. such an interesting way of thinking about it and I read a ton about persuasion and one of the most interesting aspects of persuasion is this appeal to identity that there's no there's no more powerful way of getting someone to do something than to say to do this would align with what you identify yourself as so if you are X you know then then this will amplify the fact that you are X and that that I love that you say no one's going to read a book right it's it's it's so much more power of than like the rational argument or you know the way that most people try to convince people of things is to appeal to their identity so what a what a neat way of thinking about brand yeah also i think that you know connie touched on something that that i think is really important so if you were to ask you know people about zapos you know a lot of a lot of folks would say gosh you know the return policies and they include the box with the postage.

And that one thing is brand defining to a lot of people. In the same way that you ask people about Uber or Lyft. And early on, a lot of the feedback was not having to deal with the payment at the end. I know that sounds small. It's everything. But it's huge. Or just the GPS on the phone, like being able to see where the driver was. So so much of it is just that experience.

And that experience can be something that seems incremental, like not paying when you get out of the car or including a box to return the piece. But that can define something. I mean, we're still talking about Zappos how many years later. And so I do think that that, like, maniacal focus on experience can be brand defining. And it seems like also to sort of. circle back to a camera who said it earlier, but this idea of solving your own problem, right? That, we talked about it last time about don't do something because of McKinsey study says, you know, this is an area of growth.

Do it because like this scratches your own itch and maybe the itch now is your kid's itch, not your own. But it seems like that might be a backdoor into brand as well as use that as a litmus test. Is this solving something that like actually I care about? Like would I use this? Would I do this? might be like a neat litmus test for people out there thinking about it. A few more closing questions that I love to ask people.

And everyone already knows Craig and Morgan so we can leave them off this list. The first is to hear the most memorable individual day of, I'll just say your life. I've been saying career, but I'll just say, I'll just say your life because it leaves open more possibilities. Kanye's looking at me like he needs extra time. He's bewildered. So I'm just going to speak about nothing for a second. buy him a little bit of time. Gosh, I'm deciding between two.

Well, tell me about that. One of them was yesterday. And the other of which was Election Eve 2008. So I'll start with yesterday. I had the good fortune of visiting Rikers Island, which is a jail off the coast of East Elmhurst, New York, in Queens. And I was there with a group called Defy Ventures. and to five-entures is an organization that was found that I believe in 2012

focused on anti-recidivism and helping people who have been part of the correctional facility and or have been institutionalized for some criminal activity re-enter society with some tailwind. And so find themselves in employment situations and find themselves with access to entrepreneurial resources and so forth. And so I went in there as, part of a mentorship and training program where we did resume, editing, and career coaching, and pitch evaluation. And it was an absolutely remarkable experience for me.

I did not know that 70 million Americans as a conservative estimate had some sort of criminal activity on their record. I did not know the extent to which having a criminal record leave somebody out of the productive economic system, be it access to real estate, access to voting, depending on the state, access to so many of what we take for granted as residents of this amazing country, so many of the spoils of it are, they're just left out of. And this is a huge swath of our population. And it was just remarkable to me to see the enthusiasm, the drive, the vision, the hunger, the hustle factor, yes, for these young folks, which was no different than the

entrepreneurs I see every day. And in fact, in many cases, outranked them on every one of those criteria. And yet they just were born on the wrong side of the tracks or just stumbled into the downside of advantage or were part of a system that was not rewarding them for the choices that they made, many of which I would have made if I had been in a similar circumstance. And so So it was insanely humbling to make me feel just so grateful that I have landed where I've landed because it could very easily have gone another way, but also served as a stark reminder that the best way to feel good about myself is to make others feel good and to pay it forward. And I have a responsibility to do that.

But it's also selfishly motivated because I came out of there feeling like they had done a service to me, not that I had done a service to them. The old villain test. That's it. That's it. Good for me, good for the world. And so that was a good one. Yeah.

And I could talk about that one all day. But the other one, which was a really special one, was Election Eve 2008, just because it was the first time that I felt like I was in fully baked career flow, as it were. I had the fortune of introducing Michelle Obama on Election Eve. And I was in Las Vegas. And after I did my field pitch, I didn't even stay for her speech because I was knocking on doors. And it didn't cross my mind. to stay for her speech because I had so much work to do. And it's one of those things where you're so obsessively focused on something that's so core to your value set and so important for you. And in

this case, it was winning that, and frankly, not even winning. It was turning out my district. Not even turning out my district. It was making my volunteers do what they said they were going to do. But I was so obsessively focused on that that I actually completely missed the whole forest because I was just sitting there picking berries from the ground. And it is an amazing. amazing gift to be able to have that type of circumstance in your professional life where you're so focused that nothing can distract you from your goal. And so that was another special day for me. Fantastic. Those are great ones. You got it's a high bar, Lauren. Yeah, I really go. Welcome to the question. I would say, I'm just going to go a totally different direction because I don't know how to follow that otherwise.

I would say most defining day for me, not professionally, since you said life, would probably be wedding day. Yeah. It's a big one. Can I change mine? Now I just got you in trouble. Definitely wedding day. Definitely wedding day.

Hi, Martha. So then in the spirit of pay it forward, the last question, the one I ask everyone is the kindest thing that anyone's ever done for you. And he can't say, married me. I'll go with my parents. They had some tough choices to make when I was a kid. We lived in the middle of Western Kentucky, and I was not challenged in school. And they ended up changing basically significant things in the education system of the district and the state. My mom joined a Kentucky Association for educational reform. They, you know, did a bunch of things to allow me to accelerate within that school system.

And then their work paved the way for a bunch of other kids to do the same. and I think it ended up being certainly challenging at the time and they faced pushback not only from the district but here and there for me too and I think that that kindness of really knowing what was best, you know, against everyone speaking otherwise took a lot of resilience and fortitude on their part but also has been pretty neat to see

other kids. I think one of the most powerful moments for me was when there was a kid that I babysat when she was about eight and I ended up chatting with her when she was then 13 and in medical school at the University of Kentucky. Wow. Cool. And to see what that opened up for the rest of that district was pretty neat. That's fantastic. Do I have to follow up?

You do. I mean, I guess I'll say my parents too. they gave me an education, which gave me a shot at life, and they forced me to do my chemistry and do my mathematics and do my writing, even when all I wanted to do was skateboard and play soccer. And actually never let me skateboard. That's how serious they were about the chemistry in particular. And it's because of them that I value education as much as I do,

and that I'm so fortunate to be with this. Mary band of brilliant folks here. So I thank them for that every day, or at least as often as I can. Well, this has been awesome. It's the first chance that we've got to see how a team works together on this. And I think this will be the first, hopefully, of several that I do like this. So thank you guys very much for the insight, for the time. It's been a blast. Thank you. Thank you. Now for that bonus segment. We spent some extra time talking about a research paper that the team put out, which discusses the decline in IPOs and the fact that there are only about half as many publicly traded companies today as there were several decades ago.

Given the venture capital funds need exits, liquidity events, to work, this is an important problem for Craig and his team. They have invested in a company called the Long-Term Stock Exchange, so we spent some time talking about the role of liquidity in general and their investment in particular. Craig begins with a metaphor for the investing ecosystem itself. If you think of it as a farm or as a garden, you've got a bunch of different variables or constituents that need to work in order for it to produce fruit. Right. So you need seeds.

You need water. You need fertilizer. You need ground. You need the tools to harvest. And I think what we've seen in the environment as of late is a really rich ecosystem. system with a blunted tool to harvest.

And so there's an incredible amount of seeds being planted. The water is more abundant than I think any of us could have fathomed. The ground, the fertilizer is richer. We're learning how to make that fertilizer so rich

that it's producing these flowers or fruits, but the tool to actually harvest those is not working very well. And so you've got like visualize this farm with just wonderful spoils, but the folks that are going out trying to harvest that fruit are just, it's not capturing nearly what it could be.

to the point with which, and this isn't something that we've talked about publicly, we considered creating something that we were calling the no exit fund. And so the intent behind the no exit fund was to create a pool of capital whose sole purpose was to provide liquidity for founders and companies that didn't want to go public. It's called Berkshire Hathaway. Another name for it. might have heard of it. Small thing.

We didn't agree. You know, so we actually, we engaged some of our investors. We engaged a bunch of small kind of groups of very bright folks to talk about this problem. And ultimately, where we netted out was it's not about no exit. It was a very kind of provocative statement. It's about the right exit. And the right exit is in the right environment with the right regulatory framework, with the right alignment with shareholders, and all of these things. So I guess that is what led us when we saw long-term stock exchange, we were like, ah, here's another tool that may help capture fruit from the farm.

Whether or not that is the ultimate tool, who knows. But I think that's the business that we're in is we identify these problem areas in an ecosystem and then invest in what we think could be a solution. So don't you think, though, that for a lot of the younger companies, that the IPO process, the liquidity that comes with an IPO and being publicly traded is almost like a necessary step in the life cycle. Like some of the best examples are companies that were public and then went private and then that's like Dell, for example, is one example.

When you are investing in smaller businesses, seed stage, you know, a stage, are you thinking about exits? I mean, is that what you want? Do you want them to ultimately go public? Or is the environment more acquisitions? Well, we want them to ultimately be liquid by any means necessary. We would love it if they went public. We'd be happy if they found a great strategic acquirer.

and ultimately, if not going public is a matter of us not being able to return capital to our investors, then it's certainly a problem for us. If not going public is a matter of them finding liquidity and alternative means that we can still return capital and that they can protect their interest somehow, then that actually is workable. And so at least from our vintage point, so it's not as simple as, yes, they have to go public. It's more a matter of, yes, we think there's a need for liquidity. in the market in general, we have an acute need for it and any means by which they can create that liquidity is good. But the truth of the matter is being a public company with all of its

challenges is also a great advantage to tech companies. They can use their stock as an incentive to hire. They can use, and Facebook is eating their competitors lunch because of the fact that they have a very valuable stock that they can offer alongside cash. And so just simply from a hiring standpoint, they can pay something that a private company couldn't possibly pay. And I think those types of things make these companies more resilient. And so for those who have a long-term view, being public makes that much more sense because it's such a wider capital base they can draw from in terms of offering that capital to the people who are actually creating the value for the company. Is it something you talk about with founders? Maybe it's just too early for you to

even be thinking about that. And it's much more important to focus on near-term growth and the product, etc. But is that something that's part of your conversation or advice? A lot. Can you give me a example of kind of what you're telling them, how you're talking about it, how you frame it? Well, I think one thing that we talk about is how they may get liquidity without going public. I think increasingly you have to consider what the opportunity set is for acquisition at the point that you're starting to build the company, because simply assuming, well, this won't be an acquisition target for anybody, but no problem will just IPO, is increasingly a challenging position to have in the environment that we're in today.

Yeah, one of the things that struck me in the piece was the problems, maybe some of the reasons why people prefer being private, especially this like falling CEO tenure. Company spent less and less time in the S&P 500. It's this quarterly kind of rat race to meet earnings. Everyone beats by a penny. No one loses by a penny. It's this massive distraction. And you guys have a dog in this hunt.

So I'd be curious to hear about the long-term stock exchange and just a touch on what it is and how it might solve some of those problems, but also why you got involved. What was appealing about it to you as an investment? Yeah, I think, you know, a couple of thoughts come to mind. One is just from a very macro perspective, the notion of liquidity and how that works, as you're hearing from the rest of the team, is a very fluid topic. and it comes through the form of secondaries. It comes through the form of acquisitions. It can come through the form of being a public company. And really, at the core, that's the driving force behind it as a venture capital firm

is finding that liquidity. The public markets, you know, are somewhat of a pendulum, right? So if we rewind the clock to not that long ago, companies were able to go public much earlier in their evolution. It was just easier. The markets were more forgiving of balance sheets that in some cases weren't even profitable yet. And that caused some problems, right? So we saw kind of, you know, a backlash to that. And I almost feel as though the pendulum has swung to the other side.

Now the bar is set so high that it makes it much more challenging both to go public but also to remain public. And that's having implications not just to public market investors, but to folks like us. So, you know, long-term stock exchange for us. Great name. was an experimental investment or bet in an effort to try and change those dynamics. And a couple of things are needed in order to change those dynamics. One is some regulatory change. And so as we think about the effects of Sarbanes-Oxley and other regulations that have just made

the burden, frankly, purely from a cost perspective, it's a challenge. But also just the mechanics of how the current stock markets operate, provide an advantage to folks that have higher frequency, access to information, ability to execute, and it doesn't reward kind of long-term shareholders. And so we were attracted to the kind of underlying mission of long-term stock exchange because it aligns.

the interests of the shareholders and in a lot of cases the management team. You know, I'm reminded of, you know, we saw Larry Page speak from Google, and he was saying that, you know, as you mentioned, that the average tenure of a Fortune 500 company CEO is something like six years. Yeah, that's crazy. And so it's hard, you know, as you start to think about building a legacy, if you, if you're not really planning on being there for the long, long haul, you're much less likely to take long-term risk. And that's something that he views as a strategic advantage for Google, is that he and

Sergey planned to be there for a very long time, and therefore they can invest in projects that may take 10 or 15 or 20 years to kind of harvest. So long-term stock exchange is really an effort to try to solve for just that. But I think it's one piece in an overall puzzle that's going to require guise. government is going to require investors. It's going to require a bunch of different puzzle pieces in order to work. Hey, everyone. Patrick here again. To find more episodes of Investors like the best, go to investorfieldguide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at investorfield guide.com forward slash book club. After you sign up, you'll receive a full

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