This Week in Startups - StoneAlgo’s Devin Jones on “Zillow for diamonds” + Mar Hershenson on the art of picking | E1766

Episode Date: June 21, 2023

This Week in Startups is presented by: iConnections is a platform to connect and meet with elite capital allocators through their online platform and bespoke events. The first 25 VC funds to sign up for iConnections Miami 2024 event in January of next year will receive a 20% discount! Head to iConnections.io/twist to sign up today! Crowdbotics. Great ideas can change the world, and Crowdbotics is the fastest way to turn those ideas into code. Get a free scoping session for your next big app idea at crowdbotics.com/twist. Vanta. Compliance and security shouldn't be a deal-breaker for startups to win new business. Vanta makes it easy for companies to get a SOC 2 report fast. TWiST listeners can get $1,000 off for a limited time at vanta.com/twist. * Today’s show: First, StoneAlgo CEO Devin Jones joins Jason for a jam session on scaling his startup, which is building “Zillow for diamonds” (4:38). Then, Mar Hershenson gives a presentation on “The Art of Picking.” (38:19) Mar’s talk was recorded live at LAUNCH Angel Summit. * Follow StoneAlgo: https://twitter.com/stonealgo Follow Mar: https://twitter.com/MarHershenson * Time stamps: (0:00) Cold intros DO work! (1:30) Jason explains what LAUNCH looks for in startup investments (4:38) Jason intros StoneAlgo CEO Devin Jones, who breaks down his startup: “Zillow for Diamonds” (14:27) iConnections - Get 20% off iConnections Miami 2024 event at http://iconnections.io/twist (15:58) Bootstrapping StoneAlgo as a side project, never underestimating categories, understanding the diamond market (26:10) Crowdbotics - Get a free scoping session for your next big app idea at crowdbotics.com/twist (27:37) Capital efficiency, frugality, how Devin scored an investment off of a cold email (37:13) Vanta - Get $1000 off your SOC 2 at https://vanta.com/twist (38:19) Pear VC’s Mar Hershenson gives a talk on “The Art of Picking” live from LAUNCH Angel Summit * Read LAUNCH Fund 4 Deal Memo: https://www.launch.co/four Apply for Funding: https://www.launch.co/apply Buy ANGEL: https://www.angelthebook.com Great recent interviews: Steve Huffman, Brian Chesky, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland, PrayingForExits, Jenny Lefcourt Check out Jason’s suite of newsletters: https://substack.com/@calacanis * Follow Jason: Twitter: https://twitter.com/jason Instagram: https://www.instagram.com/jason LinkedIn: https://www.linkedin.com/in/jasoncalacanis * Follow TWiST: Substack: https://twistartups.substack.com Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin * Subscribe to the Founder University Podcast: https://www.founder.university/podcast

It was actually through finding out about launch from All In. And then through looking you guys up on Crunchbase and seeing how active you were in this stage of investment and make my own spreadsheets, obviously, to kind of like qualify who are the VCs that were going to be interesting to us and who is the likeliest to be interested in us. And I cold introed myself through your website. So anybody that's looking for funding, it. cold intros can work for sure. It worked for us at least. This week in startups is brought to you by, IConnections is a platform to connect and meet with elite capital allocators through their online platform and bespoke events.

The first 25 VC funds to sign up for IConnections Miami 2024 event in January of next year will receive a 20% discount. Head to iConnections.io slash twist to sign up today. crowdbotics great ideas can change the world and crowdbotics is the fastest way to turn those ideas into code get a free scoping session for your next big app idea at crowdbotics dot com slash twist and vanta compliance and security shouldn't be a deal breaker for startups to win new business vanta makes it easy for companies to get a sock to report fast twist listeners can get $1,000 off for a limited time at advantage.com slash twist. All right, everybody, welcome back to this week in startups. One of the things I'm trying to do here is tell you how I make my investment decisions. Now, why is that important?

Well, there's a lot of angel investors and venture capitalists and seed funds and accelerators who listen to this week in startups. Why do they listen to this week in startups? Well, five days a week, six days a week, we talk about startup companies, and sometimes their startups are on the pod or a venture capitalist or a technologist. that they appreciate some of the pod so they tune in. Some people listen every day. Some people hunt and pack episodes.

But what's really important, I think, when you're an investor, is to share the companies that you're placing bets on. Why is that important? Well, if I'm placing a bet, it means I have super high conviction. Just to give you a little background on our fund, it's called launch. I've had three, and I'm now on my fourth venture fund. The first fund was $10 million, second was 11, third was 44, and we're currently raising launch fund for.

You want to read my strategy. I share my strategy publicly. Launch.com slash memo. Launch. com slash memo. You can literally read how I think about early stage investment. Why would I do this? Why would I share all of my secrets and my strategy?

Pretty simple. In the early stage, none of us are in competition with each other. We're not in competition. I'm not in competition with Y Combinator. They're not in competition with us. Pair VC, Trust Fund, Sophia Amorosa's new fund. none of us are in competition. We're all collaborating. Most early-stage startups are going to do three, four, five rounds, including and up to their Series A. If they do five rounds up to and including their Series A, they're going to probably have somewhere between five and 25 investors in each round. There'll be some duplication there, but there's probably 40, 50 people on the cap table by the time you complete your Series A. If that's the case, if I can't be one of those 40 or 50 people, well then my reputation is garbage

and I need to quit and not be an investor. That's just personally how I feel. So therefore I share everything we do. I share our thinking. I share how we come to decisions. One of the ways we come to decisions on investing in companies

is that we look for builder founders and we also love marketplaces. We have a big five category. It used to be called the big four. What's the big four in our world? Marketplace is FinTech. B2B subscription, aka SaaS companies,

and then consumer, either subscription or ad-based. We added AI as our fifth focus topic, so we have a big five internally. Our big five, our fifth used to be climate. We did that for 14 months. No offense to the climate community.

Couldn't find great deals there. Most of the deals were overpriced. The traction was low. They had low gross margins. So I'm absolutely thrilled to be an LP and Chris Saka's fund and some of the other ones, but in talking to him and other folks, in the space, they confirmed

that it's really hard to be a climate investor. So that's how we make our decisions. We look for builder founders. We look for early traction. And we never underestimate anyone. When I saw our founder's company, gone through maybe two meetings

with our firm, maybe even three, I said, this is a brilliant idea. What's the brilliant idea? It's called Stone Algo. S-T-O-N-E-A-L-G-O. Stone-Algo is a marketplace, essentially. of diamonds. You're looking for a diamond. You are scared that you're going to get ripped off. You need some source of truth. It's a major considered purchase. And you know, you have a lot of different people

selling them. So you want to aggregate them in one place. Well, that's exactly what Devin Jones. And his co-founder did with Stone Algo. So welcome to the program. And I am an investor. I'm very proud to say now in Stone Algo. Welcome to the program, Devin. Thank you, Jason. Thanks for having me. So it's a little long intro there because I'm trying to educate people on why we're talking about our portfolio companies because I really want to explain why we make our decisions. Tell me about how you came up with the idea for Stone Algo and how you built it and what the traction's been like in the early days. Yeah, so you gave a good description of the company. We view ourselves as being like Zillow for diamonds.

So we're not only an aggregator, but we're also building tools that, layer on top of that information that help people make a more informed purchase. So in the same way that Zillow built a Zestimate, our kind of core feature in the early days was our fair price estimate for diamonds. And so while we aggregate two million diamonds a day and we get live daily price updates from the jewelers we work with, we're also turning that information into useful insights. So we use it to predict the price of any diamond, even diamonds that we haven't seen before. The idea started as a solution to my own problem. So when I was purchasing my wife's engagement ring, I was looking for a product like this.

I was trying to find some semblance of confidence in what the fair price of my diamond purchase should be. And there wasn't anything out there. And so I ended up kind of patching it together myself in the early days by just going to various jewelers websites, looking at their pricing, and kind of getting like a gut feel for what pricing should be, which obviously is in a scientific method. But I was fortunate enough to be working with my co-founder today, Jason Modica. And Jay is the tech whiz. He's the CTO. And together we developed a pricing algorithm originally in Microsoft Excel. This is back in 2016. And then we taught ourselves Python. And that was how we kind of made the jump from a couple of finance guys who were used to work

in Excel sheets to a couple of internet guys who were able to publish something that could be updated in real time and accessible to tens of thousands of people every month. And this is one of the key things we look for, builder founders. Why Combinators known for having developer founders, they like to have developer founders. We like builder founders where our aperture might be a little bit wider than Paul Graham's thesis. He likes to have two developers, three developers. I'm okay with like a growth hacker, product manager, UX designer and developer. I'll put all those into the builder category writ large, but you built the product yourself, which means you didn't outsource it.

You got in there and you figured out how to make this happen. Now, tell me a bit about the business model here. We understand you're aggregating all this information. Then you're trying to normalize it and then create tools on top of it. can make an informed decision. Okay, great. So you're trying to build that trust. But this takes work, this takes people. You've got to figure out a way to make money from this. So if it's a marketplace, most people would think, okay, people either pay to list themselves on the marketplace or you take a percentage of the sale. Tell us how you think about monetization here and keeping that

monetization in the best interest of everybody on the marketplace. Yeah. So the business models evolved over time. And I think we were smart in the way that we started in the early days. When you don't have traffic and you don't have, you know, much to offer to the, to the partners that are listing on your site, you have to wear a risk. Like, you have to do some sort of a performance-based system to give them confidence that it's worth their time to list their product on your site. So day one, we were doing basically affiliate marketing. We agreed to do performance-based affiliate marketing, which for your audience, it means that we would send traffic from our site to an online jeweler's website. If that person was properly tracked by cookies that were stored in their browser by a third-party system, known as an affiliate marketing website, and that person converted into a sale for the jeweler that we sent that traffic to, we might be eligible for a commission on that sale.

And that's how we got the ball rolling. But from a cash flow standpoint, that's a terrible business model. We were constantly collecting like T plus 75, which meant that scaling was difficult. We couldn't pay to play. We couldn't pay to drive at collecting T.H plus 75. Sure. So sorry. You know, like I said, finance guy.

So 75 days in arrears, right? So we're sending traffic to an online jeweler and somebody buys a diamond on January 1st. then we're not going to collect until March 15th is when we get paid. Best case. So, for example, if we paid on Google Ads to drive that click, we are bearing the cost of that click for two and a half months. And it's brutal. And so it made scaling really, really difficult.

Ultimately, we were able to drive a lot of growth. We were forced to drive a lot of growth organically. And the way that we did that was by building, products that were useful, that were differentiated in the marketplace, and that ranked high in Google organically for keywords that people were already searching for. So we recognize that people were looking for things like diamond price calculators in the same way that Zillow and truly are recognized that people were looking for mortgage rate calculators, right?

And there just wasn't a product out there, tools. And I think that this is an important point for anybody who's super early stage that's trying to go from zero to one, especially with. With LLMs, large language models, right? With AI, we're already seeing if you're in Google's sort of like test flight of their product, Google Labs, you get this like AI description written at the top of Google search results. And this is specifically for answerable questions, right? Like, who's the queen of England? Who was the queen of England in XIA? Right? That's a known thing that's factual information. It can be answered by an AI. That used to be something that

bloggers were competing for to get to the first rank in Google. Now they're kind of stuffed underneath this LLM. And so it's going to be very difficult to drive content-related traffic through undifferentiated or commoditized information, right? But if you develop a product that is unique in the market that leverages the information that you have that's unique to you. So if you have unique datasets or if you can combine two datasets that are separate, they may even be publicly available and combine them in some unique or novel way that nobody's thought

about yet and build a product around that that people actually search for that a large language model is not just going to give a text answer to. That's a great way to drive organic traffic to your site. And people will scroll past the LLM's response to that or the LLM may not even try to give a response because Google is training its algorithms to identify situations where the LLM is not the preferred mode of communication with the user. And so that's how we kind of got the site rolling was by developing these products that people found useful, leveraging the information we were getting from the affiliate agreements that we had. And we were able to drive enough traffic that we had leverage in our conversations with our partners. And then we were able to convert them

over to our own business model, which is a cost-per-click model. And it looks very much like Google ads. Super simple. They understand it. You know, pay a couple of bucks every time you send somebody over. You know this is quality traffic because the only way for them to get to your site is they would have had to done a search. And when they land on your site, you're going to have some information about them unless

they're using like a VPN and the brave browser or something. You're going to get some and that's like whatever, less than 5% of people. So you're going to get some good data on that person and know their providence. And you can just figure it out, right? You can figure out the value of it. If it works, it works. If it doesn't, it doesn't. The average diamond purchase is what in America?

Yeah, in America today, it is probably around $6,500 is like the average engagement ring price. And so the diamond is going to make up the majority of that purchase value, probably about $5,500 to $6,000 of that purchase value. Feeling pretty good about my three-carat asher cut that I got my wife on Blue Nile, that was like $20K. put me 10k in debt. That was a, that was a tough decision back in that time. I was literally had no money

and I just went like, it was 15K in debt at the time. Three cut ash are pretty good. Pretty good poll for somebody with no cash in the bag. That's pretty good. I think by any standard that would be considered

a pretty large diamond and a pretty good poll. Pretty good pull, I think. Listen, when you're a fund manager like me trying to raise money for your fund, it's not an easy task.

Let's face it. there is a new way for you to find elite institutional LPs and its I Connections. And this platform, uh, which is an app online in person, it allows you to meet the most elite capital allocators. I won't tell you the names, but I was able to get in touch with and meet with beep, beep, beep, three of the major ones that I was looking to me with all on I connections. These are the biggest LPs in the world. Endowments, foundations, sovereign wealth funds, fund of funds, etc. I connections is specifically built to connect the global network of capital allocators, LPs, with a diverse range of fund managers, GPs, general partners like me. And they do this two ways.

They got the I connections platform and then they do the bespoke events. The events are amazing. And you have an LP meeting schedule inside the app. You can share documents. You get a database of all of these contexts and you get access to these world class events which have exclusive content like me. I am over the moon with I connections. I love it. And this is like the product I was always looking for, and if you're a fund manager of any kind, you can sign up for IConnections. dot I.O. slash twist. That's right. IConnections.com slash twist. First 25 funds that sign up for IConnections, Miami in 2024 in January of next year will receive a 20% discount. This is the largest capital allocator intro event in the world with trillions in LPMoney represented. Sign up at iConnections.com.

and thanks again to my friends at eye connections. So you haven't raised a ton of money for this company. You kind of bootstrapped it mostly? Sweat equity. Yeah, we, yeah, definitely. I mean, early days for the first couple years, it was Jay and I just like working our butts off on side gigs during the day to keep lights on at home and then hacking away at night as late as it would take,

teaching ourselves to code, building the product. I mean, it's come a long way since then. But yeah, we bootstrapped it for years and raised a very small amount of money from a couple trusted advisors over the past five years. And now we're fortunate enough to have you coming on board, which is just, that's a huge pull for us. Oh, yeah. Well, you know, we like to find Diamond in the Ruffs, so to speak.

we find founders who built a business, a real business, cash generating business that some other investors might think, huh, not sexy or maybe it's obvious. A lot of times, you know, obvious things don't exist in the world, and they just need to be executed at an absurdly high level. And so when I looked, and I'll just be candid with you, I looked at it and said, that's got to exist.

And then I did my research, I had my team do the research and was like, nope, this doesn't exist. It really, and it doesn't exist at the level of fidelity, clarity, if you will, you know, that you built it. And so when we see product excellence, and I think this is important for every investor out there, especially angels and seed stage investors, don't underestimate anyone and don't underestimate a category. Google was the 15th search engine. You know, Tesla was the 10th electric vehicle. there's a lot of times it's the 10th or 20th person

who tries to solve a problem who actually unlocks the door, Facebook being perhaps the best example we've ever seen. He just basically copied Friendster, LinkedIn, and Myspace and said, how could I make this simpler

and keep the servers up running? Because at the time, Frenster and Myspace couldn't keep their servers up and Facebook ran away with it just by being on the iPod. Even Steve Jobs in the iPod, that was far from the first MP3

player, but he just had a level of execution that was so much higher than everybody else. And he was, he was in the details and they were doing the hardware and the software. And yeah, I agree with you completely. I think that's what we're trying to do as well. Just go as deep as we can on this, on this topic. Yeah. I had so many of those early MP3 players. Like, I guess it was creative labs.

Had a really good one. Yeah. It was a, yeah, the Rio. I had the Rio. That was a really amazing one. You could put like the Zune, 30 songs. well the Zune yeah that had their own and even before MP3s

Sony had the minidisc which was essentially because it had DRM on it it was kind of different but yeah Compact came up with Compaq had a mini computer like a handheld computer

it was called the IPAC I think that was part MP3 player part like control your home it was really really interesting let's talk about diamonds for a second the diamond market how you say diamonds people got a lot of things that come

of mine, blood diamonds, fair trade diamonds, fake diamonds, and synthetic diamonds. So many different kind of things get triggered in people. But let's start with something very basic. What is the diamond supply chain in 23? I understand, you know, we find these in certain geographies more than others, and there's some concerns about geopolitics around those and human rights. And then I think they all go to, if I'm correct, India or Pakistan and they just have the best centers in the world for polishing them or cleaning them up. I don't know if that's true. And then somehow, I know growing up in New York, they wind up on 47th Street in the Diamond District. I believe it's 47th. You correct me if I'm wrong. That's correct. So that's my understanding of the trip of diamonds. Where am I

correct? Where am I wrong? No, you're, I mean, you are mostly correct. So the supply chain for, Let's distinguish between the two types of diamonds, really. There's natural and then there's now lab grown. And then you also have synthetics, which would be non-diamond. So that would be like a CZ, cubic zirconia, which is not a diamond. It's a different material. Diamond is a it's a compressed carbon, right? It's a type of mineral.

So natural diamonds go through a supply chain of first being mined from the earth, like you said in specific countries around the world that have rich diamond deposits. They are then cut and polished, typically in India. And they are then... How did that happen? How did India become the place where diamonds get polished? As opposed to, like, at the source or on 47th Street? That's a great question. I'm not 100% sure for the diamond trade exactly at what point it made that jump, but there's been a rich history of of gemstones in that area. for a very long time, whether it's rubies or other types of gemstones. And so the cutting and polishing techniques over there probably were ready for the diamond

market when it came to pass. Um, but, uh, you brought up 47th Street too, because I am I wrong? It's like Africa and Russia major diamond sources and India. I think it's kind of like in between those two places. Like triangulating between those two? Yeah, I'm just taking a guess here. Like, is there some geographical reason that that that I mean, obviously, having affordable labor and, you know, a labor force that is hardworking and detail-oriented, and that's affordable.

And that can work long hours doing something that's very precision-based. I think that's kind of, but Russia, Botswana, Congo, not sure where else diamonds come from, but yeah, those seem to be the big one. There's some even in Canada. Oh, yeah, I didn't know that. I didn't know. Yeah, it's, you know, but, but you nailed the big. big ones. And in the U.S., after they've been cut and polished, about 90% of the diamonds that enter to this country come in through 47th Street. And 47th Street, yeah, and as you know,

as in New York, it's hilarious. I'm also based in New York, as you know. So we're not far from 47th Street right now. 47th Street isn't like, it's not 47th Street running the width of Manhattan that we're talking about. It's two blocks. It's between sixth and Madison? Or is it? It's really fifth to six. Yeah, it's really one block and it is like another world. Like, it is like no other part in New York, truly. If you've seen uncut gems, you can get a really interesting peek into it. Sure. It's, it's Hesida, a city Jew's run most of it, I think. I knew this because I lived in Brooklyn and there were, I remember when I worked in Rockefeller Center area, I'd see all these buses, uh, like school buses and,

30 Hasidic guys would get 100 off the buses every day. What's going on here? I was like, oh, yeah, they're working in the Diamond District and they're going back to Brooklyn. I was like, can I get a ride? I'm going back to Brooklyn too. I've got to take this subway. It's an interesting place and it's come a long way. Like the Diamond companies, the Labgrown companies out of India are setting up shop

there in the U.S. Oh, wow. For distribution purposes and business purposes. The GIA is in a beautiful new building in the middle of the blog. that is like, reminds me of when I worked at Bank of America at one Bryant Park. It's, it's very impressive. GIA does the grading. Is that the grading organization? Correct. There's a few grading organizations. The GIA being the largest and the most well known. They've done natural diamonds forever. They've started to do lab grown diamonds as well now. And I think from like the

consumer standpoint, that's really where like the confidence comes in. You have an organization that has credibility that's verifying that these are authentic, that these are a real natural diamond or real lab diamond, they'll laser inscribe them with a unique certificate identification number along the girdle, which is like the part of the diamond that separates the top and the bottom. It's like a flat edge along the side of the diamond. And you can actually, you can look at it with a magnifying glass and verify that your diamond matches the certificate that you believe it to be. And then there's a number of If you are coding the diamond, that you can...

Like a license plate number. Or your street address. How many diamonds have that? Is that like, would you ever buy a diamond that didn't have it now? I personally wouldn't just because there's not really a reason to, to not buy a diamond that doesn't have that inscription. And it's a, you know, on our website, we actually can can accept that identification number, query the GIA via their API.

And then even if, so like all the technology we built for the. consumer. We've also built it so that people like you or or me, people who own a diamond aren't even shopping, we can actually verify like you could go on our site right now and check what's your diamond worth today. That'd be amazing to do. I wonder if does it look at you're smaller than it weighs. I wonder if diamonds 20 years ago had them. Would Blue Niles diamonds? I bought it on Blue Nile. What a great experience that was. Blue Niles would all have those from 15, 20 years ago. That's great. Yeah. My guess is that 15, 20 years ago, they were probably exclusively selling GIA and maybe AGS, but we have connections to

many grading agencies. And we use that addition, we pull a ton of information. We use that information to generate our cut score, which for round diamonds predicts how sparkly they'll be. We use it to pull in information about imperfections in the diamond that might concern people, might be a reason not to and then we also use it to pull in the information necessary to produce a very accurate price estimate for the diamond. We all know the one thing that separates great startups from the good ones is product velocity. What does it mean?

Product velocity. Fancy term, right? You've got your product and you have velocity. Speed. The speed in which your product improves. So can you ship updates? Can you release new features? Can you do bug fixes?

Can you iterate on the interface? Can you solve problems for your customers? and can you do it quickly because you're not alone. You have competitors and your customers have choices. They may solve their problems by writing their own custom code or they might use your solution. This is what startups are about. How fast can you get that product velocity going? And so, you know, how do you supercharge it?

Everybody says, okay, yeah, we want to go faster, but you got to go faster intelligently. And crowdbotics is going to help you do that. They're your CTO as a service. Basically, they provide you with the most optimal architecture to get your product to market as fast as possible. You'll have access to an on-demand product manager and developer talent, and they will help get your app into production 10 times faster than conventional development. CrowdBotics can work with your in-house dev team, or you can just have them work independently, and you own all the IP, you own all the source code. Let the folks at CrowdBotix supercharge your product

velocity today, no more waiting. Get a free build plan at CrowdBotics.com slash Twist. That's a $499 value just for the Twist listeners. You get that for free. That's C-R-O-W-D, B-O-O-T-E, I-C-I-C-S dot com slash twist for a free build plan. One of the things I love about talking to you, and this is one of the reasons we wanted to make the investment, you have such a deep knowledge of the space that you've gained over the years of doing this, and you have a unique take on where this is all going. And a lot of times people who are in the industry have accumulated a bunch of biases along with their knowledge, and so they don't see the opportunities.

I think, oh, this will never work, or that can't work, or this is how they the industry works, therefore, you know, Uber and Lyft or DoorDash and Postmates, that'll never work. I've been in the delivery business for 20 years. I've been in the livery business for 20 years. I've been in the diamond business for 20 years. You're going to fail. You have a deep knowledge, but also you're coming with fresh eyes to a certain extent. And that was another thing that attracted us to investment in Stone Algo. So thanks so much for coming on the program. Continued success. And let's catch up in a year or two. Come back on the program. After you've triple to revenue. So now I've set a goal for you. Whatever revenue is right now, triple

revenue and come back. And I'm really excited to start this relationship. And I'm absolutely certain you'll take the investment and deploy it in a capital efficient manner. That's another thing we look for in founders. We love capital efficiency. So when we start your business, we're like, wow, you've really accomplished a lot with a small amount of money. And that is, that frugality is absolutely essential in startups. Now, at some point, you'll start. cooking with oil and you'll be tripling, quadrupling revenue. Somebody's going to give you some bucket load of cash and some giant series A or series B. And you got to keep that with you.

Don't lose that frugality, Devin, please. I've seen a lot of founders when they get that big check. Then they start working about the duck work in their new offices, the front desk. They start arguing over which chairs that are going to buy with their co-founder, who gets the corner office, and, you know, spending some ungodly amount of money on a goddamn off-site meeting or a board meeting and then they just do stupid stuff with the money, every dollar's got to go into your team or the product. Yeah, I think that's the key.

So, yeah, I completely agree. Yeah, continued success. Very excited to make the investment. Thanks for including us. And triple that revenue, all right? This is brass tax here. Startups are meant to grow. And when you take investment, that's the expectation.

So communicate well with the investors. and, you know, let's just keep growing the company in a reasonable fashion. We're not looking for, you know, growth should be sustainable. It's like what I'll say for the investors who are listening in and for the founders. Sustainable growth always best. No unnatural acts to grow the top line and screw up the bottom line. But you know that because you were a finance guy. Yeah?

Exactly. Yep. Now, we're on the same page. 100%. All right. Let's wrap. for me? No, I think this was amazing.

Thanks for having me on and thanks for investing as well. Oh, yeah. Well, it's my pleasure. I mean, I think I was literally had a phone call today with a prospective employee and I said, we are in a service-based business and we have to match the effort of our founders. And we pick founders based on their effort. So the great paradox of what we do is we look for the hardest working, most dogged investors, I'm sorry, founders, which then makes us.

have to be the most dogged and hardest working investors. And if we're not, the founders are going to call us out on it. Hey, we're working really hard over here. And, you know, you're skiing 40 days a year. And then I go, oh, I'm skiing for 90 minutes, 40 days a year. Just to be clear, I'm available to you any time. And you can come skiing with me as well. 40 days. Still 40 days to be clear. I mean, that was two years ago, my record. Last year was this year was only 36. But I'm 52 and I made my money already. I'm just trying to get, you ski or no. Yeah, I did. I did a lot more before I became a founder. Okay. All right. Well, listen, I'm looking forward to getting back to in the future. Well, I'm doing a, it's interesting you say that. I'm

picking some of my CEOs and founders. We're going to do a founder ski trip at my, my incredible house. And then you guys can come see my incredible ski house. I don't know if you're, are you independently wealthy coming into the startup? No, not independent. No, no trust fund. No, no trust fund here. So that's what I'm doing. I'm going to bring like 10 of my founders to my incredible ski house and show you what you're working towards. It took me 50 years to get it. Yeah, sounds good.

Come skiing with us this season. Look forward to having a fire lit under my butt by the house that you invite us to. Exactly. It's pretty spectacular, I have to say. I'm pretty proud of it. Listen, continued success, all kidding aside, it's great to have just found you randomly.

How did you find, did you ping us or do we hunt you? Yeah, actually, so it's funny. I was getting, I don't have a strong, I didn't have a strong network in terms of, you know, VCs and investors coming into this, but I did have a friend who's a CEO who was actually a direct competitor of ours and was super well funded, had one of the biggest VCs in the country as his lead investor. And we were going head to head and we sat down and broke bread. And he was like, look, this isn't working for us. You guys are scrubs. and small, you're not going to die. We can't keep on this path at like the burn rate we have.

You know, would you consider coming over or, you know, running the diamond operation for us? And I was like, look, we're, we're doing this this way. Like I put all my eggs in this basket. This is my thing. I'm doing it my way. And we ended up just becoming great friends. And he was advising me through this process and and connected me with some really big VCs and gave the warm intros and those those got us far but it was actually through finding out about launch from all in and then through through looking you guys up on crunch base and seeing how active you were in this stage of investment and and make my own spreadsheets obviously to kind of like qualify who who are who are the VCs that were going to be interesting to us and who is the

likeliest to be interested in us. And I cold introed myself through your website. So to anybody that's looking for funding, it cold intros can work for sure. It worked for us at least. To my team, clip this. Number one, shout out to my partners on All In for helping raise awareness for our early stage investments. Great job.

And then our crunch base profile, we ignored it for a couple of years. And then I told somebody, we got to get this data correct. We have so many investments. we're like ranked way down. Please make sure all the data is correct on a regular basis. And I hope we're doing that. But, um,

you know, we love people reaching out to us. Launch. com slash apply. Launch.com slash apply. And you will get a response from us in under 48 hours. And in all likelihood, you'll probably half the people who apply if there,

it's not just an idea. And if it's an idea, we send you to founding university. But we'll probably get on the phone if you've got a reasonable venture scale business. to look at and we try to do it. I told my team, I want to reply to founders within 48 hours and I want them to get a link to a group calendar and I want them on the phone with somebody in our firm in under

a week, hopefully in a couple of days. What was our response time? Like, do you remember? It was fast. It was fast and your process was good, you know, from the first call with Gigny all the way to the last call with you. You know, it was very quick. Yeah.

couldn't speak more highly about it. This is something I've worked the last year on with Mike Savino from our company, the president, on how can we be the fastest response time of any early stage venture firm? I think speed matters because I think if we have a sense of urgency, the founders will pick up on our sense of urgency. And, you know, because I know you're moving fast. And if we're slow and meandering,

now we want to make a thoughtful decision. That doesn't mean we're going to be like, oh, here's some money. I mean, we'll do proper diligence. and we want to do three or four meetings. You probably met with at least three or, probably did at least three or four meetings with us. At least, yeah.

At least. So we want to be as thoughtful as a Series A investment, even though we're putting in a seed stage check of typically $250 to a million. So, you know, and a lot of times the constraint is how much the founder wants to raise. So anyway, listen, great to get to know you. I'm so excited that we're starting this relationship. I think this business is going to be a unicorn. I'll say it right now.

I think you're going to get to $100 million in revenue. And I think you're going to do it with two rounds of funding. I don't think you're going to need a lot of funding. I know scrappy when I see it. Now, you might choose to take a third or fourth round of funding, pull some secondary shares off and buy the apartment. No, you know, in Manhattan. No ski houses.

Okay, one house. Secondary. One house with secondary. If secondary gets too big and it's two houses, that's too many. One nice apartment in Manhattan. That's the goal for a, that's the goal for the secondary. Anyway, listen, I can talk to you for hours. congratulations on the great success.

And I'm just thrilled that you let us join the cap table. And we're going to work hard for you. Do not be bashful. You got my cell phone number. You got Mike's cell phone number. You got Jignis. You got everybody's personal phone number. You got a problem.

We'll help you find a solution. You call us anytime 24-7. We're here for you. Thanks, Jason. All right, I appreciate it. We'll talk soon. Cheers now. If you're a SaaS or services company that stores customer data in the cloud,

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Oh, my Lord, what a great interview. I'm so excited about all these investments we're making. We're trying to do one or two investments a week. We want to be the most active early stage investor in Silicon Valley, right behind and Y Combinator and ahead of everybody else. So next up on the program, one of the great early stage venture firms that we work with a lot, Pairr VC. Marr Hershenson is just a great speaker.

She's candid. She's no BS. She's hard working like us. That's why our two firms collaborate on a lot of startups. And she did a great presentation at my Angel Summit. This is a yearly event for 100 capital allocators. It grew to 120 this time. Got a little too big.

And she did this presentation on the Arsulmuchamp. of picking. And she breaks down what goes into spotting talent, not only in startups, but the music industry. And she really talks about joining the scene and figuring out where the heat is. She's an amazing investor. And stick with us. You're going to want to pen and paper, take notes on this one. If you put this on 2x speed, you're going to want to slow it down to one X speed and take notes with Marr. If you're a founder or a capital allocator, probably watch this with your team and have a discussion about it because she's that smart. All right, she's that smart and insightful.

And we'll see you all next time on this week in startups. Marr's going to talk about the art of picking, which is certainly something we all have to do when we place these bets. So please welcome Mar. Well, thank you, Jason, for inviting me again. I'm going to talk to you about the art of picking. And before I get started, just a brief slide on pair. We're generalists. We invest cross-sectors, consumer B2B healthcare.

We're very fortunate to have partnered with founders and companies. companies like DoorDash, Gusto, Viz, etc. Okay, so I think you're all here, angel investors. We know that there's these four magic steps in investing, sourcing, picking, winning, and ultimately supporting the founders. But I am going to argue that there's only one thing that really matters, and that's the picking. And the question is, how do you become a great picker?

So I'm actually going to start talking about an industry where 5% of the professionals in that industry make a living. And only less than 0.1% actually the try make it at all. And that industry is actually the music industry. So meet this guy. His name is Clive Davis. He's one of the best music producers of all time. He was called The Man with the Golden Ear. And he produced some of the best artists in the same.

60s, 70s, 80s, 80s, and 90s. He funded artists in rock and roll, pop, country music, hip hop, anything. But he wasn't a musician. He didn't play any instruments. He was actually a lawyer, and by accident he joined Columbia Records in 1960 as the assistant to the general counsel. And eventually, he became the president of Columbia Records. And at the time, Columbia Records had this very aging portfolio of music, it was classical music, Broadway musicals, and he spent a lot of time negotiating contracts with the artists and with the writers. And he actually learned about something called rock and roll, and he thought that that was something that was worth investing in. Nobody at Columbia Records backed him up. In 1967, he had what he called his breakthrough moment. He went to the

Monterey Pop Festival in the 60s, full of 20-year-olds. He was in his late 30s. And he heard Janice Joplin and her band, Big Brother and the Holding Company play. And he said, that was riveting. So Janice Joplin was his first artist. And her record ended up becoming a gold record. Then he's next to artists. We're equally impressive.

He signed up Blood, Sweat, and Tears in 1968. This is his second group. And again, this guy's won in Grammy. They were in the top number one for eight weeks. And his third artist was Carlos Santana, which again, had a very successful record. So, you know, after he got this three artists, he actually had what I come to call the Halo effect.

And a lot of people sought him out. They wanted to work with him because he, knew how to get people at the top of the billboard, right? So he actually represented and produced Bruce Springsteen with New Houston, or Ith Franklin, Billy Jove. Anyways, you go look it up. It's anybody that's anybody. And the amazing thing is that he did this for four decades. So there are two things that he did in this four decades. One is he is a beast at working. He has an incredibly work ethic. So he tweeted that in 2013. Work ethic is the idea, if you have six, 16-hour days, it doesn't intimidate you.

I think if you know Jason, he probably agrees with that. And the second thing, which I find even more impressive, is that every day he walks into his office, and in the morning he listens to the top 20 songs on the billboard. And he does that because he wants to keep up to date, right? That's the cool thing of somebody that wants to learn. And remember, this guy was incredibly successful, and he still does this to this day.

He's 91. one. Awesome. So how did he have all these repeated success over the last four decades? Because I'm an engineer, I like to think in blocks. So this is my four steps for success for Clive Davis. The first thing is he had an insight and he was there, right? He has his insight about rock and roll and he was at the right place at the right time. Then he had some early wins. He did. He had the halo effect. And lastly, He had paranoia. So paranoia is the combination of angst that forces you to work hard and constantly doubting yourself. And ultimately, you know, that made him be in more of the right places, right?

So that's Clive Davis. Right, what does this have to do with venture capital? That's a big question. Let's start with some numbers on venture capital. Very similar, but worse than music, only 0.7% of all companies that starred actually raise a seed. And a lot of those have failed, right? In fact, less than 0.003% of companies will end up being unicorns. So it's actually really, really hard business.

It's not only hard for founders. It's actually really hard for venture capitalists, believe it or not. I'm going to give you, this are numbers that actually surprised me. When I looked at them, what's the DPI of the upper quartile of venture capital? And I'm going to go with the decade that followed the biggest platform change ever, which was the web. So for the first seven years, you will see that the DPI of the upper quartile funds was below two. That means it's really hard to return venture money, even for the best people, right? The next seven years were actually a little better, but not much better.

And maybe you can discount 2012 and 13. We're not quite done with those vintages, but still pretty hard, right? It's not only hard. It's actually, if you compare not just ROI, but IRR for early stage venture, this is data from Burgess from 1983 to 2017, but, you know, I bet it's the same if you can see the last five years. I think early stage venture is the only asset class where the mean and the median are really, really far apart, right? Why? Because there's only a few winners that really make it. And early stage, it's actually even harder. This data, sadly, I couldn't find it for Just Seed,

includes C to Series B. If you're in the audience, you know Series B is really late. So it's probably more, you know, it's probably even worse than what it shows here. Okay? All right. So the question is, are there any Clive Davises in our industry?

This is a really hard question. So I actually had to ask Chad GPT. and it did give me an answer. This is the answer that Chad GPT gave me, which is actually really interesting. It gave me six names. Five of them are humans, and one of them is a fund.

So John Doer, Mark Andreessen, Bill Gurley, binocco's La Peter Thiel, and Sequoia Capital. The nice thing with Chad GPT is you can have a conversation. So I asked them, what do you mean by Sequoia Capital? And then it pointed out Doug Leone, Don Valentine,

and Mike Moritz, okay? And this folks invests in seed, but they also invest in growth. And it's much easier, as you saw in my previous slide, to do that. Okay? So, and in order to plug in my partner, Peshman, I said, who is the best seed investor? And this is my partner Pesman. He was a sports journalist and a rug salesman, then an angel investor, and ultimately a VC, his number one on the seed on the Midas list, and he's not the top of the Midas list,

incredibly successful. And the question is, does this framework work for these people? All right? So let's try it out with Peshman first. This is Peshman. He was to say, he looks very young. And he was a, you know, rugs salesman in Palo Alto on University Avenue. It's very easy to discount somebody with that background. Was he there? He was there. He was in at University Avenue in Palo Alto, and he was selling rugs to people like Dad Leone and Andy Betelstein, Lumontulli, all these famous people. And he actually got started because he was at Doug's home, and he told Doug he was an angel investor, and Doug believed him. So that's how he got started. And he had some early wins. You know, he got danger, got sold to Microsoft for $500 million,

Lending Club, Dropbox. And after he had those early wins, he managed the get some halo. So he got on to Forbes. They wrote an article. He wasn't a VC at the time. He was an angel investor, but he was a rug dealer. And then the question is, with that success, more stuff came. But the question is, is he paranoid? And I have his partner for the last decade. Every Sunday he will call me and tell me what we're doing wrong and what else we have to be working on and I'm not working hard enough. So I would say he's paranoid. But I'll tell you, just thinking of a story to reflect on his paranoia. So I will tell you this one.

We started in 2013. We run an accelerator. It's called PairX. And in 2016, I went to him and I was like, oh, my gosh, this is great. Nobody's working here. It's too early. People don't care. He's like, we had to do something else because everyone is going to have an accelerator.

And I actually looked it up in the top firms, Sequoia, Excel, and Driesen, everybody. has an accelerator. So even when you're successful, you still have to be thinking about that. Okay. One more. We'll do Sequoia. It's an incredible firm, right? They have out of the five, one trillion dollar companies, they see that three of them. I mean, the metric speaks for itself, right? Apple, Vidia, and Google, does the framework work for them. I don't know. Well, inside them being there, Sequoia was started by Don Valentine, it looks really young, there. Don was a head of sales and marketing at Fairchild Semiconductor. Fairchild was really, truly the first startup in the Valley, and then he was the founding VP of Sales and National,

and he was intimately familiar with the semiconductor industry. There was no venture at the time. There was no angel. Those words didn't exist in the vocabulary, but he started kind of backing people. And with his first fund, he backed Atari and Apple. And after that, you know, he backed all these amazing companies that, you know, there may not be on their pages right now. Electronic Arts, LSI Logic. I'd like to put linear tech because this is where I got my first internship. I was a circuit designer for many years, and it was a really successful company. But his halo today, when you talk about Sequoia, it would be undeniable that they have an incredible halo effect.

But perhaps something that you guys won't know, it was the same as Kleiner Perkins 25 years ago. Actually, they want Google because Larry and Sergey only wanted to raise money from two firms, Kleiner and Sequoia, right? So that halo really mattered. And it's documented. Actually, people at Harvard Business School have done a lot of research, and it turns out, and this metric will make no sense for us in the practical real world, but if you're a statistician, it makes sense. For every additional public offering and your first tenant investments, you have 8% chance of another IPO and also people in Chicago crunched to the data and realized that 45% of VC firms are likely to repeat their first quartile performance. This is actually very

different also from other asset classes. So it's an asset class where Halo and experience, you know, or success, previous success matters, which goes against all of thinking that perhaps exist in his room. Okay, Sequoia, should they be paranoid, right? I'm going to tell you a story. Peshman and I started our fun in 2013, and we went to see Doug at Sequoia, and he had just become the global managing partner, big title CEO of the firm, and he was upset.

The first thing he told us when he met us, he was like, oh, so upset. Like, what's wrong? He's like, well, I had to take down all the posters, you know, because you go into a conference room. and we have posters of all the companies that we've invested in. And I don't want our people to think that we are successful because we are not successful because our past investments, just as our future investments.

So it's an interesting thought, but this thing that people have on their walls to impress founders, actually that's the opposite effect to the people that work for you. So something to keep in mind. So let's assume, I'm going to assume that some of you have great halo and great wins, Jason. But if you have no halo and you have no wins, what do you do?

So the first thing is, like I said, have insights on be there. But I'm actually going to flip it and say that it's actually be there and develop insights. All right. So I'm going to go to that picture with the chat GPT select. Let's start with Mike Moritz. Mike Moritz was the Times San Francisco Chief Bureau, whatever. something. And Steve Jobs called him the historian of Apple. He said he were going to be our historian. He was the best reporter out there covering SF.

Bill Gurley was one of the premier technology analysts and he had covered companies like Dell, Amazon Compact, etc. He was the best at something. And, you know, I think Jason was really good at something. You know, when he started, he put out this magazine and it ended up He knows a story, but 300-page magazine, super successful. And I think the interesting thing, think of Pashemann also, he was a salesman in the rugstore. He was the best salesman. He would do like $8 million in sales a year. These people were somewhere.

It wasn't Stanford Campus and it wasn't Google, but they were really good at what they did and they were learning in the process, right? So whatever you do, there's an opportunity for you to develop an insight. That's one. Second is, if you're there, how do you go and pick the winners, right? Okay, I was actually very luckily at breakfast with somebody today who told me it was all about team. So you probably heard this, team, market, and traction. But if you asked Don Valentine, he would maybe tell you it's all about market.

So market goes first. And then some people would say, oh, I need to see traction to get into Jason's accelerator. He needs to see some traction. and some people don't care I don't care about anything but market and some people don't care about anything but team, right? So which one is right? Well, the truth is that this combination

doesn't happen randomly, right? It's very rare that it happens randomly. There's actually a strong correlation of team to market and team to traction. You will not have a top 1% CEO working in a bad market and you will not have a top 1% CEO not execute because then they wouldn't be a great team, right?

So it's correlated. I use a framework to evaluate founders that I will share with you. I think there's multiple frameworks that work. But what I try to do is listen to the founder. And you have to listen with an optimistic attitude. What does that mean? Optimistic listening means to park your ego. That's what it means.

And I'll explain to you. Optimistic means that you are not thinking why it won't work. You're not thinking, oh, I'm smarter than you, and I know exactly why you're wrong. But you're thinking, hey, what does this person know that I don't know that could result in a big company? How does this work, right? So it requires really letting go of your ego. And the second one, and it's perhaps even more important, is you should not invest in your company. You should invest in the founder's company.

Sometimes we'll listen to a pitch, and we are already thinking. thinking in our head how this could be a big company this way and this way. But the founder is not saying that. You have to listen. So both these things are really important. I ask fundamentally three questions to people, and I evaluate them on three axes. One is how much do they know about the market, the customer, what's their strategy? How do they think? I think Sequoia caused this clarity of thought. I don't know what the name is, but how do they articulate the market? How do they know? How do they know the customer. How is their thinking, right? There's an access on execution, which is can they get done? That's, you know, obviously really important. And the last axis is really about their character.

Nobody wants to word without as you probably know. And I asked three questions. One is what insights do you have that cost you to start this company? It's very open-ended. But I think, the answer to that question will tell you what type of founder you're dealing with. How will you run this company? And again, many times I ask this question and people are taken aback. Like, what do you mean? I'm like, how will you run it? And the last one is hard to answer in a question, but you're trying to come to a conclusion from how they answer the first two questions. Okay, so let's assume somebody checks my three boxes, right? You know, they know how to think, they know how to get things done. I'm actually somebody that I want to work with.

Then you have to make a decision, which in a venture lingo is gaining conviction. There's a book that I think if you haven't read, it's called Thinking Fast and Slow. It's actually, I will summarize it in one slide. There are two ways our brain makes decisions. One is based on intuition and instinct, is 95% of what we do is based on that. It's fast. We rely on our past experiences, et cetera. and there's 5% that is actually rational thinking.

It takes effort and slow, and, you know, people typically are in awe of the intuition and not the rational thinking. And at Pear, Pechman fits there, and I fit there. And I think you need both to be successful, not just one. It's not an or, like anything in our business, it's an and. And I'll tell you the story of Envidia, since it's very fashionable right now. But Jensen Huang raised money from Don Valentine, and he was not a founder. He was reading a book.

He had to go pitch Don before he had finished the book. So, of course, he goes pitches and completely botches the presentation. And Don says, you know, I'm going to give you money, despite my best judgment, because Wilf, which was the CEO of LSI Logic, told me you're a good man. But if you lose my money, I'm going to come and kill you. So that was, I guess, his best judgment. Even the best people that have rational frameworks, they're getting off script at some point.

Okay, one last secret about venture capital. This is a look at this portfolio. It's amazing. Actually has two of those $1 trillion companies. Anybody would want to have this portfolio. It's too bad. It's really the anti-portfolio of Bessemer. And I think if you go on their website,

you can read about why they decided not to invest. And this is the biggest secret of venture, which is that I think you all know that in a portfolio of, say, 100 companies, maybe five of them are really successful. Most of them fail. But what you don't know, if you actually see a lot of companies that you passed on,

and you had the opportunity to invest and you don't. And, you know, if you did, those DPIs that I showed you would be much, much, much higher. So this is a thought that's important for all the angels to know about. It's more important to track those red dots than the oranges, because the oranges are just zeros. It doesn't matter, but these red empty dots are thousands or 10,000s, and have a great impact.

All right, I'm going to end up with three slides, one on Clive, kind of summarizing. This is what he said that he did when he joined Columbia Records. What did I do when I first took cover? I watched and I listened. You don't become an instant expert. So I think that's really important. And the second quote, you've got to be ready for the breaks our current life.

It turns out to be lucky if you're ready for it. So those insights are really important. And finally, I'll end up with a story about Paul Simon and Garfunkel. They had this very successful album. And their main single was Bridge Over Trouble Water. and they were going to go with another song, Celia, for those who like music. But Clive Davis insisted that this should be the main song. And they asked them, how did you know?

And he says, I just don't know. I just know when I hear that hit song. So I think that's the summary of venture capital. Thank you. Talk more about paranoia in relation to the accelerator. So we did get this sense that everybody would say, you know what, maybe I should have an accelerator. You and I were early to that.

If you're paranoid about everybody has an accelerator, what are you going to do about that? Yeah, that's a great question. You know, I think, you know, having an accelerator when we started, Jason, felt really early, right? And we were asking, not early to the accelerator, early to the companies, because these companies don't even exist in many cases.

And I think what we've done is gone earlier and earlier and try to be better and better. I think, you know, we use a lot of data. data to measure everything we do right and everything we do wrong and iterate on it. And that's what we've been doing. But going earlier and earlier, that's what we've been doing. It's a great strategy. Okay, let's give it up for Marr.

Thanks.