It's thinking about everything else (besides money) that's needed to scale a business. We've seen millions of companies that have capital but don't make it. And oftentimes the hard things that end up happening have nothing to do with capital but how you're thinking about solutions, how you're thinking about hiring a right or wrong person, or making decisions to go into a different market. You have to be very clear about who is your user. Great companies are great companies because they have amazing leadership and they’ve spotted something. They have amazing culture, and they’re executing against the vision. The red flag is trying to do things when others are doing things. It might be crypto, and the next thing you know, it’s AI.
At Robinhood’s first annual Hood Summit in Miami, Sherwood Media’s Editor-in-Chief Joshua Topolosky sat down with Rebecca Kacaba, CEO and cofounder of DealMaker; Charles Roberts, chief investment strategist for ARK Invest; and Chris Lyons, president of web3 Media for a16z crypto, to explore how the smartest, savviest, and most successful VCs in the world find the businesses and talent driving the next wave of innovation and some red flags that tell them to stay away from other projects.
Joshua Topolsky: Rebecca, I want to actually start this by asking you: how do you know when you've spotted something, and you’re like, this is huge. This is the real deal. Tell me about that experience. How do you evaluate that?
Rebecca Kacaba: For us, it's a very data-driven approach, because we're looking at raising digitally. There's a wide footprint where we can see engagement with a brand. To us, raising capital and brand is the same thing in today’s day and age. Seeing friends is online; businesses are being built online. So we're looking at the interaction the brand has prior to the raise — sometimes in moving up a raise, during a raise, and then after a raise as well. And the brands that can really engage with their communities between raises are the ones that can leverage the power of retail. So we know everything from who likes that brand to what demographic it is, where those people live, what other products they consume — and you can see through that data, it's becoming more and more sophisticated, what the reach is going to be for that brand.
Topolsky: That's so interesting. You really do look at this as almost an investor-to-brand fandom. But I'm curious. It's funny, we talked a lot about it, and in particular one of the things that we talked a lot about when we were building this news org within Robinhood, was that the cultural aspect of these businesses is so important. Tesla's a good example; a lot of people love Tesla, either love it or hate it. Elon is a character, and he’s got a storyline. Obviously the products are incredible, but it’s in a lot of ways a cultural buy for a lot of people. Or Apple. A lot of people are die-hard for old-school Macs, and are like, yeah, I want to own this company because it means something to me. But you're talking about a broader scale investor-to-company fandom, right?
Kacaba: Totally. It's about creating that relationship like you have with Tesla much earlier on in the life cycle. That's what we're doing. Perks are getting incredibly sophisticated, and you could frame perks around things that build the business. We've got exciting companies like Death and Co., a restaurant bar chain, as well as our supply company, and you can give folks discounts on all the new locations. They know geographically where the retail investor is based. They actually plan their new locations around where their retail investors are, because they have discount codes, and are profitable in new locations quicker. It's really that kind of thing that we're crafting to build incredibly successful companies.
Topolsky: Chris, I'm curious to hear your methodology when you’re evaluating. Obviously, there's a lot of data you've got to work through to say whether this business will actually work. Is something like a fandom a big part of it? What's your balance for figuring that out?
“Having a very contrary view is where I feel the most exciting and crazy opportunities are. We call it ‘good ideas that look like bad ideas.’”Chris Lyons: Well, I think there are a couple ways to think about these things. Fandom was definitely important in having what we call “nerd energy,” where there's a bunch of people building out their current space. So that's important. I think for us, we’re also thinking about where we think the space is going to go. And then hopefully somebody else will be like, “Oh, I heard you were thinking about this. That's interesting. I was actually thinking about this.” We've had a lot of interesting companies come from that.
But I think for us, when it comes to investing in general, just having a very contrary view is where I feel the most exciting and crazy opportunities are. We call it “good ideas that look like bad ideas.” Like, who would have thought it was a good idea to stay in a stranger's home?
Topolsky: Well, when you put it that way…
Lyons: It sounds like a terrible idea. But then you think about how Uber or Lyft transformed the industries and these were very contrary points of view on how you think about things. Oftentimes, good ideas do look like bad ideas, and you want to have what we consider “the secret.” How has your entire life brought you to this moment? As a founder, you say, I know something that nobody else knows, because I earned the secret. Now I'm going to go out and put my whole life online and build this company. Those are the factors that have oftentimes defied the odds, but at the same time have pitched to hundreds of investors and people have told them that they're completely crazy. Those are often some of the biggest opportunities.
And across all different sides, it's always easy to point to the winner when it's the winner. “Oh, we should go invest in that.” But you don't want to do things that other people are doing, when things are actually already happening. The number one rule of investing is to buy low, sell high. But they want to buy high and sell low.
Topolsky: How do you distinguish between what looks like failing and what looks like solving a challenging problem? OpenAI is a great example, actually. I love ChatGPT, it’s super fun to play around with, but it’s not like there’s a single killer application where everyone’s like, “Wow, now I understand why AI is what it is.” So how do you distinguish between what’s failing and what’s not?
“You have to have that strength of imagination to believe that this crazy idea might work — and the capital to hold your breath for the next 10 years to see.”Lyons: Half of it is, what is it that you’re actually going after? Oftentimes, founders will look at this kind of curve, it’s a small market right now, and it sounds like a terrible idea, but once we build a thing that was not there beforehand, now we're with this new world of technology. In the last cycle, the smartphone was the catalyst behind all these things. There was no GPS technology, which made it impossible for companies like Uber and Lyft and these types of businesses to really latch onto this next generation. I think now, AI is going to be the next generation’s mobile phone, where because of this you're going to be able to build out and create companies that have never existed before for markets that have never even been thought of or created.
You have to have that strength of imagination to believe that this crazy idea might work — and the capital to hold your breath for the next 10 years to see.
Topolsky: Charles, I imagine in spaces like social good or healthcare, you must see a lot of things that seem like an outrageous idea. What’s your evaluation there? What do you look for? Is it a gut feeling or is it something more than that?
“I like the concept of secret investing”Charles Roberts: First of all, I really like the concept of having a secret. A lot of times we see this in healthcare, too. It's only sometimes when people have the crazy idea and the tenacity to execute against them, and they find themselves clearing the wood, that they can see a bunch of pathways that no one else can see because they're not that clear. I think that's a really important thing, and success often comes from pivoting around, going a little way into one of those and then changing your mind. You've got to earn your place, and you have to have done something really crazy or contrarian to be there in the first place, to have cleared the woods. I like the concept of secret investing, and buy low, sell high. It reminds me of a soccer coach who once said that it’s super easy to win a game of soccer; you just have to get the white ball in the net. Well, there’s a little more to it than that.
Topolsky: This next question is about doing the thing that is not the thing everyone else is doing. Going against the grain necessarily, which a founder or an investor might be doing. There is this feeling of a herd mentality sometimes. I don't know if anybody remembers the Yo app—
Lyons: They came and pitched us. It was a very interesting year. You should have heard the ideas around what you could do with just saying “yo.”
Topolsky: All it did, if you don’t remember, is let you text someone “yo” and they would text you “yo” back. That was the whole thing. But then people were writing articles about Yo. I was like, what don’t I understand about Yo, because it seems real dumb. And it was, it turns out. It was not a success. But how do you avoid that herd mentality?
Kacaba: If you look at how herd mentality develops, it's by people geographically or ideologically very close. With democratizing access to investments, I think some of that herd mentality does break down. Do we still see herd mentality happening in investments? Sure. AI has a lot of hype, but there's also a reason for that, and there is a lot of value creation there. We have benefited from what Robinhood has done, breaking down barriers for people to invest online, and now we can bring that to the alts category and break that barrier down even further. So I do think more access for retail in the upcoming years, and democratizing access is going to break down that group mentality.
“The reason why we continue to want to work with the world’s best entrepreneurs has nothing to do with the money”Topolsky: You’re seeing it, the signals are there, but crowds can be wrong. There's a fine line between a crowd and mob. They can be wrong sometimes.
I do think that note is interesting, though, on these alternative markets. Crowdfunding this kind of direct retail investor to a business is a pretty new model in a lot of ways, right? Now you're seeing some betting markets take off, things like Kalshi. Chris, this is really institutional, isn’t it? I'll put it to you to start, but is there a shift away? Is there a future where we don't need VCs? Is there a more global crowdfunding, and do we get away from this idea of the public market being just one specific thing to the idea that it could be anything?
Lyons: I think most of the time, people think about venture in a couple different ways. For us, we've always developed the firm. When we first originated the firm, you had to look at venture capital in two different ways. For us, it was like, OK, there's a pile of money that an entrepreneur can take to help jump start in business. But what we did that reinvented venture capital was look at the service-based industry. Maybe you're a first-time founder and you have no idea how to hire an executive team, or how to go to market, or how the tech stack works, or you have no idea about the marketing, the comms. So when you think about it as just a purely financial investment, that's one area of the business.
But for us, the reason why we continue to want to work with the world's best entrepreneurs has nothing to do with the money; it's about trying to think about everything else that's needed in order to scale a business. We've seen hundreds of thousands, even millions of companies that have capital but don't actually make it. And oftentimes the hard things that end up happening in the business have nothing to do with capital but how you're thinking about certain solutions, how you're thinking about hiring a right or wrong person, or making that executive decision in order to go into a different market, versus what we call “burning the ships” and knowing that if we don't go this way, the company's going to die.
Who’s going to be in your corner when you're actually thinking about those decisions? You could have ChatGPT if you wanted to. Just say, OK, we have a Steve Jobs AI board member. We haven’t seen that happen before, that might be a thing.
Topolsky: Charles, is it the same for you? How do you see it in terms of the way markets are expanding and what the role is of an investor?
“There are loads of great ways people can lose money, in very foolish ways, quite outside investing in private companies.”Roberts: I think it's great when building a business of any kind, but you have to be very clear about who is your user. You probably have to focus on one user, at least initially, and then everything else builds around that. At Freenome, the user is the patient and the counselor needs to be laser focused on that, on that journey and that person. I think in a lot of the investment industry, if you look at many VCs, they're very focused on doing the best thing with the founder, with the leadership, and the business. Both of these have their own approach on how they serve that founder and that leader.
We also definitely care about friendship, about serving the founder, but we do it in a different way. We come from the other direction. Our primary user, the core of our audience, is the nonaccredited investor who we serve with our venture product. We've launched the ARK Venture Fund to serve that user. Nonaccredited investors have been locked out of this incredible asset class that's delivered fairly consistently as one of the best asset classes. It's not like everyone can just go and buy these companies. It’s a lot of work to find and get into these companies. To your point about herd mentalities, the great companies are even harder to get into because the herd comes around, right? So back to our nonaccredited user, the way we think about it, the whole accreditation process is kind of a legacy concept, in a way. There are loads of great ways people can lose money, in very foolish ways, quite outside investing in private companies. There are tons of opportunities to lose money.
Topolsky: What’s the percentage of companies that actually make it, 10%?
Lyons: Less than that. Most companies don’t go public. I would say 1% for sure.
Topolsky: So there are many more bad opportunities for people than good.
Lyons: In investing venture, we call it the Babe Ruth effect. Babe Ruth had the highest number of strikeouts, but he also had the highest number of home runs. So when you're thinking about investing, you have to swing for the fences at every single time, because one out of every 10 companies can potentially return that fund.
Topolsky: So you're opening these private companies, the market for them, up to an audience. Are you saying the vision is that's going to be widespread? Will the next round for OpenAI be raised by all the people in this room? Does it become that kind of situation? I don't want to say you need a gatekeeper, because nobody wants gatekeepers, but you need somebody to say, hey, this is a good idea. Obviously you're evaluating stuff, but then how do you pass that on to a retail investor?
“In retail, we’re largely looking for big opportunities that are going to change the world and are something that people can identify with.”Kacaba: Where we are seeing our role emerge is really as a portion of the capital stack. What Chris said is absolutely true: you've got lots of different benefits of all the different types of capital a company can take. They can take debt, they can take VC, strategic, retail. What we're seeing is retail in bridging that’s a strategic source, and really being valued for that strategic source. But you've got a huge amount of companies right now using retail as a component of their capital alongside VC.
Topolsky: So they raise money from Chris or Charles, maybe. Then you go and raise a little bit more and everyone basically agrees.
Kacaba: Yeah. And you see unicorns doing it today. You’ve got Reddit doing it as part of their IPO; you’ve got Substack doing it as part of their Series B.
Topolsky: Reddit’s great for this topic. If you’re an investor and you’re looking at opportunities, Reddit’s an easy one, right? There are much less sexy companies. Does it have to have sex appeal? Is that how we get to the next hustle, with something that has that cultural component to it? How do we fund companies that are doing things that are very unsexy? Earlier we heard about robotic surgery. I don't know that everybody really wants to get into that.
Kacaba: Oh, yeah. I mean, robotic surgery has made $100 million in retail. It has to be a big opportunity. In retail, we’re largely looking for the same thing that Chris and Charles are describing: big opportunities that are going to change the world and are something that people can identify with. And what we see is that every company has a slightly different community. That robotic arm that's doing knee surgery really appeals to an older demographic who’s experienced bad knee surgery and knows it needs to be better, whereas an AI-driven makeup company like Proven Skincare has a much lower age demographic and skews totally differently.
Topolsky: It’s finding those pockets. Does this become more like the public markets at some point? Are there exchanges for all these private offerings? We’re always “18 months out” from an IPO — it’s been a decade of “18 months out.” Right now, if I want to do anything with my shares of that business, there’s not really a great market for it. A lot of those places that have those secondary markets, they’re unbelievably complicated, from just the governance perspective from the company itself. Charles, let’s throw this to you: how do you create a system for that?
Roberts: We’re seeing some very interesting moves right now across the whole of investing. These players are coming together and moving in different ways. You’ve got crowdfunding coming in, you’ve got New Republic, you’ve got eToro, and Coinbase, and SoFi, which our venture fund is on right now. That's the one group many people buy it on. There are obviously amazing things that Robinhood is doing. So there's that whole medium, and we won't really know how that shakes out until some point. It almost feels like every asset becomes available on every platform.
I think the way we think about it from a venture lens is, right now, starting small in its early days. But we, in the long run, our big mission would be almost a third way, somewhere between pure private and public, where companies are able to stay private longer, partly as a result of what we and others like us do. We had a X spaces conversation with Elon Musk and one of the takeaways was he enjoyed the SpaceX journey more, maybe because it doesn't have that scrutiny and just all the downsides that come with being public.
The way we think about the retail investor and bringing them to be beneficial to the company is by having our superpower: having reach. It's having a big, open research ecosystem. What I would love to do — and we haven't systematized it yet, so it's happening a little organically — is think of the Tesla shareholders, who’s also a Model 3 owner, and is a champion for that company — we want to bring some of that to the private markets. We only have nearly 10,000 individual investors so far, mainly through the platform. I’d love for it to be a few million investors, but we want those people to be champions, early product adopters, helping companies find talent, and rebroadcasting stuff to their own network. I think that's where both the founders and these other VCs for so many deals see value, in that platform.
“Focus on the space that you think is going to be the next thing, because that's where the opportunity lies.”Topolsky: What’s a red flag? Chris, I’ll start with you, but what is the worst trend that you're seeing in the investing world right now, or even the things that are coming, that are being put in front of you, that are hitting your table. What is a trend line that has picked up steam that you think is the wrong direction?
Lyons: I think the real red flag is funds that are going based off of certain trends. It might be crypto, and the next thing you know, it’s an AI fund. The thesis of really having a grounded center is the most important thing. I work really closely with our crypto team, and our best work always happens in the winter, when nobody else is actually paying attention. And I think the red flag is trying to do things when people are doing things, as opposed to doing things when no one is looking. Focus on the space that you think is going to be the next thing, because that's where the opportunity lies. If you’re trying to run in line with everyone doing the same thing and thinking you're the one that's going to be the winner in the space, you might be, but you're going to be alongside five other people believing the same thing. So I think that's the red flag, and also where the opportunity is.
Topolsky: Rebecca, is there a red flag or a trend you see that you don’t like?
Kacaba: Yeah, I think Chris really said it well. Just to say it slightly differently, when you’ve got this bubble of unicorns that aren’t going public and aren’t returning liquidity, then you’ve got people who can’t raise their new funds and you get, not the a16zs of the world, but tier 2 and 3 funds. That has an impact on the founders and the companies getting more access to new capital, and then they’re pushing the companies in a different way. A lot of good companies can’t get funded, and I think a more diversified capital market is the answer to that.
Topolsky: Charles, any last thoughts on this?
“Great companies are great companies because they have amazing founders or leadership and they’ve spotted something”Roberts: I think a red flag is when valuations can get super out of whack. To me, because I spend time across the river, on the public and the private side, it’s when valuations on the private side — or the public side — get completely discombobulated with the other side. That doesn’t make any sense. Right now, we’re still getting sent quite a lot of very early-stage companies getting $20, $30, $40, $50 million valuations. That is literally bananas. It’s like the Warren Buffett thing. The public markets can get a little crazy. But I think that’s one big thing, when you see that massive public-private dislocation, and we are seeing it.
Topolsky: Is that a theme, are we just overvaluing ideas? Are you going up to a company and saying, “Does this make any sense?”
Roberts: I think it’s worth looking at both sides of that aisle. What we see with our venture is, great companies are great companies because they have amazing founders or leadership and they’ve spotted something. They have amazing culture, and they’re executing against the vision. They’ve got their eye on the properties, and they might change their “how” along the way, but they never change the “why.” They might change their “what” and they might change their “how.”
It doesn’t matter if its public, private, whatever, when you see valuations get so dislocated, as we’ve seen, I think that’s one huge red flag. That’s happened a lot in the last couple years — it’s flip-flopped, often with a six- to nine-month tail, and they’ll get out of whack in both ways.
The other thing that I’m seeing quite a lot of is, we’re still being pitched often business plans, or we’re seeing people make two-, three-, four-, five-year plans in companies based on business models that will probably disappear or completely be disrupted.
Topolsky: So the lesson here is don’t make a business plan, is what I’m hearing.
Roberts: Survival of the fittest, I think is the point. When you’re evaluating teams, you’re like, is this team — not just the person — but is the team super adaptable and resilient? It’s survival of the fittest. It’s worked since Darwin and before.
0 comments:
Post a Comment