Nov 2, 2018 · 34m · 20vc
20VC: Ryan Caldbeck on Why The Business Model of VC is Broken, Who is To Blame, How The Best Funds Will Use Data Intelligently Moving Forward & Whether We Are In A Consumer Bubble Or Not?
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of The 20 Minute VC, host Harry Stebbings interviews Ryan Caldbeck, founder and CEO of CircleUp, to discuss structural flaws in traditional venture capital, the power of data-driven quantitative investing in consumer markets, and strategies for building capital-efficient startups.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 35% of the talking time here. How this is scored →
Harry as informed peer 4.3 Guest teaching 4.6 Guest disagreement 3.1 Harry pushing back 3.9
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 17:40 Ryan calls tech VC valuations in consumer companies offensive
Ryan forcefully attacks tech VC behavior in consumer investing, calling $900M valuations on $15M revenue mathematically nonsensical and offensive.
Hardest push from Harry ▶ 12:55 Harry directly challenges Ryan's tweet on Micro VCsHarry calls out Ryan's tweet about micro VC fund sizes, stating it made him irate and calling the premise untrue while citing top-performing counterexamples like Floodgate and Baseline.
Biggest teaching moment ▶ 22:29 Ryan breaks down COGS and CapEx differences between tech and consumerRyan educates Harry on how tech investors miscalculate gross margins by excluding internal software engineering salaries from CapEx, while highlighting hyper-capital-efficient consumer exits like RXBar.
Harry holds his own ▶ 11:13 Harry raises the Collison brothers to challenge algorithmic sourcingHarry demonstrates keen industry insight by citing the Stripe founders' non-traditional background to show how pattern recognition algorithms miss major tech outliers.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Guest Welcome and Ryan Caldbeck's Inspiration | 2 | 2 | 2 | 1 | Harry sets up the conversation warmly and prompts Ryan on why venture capital is broken. Ryan articulates how legacy VC firms lack business model innovation and carry high profit margins that make them ripe for disruption. | |
| LP Accountability and Flawed Incentive Structures | 5 | 3 | 1 | 4 | Harry challenges the framing that VCs are solely to blame by sharing a direct anecdote from an LP about job security incentives. Ryan agrees and expands on how LP compensation structures discourage taking risk. | |
| Integrating Data and Technology into Private Investing | 3 | 5 | 2 | 2 | Harry asks where data integration has the most potential in VC workflows. Ryan educates on how data adoption will start in industries with standardized business models and abundant data rather than early-stage tech. | |
| Limitations of Data in Early-Stage Tech vs Consumer | 7 | 4 | 5 | 7 | Harry pushes back forcefully against Ryan's claim about micro VCs by citing high-returning counterexamples like Floodgate and Baseline. Ryan defends his view by highlighting how AUM fee incentives push funds to scale despite performance drop-offs. | |
| Consumer Investment Bubbles and the Post-Money Trap | 5 | 6 | 4 | 5 | Ryan sharply criticizes tech VCs for inflating consumer valuations, citing the post-money trap of Honest Company. Harry pushes back on whether a high-volume, small-check strategy can yield viable venture-scale returns. | |
| Distribution Realities: Direct-to-Consumer vs Omnichannel | 5 | 7 | 5 | 6 | Harry challenges Ryan's capital efficiency thesis by citing founder complaints about skyrocketing customer acquisition costs. Ryan dismantles the premise, explaining that tech VCs misunderstand DTC, which is for product testing rather than efficient scaling. | |
| Debating Capital Efficiency and Margins in Tech vs Consumer | 7 | 8 | 6 | 6 | Harry presents a detailed critic's perspective that consumer startups are capital intensive with poor margins. Ryan responds with a thorough breakdown of COGS accounting metrics and real-world counterexamples like SkinnyPop and RXBar. | |
| CircleUp Founding Lessons and Fundraising Alignment | 3 | 4 | 1 | 3 | Harry guides Ryan through reflecting on fundraising mistakes and executive leadership decisions. Ryan shares his management philosophy on using objective frameworks rather than subjective culture fit to evaluate talent. | |
| Quickfire Round with Ryan Caldbeck | 2 | 2 | 2 | 1 | Harry runs a standard quickfire round. Ryan gives concise opinions on topics ranging from Instacart's advantage over Amazon to preference stacks and sleep habits. |
Statements from this episode (26)
VC fund operations are identical to 20 years ago
“The way a hundred million dollar fund operates today looks basically identical to the way it operated 20, 25 years ago.”
VC firms operate with 30% to 50% EBITDA margins
“Think of these firms, these VC firms as little companies that effectively have EBITDA margins of 30 to 50%.”
Innovators will attack traditional venture capital profit pools
“What I think will happen is that innovators are going to attack those profit pools and the lack of innovation.”
Institutional LPs are compensated mostly by fixed salary
“Right now, many, not all, but many of the LPs, their compensation is almost entirely salary. The bonus based on performance doesn't really move the needle for them that much.”
Data-driven private investing will start outside Silicon Valley
“I think that that trend will start outside of early stage tech and outside of Silicon Valley. So it'll start first in an industry where there's a ton of data and where business models are largely the same.”
Solely heuristic-based private investing will die off over time
“Over time, we do think that the concept of private investing, based solely on human heuristics, that will die off over time.”
Quantitative VC models lack historical training data for early tech
“There weren't a thousand other examples where there's enough training data to train models to understand what success looks like. There might be two or four. That's a reason why I really struggle to understand how this could be successful in tech, but in other…”
Halo Top Creamery generates hundreds of millions in revenue
“Halo top ice cream, which is now a couple hundred million dollar revenue company”
Venture capital fund returns decline as fund sizes increase
“There's a lot of studies that suggest that returns go down as funds get larger in AUM. There's a ton of studies that show that.”
VC managers raise larger funds because management fees outweigh carry
“And the reason they move up market is that the fees for larger funds always outweigh the performance of smaller funds. The people running these funds have incentives to raise larger funds.”
USV and Benchmark are rare exceptions to VC fund bloat
“Union Square Ventures, Benchmark, or some other exceptions to what I said.”
Consumer startups reach profitability on $4M to $8M
“These companies in the consumer space, they tend to get to profitability by raising four to eight million dollars. Not 50 to eighty million dollars, as they do in the tech space.”
Honest Company entered recapitalization due to overvaluation
“Where Honest Company is a good company, it just got stuck in a post-money trap. It got passed over for acquisition, and now it was in a little bit of recapitalization mode with Catterton because it raised too much at far too high of a valuation.”
Hampton Creek will suffer a massive down round
“From tech VC firms, and we're seeing, you know, the mayonnaise company with a nine hundred million dollar valuation and fifteen million dollars revenue. That math doesn't make any sense. It's offensive. They're not going to have a successful exit. They will ha…”
Consumer VC requires $1M to $5M checks across many startups
“In consumer, you need to find a way to deploy one to five million dollars into each of a lot of companies. That's the answer. You can't be looking to invest in 50, seventy-five million dollars into an early stage consumer product company, you're going to get j…”
Quant fund models are the future of private consumer VC
“We think it's a different model, candidly. We think it's a model of developing systematic approach to private investing. So if you're familiar at all in the public markets with AQR, Two Sigma, Renaissance Technologies, any of the public quant funds, We think t…”
Large CPG firms do not spend on R&D
“Innovation isn't coming from the large CPG companies because they don't spend anything on R&D. It's coming from the small ones, so they're all looking for that innovation.”
Direct-to-consumer is for product testing, not scaling efficiently
“Most tech VC firms look at D to C, direct-to-consumer, as a way to scale a business efficiently. That is completely wrong. It is not a channel to scale a business. It isn't certainly not a channel to scale a business efficiently. DTC is a great channel to test…”
Almost all DTC brands must eventually sell offline
“It turns out that almost every DTC company eventually realizes when they get to a We got to start building our own stores or, you know, selling these products offline because the online channels are just too expensive”
RXBar raised only $10,000 before selling to Kellogg's for $600M
“RX Bar, a snack bar, raised 10,000 dollars to sell for six hundred million dollars to Kellogg's.”
Consumer companies have higher net margins than tech companies
“At the end of the day, consumer companies have higher net margins and are more profitable than tech companies.”
Consumer startup valuations have dramatically lower volatility than tech
“The standard deviation of consumer company valuations is dramatically lower than the standard deviation of tech valuations.”
Cultural fit is a bad predictor of employee success
“I tend to find the concept of, oh, that person's just not a cultural fit to be a really bad estimate of whether or not that'll be successful.”
Once you start considering firing someone, the decision is made
“When you're thinking about whether or not to let someone go, to fire someone, the decision's already made, and that point is absolutely true. When you're having that consideration in your head, it has gone far enough, and you need to just make the decision.”
Offline retailers will prefer Instacart over Amazon as a partner
“Offline retailers need Instacart to work. Amazon is too much of a threat. Instacart is closer to a partner.”
Most funded consumer startups will sell below their last valuation
“Consumer companies typically it'll be a graveyard. There'll be some exceptions. Unilever bots, Dollar Shave Club, because they needed the capabilities of DTC. That'll happen a few more times, but many times they will be sold for half of the last round valuatio…”