The Exchanges

Q Now I'd love to start off by hearing about how an English Oxford educated young man comes to be one of the leading VCs in New York's tech scene. So can you give me a two to three minute origin story for you?

A Uh, wow. Well, thanks to, um, uh, describe me as one of the leading VCs. The origin story is very simple. I graduated from Oxford too many moons ago than I really want to think which year it was, and with no idea what to do, and like most people who graduate from Oxford, no idea what to do, ended up going down the route of becoming a chartered accountant, you know, quickly qualifying, realized that was not the best place for me to be spending my time, uh, was hired by Goldman Sachs in London, which was an unknown firm in London back then, Somehow was at the firm for about 21 years, doing various roles, uh, helping build various businesses for the first half of my career there. For the last 11 years, uh, was on the sales and trading floor, uh, covering hedge funds, uh, and got to work with some of the smartest money managers. During the period I'd moved from the U.K. to the U.S., uh, I've been in the U.S. pretty much since 1990 or so. In fact, December nine and nine, I started angel investing. And was fairly successful at it. It was something you could do whilst a Goldman, and it was diversified away from all of the market risks that everything you did as being a salesman on the trading floor would involve. And I just felt I had a knack for it. It didn't take up much of my time. But when I left Goldman in February, I decided to sort of take things professional. Alex Katz, um, on…

AI assessment note: “The origin story is very simple. I graduated from Oxford too many moons ago”

Q Now I'd love to start off by hearing about how an English Oxford educated young man comes to be one of the leading VCs in New York's tech scene. So can you give me a two to three minute origin story for you?

A Uh, wow. Well, thanks to, um, uh, describe me as one of the leading VCs. The origin story is very simple. I graduated from Oxford too many moons ago than I really want to think which year it was, and with no idea what to do, and like most people who graduate from Oxford, no idea what to do, ended up going down the route of becoming a chartered accountant, you know, quickly qualifying, realized that was not the best place for me to be spending my time, uh, was hired by Goldman Sachs in London, which was an unknown firm in London back then, Somehow was at the firm for about 21 years, doing various roles, uh, helping build various businesses for the first half of my career there. For the last 11 years, uh, was on the sales and trading floor, uh, covering hedge funds, uh, and got to work with some of the smartest money managers. During the period I'd moved from the U.K. to the U.S., uh, I've been in the U.S. pretty much since 1990 or so. In fact, December nine and nine, I started angel investing. And was fairly successful at it. It was something you could do whilst a Goldman, and it was diversified away from all of the market risks that everything you did as being a salesman on the trading floor would involve. And I just felt I had a knack for it. It didn't take up much of my time. But when I left Goldman in February, I decided to sort of take things professional. Alex Katz, um, on…

AI assessment note: “The origin story is very simple. I graduated from Oxford too many moons ago”

Q When is it and when isn't it then? When you want high growth and you need expansion quickly?

A The best time to raise a lot of capital is once you've solved a lot of a problem, so you don't prematurely scale, but you scale into a business with no numbers. That's usually around about the series A to series B stage. At the seed stage, the reason why you might want to raise A chunk of capital is because you have a business that is more capital intensive, and the, the fact that you've raised the capital creates a barrier to entry and allows you to be a consolidator of talent and resources. There are those opportunities, uh, but they're rare. You look at a company which we're not invested in, like Slack, raise enormous amount of money out the gate, and they've continued to raise money at higher valuations, and they see that as part of Basically saying, you know, we are the 800 pound gorilla in this space and you've got to be very well capitalized to compete with us. So they're sucking the oxygen out of the room. It also helps them to position themselves as a certain type of company and rate and hire a certain type of talent. Both of those things when done right.

AI assessment note: “The best time to raise a lot of capital is once you've solved a lot”

Q And you spoke there about pouring fuel onto the flames, so to speak. Uh, and, and so our previous guests, uh, Founder Collective and your colleagues in New York, Eric and David Frankel, Uh, and Eric Paley, uh, don't, don't agree with follow on funding. So, so is follow on funding something you actively engage in as part of your strategy?

A It is, and it's kind of interesting. I mean, if you look at the public market, there are people who invest over a two to four year time horizon. There are people who invest over a two to four month time horizon, two to four weeks, and probably two to four nanoseconds. So there's all different types of investors. I think that they have a really interesting strategy. Of being sort of not following on sort of the one and done approach. We like to concentrate capital on winners because we believe that we can have some sense of which companies are doing better than others and therefore concentrating on capital in. But look, they're very successful investors and I think they, um, they have a valid strategy. We just have a slightly different one.

AI assessment note: “It is, and it's kind of interesting.”

Q And then who's been the biggest mentor to you in your career?

A This is someone you don't know. It was a, it was a guy who unfortunately passed away about 15 years ago. He was a really good mentor and friend of mine at Goldman Sachs, Dick Groper, and he had to go through life with that name, and he became an incredibly funny, engaging, ah, person. He would light up the room, and he really taught me that you just can't take life too seriously. And you have to be able to, uh, be accommodative across, uh, many things you do with people. I've still got many sort of, uh, fine memories of, of things he said and did that have sort of just become tokens for me to sort of refer back to from time to time.

AI assessment note: “He was a really good mentor and friend of mine at Goldman Sachs, Dick Groper”

Q And talking about being boxed in, one, one solution to not raising more money and increasing the runway is to just reduce burn. Uh, obviously, obviously reducing burn can affect growth. So how do you approach this dichotomy of, of growth versus, um, burn retention?

A It's kind of interesting. We often find that the hot deals where everyone's scrambling to get in, where they raise the round size and they raise the round price, they prematurely scale, and they're often challenged as the company approaches the next round and the like. So we're great believers of starting off lean, iterating, getting a really good sense of your model before you start to sort of pour serious fuel on the fire. Uh, because elsewise, you know, a team of four or six is easily manageable. Your team of 12 and you're in the wrong business, you have to pivot, it becomes expensive. It's very tough to do that successfully. We've seen companies do it successfully. You kind of want to avoid that situation.

AI assessment note: “we're great believers of starting off lean, iterating, getting a really good sense”

Q And you mentioned like giving them a couple of years and tying that back into the kind of macro seed environment, uh, of, of negativity. Do you, do you suggest then that startups should, uh, increase their desired runway to say, 24 or 36 months, even instead of the traditional 18 to allow for constrictions in future funding. I mean, is, is this increased runway what you'd advise?

A Well, in, in an ideal world, I'd be two inches taller, but I'm not sure I can achieve that. And in the same way, if you raise too much capital, it'll be too diluted that you won't be enough. So, you know, each round is 20 to 30% diluted plus or minus. You know, the constraints are such that you just can't raise that amount of money. And so the question is, you know, what are you going to do with the amount of money that you raise in order to significantly reduce the risk of the company to raise more money at a higher valuation, assuming that that next stage is going to be there. And those, those are the individual trade-offs that have to happen, um, on every, you know, every business. And so, yeah, you'd raise more money, But you probably don't want to raise at the valuation that you'd be able to raise that amount of capital at. And therefore, um, you're sort of boxed into this sort of step function of raising capital that we have.

AI assessment note: “in the same way, if you raise too much capital, it'll be too diluted”

Q When is it and when isn't it then? When you want high growth and you need expansion quickly?

A The best time to raise a lot of capital is once you've solved a lot of a problem, so you don't prematurely scale, but you scale into a business with no numbers. That's usually around about the series A to series B stage. At the seed stage, the reason why you might want to raise A chunk of capital is because you have a business that is more capital intensive, and the, the fact that you've raised the capital creates a barrier to entry and allows you to be a consolidator of talent and resources. There are those opportunities, uh, but they're rare. You look at a company which we're not invested in, like Slack, raise enormous amount of money out the gate, and they've continued to raise money at higher valuations, and they see that as part of Basically saying, you know, we are the 800 pound gorilla in this space and you've got to be very well capitalized to compete with us. So they're sucking the oxygen out of the room. It also helps them to position themselves as a certain type of company and rate and hire a certain type of talent. Both of those things when done right.

AI assessment note: “The best time to raise a lot of capital is once you've solved a lot”

Q And talking of the macro, with the kind of downturn that everyone is talking about and the potential downturn, a lot of VCs are saying, though, they've seen a kind of strange increase in the quality of deal flow coming in. Is that something you've seen since the negativities arisen?

A There's a narrative that fits that story, but I think the story is a little skewed. And what I mean by that is, you know, we look at two to 3000 companies a year and we end up investing in 15 to 20. And pretty much every DC does that. We've seen consistent, high quality companies throughout our existence, and we think we've invested in some great companies throughout our existence. You know, in the last couple of years, there were just some stupid companies raising money at stupid valuation. And when I say stupid, they're just ones where the risk reward didn't make sense. Maybe some folks got a little lazy. Maybe some folks We're more momentum driven and we're investing because, you know, five people they know well were investing. But those who are more value oriented, who just sort of step back and look at the opportunity set in front of them, uh, didn't get sucked into that mindset. A lot of companies at the C stage just don't get funded, whether they're good or bad companies. And I think what, I think what this has done is kind of interesting. The equity markets, the public markets sort of fell out of bed. And then have kind of recovered since the beginning of the year. Private markets have not paid any attention to that recovery. And so I think it's become one of these sort of reflexive moments that can happen in markets where they can become a self fulfilling prophecy of e…

AI assessment note: “There's a narrative that fits that story, but I think the story is a little skewed.”

Q And talking of the macro, with the kind of downturn that everyone is talking about and the potential downturn, a lot of VCs are saying, though, they've seen a kind of strange increase in the quality of deal flow coming in. Is that something you've seen since the negativities arisen?

A There's a narrative that fits that story, but I think the story is a little skewed. And what I mean by that is, you know, we look at two to 3000 companies a year and we end up investing in 15 to 20. And pretty much every DC does that. We've seen consistent, high quality companies throughout our existence, and we think we've invested in some great companies throughout our existence. You know, in the last couple of years, there were just some stupid companies raising money at stupid valuation. And when I say stupid, they're just ones where the risk reward didn't make sense. Maybe some folks got a little lazy. Maybe some folks We're more momentum driven and we're investing because, you know, five people they know well were investing. But those who are more value oriented, who just sort of step back and look at the opportunity set in front of them, uh, didn't get sucked into that mindset. A lot of companies at the C stage just don't get funded, whether they're good or bad companies. And I think what, I think what this has done is kind of interesting. The equity markets, the public markets sort of fell out of bed. And then have kind of recovered since the beginning of the year. Private markets have not paid any attention to that recovery. And so I think it's become one of these sort of reflexive moments that can happen in markets where they can become a self fulfilling prophecy of e…

AI assessment note: “We've seen consistent, high quality companies throughout our existence”

Q Okay. And, and when, when is the right time, you know, do you do lean startup methodology? And if after a month, try a different thing, you know, alter the,

A It always varies, and it can come out of problems and issues companies have. Usually, companies pivot too late. Usually, when it, you know, when it fails, it's because they pivoted too late. They stayed with the wrong model too long. Look, ultimately, at the early stage, you're really trying to get your hands around what you think the world's going to look like five, six, seven, eight years in the future, and where you think, Consumed behavior and demand will be. You know, our belief is you take some bright people, talented people, you give them some resources, you give them a couple years to sort it out, and they'll work it out. Sometimes you're just wrong, and there isn't that opportunity set there, and you know, this is a business where there's a lot of wrongs and a few rights, but the few rights pay for all the wrongs, but, ah, usually pivots happen a little bit too late, and they usually happen out of desperation when The easy money and the easy choices dry out. The worst companies we've seen in our portfolio have been the ones that take three, four years to get to revenue, three, four years to get, to prove their ideas against customer engagement. We're trying not to do that anymore.

AI assessment note: “Usually, companies pivot too late. Usually, when it, you know, when it fails”

Q And then Indiegogo versus Kickstarter, is it a winner-take-all? Where's the exit?

A Well, we're investors in Indiegogo, and I'm not familiar with the other company you mentioned. Um, Kickstarter. Kickstarter? Can you spell that? Look, I think, I think Indiegogo has been An innovator in the space, and has a desire Uh, to go public and be a utility platform to change the funding for the world. It's not necessarily a winner-take-all space. You know, I've heard people describe Kickstarter as becoming the Friendstoper space, but I'm not really seduced by that argument. I think that there's room for more than one platform, and they, their models really are, you know, quite different in their approach. But I've met up with the team at Indiegogo recently, Very constructive on the strategy and what they're doing. Both of these companies and others in the crowdfunding space are revolutionizing funding between people have ideas and people have money without, uh, mediators. And I think, I think that is a very powerful concept, and I think there'll be some very big businesses built over time. And I still think, I think we're still in like the second innings of this space.

AI assessment note: “It's not necessarily a winner-take-all space. ... room for more than one platform”

Q I'd like to touch on that if people like to be associated with great companies. Absolutely. So how much of an extent would you say that portfolio, uh, is a branding tool for VCs?

A You can do it quickly or you can do it slowly. We like to do it slowly. So the quickly way is to invest in a hundred startups. Hope one of them, it becomes a household name and say, oh, I was the first investor in X. The problem is that doesn't lead to high returns to that portfolio. Because for, you know, every one in a thousand companies you had, you also have the other 999. The way we think to do it is to do it in the traditional way. Takes time, which is you invest in some great companies when they're just getting going, and then four or five years later, people come to recognize companies like Still Networks, Indiegogo, or Plated as sort of leaders in their space. That, we think, is the right way to do it.

AI assessment note: “You can do it quickly or you can do it slowly.”

Q I'd like to touch on that if people like to be associated with great companies. Absolutely. So how much of an extent would you say that portfolio, uh, is a branding tool for VCs?

A You can do it quickly or you can do it slowly. We like to do it slowly. So the quickly way is to invest in a hundred startups. Hope one of them, it becomes a household name and say, oh, I was the first investor in X. The problem is that doesn't lead to high returns to that portfolio. Because for, you know, every one in a thousand companies you had, you also have the other 999. The way we think to do it is to do it in the traditional way. Takes time, which is you invest in some great companies when they're just getting going, and then four or five years later, people come to recognize companies like Still Networks, Indiegogo, or Plated as sort of leaders in their space. That, we think, is the right way to do it.

AI assessment note: “Hope one of them, it becomes a household name and say, oh, I was”

Q And you mentioned like giving them a couple of years and tying that back into the kind of macro seed environment, uh, of, of negativity. Do you, do you suggest then that startups should, uh, increase their desired runway to say, 24 or 36 months, even instead of the traditional 18 to allow for constrictions in future funding. I mean, is, is this increased runway what you'd advise?

A Well, in, in an ideal world, I'd be two inches taller, but I'm not sure I can achieve that. And in the same way, if you raise too much capital, it'll be too diluted that you won't be enough. So, you know, each round is 20 to 30% diluted plus or minus. You know, the constraints are such that you just can't raise that amount of money. And so the question is, you know, what are you going to do with the amount of money that you raise in order to significantly reduce the risk of the company to raise more money at a higher valuation, assuming that that next stage is going to be there. And those, those are the individual trade-offs that have to happen, um, on every, you know, every business. And so, yeah, you'd raise more money, But you probably don't want to raise at the valuation that you'd be able to raise that amount of capital at. And therefore, um, you're sort of boxed into this sort of step function of raising capital that we have.

AI assessment note: “you probably don't want to raise at the valuation that you'd be able to”

Q And talking about being boxed in, one, one solution to not raising more money and increasing the runway is to just reduce burn. Uh, obviously, obviously reducing burn can affect growth. So how do you approach this dichotomy of, of growth versus, um, burn retention?

A It's kind of interesting. We often find that the hot deals where everyone's scrambling to get in, where they raise the round size and they raise the round price, they prematurely scale, and they're often challenged as the company approaches the next round and the like. So we're great believers of starting off lean, iterating, getting a really good sense of your model before you start to sort of pour serious fuel on the fire. Uh, because elsewise, you know, a team of four or six is easily manageable. Your team of 12 and you're in the wrong business, you have to pivot, it becomes expensive. It's very tough to do that successfully. We've seen companies do it successfully. You kind of want to avoid that situation.

AI assessment note: “starting off lean, iterating, getting a really good sense of your model before you start”

Q And then Indiegogo versus Kickstarter, is it a winner-take-all? Where's the exit?

A Well, we're investors in Indiegogo, and I'm not familiar with the other company you mentioned. Um, Kickstarter. Kickstarter? Can you spell that? Look, I think, I think Indiegogo has been An innovator in the space, and has a desire Uh, to go public and be a utility platform to change the funding for the world. It's not necessarily a winner-take-all space. You know, I've heard people describe Kickstarter as becoming the Friendstoper space, but I'm not really seduced by that argument. I think that there's room for more than one platform, and they, their models really are, you know, quite different in their approach. But I've met up with the team at Indiegogo recently, Very constructive on the strategy and what they're doing. Both of these companies and others in the crowdfunding space are revolutionizing funding between people have ideas and people have money without, uh, mediators. And I think, I think that is a very powerful concept, and I think there'll be some very big businesses built over time. And I still think, I think we're still in like the second innings of this space.

AI assessment note: “It's not necessarily a winner-take-all space.”

Q Okay. And, and when, when is the right time, you know, do you do lean startup methodology? And if after a month, try a different thing, you know, alter the,

A It always varies, and it can come out of problems and issues companies have. Usually, companies pivot too late. Usually, when it, you know, when it fails, it's because they pivoted too late. They stayed with the wrong model too long. Look, ultimately, at the early stage, you're really trying to get your hands around what you think the world's going to look like five, six, seven, eight years in the future, and where you think, Consumed behavior and demand will be. You know, our belief is you take some bright people, talented people, you give them some resources, you give them a couple years to sort it out, and they'll work it out. Sometimes you're just wrong, and there isn't that opportunity set there, and you know, this is a business where there's a lot of wrongs and a few rights, but the few rights pay for all the wrongs, but, ah, usually pivots happen a little bit too late, and they usually happen out of desperation when The easy money and the easy choices dry out. The worst companies we've seen in our portfolio have been the ones that take three, four years to get to revenue, three, four years to get, to prove their ideas against customer engagement. We're trying not to do that anymore.

AI assessment note: “It always varies, and it can come out of problems and issues companies have.”

Q despite your position as a seed investor, I do want to address at the later stage as well a bit today. So, but let's start with the seed. And in recent years, we've seen like a massive drop in the cost of company creation and a large rise in seed funding. So as a seed funder, how's that changed how you act as, as a funder of the earliest stages?

A Um, so, I mean, I think there's a couple of things there. Uh, firstly, uh, yes, the cost of starting a company approached the cost of being unemployed, which is pretty good because a lot of millennials are unemployed. You know, I think it's pretty much bottomed out. Uh, I think we've pretty much taken most of the OPEX, or rather, most of the CAPEX involved in starting a business making an OPEX. I'm not sure it goes down much from here, because now you're down to people costs, And real estate, and unless we have another, uh, significant recession, those things aren't going to move. Um, the secular drivers are pretty strong. So I think it's bottomed out, number one. Number two is, this is a space that is a fraction of a fraction of a fraction of a fraction of investable assets. And it punches above its weight with regard to headlines, And to be quite honest with regard to impact on the economy, this is where the growth is in a zero growth world. I'm trying to give you a 32nd macro synopsis of how we got here. Uh, the Fed has consistently cut rates over the last 16 years to solve problems brought about, to be quite honest, by low rates, and is now stuck in this, um, circle sort of consuming itself and the rest of the economy. People have come to believe that the rate environment we're in Is normal, but we're really through the looking glass. At some point, we're going to have to s…

AI assessment note: “I'm trying to give you a 32nd macro synopsis of how we got here.”

Q despite your position as a seed investor, I do want to address at the later stage as well a bit today. So, but let's start with the seed. And in recent years, we've seen like a massive drop in the cost of company creation and a large rise in seed funding. So as a seed funder, how's that changed how you act as, as a funder of the earliest stages?

A Um, so, I mean, I think there's a couple of things there. Uh, firstly, uh, yes, the cost of starting a company approached the cost of being unemployed, which is pretty good because a lot of millennials are unemployed. You know, I think it's pretty much bottomed out. Uh, I think we've pretty much taken most of the OPEX, or rather, most of the CAPEX involved in starting a business making an OPEX. I'm not sure it goes down much from here, because now you're down to people costs, And real estate, and unless we have another, uh, significant recession, those things aren't going to move. Um, the secular drivers are pretty strong. So I think it's bottomed out, number one. Number two is, this is a space that is a fraction of a fraction of a fraction of a fraction of investable assets. And it punches above its weight with regard to headlines, And to be quite honest with regard to impact on the economy, this is where the growth is in a zero growth world. I'm trying to give you a 32nd macro synopsis of how we got here. Uh, the Fed has consistently cut rates over the last 16 years to solve problems brought about, to be quite honest, by low rates, and is now stuck in this, um, circle sort of consuming itself and the rest of the economy. People have come to believe that the rate environment we're in Is normal, but we're really through the looking glass. At some point, we're going to have to s…

AI assessment note: “I'm trying to give you a 32nd macro synopsis of how we got here.”