The Exchanges

Q with something that deeply troubles me to hear from you, given, obviously, my love of the wonderful world of venture, which is what you said to me before being, Harry, venture capital has a problem. I mean, such a cliffhanger to leave me on there, Ryan, but I want to start there, and almost let you riff here. So, What in your eyes are the biggest problems of VC today?

A So let's dive into what I mean by the issues. First, on little innovation, the way a hundred million dollar fund operates today looks basically identical to the way it operated 20, 25 years ago. You have three to five partners that go around, cocktail events, demo days, chart, and network deferral flow, making decisions based on their own heuristics. The second thing that I mean is that there are huge profit pools here. Think of these firms, these VC firms as little companies that effectively have EBITDA margins of 30 to 50%. That effectively means if you raise a hundred, hundred, twenty-five million dollar fund, and you're one of the co-founders, you're walking away individually with 20 to forty million dollars in five, seven years. That's a heck of a return. To quote Jeff Bezos, your margin is my opportunity. What I think will happen is that innovators are going to attack those profit pools and the lack of innovation. So how are they going to do that? I think they're going to try and give the same product for lower fees. I think that, or I think that they will try and give a different product and how will they give a different product? They might create funds that specialize in certain geographies or certain industries, or they might create funds that use data in new ways, or they might create funds that help companies push clothes like interest or wits, or perhaps have a dis…

AI assessment note: “First, on little innovation, the way a hundred million dollar fund operates today looks basically identical”

Q I have to ask, you said post money trap there. What do you mean by post money trap, and how do you kind of see that one playing out, and how should founders think about that?

A Yeah, so in the, in the tech world, um, oftentimes, not always, but oftentimes a tech VC can believe if I bet on the right winner, it'll own 80% of the market. If it owns 80% of the market, that means the valuation and exit will be huge. A 1,000,000,010 billion, it'll be a big number. In consumer, tastes are fragmented. Tastes have been fragmenting because of personal preferences, because barriers to entry have declined. As tastes fragment, the winners are smaller. If the winners are smaller, the exits are smaller. If the exits are smaller, you can still make money, but you have to be disciplined when you come into the business. The valuations you use on the in need to be reasonable, and that's not what we're seeing from tech VC firms. 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 have an exit at some point, but it'll be a massive down round. And so what we think needs to happen if investors play in a space, they need to find ways to systematically deploy capital across a lot of companies at earlier stage, a lower valuation. Then these companies don't raise as much money. The exits are still really healthy. You can invest a 10, sell it for a hundred. That's a great exit…

AI assessment note: “They will have an exit at some point, but it'll be a massive down round.”

Q more in terms of that sustainability of channel and being aware of kind of the mortality of channel. I did have a VC on the show the other day that went against the tide of many VCs chasing consumers saying, man, it's just not interesting. It's capex intensive. It's low contribution margin. And after all of that, you sell it for 1.6 EBIT. How would you respond to that, Ryan?

A Yeah, that's interesting. There's a couple points in there. I think first, when we say it's capital intensive, I'd love to come on the show with that guest, and maybe we could have a fun debate together. But on the capital intensive point, what I'd probably ask about is where that data comes from. When you look at the history of tech companies, tech companies raise on average more than fifty million dollars to get to profitability. Consumer companies raise on average about five million dollars to get to profitability. Full stop. That's a pretty powerful point. Tech companies have their manufacturing plant in-house, and this isn't a politically correct thing to say, but that is what the engineers, product managers, data scientists are building. They are building a product. In consumer, you outsource that. Very, very rarely do you own your own manufacturing plant. Typically, you outsource it. I'll give you an example. Skinny Pop Popcorn Had raised 500,000 dollars in total to get to eighty million dollars in revenue. Halo Top has raised less than two million dollars to get to a couple hundred million dollars in revenue for that ice cream company. RX Bar, a snack bar, raised 10,000 dollars to sell for six hundred million dollars to Kellogg's. Those are pretty powerful examples. I don't think we'll ever have an Uber that will have an But conversely, you'll never find a consumer prod…

AI assessment note: “on the capital intensive point, what I'd probably ask about is where that data comes”

Q And you mentioned there that it might not be optimal for tech companies to raise using this form of funding platform. Why is it that you believe that, and why may it be not so optimal for them to raise using this?

A Well, first and foremost, I think, um, tech companies, to be candid with you, shouldn't use any online platform. I think tech companies have a very robust funding environment already, and so, you know, that's in the form of not just Silicon Valley and New York City, but the other 25 cities in the U.S., And dozens and dozens of cities around the world that are giving, uh, strong incentives for the tech environment and for VC firms. There is no shortage of investors or capital flowing into tech companies. So then when you consider if a, if a company in the tech space goes to an online platform, I think you can reasonably assume they already tried to raise from Sequoia. Or Union Square Ventures, or all of the other VC firms, or they tried to go to the incubator groups, or the angel groups that are offline, et cetera, and they were passed over. That's fine, but then what you have to believe is that those companies that were passed over will still provide a strong return to accredited investors through an online platform, and that's difficult for us to believe, especially when you consider that the returns in tech Investing over the past 15 years have been very poor. Then, when you start talking about Title III of the JOBS Act, unaccredited investors, I think what you have to believe is, all right, they were passed over by all the best VC firms, then they went to all the angel group…

AI assessment note: “tech companies have a very robust funding environment already”

Q of cases, anomalies. If one looks at the likes of the Collison brothers coming out of a small town in Ireland with no Stanford degrees behind them, no Google experience behind them, the pattern recognition from the data wouldn't suggest that they would create a ten billion dollar company. How does one think about ambiguity and nuance? Hindering the effects and impact of data when there is little data anyway.

A And you just hit on one of my core issues with doing this in early stage tech. I just struggled to see how data could be used to have predicted Uber in 2009, 2010. There was never an Uber before that, or Stripe as the example, or whatever it is. Even in industries where, if you look at Facebook, there was MySpace before that, or before Google, there's a couple other search engines. If there weren't 500 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 industries, it is working really, really well. So consumer and retail, as an example, when the next restaurant hits, there's a thousand other examples of restaurant companies that have been successful. You know, when the halo top ice cream, which is now a couple hundred million dollar revenue company, There was already examples of food and more specifically ice cream companies have been successful. That allows us to build models to predict their success much more effectively than at least I can envision on how to do it in tech. I never want to say never. I certainly don't want to be quoted in the future as not having seen the vision, but I struggle to see how it is applicable in early stage tech in the near future.

AI assessment note: “There weren't a thousand other examples where there's enough training data to train models”

Q Do you really think there's a VC business there then? Because having that reliability of having several hundreds is extremely tough, and having a couple of hundred exits, in most cases for fun, simply isn't enough.

A Some very, very smart people disagree with me, and there's some smart people that agree with me. It's a kind of controversial point, but I absolutely think that there's a huge investing business. Now you had a key word there, which is VC, right? Like I don't think that the investing market in consumer will look like what it does in Silicon Valley or other tabs. It'll look very different in consumer. 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 just killed for that because the exits won't be big enough to justify that capital or the valuation that is implied by that capital. So how does that happen? Well, 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 that is the solution in the private markets to being able to invest into a lot of these companies with little, relatively smaller checks than what you typically see in tech private investing.

AI assessment note: “I don't think that the investing market in consumer will look like what it does”

Q with something that deeply troubles me to hear from you, given, obviously, my love of the wonderful world of venture, which is what you said to me before being, Harry, venture capital has a problem. I mean, such a cliffhanger to leave me on there, Ryan, but I want to start there, and almost let you riff here. So, What in your eyes are the biggest problems of VC today?

A So let's dive into what I mean by the issues. First, on little innovation, the way a hundred million dollar fund operates today looks basically identical to the way it operated 20, 25 years ago. You have three to five partners that go around, cocktail events, demo days, chart, and network deferral flow, making decisions based on their own heuristics. The second thing that I mean is that there are huge profit pools here. Think of these firms, these VC firms as little companies that effectively have EBITDA margins of 30 to 50%. That effectively means if you raise a hundred, hundred, twenty-five million dollar fund, and you're one of the co-founders, you're walking away individually with 20 to forty million dollars in five, seven years. That's a heck of a return. To quote Jeff Bezos, your margin is my opportunity. What I think will happen is that innovators are going to attack those profit pools and the lack of innovation. So how are they going to do that? I think they're going to try and give the same product for lower fees. I think that, or I think that they will try and give a different product and how will they give a different product? They might create funds that specialize in certain geographies or certain industries, or they might create funds that use data in new ways, or they might create funds that help companies push clothes like interest or wits, or perhaps have a dis…

AI assessment note: “First, on little innovation, the way a hundred million dollar fund operates today”

Q of cases, anomalies. If one looks at the likes of the Collison brothers coming out of a small town in Ireland with no Stanford degrees behind them, no Google experience behind them, the pattern recognition from the data wouldn't suggest that they would create a ten billion dollar company. How does one think about ambiguity and nuance? Hindering the effects and impact of data when there is little data anyway.

A And you just hit on one of my core issues with doing this in early stage tech. I just struggled to see how data could be used to have predicted Uber in 2009, 2010. There was never an Uber before that, or Stripe as the example, or whatever it is. Even in industries where, if you look at Facebook, there was MySpace before that, or before Google, there's a couple other search engines. If there weren't 500 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 industries, it is working really, really well. So consumer and retail, as an example, when the next restaurant hits, there's a thousand other examples of restaurant companies that have been successful. You know, when the halo top ice cream, which is now a couple hundred million dollar revenue company, There was already examples of food and more specifically ice cream companies have been successful. That allows us to build models to predict their success much more effectively than at least I can envision on how to do it in tech. I never want to say never. I certainly don't want to be quoted in the future as not having seen the vision, but I struggle to see how it is applicable in early stage tech in the near future.

AI assessment note: “you just hit on one of my core issues with doing this in early stage tech”

Q Do you really think there's a VC business there then? Because having that reliability of having several hundreds is extremely tough, and having a couple of hundred exits, in most cases for fun, simply isn't enough.

A Some very, very smart people disagree with me, and there's some smart people that agree with me. It's a kind of controversial point, but I absolutely think that there's a huge investing business. Now you had a key word there, which is VC, right? Like I don't think that the investing market in consumer will look like what it does in Silicon Valley or other tabs. It'll look very different in consumer. 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 just killed for that because the exits won't be big enough to justify that capital or the valuation that is implied by that capital. So how does that happen? Well, 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 that is the solution in the private markets to being able to invest into a lot of these companies with little, relatively smaller checks than what you typically see in tech private investing.

AI assessment note: “I absolutely think that there's a huge investing business.”

Q Well, you're very, very kind, and I so appreciate that, but I'd love to start today with a little bit on you, and for those that maybe didn't get a chance to listen to round one, tell me, when you were a little boy, was it the dream and a Transpiration career-wise to co-found and found Circle Up, and how did that really come about?

A It definitely was not. To be candid with you, I knew nothing about technology, certainly nothing about investing. I grew up in a small town in Vermont, 2000 people in the town, and the kind of dream that I had came about when I was about 1516 years old, and JetBlue, the airline, moved into Burlington, Vermont, which is the biggest city in Vermont, and And started a new route to New York city. And there's a big newspaper article about it. It was a really big deal in that town back in the early nineties. And, you know, for me, there was just something that hit me when I read that article, when I was 1516 years old and in our kitchen in Vermont. And what hit me was, gosh, wouldn't it be amazing to create something that made this many people happy? That concept was what inspired me to try and build something that I thought would help other people to thrive, help other people be happy. And that is what eventually led to circle up. But Everything else about Circle Up was certainly not part of the vision, uh, growing up in Vermont.

AI assessment note: “It definitely was not. To be candid with you, I knew nothing about technology”

Q I couldn't agree with you more in terms of kind of leaning into the risk. We mentioned some of the ways that people can innovate there. I'm interested by one in particular, which is kind of the integration of data. How do you foresee maybe the integration of data into VC workflows, and where do you think it maybe has most potential?

A Yeah, there's actually a Wall Street Journal article in the past week about private investors using data more. We think that's the future. Like, to be, for disclosure, we're an investment firm powered by technology, um, and the technology finds, evaluates companies, so clearly I'm biased, but that bias comes because I bet my career that that was the future for private investment. I think data and tech will be used to find and evaluate companies and to help them post-close in the private markets. 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. So what I mean is in tech, the business models are wildly different. There's also not a lot of data, particularly for early stage tech companies. You're often dealing with a CS major from Stanford. He's got a 15 page PowerPoint deck and you got to make a bet. That's a hard place to use a lot of data. Unless the data is effectively like correlation ventures, you're just making that on who else is in the round. That's fine, but that's not really what I'm talking about. This will start also in industries, geographies, asset classes, where there's a problem to be solved. So I'm thinking of areas outside of Silicon Valley. Silicon Valley, there's no secret on who the investors are and who …

AI assessment note: “I think that that trend will start outside of early stage tech”

Q Up, but this next one made me interestingly irate, which is when I saw on Twitter, you tweeted, micro VC funds, and the element of them having small funds because they just can't raise bigger, and I immediately thought to the likes of Floodgate, Baseline, Founder Collective, the multitude of examples that suggest stellar returns, and actually, that's just not true. How do you think about and explain that one?

A First of all, 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. The other thing I would say is what I have typically seen is that a fund will start, let's call it a fifty hundred million dollar fund. It'll do really well. Then we'll raise a much larger fund and it'll keep moving up market. 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. There are exceptions. And you've mentioned a couple exceptions. In my tweet storm, I mentioned some others. Union Square Ventures, Benchmark, or some other exceptions to what I said. There are absolutely investors out there that want to stick to their knitting and stick focused on smaller funds where they know that the performance has been fantastic, work with entrepreneurs in a certain stage, and I think that's terrific. But by and large, I also see a general trend towards investment managers trying to raise larger funds and

AI assessment note: “There are exceptions. And you've mentioned a couple exceptions.”

Q I have to ask, you said post money trap there. What do you mean by post money trap, and how do you kind of see that one playing out, and how should founders think about that?

A Yeah, so in the, in the tech world, um, oftentimes, not always, but oftentimes a tech VC can believe if I bet on the right winner, it'll own 80% of the market. If it owns 80% of the market, that means the valuation and exit will be huge. A 1,000,000,010 billion, it'll be a big number. In consumer, tastes are fragmented. Tastes have been fragmenting because of personal preferences, because barriers to entry have declined. As tastes fragment, the winners are smaller. If the winners are smaller, the exits are smaller. If the exits are smaller, you can still make money, but you have to be disciplined when you come into the business. The valuations you use on the in need to be reasonable, and that's not what we're seeing from tech VC firms. 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 have an exit at some point, but it'll be a massive down round. And so what we think needs to happen if investors play in a space, they need to find ways to systematically deploy capital across a lot of companies at earlier stage, a lower valuation. Then these companies don't raise as much money. The exits are still really healthy. You can invest a 10, sell it for a hundred. That's a great exit…

AI assessment note: “They will have an exit at some point, but it'll be a massive down round.”

Q On first glance, it would be very easy to put yourself in the bucket of crowdfunding, but you very particularly segment yourself away from that into the label of marketplace investing. So why is that? And what are your thoughts on these two labels?

A Sure. So crowdfunding is just, it's a very broad term, right? So It basically means a group of people, uh, or, or institutions coming together to fund something. And that could be donating money to a cause. It can be pre buying a watch on Kickstarter. It can be investing in the form of debt or in the form of equity. And that confusion I think has led some, not all, but some investing marketplaces to say, you know what, let's separate ourselves from that concept just to give more clarity. On what we do. We don't allow folks to just donate, or to companies to just ask for donations. We're an investing platform, and our goal, our mission, is to help entrepreneurs to thrive, and we do that by providing strong returns to the underlying investors. And that's a very different goal than some of the rewards-based crowdfunding sites that are looking to help A project get off the ground by allowing people to pre-buy product, or some of the non-profit sites which allow non-profits to pool funds together. And it's not demeaning their missions at all. It's just a very different mission. And so we try to provide clarity with the focus of being marketplace investing.

AI assessment note: “separate ourselves from that concept just to give more clarity. On what we do.”

Q And what do you think the transition in the jobs act and the movement in the SEC's ruling will affect the marketplace investing ecosystem?

A You know, it's a really good question, and we have a contrarian view on, uh, Title III of the JOBS Act, which will allow unaccredited investors in the U.S. to invest. Our view is that it won't be, uh, it won't have a major impact, and we believe it will not have a major impact in part because of the costs to the companies. So we, we look at the rules themselves, and while the goal of trying to Allow unaccredited investors to access this, you know, private investments, I think is, is, is a worthy one. The execution by the SEC made it very difficult to believe that good companies would ever want to raise money using Title III. So basic summary is that if a company raises capital using Title III of the JOBS Act, they have to jump through a bunch of hoops that they would not have had to jump through if they raised capital From accredited investors or institutions. And so what you have to believe is that that cost is worth an extra benefit. If you don't believe that there is an extra benefit from rate, from raising from unaccredited investors, then logically you'd have to believe that most companies would first go to accredited investors because there's just less cost to doing it. So let me walk through a little bit of what, what the, some of the costs are. The key one is exposing your financials on an annual basis for the entire world to see. Now, public companies do that on a quar…

AI assessment note: “Our view is that it won't be, uh, it won't have a major impact”

Q And you mentioned that the funding process for you and raising from USV, Maveron, Canaan Partners, and that naturally gets very excited all as, all as past guests of the show. So how was the funding process then for you? And what was it like getting such top tier investors investing in circle up?

A Sure. Yeah. It's actually, it's been different in each round to be candid with you. So when we first started, And raised our seed round, which, uh, Maveron and Clayton Christensen wrote the book called the innovators dilemma, um, through his hedge fund, Rose Park. They led that back in, uh, in 2012. That was a very hard round for us to raise, to be frank with you. And I think we went to 60 some odd investors who passed. And I remember vividly more than a few investors laughing at the concept of this little niche industry called consumer product and retail companies. And as much data as I would show them to say it's actually a larger industry than tech, and it's 20% of the economy, and it's just hard to get them excited, um, about, about where, uh, you know, the, the, the dislocation occurs. You fast forward then to our A round, and, you know, Union Square had said, um, very energetically that they would never invest into an online equity, uh, investing platform. And, uh, they met us, and, and they changed the Their view, um, because they, they realized that we were filling a need and their thesis and our thesis is that marketplaces work when there is a pain to be solved. And that's exactly why they didn't believe it worked in the tech world, that there was no pain to be solved. But in consumer and retail, there's a massive industry and a massive pain to be solved. You know, our…

AI assessment note: “It's actually, it's been different in each round to be candid with you.”

Q Well, you're very, very kind, and I so appreciate that, but I'd love to start today with a little bit on you, and for those that maybe didn't get a chance to listen to round one, tell me, when you were a little boy, was it the dream and a Transpiration career-wise to co-found and found Circle Up, and how did that really come about?

A It definitely was not. To be candid with you, I knew nothing about technology, certainly nothing about investing. I grew up in a small town in Vermont, 2000 people in the town, and the kind of dream that I had came about when I was about 1516 years old, and JetBlue, the airline, moved into Burlington, Vermont, which is the biggest city in Vermont, and And started a new route to New York city. And there's a big newspaper article about it. It was a really big deal in that town back in the early nineties. And, you know, for me, there was just something that hit me when I read that article, when I was 1516 years old and in our kitchen in Vermont. And what hit me was, gosh, wouldn't it be amazing to create something that made this many people happy? That concept was what inspired me to try and build something that I thought would help other people to thrive, help other people be happy. And that is what eventually led to circle up. But Everything else about Circle Up was certainly not part of the vision, uh, growing up in Vermont.

AI assessment note: “It definitely was not. To be candid with you, I knew nothing about technology”

Q I couldn't agree with you more in terms of kind of leaning into the risk. We mentioned some of the ways that people can innovate there. I'm interested by one in particular, which is kind of the integration of data. How do you foresee maybe the integration of data into VC workflows, and where do you think it maybe has most potential?

A Yeah, there's actually a Wall Street Journal article in the past week about private investors using data more. We think that's the future. Like, to be, for disclosure, we're an investment firm powered by technology, um, and the technology finds, evaluates companies, so clearly I'm biased, but that bias comes because I bet my career that that was the future for private investment. I think data and tech will be used to find and evaluate companies and to help them post-close in the private markets. 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. So what I mean is in tech, the business models are wildly different. There's also not a lot of data, particularly for early stage tech companies. You're often dealing with a CS major from Stanford. He's got a 15 page PowerPoint deck and you got to make a bet. That's a hard place to use a lot of data. Unless the data is effectively like correlation ventures, you're just making that on who else is in the round. That's fine, but that's not really what I'm talking about. This will start also in industries, geographies, asset classes, where there's a problem to be solved. So I'm thinking of areas outside of Silicon Valley. Silicon Valley, there's no secret on who the investors are and who …

AI assessment note: “I think data and tech will be used to find and evaluate companies”

Q Up, but this next one made me interestingly irate, which is when I saw on Twitter, you tweeted, micro VC funds, and the element of them having small funds because they just can't raise bigger, and I immediately thought to the likes of Floodgate, Baseline, Founder Collective, the multitude of examples that suggest stellar returns, and actually, that's just not true. How do you think about and explain that one?

A First of all, 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. The other thing I would say is what I have typically seen is that a fund will start, let's call it a fifty hundred million dollar fund. It'll do really well. Then we'll raise a much larger fund and it'll keep moving up market. 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. There are exceptions. And you've mentioned a couple exceptions. In my tweet storm, I mentioned some others. Union Square Ventures, Benchmark, or some other exceptions to what I said. There are absolutely investors out there that want to stick to their knitting and stick focused on smaller funds where they know that the performance has been fantastic, work with entrepreneurs in a certain stage, and I think that's terrific. But by and large, I also see a general trend towards investment managers trying to raise larger funds and

AI assessment note: “There are exceptions. And you've mentioned a couple exceptions.”

Q doing so, I speak to many consumer founders and they go, sure, I get you on capital efficiency, Harry, but we don't have free and open distribution today, and I have to compete with the incumbents of this universe to acquire customers on insane cost to act Customer acquisition channels. How do you respond to this? And how do you think about that lack of free and open distribution today?

A So look, I think what we're really talking about in that question is in part, there's kind of two main channels. There's, there's online and then there's offline. And what we see in the offline world is a flood towards innovation. Retailers are desperate to bring innovation on their shelves. That was not true 10 years ago. Those barriers to entry have declined dramatically. What used to be called plotting fees have declined dramatically, meaning you used to have to pay a 100,000 dollars to get on the shelf of a retailer here in the U.S. That has changed in many instances. The reason is that retailers, online and offline, recognize that if you're only competing on price, you're going to get killed by Walmart, by Amazon. It's really hard to do that. You need to deliver value to the consumer in another way. Possibly, Through innovation. 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. Now, a different part of your question was around the cost. Effectively, it was around the cost to distribute products online. This is another area where I think tech VCs get it very wrong. 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 cha…

AI assessment note: “DTC is a great channel to test new products because you can cycle through”

Q I love the kind of focus on framework there, and I haven't heard that kind of quite specific Explicitly stated before, but I would love to ask maybe when the framework doesn't work out, and there's questions around a potential individual, how do you determine when a stretch VP is really a stretch too far?

A Well, it's an interesting question. I got advice, and I'm sure probably everyone has, that 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. So there's different symbols of that. Certainly someone who breaks our values, you know, the values that we have here at Circle Up, and we have them clearly laid out actually literally on our wall. That's a non-starter. Then it comes down to impact. Impact in a way that is consistent with our mission and vision. And so we work very clearly to define objective key results for everyone on the team so that they know what are we asking them to contribute to. If they're contributing it in a way that is consistent with our values, with a mission, a vision, then they're doing a great job. If they're not, then we need to have a conversation about whether or not it can improve, and if it can't, we need to part ways. But one of the benefits of using these frameworks is that it helps to take out personal bias. It helps to take out not all, but a lot of the ambiguity that typically comes with those performance decisions, both in hiring and in letting someone go.

AI assessment note: “Certainly someone who breaks our values... Then it comes down to impact.”

Q couldn't agree with you more there in terms of certain cases of kind of AUM hungry VCs, but before we kind of discuss maybe some of the solutions in more depth, I'm interested in terms of accountability. Is this solely the fault of the AUM hungry managers, or does one blame the LPs and the LP mechanism for allowing this behavior to occur and really supporting it with their dollars?

A Perhaps. I mean, it definitely takes two to tango here. In terms of the LPs, there are some who have the courage and capacity to try something new. Those are the LPs that will thrive. Also, an old expression in investing from many decades ago that said, I don't get fired for investing into IBM. The Right? So we can both think of some firms that even recently are kind of blowing up, haven't seen any innovation, returns have gone down for them year after year, but LPs are scared that if they take a chance, they might get fired. Playing it safe means sometimes going with old brands, and so from that perspective, I think that the LPs are partly to blame.

AI assessment note: “it definitely takes two to tango here... I think that the LPs are partly to blame.”

Q doing so, I speak to many consumer founders and they go, sure, I get you on capital efficiency, Harry, but we don't have free and open distribution today, and I have to compete with the incumbents of this universe to acquire customers on insane cost to act Customer acquisition channels. How do you respond to this? And how do you think about that lack of free and open distribution today?

A So look, I think what we're really talking about in that question is in part, there's kind of two main channels. There's, there's online and then there's offline. And what we see in the offline world is a flood towards innovation. Retailers are desperate to bring innovation on their shelves. That was not true 10 years ago. Those barriers to entry have declined dramatically. What used to be called plotting fees have declined dramatically, meaning you used to have to pay a 100,000 dollars to get on the shelf of a retailer here in the U.S. That has changed in many instances. The reason is that retailers, online and offline, recognize that if you're only competing on price, you're going to get killed by Walmart, by Amazon. It's really hard to do that. You need to deliver value to the consumer in another way. Possibly, Through innovation. 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. Now, a different part of your question was around the cost. Effectively, it was around the cost to distribute products online. This is another area where I think tech VCs get it very wrong. 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 cha…

AI assessment note: “there's kind of two main channels. There's, there's online and then there's offline.”

Q there's a higher chance of This not working out in this fund, not having that sustainability than in a stodgy old firm. So I will have moved on from my current position in five years. So if I invest in stodgy X firm, at least no one will know. And if I invest in you and it doesn't work, someone will know. Do you think the LP mechanism is broken?

A Yeah, so that's exactly right. And by the way, that quote is an identical quote to what we hear in other large stodgy industries that have had very little innovation and people are just trying to keep their job. That is the risk, and so how do you change that behavior? Well, I think you have to start with changing incentives. 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. Think of industries where it's almost all salary-based. You try to keep your job. That's it, and so how do you keep your job? Yeah, you invest into old, stodgy businesses that are going to be safe, And that's fine. There's a portion of LP capital that should be kind of just safe, but alternative assets are higher risk, and LPs need to lean into that risk if they're looking for the returns that have historically come from alternative assets.

AI assessment note: “Yeah, so that's exactly right... you have to start with changing incentives.”

Q On first glance, it would be very easy to put yourself in the bucket of crowdfunding, but you very particularly segment yourself away from that into the label of marketplace investing. So why is that? And what are your thoughts on these two labels?

A Sure. So crowdfunding is just, it's a very broad term, right? So It basically means a group of people, uh, or, or institutions coming together to fund something. And that could be donating money to a cause. It can be pre buying a watch on Kickstarter. It can be investing in the form of debt or in the form of equity. And that confusion I think has led some, not all, but some investing marketplaces to say, you know what, let's separate ourselves from that concept just to give more clarity. On what we do. We don't allow folks to just donate, or to companies to just ask for donations. We're an investing platform, and our goal, our mission, is to help entrepreneurs to thrive, and we do that by providing strong returns to the underlying investors. And that's a very different goal than some of the rewards-based crowdfunding sites that are looking to help A project get off the ground by allowing people to pre-buy product, or some of the non-profit sites which allow non-profits to pool funds together. And it's not demeaning their missions at all. It's just a very different mission. And so we try to provide clarity with the focus of being marketplace investing.

AI assessment note: “we try to provide clarity with the focus of being marketplace investing.”

Q And what do you think the transition in the jobs act and the movement in the SEC's ruling will affect the marketplace investing ecosystem?

A You know, it's a really good question, and we have a contrarian view on, uh, Title III of the JOBS Act, which will allow unaccredited investors in the U.S. to invest. Our view is that it won't be, uh, it won't have a major impact, and we believe it will not have a major impact in part because of the costs to the companies. So we, we look at the rules themselves, and while the goal of trying to Allow unaccredited investors to access this, you know, private investments, I think is, is, is a worthy one. The execution by the SEC made it very difficult to believe that good companies would ever want to raise money using Title III. So basic summary is that if a company raises capital using Title III of the JOBS Act, they have to jump through a bunch of hoops that they would not have had to jump through if they raised capital From accredited investors or institutions. And so what you have to believe is that that cost is worth an extra benefit. If you don't believe that there is an extra benefit from rate, from raising from unaccredited investors, then logically you'd have to believe that most companies would first go to accredited investors because there's just less cost to doing it. So let me walk through a little bit of what, what the, some of the costs are. The key one is exposing your financials on an annual basis for the entire world to see. Now, public companies do that on a quar…

AI assessment note: “Our view is that it won't be, uh, it won't have a major impact”

Q And you mentioned there that it might not be optimal for tech companies to raise using this form of funding platform. Why is it that you believe that, and why may it be not so optimal for them to raise using this?

A Well, first and foremost, I think, um, tech companies, to be candid with you, shouldn't use any online platform. I think tech companies have a very robust funding environment already, and so, you know, that's in the form of not just Silicon Valley and New York City, but the other 25 cities in the U.S., And dozens and dozens of cities around the world that are giving, uh, strong incentives for the tech environment and for VC firms. There is no shortage of investors or capital flowing into tech companies. So then when you consider if a, if a company in the tech space goes to an online platform, I think you can reasonably assume they already tried to raise from Sequoia. Or Union Square Ventures, or all of the other VC firms, or they tried to go to the incubator groups, or the angel groups that are offline, et cetera, and they were passed over. That's fine, but then what you have to believe is that those companies that were passed over will still provide a strong return to accredited investors through an online platform, and that's difficult for us to believe, especially when you consider that the returns in tech Investing over the past 15 years have been very poor. Then, when you start talking about Title III of the JOBS Act, unaccredited investors, I think what you have to believe is, all right, they were passed over by all the best VC firms, then they went to all the angel group…

AI assessment note: “tech companies have a very robust funding environment already”

Q And you mentioned that the funding process for you and raising from USV, Maveron, Canaan Partners, and that naturally gets very excited all as, all as past guests of the show. So how was the funding process then for you? And what was it like getting such top tier investors investing in circle up?

A Sure. Yeah. It's actually, it's been different in each round to be candid with you. So when we first started, And raised our seed round, which, uh, Maveron and Clayton Christensen wrote the book called the innovators dilemma, um, through his hedge fund, Rose Park. They led that back in, uh, in 2012. That was a very hard round for us to raise, to be frank with you. And I think we went to 60 some odd investors who passed. And I remember vividly more than a few investors laughing at the concept of this little niche industry called consumer product and retail companies. And as much data as I would show them to say it's actually a larger industry than tech, and it's 20% of the economy, and it's just hard to get them excited, um, about, about where, uh, you know, the, the, the dislocation occurs. You fast forward then to our A round, and, you know, Union Square had said, um, very energetically that they would never invest into an online equity, uh, investing platform. And, uh, they met us, and, and they changed the Their view, um, because they, they realized that we were filling a need and their thesis and our thesis is that marketplaces work when there is a pain to be solved. And that's exactly why they didn't believe it worked in the tech world, that there was no pain to be solved. But in consumer and retail, there's a massive industry and a massive pain to be solved. You know, our…

AI assessment note: “It's actually, it's been different in each round to be candid with you.”

Q And I have to ask that you mentioned the seed round with possibly 60 VCs saying no to you. How did you as the founder keep the morale up and not be disheartened by the, by the continuous rejection of investors at such an early stage?

A That's a great question. Um, I have a, a bizarre, um, personality trait that when someone doesn't believe in me, I believe in myself more. And I use that, um, I, there's a little bit of a, uh, a vengeance to be candid with you. Um, and, uh, that, that anger, uh, energizes me. Um, and so I said to our, our board, um, casually, Uh, you know, after the C round that, you know, I'm someone that when my teammates believe in me and the opponents don't believe in me, I am at my best. Um, and so when I would meet with a VC firm and they didn't, or a angel investor or whatever, and they didn't believe in, in me or us, it got me more excited and, and, uh, just to, to prove them wrong, to be candid. And so I could, I could still tell you very small details about most of the meetings, uh, Of folks that passed. And, uh, I remember those details very vividly. And when things are going really well, I like to think back to those details to fuel me, uh, to, to prove them wrong and to build something that's really special.

AI assessment note: “when someone doesn't believe in me, I believe in myself more.”

Q So for you and CircleUp, how are institutional investors getting into this sector, and is there anything else you'd like to see in terms of them entering the market?

A You know, that's a great question. So we're seeing, um, a explosion of Institutional investors on the platform in 2012 when we first started the average check on circle up was 12,000 dollars and it was all from individual investors accredited investors in 2015 the average individual check was over a 100,000 dollars into a single deal on circle up and half the capital comes from institutional investors what you've seen over the course of those those three years is Uh, a path that looks very similar to lending clubs path and there's first three or four years where they started with individuals loaning money to other individuals and then move to family offices, then small funds and larger funds, et cetera. And we're seeing a very similar path, which by the way, is why some of the largest VC firms that backed lending club are in circle up and their COO is on our board, right? They, they see a very similar path. They view us as the equity equivalent of, of lending club. You know, but I, I think as we look forward, um, we get even more excited about that. So in our series C a few months ago that we raised and announced it in, in November, some of the, you know, best marketplace and fintech investors in the world invested, but we also had the ex CEOs or presidents of Goldman Sachs, Thompson Endowment, Capital One, and others invest, and they all invested with the theses that goes back…

AI assessment note: “half the capital comes from institutional investors what you've seen over the course of”