The Exchanges

Q Do you think it's possible to have, um, an even divide amongst co-founders, like a fifty-fifty split or 25, 25, 25?

A I don't actually. And so, and the reason is that at the earliest stages, you have to sort of forward look the cap table. In other words, I'm going to raise a seed and I'm going to get 20% dilution to Typically the Series A, another 20 to 30% dilution, and so on and so forth. And so the question is, at the end of the day, when you're at Series C and you now own five or six percent of the company, or let's say seven or eight, is that enough to keep you motivated and knocking your head against the wall 18 hours a day and busting through all of the barriers that are presented to you? And it's a question mark. Having said that, if you own 50 or 60% of the company, then you are all in. And so it's that simple forward-looking five-year-ahead view that we bring to the table.

AI assessment note: “I don't actually. And so, and the reason is”

Q And how do you come up with a valuation? Like, where does that come from? Often, I mean, from an outsider's perspective, it seems like some of the valuations I see tossed around in the newspaper headlines are just, they seem outrageous based on the economics of the business.

A Completely arbitrary. Yeah, no, no, there's some rubrics. So, you know, they're in SaaS based businesses, uh, because they're very data driven, uh, SaaS by software as a service, you know, there are, there are obvious statistics like the cost of acquisition of a customer, the CAC, the lifetime value LTV. There's ratios. There's different dynamics that you can pull from other companies that are successful, and you can apply them to your company, and then you can raise and lower. Generally, it's a price to sales multiple. Um, you can raise and lower your multiple based on the dynamics, right? So if I have very high churn, you're going to get a lower multiple. If I have very high margin, let's say in the high nineties, um, you're going to get a higher multiple. Uh, but at its core, uh, it's a function of a couple of other things that are, Somewhat different. One is the investor syndicate needs to own enough to make it worth their while, right? So a lot of VCs will say, I need to own 20 or 30%. We won't get involved. Otherwise, uh, angel investors may, uh, simply want to put dollars in and get reasonable ownership out. At the same time, the founding team needs to have enough equity to make it worth their while. And I think some VCs have it upside down where they say, well, we're going to own all this business, but then you've lost alignment of your founder. And if you lose your fou…

AI assessment note: “there's some rubrics... Generally, it's a price to sales multiple.”

Q Two minute version from the end of university or three minute version until now?

A Sure. I graduated university in, in the late, uh, nineties, 96, I think, and, uh, immediately went to IBM. So I did an engineering degree in undergrad and IBM was sort of the pinnacle of what I thought the world could be. And so I accepted a job and, uh, spent two years at IBM and, uh, really didn't like any of it, partly because I was very junior and there was a lot of very senior skilled engineers there. So you ended up getting relegated To all the menial stuff. So on the heels of that, I moved from Toronto, Canada to Baltimore, Maryland. So I moved to the U S to a startup called Sienna, and that afforded me a lot more opportunity as a startup to be a designer and build real world things and have my hand in it. In that process, got an MBA and, uh, in my MBA class, I met my first VC. I'd never even heard of the asset class, didn't know anything about finance before that. When I heard what venture capital was about, uh, at the time I fell in love immediately and decided that was it for me. And so within weeks I went back and, uh, happened to have a fortuitous meeting with the CEO of Siena and, and, uh, they ultimately hired me as an analyst in their new venture program. So I cut my teeth as an analyst and then I moved to California. Uh, where I came up through the ranks, associate, principal, partner at multiple firms, and had a fairly successful start. I finished at Motorola V…

AI assessment note: “I graduated university in, in the late, uh, nineties, 96, I think”

Q Talk to me. You mentioned the power law of VC economics. Talk to me about that. What is that?

A Yeah. I mean, if you look at the sheer, uh, I'm going to, I want to say failure, but I, but I, I sort of hesitate to use that word, but the reality of venture is that at every subsequent financing, about half the deals fall off. And so to become a unicorn, uh, is a one in a thousand proposition. And so the, the power law basically says that you need to find that one unicorn in your portfolio of 20 or 30 bets of each fund. In order to have the kinds of returns that our LPs, our limited partners are expecting. And so those numbers are very hard to find. And unless you're a, I'm going to call it a tier one firm who has a history of getting amazing deal flow from the best founders, it's really tough to, to live on the power law and expect to get a unicorn in every fund. So we have a slightly different model. Ours is, you know, especially in, in a, a tier two market like Canada, if you will, as opposed to Silicon Valley, you know, there's less unicorns born here. So we are looking for the, The, the solid, but mid hundreds of millions of dollars exit as opposed to the billion dollar unicorns.

AI assessment note: “the power law basically says that you need to find that one unicorn”

Q Right. And do you, do you sort of clean that up or do you avoid those situations?

A It depends. It depends on how coachable the entrepreneurs are. And I don't say that with any sort of arrogance, but you know, the, the, a good entrepreneur is a good listener as well, right? They don't necessarily follow your advice cause that's, that's not necessarily a good thing, but they'll listen to, um, ideas and perspectives and then they may right the ship. So I've, I've been in situations where, you know, a husband and wife team They, they decide, yeah, you're probably right. And we're already feeling the strain at home. And so therefore one of them is going to go off and, you know, she's going to continue to run the business as an example. But if they, you know, dig in their heels and say, you know, that's, it's not going to be an issue. I guarantee it. I know this, we're different than everybody else. And then we probably walk away.

AI assessment note: “It depends. It depends on how coachable the entrepreneurs are.”

Q Walk me through your entire decision process from finding sort of possible companies to invest in all the way down to making the investment decision and writing the check. What are the gates that you have? What are the questions you're asking yourself? How are you evaluating not only the companies, but yourself in order to commit capital?

A A bit more of a long winded answer. The, the process for us can take anywhere from, I'm going to say two months to a year. Uh, from, and actually in multiple deals, it's, it's several years, um, for whatever reason, we're tracking companies, but it starts, you know, with that initial meeting. So we'll be introduced to a company through a reputable source, one of our limited partners, another VC, an accountant, um, you know, a lawyer, et cetera. We'll have that meeting and we'll decide whether we're interested at all right out of the gate. And so that's comes from three things, three core questions. Do we like the team? Do we like the technology? And do we like the market? So we have a general rubric of what we invest in, which is enterprise software. Um, and we're looking at the intersection of technology and enterprise functions. So does it meet that market segment? Is it big enough? Is it growing? Is it interesting? And we'll be able to assess that fairly quickly. Um, the technology itself takes a little bit more digging and probing, uh, but we can figure that out whether there's enough to go forward in that first meeting. And then the team itself, You know, again, it's a relationship building exercise. It's multiple meetings over multiple days, um, and a rapport gets built up. Then if we agree that we want to move forward with the deal, we'll start doing diligence. So ideall…

AI assessment note: “it starts, you know, with that initial meeting... we'll decide whether we're interested”

Q Talk to me about some of the mistakes that you've made. So what, what happens when you realize you've made a mistake? Do you just immediately write the company off and don't invest in it? And like, don't invest any time in it anymore. Do you dive in and try to solve that? I know you're huge on problem solving and troubleshooting. Sure. Like, how do you handle that?

A Yeah, there's, there's a number of different models. Um, I wouldn't necessarily say that ours is the best, but some VCs that I know, I won't name names. Um, believe in cutting bait early, so they will invest in a company, and if it's not tracking, they simply walk away. Whether they sell their position or resign from the board and let the company fend for itself is their strategy. Our view is, um, twofold. One is, because we invest a small amount up front, we have a structural, um, sort of gate at the Series A. Before we invest a significant amount of capital, we have a much more clean decision, thorough diligence process. Um, and that means that We can walk away from our early bets with minimal capital deployed and chalk it up to a learning experience.

AI assessment note: “We can walk away from our early bets with minimal capital deployed”

Q A large part of your job now is evaluating founders. What, what are the tools, the questions you ask, the sort of like things that you look at in order to do that?

A Sure. I, you know, I think it's a bit cliche, but it all comes down to people, right? So my job really is to meet with people and get to know them and decide, you know, who I want to work with. And so we've passed on good founders and we've passed on not so good founders, but at the core of it, it's, You know, does this person have a vision on the future that doesn't exist today that we want to play a role in? And it all starts with, with my first question with every interview is tell me about inception. So why do you want to do this so badly that you're willing to break through walls and spend years, uh, in the cold as an unknown at the shot for the shot of being a successful entrepreneur? And the, the answer that you get back is really insightful, right? Is it, Is it a problem that they've experienced personally for a long time and just, you know, have to solve it? Um, or is it a job? Is it, are they a wantrepreneur who, you know, found some technology and they want to exploit it?

AI assessment note: “my first question with every interview is tell me about inception.”

Q A lot of people would argue that you can't identify these things in the beginning, and it's just through sort of randomness that some of them work out to these, these exits that generate the returns, but you're, you make a living sort of On the other side of that, can you riff on that for a second?

A Yeah, I think, you know, the numbers, numbers sort of show that venture backed companies historically and statistically do better than non-venture backed companies. And, um, not to sort of blow our own horn, but VCs have a lot of experience in pattern matching, and they simply have a lot of exposure to things that company founders don't have every day. And so the idea of, uh, being a venture backable company in the first place is a different kind of category of company. And having a good syndicate of VCs around the table who can give you insight into customer behavior, trends in the industry, talent that, that you can attract, et cetera, and the credibility that goes along with being professionally funded gives an edge to those companies. So I'm not gonna say refute, but I believe that venture backed companies tend to do better than none.

AI assessment note: “VCs have a lot of experience in pattern matching”

Q So what, what are the differences you see in the response? You challenge this, the CEO, you're trying to put money into the company. They want to raise money. Uh, you've probably seen a spectrum of different responses. Talk to me about some of them.

A You know, I often say, and I, and I, it was a bit tongue in cheek, but it's the entrepreneur's job to lie to me until I cut them a check. And it's my job to pick the best liar. And so, you know, integrity, notwithstanding, which of course critical here, but when you When you challenge an entrepreneur with a tough question, and you challenge their assumptions, you know, they can react in a myriad different ways, right? So they can obviously be really defensive immediately and say, no, you don't understand. This is the way it is. Well, that's a pretty strong signal. The ones I like are, you know, contemplative, and they'll sit back and go, you know, that's really interesting. Have you thought about it this way? And they'll, they'll contemplate it. And maybe they shift decisions, or maybe they don't. I prefer the ones that take it in Uh, consume it and then dictate their own path, not necessarily mine. Cause the fact is, you know, they're qualified to run their business. I'm not, I'm qualified to advise and be a mentor, but I'm not qualified to run their business.

AI assessment note: “they can obviously be really defensive immediately... The ones I like are, you know, contemplative”

Q I know you're a voracious consumer of audiobooks, podcasts, different information sources. Can you riff a little bit on how you curate the information sources that you're bringing into your brain and how you translate that into specific knowledge?

A Yeah, my, my sort of Uh, goal with reading and consuming information is twofold. One is for my, my work, right? So I listened to a lot of podcasts and books, um, around startups, successes and failures, looking for clues on how companies can fail more than looking for success indicators. Um, that just helps me in my, my day-to-day business. The other sort of, uh, half of the content that I consume is around, uh, two fundamental questions. One is, um, Um, understanding what the meaning of life is, and to put it in a broad perspective. So searching for what, what is happiness? What is truth? What is, uh, the point of it all? And by, by reading, uh, fundamentally biographies, um, up and down the line from, say, Marcus Aurelius to, you know, Putin to, you know, even, even Trump's biographies written by third parties are interesting in that they give some inkling and some insight into what life is for them and why they're living it. But I will say, and I'm quick to say it, I, I, I'm a terrible consumer and I have terrible retention. We've talked about this in the past. So I, I listen to high speed. I listen.

AI assessment note: “One is for my, my work... The other sort of, uh, half of the content”

Q What are some of the other questions that you ask other than the story and the why, like to get to the really, the character of the people that you're investing with, to establish trust, to understand them?

A You bring up trust, which is critical, right? So integrity, trust, uh, rapport, all of those things are really integral to successful relationship. And at the core of all successes are, are talented people who are trustworthy, et cetera. So rather than pick personality or an entrepreneur, uh, From a series of interviews, what we do is we invest upside down. So we invest a small amount at the pre-seed stage and work very, very hard with our entrepreneurs to get to a series A. And at the series A, we invest significantly more than we did at the seed stage. And the reason I say that's upside down is that most firms will do one of two things, two other things. One is they develop deep conviction and knowledge around a space, and they pick the best founders to Prosecute that space. And the other strategy.

AI assessment note: “rather than pick personality or an entrepreneur, uh, From a series of interviews, what we do”

Q I want to switch gears a little bit and talk about sort of misvalued assets. What do you think is the most miss undervalued asset in the world right now? The most undervalued asset in the world?

A Let me reframe the question to, to what I think is interesting as an investment area. Our view is that we, we invest in technology, but not for technology sake and technology that enables application of technology. So for example, AI, you know, a lot of people talk about AI being a sector. AI is not a sector. AI is math. AI is an algorithm that's enabled by very fast processors with new ways of thinking about how to analyze big sets of data and now smaller and smaller sets. But AI in and of itself is not that useful. But AI combined with a subject matter, um, as a collision is really interesting. So we've invested, for example, in a company called Blue Jay Legal that does AI meets case law. So what they do is they apply artificial intelligence on all the historical cases around a particular question that were litigated. And so they can predict with 95 plus percent accuracy The way that a judge will rule on a particular question, given a certain set of, um. Not retrospectively, but in the future. In the future. So basically, the software will ask you 10 questions that are salient that the AI figured out to ask, and if you answer yes or no, positive, negative, um, it will, it will predict for you whether you will win or lose the case. And the, the upshot of that is that, you know, the, the judiciary system can focus on cases that are fifty-fifty, which really do need to be added …

AI assessment note: “Let me reframe the question to, to what I think is interesting as an investment area.”

Q friends or, you know, close people close to you. And then as you grow, you reach the ceiling of, of capability of people. Yourself included. Like, as you try to scale, talk to me about some of the problems you see as companies try to scale and then getting rid of people. Like, how do you decide when to move on from somebody who's got you to where you are?

A There's, there's a lot packed in that question. Let me, let me see if I can tease it apart. You know, some common mistakes early on are expecting that you and your three co-founders who you've split the company up four ways, 25% each will scale and it rarely does. Right. So More often than not, one of those co-founders finds something else to do, and now they're, they're benefiting because they have 25% of the stock that's not vested. So that's, that's a simple mistake that we look for in capitalization tables before we invest. Following on that, you know, there's the nepotism law, right? So rarely do husband-wife teams work out for a number of reasons, but not least of which, in our view anyway, you know, let's say that the wife is the CEO and the husband is the CTO or the CFO, You know, their direct reports are rarely gonna, you know, not gonna go to the CEO and complain about the CFO. So there's, there's obvious dynamics there. Those are, those are things that we have learned through hard knocks.

AI assessment note: “some common mistakes early on are expecting that you and your three co-founders”