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Demystifying the conversations we're already here at RRE and with our portfolio companies. In each episode, your hosts, Will Porteous and Raju Rishi will dive deeply into topics that are shaping the future, from satellite technology to digital health, to venture investing, and much more.
Zach: So, a really interesting question that I thought was pretty funny, and I did want to ask, that I got from someone here in the audience was, if I slid over a phone to you, and you could call your 18-year-old self, would you call? If you would, what would you say?
Mark: I saw that question. I was hoping you weren’t going to ask it.
Raju: [laugh].
Mark: But you asked it a little different, so you’re giving me an out, and I wouldn’t call myself, so—[laugh].
Zach: [laugh]. I would call. I would call [unintelligible 00:00:26].
Raju: Buy Nvidia.
All: [laugh].
Raju: Like, why wouldn’t you buy Nvidia? Like, jeez, I’m set.
Will: Welcome to RRE POV—
Raju: —a show in which we record the conversations we’re already having amongst ourselves—
Jason: —our entrepreneurs, and industry leaders for you to listen in on.
Zach: So, to start, we have Raju Rishi, general partner of RRE Ventures, Mark Volchek, founding partner of Las Olas Venture Capital—founder of Higher One as well. So Raju, if you want to start and just give background into RRE Ventures, what is RRE Ventures? What is your investment strategy, thesis, and your approach right now?
Raju: Sure. Yeah. We’ve been in business for a long time, over 30 years. We’re on our eighth venture fund, and we have two opportunity funds. All of our venture funds are really quite similar. We target 250 million in size, we put a small amount of capital to work in Seed Checks. Typically, there we’ll write between 250 and 500 just to, sort of, get, you know, acquainted with the founder, acquainted with the company. Our sweet spot is really Series A, but we’ll work with checks between 3 to, like, $7 million to [work with 00:01:43], with a total capitalization of 10 to 12 in the ones that, sort of, needed additional capital.
We’re sector agnostic. We do some consumer, we’re a little bit heavier on B2B and enterprise software and SaaS. We do robotics, healthcare, we’ve done some crypto. But generally speaking, we do the Series A, we’ll take a board seat, we’ll work with the team for the duration. I’ve taken a couple companies public, and still sit on one public company board as a result of just, you know, Series A investment that I did a while ago. But you know, that’s us. We’re headquartered in New York, we’ve got a satellite office in South Florida, and love working with these guys as well. So.
Zach: Thank you. Mark?
Mark: Sure. So, Las Olas Venture Capital, we’re based in Fort Lauderdale, Florida, but we have a lot of portfolio companies in New York. I used to be in New York. I started really as an entrepreneur. So, the first 15 years of my career, took a FinTech company literally from my dorm room to an IPO in 2010, and then we took it private again in ’16, and that’s when I started Las Olas Venture Capital.
We’re focused on B2B software only, so we’re a little bit more narrow in terms of our focus. So, B2B software from, kind of like, seed is our primary target, but we’ll do some pre-seed, and then we’ll do some early A and, you know, there’s, you know, in terms there, we have a little more flexibility. And we like investing all over the East Coast, so really Boston, New York, Atlanta, down to Florida, and we’ve done a little bit, you know, in Chicago and elsewhere. So, that’s, kind of, our focus. Um…
Zach: And I know you mentioned you take board seats—
Mark: Yeah.
Zach: —in some of your portfolio companies. I know we do as well. So, can you maybe dig into what value-add you add to your portfolio company [unintelligible 00:03:23]? How do you provide resources?
Mark: [unintelligible 00:03:25].
Zach: No, no, no. [crosstalk 00:03:29].
Raju: We’re… you know, listen as you were, I’ve been an entrepreneur for three times. I started my career, I was in Bell Labs for five years, I ran international for AT&T and Lucent for a few years, and then I started three companies when mobile was hitting its inflection point. And I, kind of, fell into venture. I wasn’t really, kind of, a venture guy, but RRE Ventures had backed one of my companies. The first one was backed by Greylock and Sigma, the second one Bootstrap, the third one Bain Capital, RRE, and Sigma. Joined Sigma Partners for a few years, and then my real home was RRE, and I’ve been here for ten.
And, you know, so the value-add, there’s, sort of, different degrees of value-add you can get from venture firms, depending on their size or scale. Some firms are, sort of, massive, and they’re going to help you with recruiting, and marketing, and all sorts of things like that. We’ve always, kind of, shied away from offering that level of services because there’s always a combative nature to it in terms of the number of portfolio companies you have. If you got 30, 100, 200 portfolio companies, everybody’s looking for a head of sales. Only one of them is going to get that top candidate, and so it just doesn’t make sense.
The value-add we offer is really, you know, we’re entrepreneurs, and we’ve, kind of, went through all the stages that your company is going to go through, and we’re going to be there as the first call. We’re going to help you, kind of, think through strategy, think through, you know, sort of, when to turn on marketing, what the right unit economics [for your 00:04:53] business are. And then we’ve got a bunch of services that we can offer you, we can direct you to. So, if you’re looking to recruit, we know a bunch of recruiters. If you’re looking for a banking partner, we’re just going to point you to Brad. That’s the only one we’re going to point you to.
And you know, those kinds of things do help you get off the ground, but in terms of, sort of, am I going to be your arms and legs, and have a CFO that’s in-house that’s going to do the job as the CFO, we just don’t do those kind of services. There’s too many portfolio companies to be able to do that well.
Mark: Yeah, very similar for us. You know, we really want to be there to provide advice, to be, sort of, a sounding board. I think the two areas were probably most involved, sort of, on the regular basis is, sort of, key hires, often, you know, we’ll look at a resume and say, you know, this makes sense, this doesn’t, really again, as an advisor to you. And then when you raise the next round. That’s another one where we have a lot of—just like Raju and RRE—have a lot of connections to later stage investors, and so we make those intros, and we can guide you to say, “You know, this might be a better fit than here,” and so we really help with that.
But otherwise, we’re really, sort of, an active board member. We’re there at board meetings, we’re also available anytime by text, by phone, by email, for all kinds of questions, you know? We’re really just an experienced advisor. And the whole team. So, Zach helps some of our portfolio companies with their PR release, and you know, I’ll deal with other things in, you know, whatever questions come up. So, it’s really—I try to think about it as what does the company need, rather than prescriptive. And since this is what we want to do, we’re more reactive to what the company needs or wants.
Zach: Then, Mark, can you talk a little bit about what excites you most when you’re evaluating a seed-stage company? And then what are some of those red flags that you see that are common in seed stage [pitching 00:06:38] you?
Mark: Sure. So, for us, you know, the most important thing is always the team. And it’s not, sort of, an evaluation on its own; it’s, is this the right team to execute the plan that you’re, sort of, proposing, right? Because every business plan we see is, sort of, a home run, so the question is, can this team actually hit the home run that they’re proposing, right? So that’s, sort of, the first thing we think about is, like, is this a good team, or a good fit, a good founder. So, that’s number one.
Number two is really traction. You know, how much traction you have? And traction can be a lot of things. For us at the seed stage, it often is, you know, some early revenue traction, but it could be user traction, you know, engagement, it can be a lot of different things, and the traction relative to the resources you’ve spent. Usually that’s money raised, right?
So, if you’ve raised $1 million, what have you done with it? If you’ve raised $5 million, what have you done with it? That’s an important evaluation. And again, back to the team: what has the team accomplished with what, you know, the resources they’ve used? So, that’s really important.
And then ultimately, as a venture capital fund, we’re looking for companies that can really provide, sort of, a huge return. We’re not looking to make two or three times our money over the next five years. For that, people can invest in US Treasuries, right? If you do the compound, the treasury is at five, six percent tax-free, that’s a pretty good investment. But what we’re looking for is companies that can grow 10x in two or three years, really what we call venture scale returns.
So, it has to be a big market, it has to be high growth, and has to show how you can get from today to where you need to be in four or five years. Again, it may take a little longer, but we have to believe that it’s possible in what you’re doing.
Raju: Yeah. And so, you know, we’re a little later stage. We do a bit in seed but mostly Series As. And really, like, if you talk to any venture investor at the Series A level, they’re going to look at five things. They’re going to look at your team. Do have people who have subject-matter expertise, do you have a complete team that can do marketing, and sales, and technology and whatever else is involved? You know, they’re going to look to see if you have startup experience, you know? And we do. And we take that into account.
The second thing is, sort of, the size of the market, and does it have tailwinds or headwinds? I think that’s a really big barometer in the successes that we’ve had in the past is, are there tailwinds in this industry, or are there headwinds? You know, if you’ve got into a thing where you [got 00:09:08] regulatory issues, and that created a headwind in your business, it really doesn’t matter how good you are. You’re just struggling to, sort of, move forward. But there are a lot of industries that have tailwinds, and that thesis shifts, and so you have to pivot a little bit. But we look at the market opportunity, and that’s a big one.
The third is product-market fit. Do you have—is there a pull in the market? You know, are you seeing some, kind of like—my favorite product-market fit story is when your product’s broken and people still use it, you know? Because they’re like, “I need to use this thing, and it sucks in these three dimensions, but it’s so good, it’s so valuable that”—and I love those kinds of stories.
The fourth thing we look at is competition. You know, is this a one of one that you can be, or are there a hundred people in the universe trying to do this. And the fifth is your business model. And I think when you look at Series A the most important pieces are really a team, product-market fit—just like you said—and what is the market size.
And the red flags, for me, tend to be founders that are a little too ambitious. One of my favorite sayings is more startups will die from indigestion than starvation. So, if you try to do too many things concurrently, you know, you’ll do all of them poorly, and you’ll probably never get off the ground. So, I look for, you know, entrepreneurs that say, “I have a sequence.” And sequencing is, like, my favorite word in venture. Like, what is your sequence? Where are you going to start? Where are you going to get to next? What does that unlock? What unlocks next? And just roadmap that out.
I don’t even need to get a pitch deck. Come to a whiteboard, show me the sequence that you’re going to create for the business, and if I believe you, I think we can move to the next step. And so, the red flags would be, like, “I’m going to do it all. I don’t have, you know, sort of, a sequence. I’ve just got a morass of things I’m trying to go after concurrently, and whatever sticks, I’ll make work.”
Zach: One of the most common questions that everyone submitted when they were registering was about product-market fit. That’s one of your four or five things you just mentioned.
Raju: Yeah.
Zach: Can you talk about what product-market fit is to you, and how you assess it in [unintelligible 00:11:05]?
Raju: You know, it’s—first of all, by the way, like, product-market fit changes over time. And so, this is one of the key mistakes that most entrepreneurs make in their life. And I made it—by the way, I’ve made a ton of mistakes in my startups; like, I can write books on it—and you were highly successful in yours, and—he didn’t make any mistakes, so he’s [laugh] the wrong one to talk to. He took his public. But, you know, one of the things that you look for in product-market fit is, is there a hole in the marketplace as opposed to a push? Am I actively selling this or do I have people just finding out about me, you know, through word of mouth, and are they pulling?
Another piece of product-market fit that I like is, you know, will people use the product when it’s broken. Because you can’t do everything. You can’t dot the I’s and cross the t’s your initial product. You just don’t have enough money. So, if you’ve got a product that says, you know, like, “We really need to use this, even though it’s broken,” that, to me is, like, the biggest, sort of, motivation that you can put money toward fixing the product, but the value proposition is really there.
The third thing I look at is when you ask—when I call your customers, which I will inevitably do, and they say, “What is this priority?”—nice catch, by the way—so you know, they basically will say, “This is, like, one or two in my priority.” As opposed to, like, “Yeah, it’s number four or five on the list.” And—because number four and five on the list never gets done, you know? If you see that, like, it’s a real pull.
And then my, sort of, hidden gem that I’ll tell you about is, can somebody besides the founder sell the product? Sell the solution? Because the founder has an interesting capability. They can go tell engineering to fix it or to change something, but if you have a salesperson that doesn’t have that clout or juice the company, and they’ve sold the product, it means it’s repeatable. It means somebody other than the founder can, sort of, convince somebody to do it. It doesn’t have to get features built in order to close the sale. So anyway, those are the things that look at.
Zach: Great.
Mark: Yeah. And I, sort of, agree with everything you’ve said. And I think product-market fit is really differently defined at every stage, right? Because every investor wants to see some product-market fit, but somebody investing $25 million, they want to see more product-market fit than we do, right? So, product-market fit to me is really, like, stage-dependent. And so, we’re looking for, you know, one, the product has to be live. You know, there has to be users using it.
And then we want to see engagement. Like, how much do the people use it? Do they use it every day? All day? Like, what—we rarely do anything pre-revenue because we usually look for early revenue traction, but one of our big success stories in our first fund was a company we did invest pre-revenue.
People say, “Well, why did you invest pre-revenue?” And we paid a pretty expensive valuation. Why? Because they had, like, 10,000 users who use this product that average of four hours a day. And they had never charged anybody. But they were going to charge people, after about a year, $30 per month.
And so, if you do the math, they were going to have $3 million ARR overnight, if this plan worked. We invested. Everybody thought we were crazy. Six months later, they had 3 million of ARR, and they raised an [unintelligible 00:14:16]. So, it was a great bet. And we sold it for 100 times—almost 100 times what we had paid for, three years after we’d invested, in the heyday of 2021.
So, it was a great run, but it’s because they had product-market fit. They had thousands and thousands of users using it all day, every day. And so, that’s one way to look at it. It doesn’t have to be revenue. But often we look for is someone willing to pay for it, right? That’s a good sign of product-market fit. If someone buys it pays for it and continues to pay for it every month, they probably like it, or they’re using it, or they need it, right?
So, those are all the things we look for. But there’s no easy answer to this question. Because entrepreneurs often look for, like, well, how much revenue do I need? It sort of depends on your business and how much we believe that people really need it. Do you have a hundred customers who love you, who pay a little bit? Or do you have two customers who you’ve known for 20 years who are doing you a favor and bought your product, and might be paying you enough, so your revenue is higher, but that may not scale to the next hundred customers. So, there’s a lot of nuance to how to look at product-market fit.
Zach: Yeah, that’s true. And we invest in early signs and product-market fit, but a difficult part of being a founder is balancing fundraising and growing your business. Really focusing on the growth of your business versus fundraising. A lot of founders get into the cycle of forever fundraising. Can you maybe talk a little bit about a balance between fundraising, growing your business, when you should fundraise, and why?
Mark: Yeah, so I think that—I mean, I’ve spent a lot of time on this question last few quarters on board meetings. Partially, I feel like today, founders are so scared of running out of money that they’re raising money far in advance of needing to. And that seems like a good idea, right? If I have nine months of runway left, why don’t I go out and raise money to make sure I don’t get too close to running out of money? But the problem with that is, nine months before you’re out, your metrics may not be there to be able to raise the next round, but you’re spending a lot of time trying to raise money, and in the meantime, the business isn’t growing as fast as it should.
So, I personally believe, in times that are tougher like today, you have to be one of the best companies in your category to raise money. And the way you become one of those best companies is you take more risk. You got to get close to the precipice of running out of money, spend all that money to make your metrics, and your company as big and good as possible, and then raise money with maybe a little less runway than you would like. Being comfortable is not a requirement of being successful. Sometimes it requires taking risks, almost running out of money.
And I started my business in March of 2000, so a few months before the dotcom crash for the few people in the room remember 2000, and we basically were able to raise just a little bit of angel money in 2000, we raised some more angel money in ’01. But we raised money once a year. But we literally were down to two weeks of runway. And I’m not saying that’s the right thing to do, but we spent every dollar that we raised to get to those milestones to raise the next round. And we raised once a year, which is not ideal, but you know, raise when you have to, not because you think it’s convenient, or it’s a good time.
Because the further you can get your metrics up, if you can get—for the Series A for example, if you’re only at 1 or $2 million of ARR today, you cannot raise a Series A. You got to be a 3 to 5. And again, depending on your business and where you are. So, trying at two-and-a-half, just because you’re scared you’re going to run out of money is a waste of time. So, wait till you’re ready, and then do a quick fundraise and get it over with. That’s the advice we try to give to our portfolio companies.
Raju: Yeah, that’s good advice. I mean, my thought process on this is, you should fundraise at discrete moments. You should not be continuously fundraising. That doesn’t mean you can’t have dialogs, and coffee meetings, and, kind of, get up to speed with the perfect investors, the investors that you want to know. Because there’s this bridge that you want to create, you want to create relationships with your potential new board member and your new investor, and they got to get familiar with your business, and you can spoon-feed them certain pieces of information. But fundraising should be a discrete moment.
So anyway, the net-net on this is that, you know, you have those dialogs on a periodic basis, and then when you hit the fundraising, it’s got to be when your metrics are appropriate—number one—and it’s got to be so you’re not doing it continuously that people sit there and say, “Well, that company’s been in market for, like, nine months.” And nobody wants to invest in a company that’s—because they think something’s wrong, and they’re not catching it. Even if you’re perfect and you have good metrics, if they see you’re in market for nine months, I think people are just going to be, like, a little bit nervous, like a house sitting on the market for too long, you know? You, kind of, take it off the market, and you got to put it back on the market. That’s kind of the way to do things.
But yeah, I’m in, kind of, agreement with that, you know? Just, I wouldn’t wait till two weeks. I never advise my companies [laugh] to wait for two weeks. But yeah, when you have a reasonable short period of runway, but you’re hit that of, like, if you hit that inflection point, and you’ve got 12 months of cash in the bank, you still might want to raise. But you’ve hit that inflection point, right, then you—because then things can change at that moment, but it’s really when you hit those inflections.
Zach: Right. And when a founder is pitching you, Raju, and tons of calls throughout the year, what is the most common pitfall in the founder in one of those calls? How do they mess up? How do they fail? How do you not decide to invest?
Raju: Yeah. I mean, I’ve said it before, I mean, more startups will die from indigestion and starvation. If they don’t have clarity on how they’re going to go from point A to point B to point C to point D, that to me is, like, pretty much a showstopper, right? Like, you can’t do it all at once, and when I talk to a founder, and they’re like, this is—you know, “Look at this size of the market. It’s so massive. We’re going to own it.”
And it’s like, “Okay, so where are you going to start?” And they’re like, “Well, you know, we’re just going to try a bunch of stuff,” or—that, to me is, sort of, a negative, if they don’t have a good sequence for the business. A second is people that say, like, you know, “Why are you an entrepreneur?” “Because I want to start a company.” Right?
I’m like, “You just want to start a company? That’s, like, the goal? Like, do you realize that, like, 90% of these fail, and like, you’re going to dedicate your life to doing it because you want to be a founder?” Like, there’s got to be a problem you’re trying to solve, right? And you have to know what that problem is, and be passionate around that problem because a lot of stuff is going to change.
Founders should go from point A to point B as fast as they can go until they realize point B is the wrong destination, and they have to [unintelligible 00:20:49]. And you have to be motivated. Because of a guy or a gal who decides to be a founder because they just want to be a founder, give up if that value proposition changed, or your tailwinds turned into headwinds, you know? You didn’t get some FDA approval, whatever it might be. Like, there’s got to be some dedication to that problem to be solved, more than just wanting to be an entrepreneur.
Mark: Yeah, so I don’t know how many secrets I want to give away here, but I’ll give you a few. The first I would say is that, like, for our fund, we looked at over 4000 opportunities last year to make seven investments. So, we need to say no quickly. So, our job, essentially, everyone’s job in the firm is to find a reason to say no. And if we can’t say no, for long enough, then eventually we make an investment, right? I mean, that’s one way to think about it, right?
So, your job as a founder is to not do anything that causes a no, right? So, I’m going to give you examples of things of not to do. And some of these may be funny, but they happen every week, and people do this all the time. So, one of our associates sends you an email and tries to schedule a call, and you say, “I’m not getting on a call unless you get a partner involved.” You don’t know who we are. That’s an obnoxious response. Like, why would I get on the phone with you? We don’t know who you are.
Then we say, “Well, send your deck.” “I’m not going to send my deck until after I did an intro call.” Why would we take an intro call if we don’t know what you do? Like, what are you hiding? And remember, we’re trying to say no 3993 times, so you, you know, act that way before we even had a first call, you’re not going to get very far. So, think about pitching for money like interviewing, like you would interview somebody in your team.
Like, if you are interviewing somebody, and you say, “Can you send me a resume?” “No, I want to talk to you before I send my resume?” Are you going to take a call? I mean, that’s—literally, we get thousands of these calls. So, think about how you approach it. If you show up ten minutes late to Zoom, 30 minutes, that’s probably not a plus, right?
If somebody interviews for a job and shows up ten minutes late, they’re probably not going to get the job, right? I mean, these are little things, but I would say, like, half of the founders who pitch us disqualify on something like this, something that just, like, and we may still take the call, but I’m thinking in my mind, I’m annoyed that you were ten minutes late. Your chance of, like, convincing me that you’re a great founder is low, right? So, think about all these different—or if we send you an email, and it takes a week to respond. And this happens all the time.
We have people send us—respond weeks later saying, “Oh, I forgot to respond to your email. Can we schedule a call?” Probably not very useful anymore. So, think about the process, how it works internally, right? So, for us, one of our associates takes the first call, and if they like it, then they recommend it to the partners. And if one of the partners likes it, then we take a second call.
So, think about how you can navigate that process. How do you get the associate to like you so that they recommend it to the partners, right? And then how do you get the partner to love it so then we can take it to the investment committee, and then everybody loves it. But think about that process. And it’s like interviewing, it’s just like somebody applying for a job or for something else, right? It’s a process.
And there’s obviously a lot of things, as you get to the later stages, become more art, but most entrepreneurs disqualify themselves long before it comes to actually the metrics because we’re valuing you as a team. So, that’s what’s really, really important. And I’m just frustrated when I see this because I feel bad. Like, people want to have a first call with me, but I have very limited time. The only time I really take first calls is if one of our portfolio company founders or CEO says, “I know this guy or woman, and they’re great, and you got to take the first call.”
Then I might take your first call. And we’ve had some where literally we’ve gone from that first call to investment in a few weeks. But that’s a rare way, right, because I’m using the capital—or that founder is using their credibility capital to downstream. But otherwise, you got to go through the process.
Zach: Yeah. So, as the market has changed a lot, obviously since 2021, valuations are sky-high, it’s very different, very founder friendly. It’s becoming more investor friendly. So, how do you see 2024 laying out in terms of founder versus investor-friendly? What are some trends you foresee coming into the next Q3, Q4 of 2024, into 2025?
Mark: Go first.
Raju: Oh, my God. All right, fine. I think… I think the shoes haven’t all dropped yet. I mean, that’s the truth in… what I see in the marketplace. I think we had a bunch of, you know, sort of—a triangle of—a triumvirate of really negative events that happened over the years, you know, obviously, we had a whole issue associated with, you know, the venture debt market, kind of, imploding, that we had the public markets, kind of, go in disarray, and we have a bunch of late-stage investors that are, sort of, pausing in terms of investing.
So, I think the reality is, like, for people who are doing seed and Series A, they’re better off than people that are trying to raise Series Bs, Series Cs, and Series Ds right now. And so, if you think about it from the perspective of—let’s just go to pre-IPO. I’m a pre-IPO round of investor, and I put [IGM 00:26:18] money into this pre-IPO company—I’m a crossover investor—and then that company goes public, and I get a nice pop, and I’d make some money. And that’s really great. Now, what happens is, your public company multiples of SaaS companies—Software as a Service companies—are not at 15x, they’re at 5x.
And I look at this pre-IPO company, I say, I’m going to put in money at a 15x multiple on this company. Why would I do that when I can invest in the public markets at a 5x multiple? And oh, by the way, there’s a bunch of [unintelligible 00:26:50] companies are actually pretty good companies that are sitting at, like, one 1x multiple. And so, that market needs to shake out before these crossover investors are going to sit there and say, “I’m going to put money toward, you know, this pre-IPO company.” We have a dearth of pre-IPO companies, it falls downward, right? Then the person below you says, “Well, there’s going to be no money.” So, you’ve got this Series D round is your pre-IPO [round 00:27:16], and you have to be able to conserve that cash.
So, the thing that’s happened is, I think, folks, it goes all the way down to, sort of, Series B. Series seed and A are a little bit immune to this because some of those companies, the metrics aren’t really there to measure, you know, where they’re going to be and where the growth is. But once you get to Series B, and above, it’s just, you’re looking at unit economics, and people are looking for companies that have the ability to get to cash flow neutral, the ability to be, you know, sort of, grow at some conservative level, but in an efficient way. So, I think efficient growth is really happening.
And so, I think that what’s changed and what’s going to manifest in 2024, and maybe in 2025, is this notion of efficient growth. And you want to grow. You don’t need to grow at a hundred percent year-over-year. You might want to keep growing at fifty percent year-over-year, but your unit economics are profoundly well-run, so that I can throw cash into this company, and I know what I’m going to get in return. The years of 2021, 2022—you know, like, 2021 and before, what wound up happening is, you could actually create blazingly fast companies by throwing cash at the companies. They didn’t have efficient growth. They were basically buying the market until they get to pre-IPO, and then you know, effectively went out.
When you don’t have that crossover investor to help bridge that into the IPO markets—and oh, by the way, people would prefer to invest in public markets and private markets—you can’t just throw cash at growth. And so, I think you’re going to get a little bit more efficient growth models, I think you’re going to get a more conservative growth model in companies, but I think the seed and Series A checks will be written. So that’s, kind of, what I see happening. I think the metrics upon which people evaluate these businesses were going to be a little bit more profound.
And the key one that you said, “How much money did it take for you to get to a certain level of performance?” That is really, really important. If it took you $30 million, and now you’re at cash flow neutral, like, it took you 30 million, right? There’s no belief, then, from the venture capital community that you can do it with a cheaper, you know, execution plan. So anyway.
Zach: Right.
Mark: Yeah, the only thing I would add is, you know, even at the seed and Series A, there’s, sort of, a lot of this data that shows that valuations haven’t changed much. And so, founders are saying, “Well, it should be the same as it was a few years ago.” I think the big difference is that—and I’m going to use hypothetical numbers here, but just to illustrate what’s changed—so maybe three years ago, if you rank all companies, a hundred companies, and we rank them from the best to the worst, right, and nobody wants to be in the worst, but there’s a hundred companies, there’s some that are better and worse in terms of metrics. Half of them are raising a seed round at $10 million. And so, if you took the average was ten million.
Now, only the top 10% are raising money, they’re still getting $10 million, but the metrics are very different. So, those top ten might be an average of a million revenue, getting a ten million valuation. Versus three years ago, if you took the top 50, the average revenue was 100,000 or 200,000 getting a ten million valuation. So, valuation hasn’t changed, but the cutoff point has changed. What that means is, the bar for entrepreneurs to get that round is much higher, and therefore the implied multiples for investors are much friendlier—we call it—but the reality is, you’re just getting a lower multiple and a lower valuation for the same metrics.
So, if you’re 250,000, today, some people would call that pre-seed. Three years ago in ’21, that was a seed or—you know? So that, I think, is what’s changed. And so, the thing to think about is that only the best companies are going to be raising the rounds. So, the key is to put yourself in the box where you can be one of the best companies.
So, rather than stretch—the advice I would give you is, rather than stretch and trying to be a seed company with 250 of revenue, I would be a pre-seed company with 250 of revenue, right? Because then you can be one of the best. You might only get a 6 million pre-money, or seven or 8 million pre-money, and not 12, but at least you raise the money. If you’re 250k trying to raise a seed round at 12 million pre-money, you’re just not going to raise it. So, that’s the way I think about it is, sort of, the bar is moving, and putting yourself in the right box so that you are one of the best is the most important thing.
And so again, you may not be happy with the 6 million pre-evaluation, but if that’s the box that you can win in, it’s better to win than lose in a box that you might like better, but you can’t raise the money, right?
Raju: Yeah. I agree with you.
Zach: So, a really interesting question that I thought was pretty funny, and I did want to ask, that I got from someone here in the audience was, if I slid over a phone to you, and you could call your 18-year-old self, would you call? If you would, what would you say?
Mark: I saw that question. I was hoping you weren’t going to ask it.
Raju: [laugh].
Mark: But you asked it a little different, so you’re giving me an out, and I wouldn’t call myself, so—[laugh].
Zach: [laugh]. I would call. I would call [unintelligible 00:32:26].
Raju: Buy Nvidia.
All: [laugh].
Raju: Like, why wouldn’t you buy Nvidia? Like, jeez, I’m set. Now—
Zach: Now, I—that might mess up your life if you did that [laugh].
Raju: No, it might mess up my life. My life—look, I’ve got controversy all over the [unintelligible 00:32:42], so—
Mark: The real thing I would say is just—and I don’t think I would change anything about it. I don’t think I—I’ve always been this way, but, like, stay curious, be humble, you know, those kinds of things. Because there’s so many opportunities in life to, like, just become full of yourself, or just not, you know, be intellectually curious. Like, in our jobs, we have to reinvent ourselves. Like, you know, I mentioned there’s been three massive technology inflection points in our lifetime: it was PC, internet, mobile, now [unintelligible 00:33:11] AI—even though I have completely different thesis on AI—but the notion is, like, there’s been a reinvention in venture in all of those ideas. There’s been a reinvention in terms of, like, just what startups are going to create value because they’re changing the landscape around it. So, if you stop learning, if you stop being curious, you know, that’s where you, kind of—end game starts, right? So, anyway.
Zach: So Raju, why venture capital? Why are you doing what you do? Why do you continue to do what you do every day?
Raju: Yeah, I asked myself that question every day [laugh]. No, it’s… I fell into this role, I got to be honest, I didn’t really, sort of, start being a venture capitalist. I had, as I mentioned to you, I’ve been at Bell Labs, I ran international for AT&T Lucent, then I did three startups. And I kind of didn’t know what I wanted to do next, but I was, kind of, burned out, and I didn’t want to start another company.
So actually, these are, like, colossal mistakes that I made. I actually interviewed with three companies [unintelligible 00:34:11] that, you know, senior officer jobs in all of them, and I turned them all down. One was Venmo, the other was Data Dog [laugh], the other was Drop.io, which got acquired by Facebook. So, you know, just I left a lot of money on the table [unintelligible 00:34:24] life.
But I—somebody said, “Well, once you plant yourself here?” At Sigma Partners did, up in Boston, and said, “Why don’t you plant yourself here, and kind of… see if you like it. You know, bring us some deals.” So, I brought some interesting deals there. I got an opportunity because I have a little bit of, like, you know, we’re all, like, hyper ADD, you know, just all venture capitalists—are all entrepreneurs are to some extent as well—and I found that I started working with—[unintelligible 00:34:49] took a couple of board seats, and I started working with a few companies, and I really liked it.
And I feel like, you know, I do miss operating a lot because you wake up every day with a mission that is super clear, and for the first, like, year or two that I did venture, I’ve really struggled. Because you wind up working really hard toward making an investment until you feel like it’s the wrong investment. So, you feel like you’ve made no progress, you know, in some days as a venture capitalist. But then I started sitting on boards, and I saw, you know, some brilliance, like, curiosity and learning. We get to talk to the top people in every single field every day.
But where do you get that opportunity? Like, they come to us and say, like, “I’m the number one neuroscientist in the world, and I’m teaching you how to like this field is going to be reinvented.” And you sit there and say, like, “Holy crap.” Like, I get the luxury of doing that every day. So, I love that.
I love working with my teams. I love it, love it, love it. Like, call me anytime. You know how many people I’ve talked through, like, “No, you should not divorce your wife.” [laugh]. Or you should not—I mean, like that, kind of, call and you get, like, “Just relax. It’s okay. It’s going to work out.” And then you know, you have these wins in end, which is really nice. Anyway, I love it. I love it.
Mark: Yeah, so for me, you know, I was an entrepreneur, I exited my business. It went public, and I eventually left my full-time role, and was, sort of, like, burned out. So, I took 18 months, went sailing, and then came back, and thankfully, with taking the business private and then I was fully off the board and done with, you know, with my venture, and I was trying to figure out what next. And I wasn’t really ready to start another company. And so, I had been doing angel investing for a long time, and I enjoyed helping the entrepreneurs, and I said, “You know, I’m burnt out. I don’t want to start a new business. Why don’t I work with entrepreneurs, make investments and help them be successful?”
And that was, sort of, the start. That’s how we started the venture fund in 2016. We said, “Well, if we’re going to do all this work and help the entrepreneurs, might as well write a bigger check than I could write myself.” So, we started pooling money between friends and family and then raised a real fund. And one thing led to another. We had a real fund, and I was on a few boards, and I really started enjoying it.
I personally don’t miss being an operator. Even though I am an operator. I mean, I run a small business. We have six full-time employees. But it’s not like running an [unintelligible 00:37:06] or an operating business. It’s very different, you know, a lot less doing. I do very little doing and a lot of thinking, which I actually enjoy.
I can read, I can think about what we want to invest in, I can listen a lot more. As an entrepreneur, you’re constantly doing, and making decisions versus here, we really have to make one smart decision a quarter, so I can spend a lot of time coming up with one thing to do. And so, I really like that. For me, I think that’s been a good for this stage of my life. And I’m happy I was an entrepreneur, my 20s and some of my 30s, but I’m happy to be on the investment side now.
Zach: Mark and Raju, thank you for doing what you do.
Will: Thank you for listening to RRE POV.
Raju: You can keep up with the latest on the podcast at @RRE on Twitter—or shall I say X—
Jason: —or rre.com, and on Apple Podcasts, Spotify, Google Podcasts—
Raju: —or wherever fine podcasts are distributed. We’ll see you next time.