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Making capital allocation decisions in low information environments and with alot of uncertainty is hard. This show talks to people who do this every day and teases out how to be good at it.
Martin Tobias (00:00)
one. Hello everybody again. This is the first bet, and I'm Martin Tobias, the general partner at Incisive Ventures. I like to talk to people about how they made capital allocation decisions early when there is very little information, when the capital was real and the information was was very light. And I have today with me Mark Phillips who is another venture capitalist. We have invested together in a couple of companies
And we share an LP as well, who I've known
Mark Phillips (00:28)
Ha ha.
Martin Tobias (00:29)
for a very long time. and I'm very excited to talk to Mark about how he has made capital allocation decisions and maybe what he's learned over the last ten or fifteen years doing that. So welcome, Mark.
Mark Phillips (00:40)
Good to be here, Martin. And shout out to Mr. Tim. Thankful for Mr. Tim. So that's I think who's he's probably who got us connected
Martin Tobias (00:44)
Yeah. Tim Tim Jenkins who's our
Mark Phillips (00:47)
into the in the first place, Martin. So we owe him something. But it's
Martin Tobias (00:49)
Yeah, he he
he did. It was funny. He he and I started at Anderson consulting together
Mark Phillips (00:56)
Yeah.
Martin Tobias (00:56)
right out of college. And it's been a it's been a fun time following what he's done and what I've done over the years.
Mark Phillips (01:03)
Yeah.
Martin Tobias (01:04)
and I I actually am gonna try to have him on this too because he makes capital allocation decisions in low information environments all the time.
Mark Phillips (01:08)
Hmm. Yeah. He would be a great guest.
Martin Tobias (01:12)
in as an LP in venture capital funds, as a direct investor in companies, as
Mark Phillips (01:17)
Hmm.
Martin Tobias (01:18)
you know, an investor in operating companies that he does as well. so that would be interesting. But why don't you you know take me back to you know maybe 10 or 15 years ago. One of your first investments that you made with your own capital or with other people's capital. And you know how did you decide to write the check?
And you know, what was the company, what was the opportunity, why was it non obvious at the time? And what were some of the decision frameworks that you used to get to a yes in a capital allocation decisions, whether it's a company investment or something?
Mark Phillips (01:50)
Sure, sure. where how far back to go? So just a little bit of context. I you said 10 or 15 years. I haven't been investing for 10 or 15 years. So I can't go all the way, well, I can't go all the way back. which is
Martin Tobias (01:59)
how how long it would have
Mark Phillips (02:02)
just a good thing to talk about. I I entered into this world, Martin, as an operator. I was a failed founder. I started a company coming out of business school in the healthcare space. It fell apart. it nearly cost me everything.
My relationship with my family, my relationship with my wife, my relationship with God, my mental health, my physical health, all of it was was on the rocks, man. And as I came out of that experience, I just felt really passionate about this journey of entrepreneurship. And I'm sharing this because I think it's relevant to how I make decisions today. I I I can't deny that, you know, and and I'll get into what I think about that here soon. But yeah, in twenty twenty, I I was had taken another job in the consulting world and actually working for Tim's firm.
And was
Martin Tobias (02:42)
Yep.
Mark Phillips (02:43)
thinking about all the things I wanted to do with my life and where I wanted to take it. And I wanted exposure to as many entrepreneurs as possible. And so I in my my twenty nine year old wisdom, I decided the best way to do that was to start a venture capital firm. so in twenty nineteen I I launched Eleven Tribes. In twenty twenty I quit my day job to to start it. And I have now been in our first investment was made on April fifth of twenty twenty one.
So that was my first investment was in April of twenty twenty one. So I've been investing now for just over five years.
Martin Tobias (03:12)
okay. So not not a long time. But
Mark Phillips (03:14)
Not a long time. But
it's changed a lot.
Martin Tobias (03:15)
how did you come up with your thesis of what to invest in? Because that's something
Mark Phillips (03:19)
Yeah.
Martin Tobias (03:19)
for, you know, eleven tribes. Like how do you you know, first of all, l quitting a real job and becoming a VC, but then figuring out what you're going to invest in and why you think you can be successful in that investment. So
Mark Phillips (03:29)
Right, right. Yes.
Martin Tobias (03:32)
maybe walk us through your thought process of how you constrained what
Mark Phillips (03:35)
Yes.
Martin Tobias (03:36)
you're gonna invest in, how you thought you might have an edge,
Mark Phillips (03:39)
Yeah, absolutely. So I our conversations probably well, I shouldn't presume what other folks have talked to you about, but I feel like this is going to take a little bit of a different tact. I was not an investor, right? I did not understand.
Martin Tobias (03:47)
Sure. I was not an investor. Yeah, you were not an investor, yeah.
Mark Phillips (03:50)
I was not an investor. I don't really particularly like the stock market. I like do the ETF thing. I like all my personal savings. I just like put it in something I don't have to worry about. I'm I'm in that visionary category. I like thinking big picture.
I want to feel things. I don't necessarily need to get into all the nitty-gritty. At some point, you'll have to have Isaac Arnold from my team onto this this podcast. He's our vice president of investments. Yeah, Annie Duke is is his hero. Thinking about, I think getting to kind of the nature of the questions you're asking is where he has been such an important addition to my team. And I'm very, very grateful for him. But back to your very initial question, I mean, I came out of my experience as a failed operator into my journey as an investor, hyper focused on people. Hyper focused on people.
And
You'll hear investors talk about the gut of it all and feeling a certain way about folks. I continue to stand by when you're investing at the pre
Martin Tobias (04:37)
end of the
Mark Phillips (04:38)
seed in the seed, you are ultimately underwriting the individual. we we like to cite a statistic that CB Insights did a study over 2,000 failed startups. They found that 63% of the failures were
Martin Tobias (04:49)
The C T group is that.
Mark Phillips (04:50)
attributed to people related issues. And so our
Martin Tobias (04:52)
Mm-hmm.
Mark Phillips (04:53)
my fundamental foundational belief of how I invest is healthy people build healthy businesses, which generate healthy.
And so when I looked at the first few investments, gosh, I I think of you know, there are a handful. I think of the in fund one, you know, a company called Scheduler AI. There's a company called Breshna, Miriam Neustrad is still running that. you know, when I think of those companies and I think about the decision that we made to invest, Martin, what it really anchors back to, because
Martin Tobias (05:18)
Yeah.
Mark Phillips (05:18)
at that point it was basically just me on the team, was
Yeah, I kicked the tires on the business. You know, I did a little bit of research on the market. I I looked at the financials. But my belief, and I still hold to
Martin Tobias (05:28)
Yeah.
Mark Phillips (05:29)
this, these were pre-seed investments. My belief at that point was at the end of the day, either this founder is going to be successful and they have the resilience and the grit to get to where they want to go. Or and and of course, assuming if this company is to sell for hundreds of millions or billions of dollars, the only thing that
Martin Tobias (05:31)
at that point was at the end of the age it's 100 points. And they have this little input they want to know. And then of course doing as a company developer under
Mark Phillips (05:44)
will remain constant is the founder. Everything else will change: the business
Martin Tobias (05:46)
Yeah.
Mark Phillips (05:48)
model, the revenue, the customers.
All of it is going to change. And so as we underwrote those businesses, I spent a lot of time with the founders. One of the things we've used from a very, very early days is different tools in the psychometric profiling category. that's something that I think is, sure.
Martin Tobias (06:00)
Yeah, why don't you tell me about some of those? How how
do you assess a founder and what are some of the frameworks that you use? Because everybody says they want to invest in great founders. And the question is, how do you use data?
Mark Phillips (06:10)
How do you decide that? Yeah.
Martin Tobias (06:11)
How do you come to that?
Mark Phillips (06:14)
Yeah, it's it's been a journey. I mean, early on, we used things like Working Genius by Pat Lencioni and the table group. We've you we've used Enneagram. we've used something called the Colby Index. I've I've honestly, I think we've probably used six or seven different types. Today, I I would be remiss if I didn't just focus on what we're doing today because I do think it's it's as strong as it gets. We use something called the culture index. Culture index is a very it's been around for about 40 years. It they keep it pretty tight. You can't really find the test online.
You have to kind of get a relationship with the the organization itself. But what I like about it, Martin, is it gives you
Martin Tobias (06:48)
Yeah.
Mark Phillips (06:49)
an understanding of people's strengths, but it also helps you understand how those strengths can be weaknesses. So for example, my profile,
Martin Tobias (06:54)
Yeah,
Mark Phillips (06:55)
there's a a red dot at the top of the chart, which stands for how much autonomy you have. And what we do across all of our portfolio companies now is we map not just the CEO, and and this is kind of the punchline. We don't just understand what the CEO is. We look at what the founding team has in terms of
Four different distinct qualities: autonomy, social ability, patience, and conformity. Those are four very important words when you're talking about building a business. And my point here being there's
Martin Tobias (07:22)
Okay.
Mark Phillips (07:22)
no r there's no right answer. Let me finish this thought. There's no right answer for what the CEO needs to look like. But there is a right answer when it comes to what is the distribution of those four attributes across a founding team.
Martin Tobias (07:34)
yeah. And and what it what is that in your mind to underwrite a a pre seed team?
Mark Phillips (07:39)
It is
a it is a collection. It is a and it is a collection and a healthy distribution of the two primary dots, which is autonomy and conformity. So autonomy is your gas pedal, how fast am I willing to go? And conformity is your brake pedal. And so companies that have too much autonomy, what I like to say is those companies are going to die from indigestion, not starvation.
And companies that have too much conformity are the opposite, right? They're gonna think, they're gonna overanalyze, they're not going to be able to press the the pedal to the metal, so to speak, to do the sort of non-scalable, difficult things that are required to get a company from zero to one. So generally what we'll see is a CEO will have that very high red dot. They'll have a lot of autonomy, they'll gonna they're gonna wanna go, go, go,
Martin Tobias (08:23)
Time.
Mark Phillips (08:24)
go, go. But then you're gonna find hopefully a C O O or a C F O or a CTO that's gonna bring that conformity.
They still have to have a little bit of autonomy.
Martin Tobias (08:31)
Yeah,
Mark Phillips (08:32)
They can't be very neutral, right? They can't be a slow act. You've got to have a lot of go in you, but you have to have that conformity to make sure you don't die from indigestion.
Martin Tobias (08:40)
Do you want that conformity person at the pre seed or when is the right time for that person to come in?
Mark Phillips (08:46)
Hmm. That's an interesting question.
Right. I was gonna jump in as you said that. I mean, we're not really investing at pre-seed anymore. This in fund one, we did a little bit more. See, we're we're investing fund two, and as we get into fund three, we're doing deals that are half a million to two million dollars revenue. So that's a really interesting question that you're asking. It is definitely
Martin Tobias (09:02)
yeah. So that's more of a seed. That's a seed round.
Mark Phillips (09:05)
more traditional seed, yeah. I, you know, gosh, I I would say ideally you have that conformity early on.
And you just need to have a healthy understanding of the power dynamics of the team to know at the end of the day, like the CEO or the person with that high autonomy, like that person has to be able to make the hard decision in the moments where it's like, we don't have enough data to make this information or make a decision, but we know we have to move forward regardless. So I think having someone with that confidence and the belief in themselves to make that decision, it's still really helpful to have that conformity on the team. So you're building in such
Martin Tobias (09:39)
So
Mark Phillips (09:39)
a way where the foundation is strong.
Martin Tobias (09:41)
so what I hear you is that what one of the things that that has changed over your investment training in the last six years is that you've gone a little bit later, which means you're going with a little bit more information and you're a
Mark Phillips (09:53)
Yeah.
Martin Tobias (09:54)
little less comfortable with a low information. So one of the ways that people respond to making decisions in low information environments is some people just say, I'm not gonna do it. I'm gonna wait till I have more information. And and
Mark Phillips (10:04)
Yeah. Yeah, totally. That
is absolutely a response.
Martin Tobias (10:08)
And that's certainly
one response to it. You still have less information at the seed than the A guy does. He's gonna
Mark Phillips (10:16)
Yeah.
Martin Tobias (10:16)
have a lot, you know, more revenue and more bigger team and all of that stuff. But you know, you you you have gone more into the seed. So you you say you want to see that balance in the pre-seed, I would say in I'm only doing pre seed, I'm not doing seed.
And I have to get comfortable with the fact that certain big pieces
Mark Phillips (10:37)
Mm.
Martin Tobias (10:38)
of the team might be missing in the pre seed. And I have to decide
Mark Phillips (10:40)
Mm. Yeah, I
Martin Tobias (10:42)
if I'm going to write the check anyway, because you're not going to get all the pieces that you want. you're basically, that's why you're writing a check in pre-seed is to potentially build the pieces
Mark Phillips (10:53)
Mm.
Martin Tobias (10:54)
so that the seed investor is gonna see them.
Mark Phillips (10:57)
Yeah. I I you're agree on all fronts. And and we did make that decision. Coming out of fund one, we felt like and and where we might go here is, you know, we underwrite differently now. We aren't looking for the same type of deals as the as maybe the more some of the larger venture investors on the coast are looking for. We underwrite the exit of the companies we work with is something between a hundred and three hundred million dollars today. And so we definitely in in order for that to work, you have to have a better batting average and we could get into all of this. I
I know there's a number of firms that are thinking like this these days, but you have to have a better batting average. And so we needed more information to be able to make decisions about which companies we wanted to invest into and which we didn't. So I I will say we still we've done two pre-seed investments in fund to two. And the reason we did both of them was because they had ridiculous, through the roof, off the charts, founder market fit. Somebody who has already built the two examples I know I'm thinking of, one is Zip Zone. they
the founder has already built a solution exactly like what they're building today, sold it, and realized that there was something that they they could do better. There was something that they left on the table. So it for me, it does continue to come back to even as we are a more traditional seed investor, it comes back to the nature of that founder and whether that's someone that we get really excited about.
Martin Tobias (12:05)
Okay. and so what you've one of the things you've learned over time is you want a little more information. You also it sounds like you've changed the underwriting. Certainly in in venture, you're you're saying you're underwriting to a different outcome than maybe the VCs
Mark Phillips (12:23)
Yeah, yeah.
Martin Tobias (12:24)
on the coast would be underwriting to, which is the
billion or now the trillion dollar.
Mark Phillips (12:26)
Yeah. Yeah, billions
not enough. Yeah, billions not enough. Ha.
Martin Tobias (12:31)
out outcome. Yeah.
Mark Phillips (12:32)
I mean, don't you think that's a little laughable, Martin? At what point do we decide that like not everybody, you know, i I think we're getting everyone's getting compared to anthropic and open AI. And I just don't think there's very many companies we know there's never been a company quite like it. So I think it's yes is the answer. I'd be curious your perspective. When does too big become or when does big enough become too big? Especially as you think about it from a pre seed or seed perspective.
Martin Tobias (12:55)
Well, I mean, I've written a little bit about this. and that's why I like continuing in the pre seed at the lower valuation, because if you invest at a low enough valuation, any outcome is positive for you. and part of the problem in these seed rounds, I talked to a guy today who was doing a seed round pre product at a hundred million dollar valuation. This is a New
Mark Phillips (13:18)
Yeah.
Martin Tobias (13:18)
York deal.
I'm like, I don't
Mark Phillips (13:20)
Huh.
Martin Tobias (13:20)
understand how you make money there because you have to have a decacorn or you don't make any money. Like it is
Mark Phillips (13:24)
Yeah. Yeah.
Martin Tobias (13:27)
that is the only outcome where you make money. There
Mark Phillips (13:29)
Yeah. Yep.
Martin Tobias (13:31)
there is no distribution in the potential outcomes. And I think venture is in a tough spot right now where you know everything you read about in the public news is these incredible outliers that
that that are incredibly rare that people are thinking is the venture market. But you know, Anthropic,
Mark Phillips (13:49)
Yeah. Yeah, that's standard. Yeah, that's right.
Martin Tobias (13:51)
ChatGPT, these are not the venture market. These are incredible outliers. You know, SpaceX, the these are companies that have never been created in the history of the world and there are are unlikely to to to to be other ones. so I I think it's distorting the expectations of a lot of founders and investors. I
Mark Phillips (14:11)
Mm.
Martin Tobias (14:11)
think it hurts
founders the conversation I have a lot with founders is that you know they're
Mark Phillips (14:17)
Hmm.
Martin Tobias (14:18)
like hey my friend invested at or raised money at a 40 billion dollar valuation before he had any product
Mark Phillips (14:24)
Hmm.
Martin Tobias (14:25)
and you know I want that same valuation I'm like yeah but he was a second time founder and he worked at such and such and blah blah blah and you didn't and and you know your
Mark Phillips (14:31)
Yeah, yeah. Blah blah blah. Ha Yep. Yep.
Martin Tobias (14:37)
your your valuation should be different. I mean
It's it's it's it's a tough time, but I still believe that like you do, backing the right people at fairer valuations. you know,
Mark Phillips (14:48)
Yeah, yeah, it's good.
Martin Tobias (14:50)
the first round of of Instagram was three million dollars valuation.
Mark Phillips (14:56)
Yeah. That's a good
Martin Tobias (14:56)
Microsoft,
like one one thing that I talk about a lot, the total amount of venture capital that what's the total amount of venture capital that was raised by the Mag 7 taking out Tesla that is very capital intensive prior to their IPOs. It was a hundred and thirty million dollars. Microsoft
Mark Phillips (15:12)
Wow.
Martin Tobias (15:13)
raised a total of one million dollars of venture capital
Mark Phillips (15:16)
Yeah.
Martin Tobias (15:16)
before the IPO. You do not need to raise a billion dollars before you get public to have a very successful company.
Mark Phillips (15:24)
It's a very compelling
point. It's a very compelling point. And it it actually is, I mean, you could take it to its logical conclusion, which I think is very, very destructive of the current modality of investing, which is to say these companies don't make money. The reason
Martin Tobias (15:37)
Yeah.
Mark Phillips (15:38)
they're raising so much is because they don't make any money. I was listening to on the diary of a CEO
Martin Tobias (15:40)
They don't make money.
Mark Phillips (15:42)
pod podcast, Stephen Bartlett was interviewing this guy who's he's got a whole shtick. He's like super anti AI. It's not that he doesn't like the tech, but his whole point is they're not making money.
Martin, they're not just not making money, they're burning insane amounts of capital. And his argument was if they charged you, if they just broke even, if Claude or OpenAI charged you what each token actually costs them, nobody would pay for it.
Martin Tobias (16:05)
Well, I don't know. That's one we're gonna see. I actually
Mark Phillips (16:07)
It's interesting though, isn't it?
Martin Tobias (16:09)
it it's interesting. I I I think that they can catch up to it because the value that's created there is incredible. and you know,
Mark Phillips (16:16)
Hm.
Martin Tobias (16:17)
the entire industry is built
Mark Phillips (16:19)
Mm.
Martin Tobias (16:20)
on one use case now, which is coding.
Mark Phillips (16:23)
Yeah.
Martin Tobias (16:23)
you know, all the value that that that that people are seeing is from Claude Code and Codecs.
something like if you look at the total revenue of Anthropic and ChatGPT, it's like $130 billion. And like 120
Mark Phillips (16:39)
Hmm.
Martin Tobias (16:39)
of it is coding revenue. So if you look at the amount of value that AI could provide to desktop, you know, d productivity in in in knowledge workers, there's 1.5 billion knowledge workers. There's 300
Mark Phillips (16:55)
Mm.
Martin Tobias (16:56)
there's 30 million programmers.
So the entire revenue of AI today is built on supplying less than 2% of the knowledge workers a little bit of AI. Right? So when
Mark Phillips (17:08)
Mm, wow. That's interesting. Yeah.
Martin Tobias (17:11)
you look at it that way and you think AI is gonna affect every knowledge productivity in every knowledge worker, and we're only at literally 1% of knowledge worker penetration of AI, I think that
Mark Phillips (17:22)
Yeah.
Martin Tobias (17:22)
there is a massive opportunity.
for AI to get productivity, you know, across the board. So I don't think these
Mark Phillips (17:27)
Mm. Yeah.
Martin Tobias (17:30)
I don't think these token factories are gonna go to waste. I think there's tons of productivity. Lawyers,
Mark Phillips (17:37)
Mm.
Martin Tobias (17:38)
everybody on the planet is gonna integrate AI and
Mark Phillips (17:41)
That's interesting. I appreciate
that. And and to be clear, I'm very I that guy's argument was was inflammatory and interesting to debate, right? But the the value creation is fascinating.
Martin Tobias (17:49)
He he he he he's it
it's it's very easy to say that you know we're you know it's gonna be a bubble like the internet blah blah blah. There there may
Mark Phillips (17:57)
Yeah, yeah.
Martin Tobias (17:58)
be an overbuilt bubble, but we're nowhere near it. And this is truly a a major in innovation that that is
Mark Phillips (18:05)
Inflection point. Yeah.
Martin Tobias (18:07)
changing the core economics of many, many businesses. Now I still
Mark Phillips (18:10)
Yeah, I would agree with that. I would agree with that.
Martin Tobias (18:12)
I still think there are ways to create to create companies that are very capital efficient.
In my fund one, I have 35 companies. Six of them got to profitability raising less than two million dollars. And so
Mark Phillips (18:23)
Yeah.
Martin Tobias (18:24)
if you have capital efficient companies, you should have capital efficient companies today in a market where the capital required to create anything is going down and down and down. Right? Like
Mark Phillips (18:35)
Mm-hmm. No doubt. Yeah.
Martin Tobias (18:37)
you you you should be able to create good businesses without a lot of capital. And I think those
Mark Phillips (18:42)
Yeah.
Martin Tobias (18:42)
are the businesses that investors are going to be able to make a lot of money in. Now, will they make
Anthropic type money, open AI type money? Probably not, but I still think
Mark Phillips (18:52)
Mm.
Martin Tobias (18:52)
that's where the vast majority of value gets created. Is is in businesses.
Mark Phillips (18:57)
We we
we agree super strongly on that. And that's what so so to kind of go all the way back then, so fund one, very founder focused, investing pretty traditionally as a venture fund, Martin, right? Like spray and stuff. It I I admittedly, not an investor. So didn't have the best discernible strategy. We've been blessed that we've got some very successful companies. The best company in our fund one portfolio is an organization called Rise Mushroom Coffee, very, very popular DTC mushroom coffee brand.
they are, I don't want to give specific revenue figures, but it's it's let me see, just real quick. I mean, yeah, the valuation of the business is north of 100x for us. so it's gone
Martin Tobias (19:35)
That's awesome.
Mark Phillips (19:35)
absolutely nuclear. And they did it to your point on a very capital efficient basis. They didn't raise past a series A. So very excited. And so as we learn from that, fund two fits this thesis that you just talked about, which is we want to invest in the businesses that don't need to get on the alphabet super fundraising.
And so many of them go from C to series A. we make introductions to really more growth equity type firms as opposed to, you know, series A, series B venture firms. And then very similar story to what you shared there. They turn profitable, they don't have to keep raising capital. And then this is where it comes back to. I mean, but you have right, we as investors have to be honest. If that's the path you're taking, you're not gonna get to a billion dollars. There is an element of having to
Martin Tobias (20:09)
Yeah, probably not. Yeah.
Mark Phillips (20:17)
spend, probably not. I mean, maybe again.
Rise is an interesting example. I mean, they're they're they're on their way towards that direction. So what we're looking for in our fund two portfolio is a success rate north of 45%. And we define success rate as any company returning more than two times really a two X moic in our portfolio. And we feel like based on where we are today, almost four years into that fund, we're well on our way to getting there. So we definitely have changed the way we see the world. yeah, and and I just ag I agree with what you're saying from a
capital efficiency and profitability perspective quite a bit.
Martin Tobias (20:47)
So so you you have learned that you want to be in more capital efficient things. You don't want to participate in the YOLO edges of the the market.
Mark Phillips (20:56)
Very much not, yes.
Martin Tobias (20:58)
focus a little more on capital efficiency. you alleviate the low information by investing a a little bit later. with a a little more information. that's all good. What are the other
frame frameworks that that you would say you use to select companies a little bit differently today. Are are there anything else that I didn't mention?
Mark Phillips (21:20)
Hmm.
you know, I a lot of what a lot of what we anchor to is the person's experience. you know, are are you someone that has the subject matter expertise to apply your technology to the industry that you're working in? So I think, yeah.
Martin Tobias (21:35)
So so there is definitely
a healthy debate in venture of do you want a subject matter expert or do you want a really smart person
Mark Phillips (21:43)
Mm.
Martin Tobias (21:43)
who knows fuck all, like Elon Musk going into drilling holes or starting space when he didn't know anything about space. You're in the Yeah, where where are you on on on that? And and it could go either way. I mean both both have worked.
Mark Phillips (21:48)
Yeah. Well, and I think I think that's an interesting Yeah. It we're in the I think it depends it can. I think
it depends on what you're building. If it's about drilling holes in space, then like who actually knows anything about that? You know? So might as well have the guy that's just got a ridiculous gas pedal. But if you're talking about a blue collar industry like wire harnessing, where everybody knows everybody and people only buy from people that they have relationships with, you don't have a choice.
Martin Tobias (22:16)
That's true.
Mark Phillips (22:16)
And Elon Musk
in that industry is gonna blow themselves to smithereens. And so where we
Martin Tobias (22:20)
Yeah, yeah.
Mark Phillips (22:21)
find ourselves investing, Martin, is I didn't make that up. Wire harnessing is the manufacturing space that makes all the cabling that's in your car. So when you hit the brake pedal, the lights turn red. That's a huge industry,
Martin Tobias (22:30)
Yeah, yeah.
Mark Phillips (22:31)
but it's completely overlooked from a technological perspective. And so we invested in a company called Cable Tech. Founder's name is Eric Vrobel. Eric spent 20 years building a family-based wire harnessing manufacturing company, sold it.
And then spent five years kind of figuring out where he was gonna go next and saw that AI was gonna change the world. So he built an AI company called Cable Tech. And within, you know, a matter of a year, he's doing several million dollars of revenue because two things. Number one, he already knows all the players, Martin. He already knows everybody.
Martin Tobias (22:58)
Yes.
Mark Phillips (22:59)
He doesn't have to like hire this big sales team, you know, very competitive advantage.
Martin Tobias (23:02)
What
what you're talking about is a model I like. I don't know if it's software, but I like new software
Mark Phillips (23:09)
Mm.
Martin Tobias (23:09)
for an old industry. So you you
Mark Phillips (23:11)
Yeah, that's right. Yeah.
Martin Tobias (23:12)
you you take a guy that's been in an industry a long time, he's he knows all the problems of it, and he comes up with a new solution to an old problem that he's been struggling with for a very long time, whether that's software
Mark Phillips (23:22)
Yeah.
Martin Tobias (23:23)
or some new thing, and he gets a lot of adoption of that because he has credibility for solving that problem.
Mark Phillips (23:28)
That's right.
Martin Tobias (23:30)
And he has an an
Mark Phillips (23:30)
That's right.
Martin Tobias (23:31)
ear an earned insight.
Mark Phillips (23:33)
That's right.
Martin Tobias (23:34)
that's certainly something that that that I look for is an earned insight. How important is an earned insight into a new problem solution area for you in your underwriting w versus the founder?
Mark Phillips (23:49)
Well that's interesting. Are they are they two different things?
Martin Tobias (23:52)
I think they are. You can have
Mark Phillips (23:53)
Mm.
Martin Tobias (23:54)
a a a founder with a lot of you know gas pedal, but if they don't have an an insight, in in an
Mark Phillips (24:00)
Mm, I see. Yeah.
Martin Tobias (24:01)
earned insight in into some unique approach. you know, Elon Musk, while he knew nothing about cars, he knew about
Mark Phillips (24:10)
Hmm.
Martin Tobias (24:10)
physics. And if you look at the starting of Tesla, what was the
Transportation technology everybody was talking about when he started Tesla. Hydrogen fuel cell cars.
Mark Phillips (24:21)
Mm, mm.
Martin Tobias (24:23)
That's what everybody was enamored with at the time. You know, gas cars are going to be replaced by fuel cells. He had an earned insight. He goes, I did a first principles review. And if you look at an energy density physics-based approach, hydrogen sucks because
Mark Phillips (24:37)
Yeah. Yeah.
Martin Tobias (24:38)
it doesn't have the energy density. And the cost to build the system around hydrogen is just too much. Here's the math. You're all fucking
Mark Phillips (24:46)
Mm.
Martin Tobias (24:47)
wrong.
Mark Phillips (24:47)
Mm-hmm.
Martin Tobias (24:48)
My
earned insight is that I understand physics better than you do. And he was right.
Mark Phillips (24:54)
That's awesome. That's a great
story. Yeah, he was right, clearly. Yeah, I understand your comment. And I would answer I would respond in saying, Yeah. Yeah. Yeah.
Martin Tobias (24:59)
See he he he wasn't just a good guy. He had an insight into the market.
Mark Phillips (25:05)
Yeah, because of because of a lived experience, because of being trained in the world of physics, right? So yeah,
Martin Tobias (25:10)
Yes.
Mark Phillips (25:10)
the answer to your question is ye is it's quite important to us, especially as you're attacking as you call them, old industries. That person has to come if i I it i again, if you took a Stanford CS
Dropout, 21-year-old, and you're like, build this same cable tech business in the wire harnessing industry. Good luck. I that person's not going to be successful. Eric is the one who had the earned insight. And at this point, what is what is product? I I mean, product is becoming so irrelevant, you know? I mean,
Martin Tobias (25:31)
They may be able to build the product, but they might not be able to convince anybody that their product works because yeah. Yeah.
Mark Phillips (25:40)
I I don't think that Eric's product is way better than anything anybody else could create. It's that he has the relationships, he understands the pain point, he can talk the talk.
So if that's what an earned insight is, yeah, I mean that that that's actually a huge encapsulation of when we we call it founder market fit. What is their unique right,
Martin Tobias (25:58)
Founder Market Fit, yeah.
Mark Phillips (25:59)
unique right to win in that space and and how does that put them in a position to be successful? So yeah, we we spend a lot of time talking about that. the other thing I would be remiss if I didn't talk about this is Isaac on my team has really helped us build out a great diligence process. We're a three-person investment committee. it you know, and then we've got two other members of our team who
come to each of our, you know, we call them our level two reviews, right? Where we go really deep on the company and we vote. We vote, Martin. And so we our diligence is closer to private equity than it is to venture. I've seen enough memos to know the difference. We spend a lot of time, because back to our our underwriting methodology, we have to have a 45 to 50% success rate. Like it
Martin Tobias (26:37)
Yeah yeah.
Mark Phillips (26:37)
matters. It matters. And so but what I want to touch on is, and this is from Annie Duke's Thinking in Bets, I mean, you have to allow people to come to the conversation with their own opinions.
And there is this really, really nasty you know, social behavior, which is is the best way I can describe it is just like a conformist mentality of somebody's gonna go first. It's usually the person with the loudest voice and the the the strongest opinions. Unfortunately, that's usually me on my team. and I can't help myself. I've tried to get better at it, but here we are. But everybody goes through and we have a a 12 point rubric, Martin, and we vote on things like what's the quality of the market? What's the quality of the competition? One to five. Everybody votes. And then instead of during our IC being like, Well, what do you think, Martin?
Isaac opens up the score short score sheet. He opened up the scoreboard. He's like, Martin, you put a two on Founder Insight.
Martin Tobias (27:20)
Why? Yeah.
Mark Phillips (27:21)
Why? Defend it. And Mark, you put a five. Why? And I'll tell you what,
Martin Tobias (27:23)
Yeah. Yeah.
Mark Phillips (27:26)
man, the quality of the conversations we have because of that system are they're exceptional. They're absolutely exceptional. And it's a I I would encourage everyone that's got more than a single person I see. I know you're at solo GP, so you could do this with your, you, yourself, and I. But anyone that's got a multiple person I see, I would really highly recommend thinking about a system.
Martin Tobias (27:43)
I agree. So that's another framework that you use to make
Mark Phillips (27:45)
Yes.
Martin Tobias (27:46)
capital allocation decisions is in a multi-decision maker framework, you pre vote
Mark Phillips (27:53)
Yes.
Martin Tobias (27:54)
on you agree on a rubric, you pre-vote on it, and then you make people defend their agreement. And that's how you
Mark Phillips (28:01)
Debate. Yeah.
Martin Tobias (28:02)
get to a better decision than if you just
Mark Phillips (28:04)
One hundred percent.
Martin Tobias (28:05)
have an unstructured conversation about feelings.
Mark Phillips (28:10)
Shocker.
Can you believe that creates a better decision
Martin Tobias (28:12)
Yeah, surprise.
Mark Phillips (28:13)
structure? Shocker. Yeah. And you know what the other thing I would say is I I'm a big culture guy. I love culture. I've worked really hard to build the culture of our firm. And the thing that is required to make those conversations the best is healthy conflict. Because you know what? I sometimes I
Martin Tobias (28:24)
Yeah, yeah. I I I
Mark Phillips (28:25)
really care about a company and I really want it to move forward. And then my partner says, Well, I think it's a a terrible market. I think it's a bad business model. I think it's I vote no. And I I want to get into it. But if you have a if you have a culture where people are afraid to step on each other's toes.
I I would actually take it a step further. I would say if you have a culture where the leaders of your organization have an ego, where their opinions can't be challenged, you are not going to get to a point where you can make healthy decisions because the people below you and the people aside from you, they're not willing to have conflict with somebody like that. So it's it's multifaceted on how we make decisions in terms of the culture and the process and the framework. But I am really energized by how we make decisions today as a
Martin Tobias (29:03)
Okay, that's great.
I have one last question before we go.
Mark Phillips (29:05)
Yeah. Sure.
Martin Tobias (29:07)
You obviously, you know, taking the step into venture and becoming an investor after a a CEO was a big, you know, leap of faith, you know, yourself
Mark Phillips (29:16)
Mm.
Martin Tobias (29:17)
and and and putting a big bet on on yourself. Where do you think you got the confidence to go do something completely different? you know, was it your parents? Was it, you know, getting a lot of
Mark Phillips (29:27)
Mm.
Martin Tobias (29:28)
trophies when you were a kid? Where where do you think the
The confidence to take what was a risk in in a whole new bus industry at that time.
Mark Phillips (29:35)
Wow.
That is a great question, Martin.
I don't think anyone's ever asked me that. I I have a level of irrational confidence. I I I don't ex I don't I'm not proud of it. I'm not ashamed of it. It just is who I am and I've learned that about myself. I mean, Isaac on my team, I'm the red dot, he's that green, he's that, I'm the autonomy, he's the conformity. He'll tell me something and I'll hear it once and I'm like, that's a great idea. I'm gonna tell everybody I know about it. And he's over there being like, Well, I need to do 10 more hours of research on this. You know, it's a little comical in that way. And so, but your your question is so thoughtful in that it it kind of drills down into who I am.
And it's it's a two twofold answer. And I'll get real for a second. It it absolutely is my parents.
Martin Tobias (30:16)
Okay.
Mark Phillips (30:16)
my mom and my dad, they had this really healthy balance of like they were so encouraging of me. They were so supportive. They were at every race, they were at every tennis match, whatever it might be. And yet they didn't overpraise me. Like they weren't that it didn't define like
Martin Tobias (30:29)
Okay, so no or
Mark Phillips (30:31)
the the the championship, the medal, the award, it didn't define me.
Like my value was not my mom actually really loved to say, like, life's not fair and you should be glad that it's not. And the reason she would say that, and this is the second part, and again, getting getting very honest, is it's my faith. So I'm a follower of Jesus. I
Martin Tobias (30:46)
Face. Great.
Mark Phillips (30:48)
believe that I have been created with a purpose.
Martin Tobias (30:51)
Mm-hmm.
Mark Phillips (30:51)
I think the way that I view the world, experience the world, the way that I interact with the world, I I can't take credit for it. I
Martin Tobias (30:57)
Yeah.
Mark Phillips (30:58)
was I literally think there was an element of being born this way and having the parents
Martin Tobias (31:00)
Yeah.
Mark Phillips (31:01)
that I did. So it's that nature versus nurture.
And all I really want to do with my life is use that gift to honor him. And so when I go into a decision, when I decided, you know, my my wife was sitting across the table from me the day I decided to give Eleven Tribes an honest effort. And she said, she goes, if you don't try, will you regret it? And that was such a powerful question. And one of my mentors has often said, sometimes if you listen closely enough, it sounds when your wife is talking to you, it's like you can hear God speaking.
And that was that moment for me, Martin. And I
Martin Tobias (31:25)
Mm-hmm. Great.
Mark Phillips (31:28)
it spoke to my soul. And I was like, yeah, I'll always regret it.
And so that was the decision we made to like say, I I don't know what I'm doing. I'm gonna make a ton of mistakes. This is gonna be really painful, but I'd like to try. So I appreciate that question quite a bit, Martin. That's very thoughtful.
Martin Tobias (31:44)
Well good. Yeah, I I I do like to ask that 'cause it it comes from different places all all over, but that
Mark Phillips (31:48)
It definitely does. Yeah.
Martin Tobias (31:50)
what you just said, that's kind of echoes Jeff Bezos's answer, which is this regret minimization framework. He has people
Mark Phillips (31:57)
Yeah.
Martin Tobias (31:58)
ask him, Why'd you leave D. H. Shaw very highly paid P E thing in New York to start this crazy idea out of your garage? And it was because I thought twenty years from now, if I didn't do it, I would regret it. And and you might as well.
Mark Phillips (32:09)
Yeah, yeah.
Martin Tobias (32:12)
and and you also had the stability and confidence given to you by your parents and your your faith that you you you didn't think a failure at this new thing
Mark Phillips (32:22)
Yeah.
Martin Tobias (32:23)
would be the end of the world for you. And and I think a lot that that's what enables
Mark Phillips (32:25)
Yeah. Mm. That's a yeah.
Martin Tobias (32:28)
a lot of people to take risks is when they have enough security to believe that it's
Mark Phillips (32:33)
Yes.
Martin Tobias (32:34)
that a failure would not be the end of the world. Existential.
Mark Phillips (32:36)
And won't define them. It's
a it's it's incredibly it's an insightful comment and and articulation. And I would just say I think I want everybody to hear. It's not that there ar haven't been a lot of moments where like that identity crisis has felt very scary,
Martin Tobias (32:49)
sure.
Mark Phillips (32:49)
but it's that continual progression of like, I'm at a point now, Martin, where if eleven tribes were to fail tomorrow, I can honestly tell you I'd be okay. I'd be okay. And I couldn't have said that, but I I knew exactly your point. I don't know if I would have been okay, but I knew the people around me would have made
Martin Tobias (33:04)
Yeah.
Mark Phillips (33:04)
it okay.
Martin Tobias (33:06)
Okay. All right. Well, hey, Mark, thank you very much for sharing your frameworks. And hopefully they'll
Mark Phillips (33:10)
Yeah, it's a great conversation.
Martin Tobias (33:12)
be help helpful to some of the listeners here. We'll add them to the the the list and and and see what wisdom comes out of me talking to a hundred people
Mark Phillips (33:19)
That's good, Martin.
Martin Tobias (33:20)
about how they make these kinds of decisions. And if you have something that's a little bit earlier or you have another one of those two pre seed guys who you get high conviction of
Mark Phillips (33:28)
Yep.
Martin Tobias (33:29)
and
and one
Mark Phillips (33:29)
Yep.
Martin Tobias (33:30)
other investor, give me a call. I'm just doing the pre seed.
Mark Phillips (33:31)
I know where to find you. I know where to find
you, my friend. I appreciate this conversation. Thanks for thanks for letting me join. All right, man. We'll see you.
Martin Tobias (33:38)
All right. Okay, that's
it.