Venture Capital Panel Discussion | TCA Venture Group • 2

00:00:05 welcome back everyone super excited to have you here I'm Lucas P's the managing partner of Pegasus Angel accelerator for another episode of VC unfiltered today we're taking you behind the scenes of an event that techos Angels one of the largest Angel networks through here a couple weeks ago uh we've got a bunch of great panel of venture capitalists that came and gave unfiltered advice to some of the investors and so take a listen good morning we have have a great session for you it's about early stage

00:00:34 investment if I can ask all of you to maybe give us a little bit overview of your firm types of technology or deals that you're interested in the stage of companies you invest um John tabis uh from M13 um there's the core fund which is a roughly $400 million series a focus fund about 80% of the deals will be leading at series a 10 20% at sort of the seed I actually run the Venture Studio within the fund um so we're pre preed preed as early as you can get you know an idea and a piece of paper um our

00:01:07 deals are typically 250 to 500k first money in alongside of some Angel Investors maybe another uh precede fund uh we aimed to launch three to four companies a year I've been with M13 for about a year and a half and uh joined formally about about a year ago um previous to that uh founded the books company which is an online flower uh gifting company it's about 100 million in Topline break even you would uh today uh have a wonderful CEO running that and I spend some time as chairman of the board there as well my name is lauron

00:01:35 Grill uh I'm a partner with jlll spark we are a global uh prop Tech real estate Tech investor investing in seed through uh series B um check sizes $2 to10 million we're looking at all things within the built world so everything from construction Tech to Property Management uh the financial Tech sector uh within our space um smart buildings and a handful of other things sustainability and recently a lot more in the data center space uh previous to that I um managed a firm called Luma launch early stage seed fund uh here in

00:02:08 La my name is Howard Co I'm a partner with Morpheus Ventures uh we're based in La um actually just across the the hill here in trean Oaks um we typically ride between 1 to 10 million uh3 to7 million a straight down the Fairway so we do seat series a series B more often than not we're co-leading or leading or co-leading series a Investments we're vertical agnostic uh so we'll invest all the way from Enterprise software proptech fintech uh AI machine learning obviously um all the way through a deeper Tech U so our deeper Tech

00:02:36 portfolio kind of includes Quantum Computing uh robotics space Bas related um type Investments good morning uh my name is Rick Smith founder General partner at Crosscut Ventures we're a la based seed fund uh we're on fund five we have about 330 million under management uh for most of those 16 years we've been around we've been a generalist fund the last couple years we've been more focused on on climate Tech and Frontier Tech doing some fun cool stuff there uh but uh uh we're still investing across

00:03:09 the board but most of our investments these days are going to be in those two categories whether it's within the past 12 months or we share with us a deal that um you wish you had invested and you didn't and maybe a deal that you very happy you did not invest that so I and it really is it's a few years ago now but but I always think about this deal it's called clutter I don't know if anyone here was invested in clutter uh it's a deal we looked at we thought was going to be really big but we just

00:03:38 couldn't get our arms around it Sequoia came in after us like a bunch of people came in and is one of those deals I see the trucks going down the road all the time like damn it you know why didn't we invest in clutter um and I found out last year you the in after all these money raises the the investors got wiped out okay and it really just reminds me that you know in this business and everyone in here is investor ium you know it's a tough business um and even even though I've been around for a little bit I still was sort of

00:04:09 counting my losses just based on rounds raised you know rather than you know actual outcome for the company and I think I was talking about Annie Duke's book thinking invest which I think is great but one of the things she says is you know don't necessarily judge your Investments by how things turn out although ultimately that's how we're judged but really is your process and do we do our process right unclutter yeah we did uh it just wasn't going to be a deal for us it take more capital and all

00:04:34 that kind of stuff so it just wasn't the right deal at the time so that's one of those deals I wish I done and now wish you know glad I didn't do I guess at at the same time um but a more recent deal we did was a company called Umbra which uh is what kind of our first deal in in the Frontier Tech space it's a satellite that uh just has better ability to take images uh than anything out there much cheaper through clouds at night uh a company is going from 2 to 30 to 100 million in Revenue over the last couple

00:05:03 years so of course my favorite is one that's generating the most Revenue but I've never seen that kind of growth um and uh and so it it has embolden us uh to take a few more chances like that um I will say the thing we have to keep reminding ourselves is we need to take big chances this is that kind of game um and when we take the smaller plays it feels safer but just doesn't produce the returns I I I think maybe it's similar to Rick I think um I think you need a bit of time in order to be able to see

00:05:32 something in retrospect to see if it's works or not I think in 12 months might be a little short um maybe I I I'll take mine for a few years back uh bird since we you know especially in town right um I still remember um got introduced to team it was just like next like first like when we first looked at it was 60 million then it was 100 then it was a billion then it was 2 billion right and I still remember value not not not much revenue but valuation wise and at the time like wow like did we miss the boat

00:06:06 here right um but we just couldn't at least I couldn't get my my my arms around the UN economics of the business the business model itself and the and the market they were serving but man when it just kept on going up and up and up and up um it certainly didn't feel very good um you know passing on that deal um you know in retrospect like you know now that you know what's happened with with with the company and whatnot you know you you know hindsight's always 2020 right to some degree um you're like

00:06:35 yeah like I knew that that would have happened but it really did not feel very good um when you could have got a 20x markup like literally within 18 months I think um kind of at the time um so that so that was one um I think one of the more interesting deals we we we did recently and so Rick is that you know we took a bit of a longer term View and took a big of a a bit of a swing um and to some extent I think you know we always have this discussion internally um about should we be taking those swings that is kind of binary in nature

00:07:08 um or hey these these companies that's a good company that can hit 10x 15x 20x reasonably P reasonable path so we did a company in Quantum Computing uh that that was doing room temperature Quantum Computing chips um and the thought process there was look if you if you can actually pull it off the market should be pretty massive kind of for that because the current Quantum Computing I don't know if anybody knows but it you have to be like basically in freezing temperatures or below freezing temperatures like ridiculously hard to

00:07:36 do um but if you're able to do it you get to at room temperature the application becomes much more expansive right now that company was a cstage company um we don't typically do it that early um but from a risk reward perspective it made a lot of sense what we didn't have to write $10 million checks into it to in order to kind of kind of see how it progresses I was just saying I I think we always have this discussion internally about whether or not how much risk we should be taking um and should we be taking more binary risk

00:08:05 um versus just kind of hey this will exit to private Equity like for example right um and so this is kind of what we you know kind of settle on for for now which is some combination of the two is a good idea maybe you don't over index too far one way but you also don't over index too far the other way we're still fundamentally venture capitalist early age and we should be taking more kind of risk so we all have our anti- portfolio um which you know I think go all the way back and I'd say everyone in La that

00:08:34 didn't invest in Honey could put that on the yeah well so we all saw it everyone saw it at some point and we all thought that uh you know a Google um extension had no chance of being successful so uh that was fun um that was a $5 million valuation when I looked at it so that would have been that have been fun um I I'll I'll go to sort of what we're looking at and and and you know I I think the bigger thing is the last two years um pretty much any investment 90% of the Investments that we would uh that

00:09:08 we've made and would have made are facing troubles right now not because they're bad companies because the valuations were out of out of whack and ultimately in our industry and kind of to your point about clutter um one of the challenges especially as an early stage investor and my previous fund I was doing pre-seed and seat so everything I was doing I was either first check or very close to it um like you know $2 to $500,000 checks and uh you know no matter how good the company does if they can't continue to raise on

00:09:43 a higher valuation and continue to grow the earlier investors very often get screwed so there's a lot of success that exists out there that we look at from a an external perspective and it's like wow what an incredible success but you don't really necessarily know what the underlying nature of the early stage investors were so like you know if you didn't know anything about clutter I mean he just whispered in my ear and he said I didn't know clutter got wiped out and it's like yeah you would just see

00:10:07 that clutter is you know still around doing well he's doing well in the sense of like the consumer perspective But ultimately there's hundreds of millions of dollars that are now worth probably 30 bucks right and so you know there's a long long long list of companies that live in that category and the and the last two years there's going to be a a handful that will continue to live over the next 5 years so I don't really want to highlight on one um I just think there's going to be some pain and we are

00:10:32 currently facing that I have I don't know 90 portfolio companies over the last 10 years and luckily a good portion of them are well capitalized and really thought about their unit economics and the fundamentals of their business so that they weren't reliant on raising serious capital in this environment and so they're going to hopefully be able to get out and and right size the business in a in a way that will prevent any major uh paying points but you know I think for everyone here who's looking at

00:10:58 the earliest stage which is what I spent a large portion of my my career look looking at and and now we do like a little bit of later seat stuff um but mostly series a uh I think the most important thing is understanding like do you believe this founder is is has a strong grasp of the fundamentals to build a business while simultaneously having an outcome that is potentially binary right and it's a very hard balance because there's this balance of is this person too conservative because then it's not a venture deal verse are

00:11:30 they you know going to blow all your money and have to raise and raise and raise and raise and there's a capital intensive to a point where it doesn't necessarily uh pencil in in a PL in an environment which is going to at some point which we call it series a is going to judge them based on their revenues and based on their actual economics um and so now you know we have a handful of companies that might have raised at $100 million valuation uh 18 months ago are going out for 2530 because they raised

00:11:56 on you know 2 million of Revenue and now they're at six but that six is getting valued at 6 or 7x not 100x um so a couple deals so on the on the core fund side uh we we led a seed round about uh creep creeping on two years ago in a company called prepared which the the founder was a young guy I think he was a sophomore at Princeton when he started the company uh just looking at the connection connectivity between 911 operation centers and cell phones which until prepared came along just didn't exist if

00:12:26 you were in an area and you had a cell phone and you had an emergency it was this really ridiculous process to get you actually get you help um launched the business we led the seed round um uh based on just what seemed like a very clear concept um very young founder but um really highly skilled and very intelligent um that one's gone great uh Andre's leading the series b a 38 $40 million series B um so that's one we really like right high quality founder interesting space clear path to to revenue uh on the on the studio side we

00:12:59 sort of going the other way we we started a build um with Tony Robbins Tony Robbins was launching a book called life force all around sort of biohacking and life optimization long term uh he's an LP in the fund we started talking about this concept we built a business around it um very quickly I think you know N9 10 months uh post launch was at $1 million ARR um they've now raised a series a as well um so sort of one from the founder side and one from really the the incubation side um one that we

00:13:28 missed recently on on the Venture Studio which is really unfortunate cuz it was really just sitting right in our hand and we could have had it um two two of the former lead game developers for scopely left to build a casual games business um sort of that micro snacking Trend that we all had with wle for a little while and they were just like we can build these games using AI to build them faster more efficiently and make them more engaging um we had sort of a good two months of of conversation just

00:13:55 cuz we were kind of like are we really going to to build like a mini games website just felt so 20 years ago um and they've already raised a ton of money and they're Off to the Races they're doing a great job so that's one we missed are there any specific Industries or segment within where your focus is that uh you're particularly excited about or avoid it sure so um as a fund we sort of we invest very broadly behind four you know big themes future of Health future of Commerce future of work etc um so we don't have a very narrow

00:14:25 lens um you can't avoid AI as just a core piece of almost any thesis at this point it's eeding the world and it's tough to to Really find any pitches that don't have you know an AI angle in it um I would say that we are unlike um where Rick's headed we're you know we're not deep down sort of the Frontier Tech Hardware um Quantum Computing like Howard like we're really more focused on sort of the the enablement layer underneath the consumer layer for for most of these businesses so that's really where we're where we're focusing

00:14:57 um I would say like from an excitement persp perspective anything where we're seeing you know massive workflow improvements for efficiency within any you know any layer above it is is really a place where we're investing heavily I think we did three AI agent investments in the past six months um and so that's really a heavy heavy area Focus for the fund um I'm not a generalist anymore uh as fun as that was but um within the our space is fairly broad within the uh built World Tech environment it's as I

00:15:28 said it's sort of the life cycle of the building so everything from construction all the way through um one of the things I'm interested in is actually the uh the repurposing of of assets um where where I think we're going to avoid for a little while are the capital obviously the capital intensive businesses specifically around transactions um there you know in a low interest environment or zero interest environment um a lot of companies were built uh because they had free money and uh there was a lot of business models some are

00:15:59 surprisingly holding on like a firm but um there's a handful of business models that were created specifically in our space that were built around this concept of of of really cheap money and and I think we're going to avoid that because I don't know if that's ever coming back to even close to what it was before and so uh moving forward I'd say some of our focus is around sustainability because that's one of the lwh hanging fruits of our uh customer base and the customer base being anyone who is purchasing software or Hardware

00:16:26 in some cases um building owners operators and tenants um that's a huge topic is is sustainability and it's it's a very broad one so it's everything from how do we uh think about our utilities how do we think about repurposing our spaces making our spaces more efficient how do we build in a more efficient way because that's a huge part of the emissions in our space um and and to your point about AI it's obviously just sort of a layer on top I don't even look that as a as a vertical that's that's

00:16:55 horizontal um so yeah that's big ones for us we probably trying to avoid actually AI to some degree um part of it is that there's a lot of kind of AI that's called rapper and may Howa heard of the nomenclature where 97% of them right um and and what we do focus on there though is you know do you actually have kind of a data mode coming in do you have unique access for creation of data that nobody else has because if you have if you're just accessing data and using kind of public LM you do in two

00:17:29 weeks look at the next guy right uh and then the secondary to that is can do you have a compounding mode from the data that you're that that you're that you have access to and you're iterating on so that's why I say like we actually to some extent um avoid AI in in large degree just because a lot of the companies we see you know really don't have that and you see a lot of it I think it's just more of a funnel perspective you still see you know I think really interesting kind of players uh new new companies kind of kind of

00:17:57 going into that but a lot of it is if you just look look at through that filter I think 90 plus per of It kind of falls out now from an area that we kind of really at least I'm uh I'm looking at a lot is production Automation and and the whole re near Shoring and re uh Reon Shoring of of infrastructure capacity or um just supply chain kind of within kind of Western countries uh Global Supply chains were fairly fragile as everybody kind of figured out over the past kind of couple years and geop geopolitics has

00:18:28 probably made this much more of a a thing um over the over the next 5 to 10 years uh so we're looking at a lot of that and not just from an aerospace and defense perspective but simply like let's say Reclamation of lithium right do you have access to lithium uh for for Battery Technology right um Iron Ore right how you know I just looked at a company who was doing um that's say green steel right uh how do you take low breed iron or and actually process it without being you know having access to

00:18:54 higher grade iron or outside the United States stuff like that um but that's just like one aspect but in simply like manufacturing industrial operations how do you make that more efficient so that you know we have a problem with labor in in the United States we're pretty much at full labor capacity right believe it or not this time around the blue collar workers aren't the one that as actually getting hit the hardest um the the the white collar workers are actually the biggest problem um you know got hit

00:19:20 hardest you can't find blue collar worker kind of right now you see it all the time in your fast food restaurants down to the construction sites actually really really difficult to find that type of Labor and in order for that to get resolved we're going to have to figure out how to be more efficient and work with what we got which is a lower labor force that requires automation to be able to kind of make it more efficient um so that's how that's where we're looking at so we've been generalist funds I mentioned for about

00:19:48 16 years at Crosscut but the last couple years I went from climate curious to climate committed uh because I read some books and and realized that you know the planet really is effed um and technology is going to be needed to to correct that but you also have 90% of uh of the Fortune 500 committed to to carbon neutrality by 2050 there's just a whole bunch of things happening it in some ways it's a size Industrial Revolution at the speed of the internet Revolution I think that's what we're going to see

00:20:18 over the next 5 to 15 years so I thought I was sort of narrowing my focus as a journalist for such a long time and I realized that when I said climate it now encompasses is almost it's almost like AI a lot of things can be climate but you know we've looked at electric airplanes we've looked at electric train cars you take a single car put it on a track and send it from LA to San Diego by itself 97% of train tracks are not used most of the time so it it it's you there's just a whole variety of things

00:20:48 we have invested in a new type of wind turbine doesn't look like a windmill is a whole different kind of thing we think we can produce electricity cheaper than any other source in in in the world if it works we don't know if it works um but we did just get $7 half million do committed um not final approv yet but from the state of Wyoming at a matching Grant uh we're invested in that with Bill Gates's fund uh breakthrough energy and a firm called Lower carbon uh one of the leaders in in the space so you know

00:21:18 we we're I I think overall we're looking at ways to keep more carbon dioxite from going in the atmosphere and the and the stuff that is there trying to get it out and and and that also implies electrification of America like everything your your gas grill is not going to be there in 20 years your your gas powered water heater um and it's not hot water heater my dad was a plumber water heater if it was hot water you wouldn't need to heat it um all that stuff's going to be uh write that down um all all that stuff's going to be all

00:21:49 that stuff's going to be replaced which means the grid needs to be improved and and you know we have these smart meters at the end of the Grid at our homes but that's not that information is not being feed fed back to the utilities who could use that to have a more efficient and effective grid so it you know climate it covers a lot of things it really is the reindustrialization of of America which is what a16z calls their fund something like that can you each talk a little bit about um where do you look to find

00:22:19 deals um how often do you coinx with other BCS and what do you look for when you actually do a coin best uh we get deals from a variety of sources uh I will tell you this the you know in 27 years of doing this I think I've done one deal that came in cold out of 20 or 30,000 that we've seen right that have come in over that time so uh it really does help to have a deal come in from another VC if laurant calls me up and says we're excited about this deal 100% we're going to look at that deal morphus calls us up

00:22:50 100% we're going to look at that deal right so um even John show UPC even John call that so yeah we're definitely that so other VCS other you know our past CEOs you stting a company or know company or current CEOs referring deals in so it is a it really is a you guys know all this but it's a referral Network so we you know there's a pile of deals that come in that way um and then there's the others we're a seed stage fund so 100% of the deals that we do we look for co-investors uh so it's you know we we are I I I'm old school

00:23:25 Silicon Valley in that way I started investing in Silicon Valley in 97 that's just how you that's just how you do it you do it to lay off risk but you also do it to bring other views to the table and if things go well you don't really need a co-investor most of the time they don't go well or don't go as well in the time period you think so it's nice to have deeper pockets and more experience and a different network around around the table I think from a sourcing perspective um we kind of have a both an

00:23:52 inbound and outbound kind of aspect to it um obviously I think you know funds like uh Ricks with cost cut um and a lot of Siege kind of Siege stage fund preeg stage funds um they do their referrals are are really valuable to us because it's effectively prev vetted they've done a lot of work we know that the founders kind of already understand kind of what it takes to be a venture type company uh so it really helps uh with like kind of sophisticated investors who've done this before um kind of already in the companies um and

00:24:22 obviously um we also have more of an outbound approach to it we U I think we we actually look at almost every deal that that gets funded between 500,000 to 6 million uh um kind every week across the United States uh and we actually go through that list and see which companies are I think interesting enough for us to kind of uh do Outreach to and have and make contact and have a conversation they may not be raising at the time it's just kind building the relationship kind of over the next weeks months or maybe sometimes years uh you

00:24:51 know type of thing uh from a coest standpoint you know we're fortunate enough to actually be Co investors with lauron at jll on one of our companies uh that we a lot um and so it's it's it's an important aspect I think the nice part about U I think being in the LA ecosystem is that I think to a large degree the you don't have as much sh sharper elbows um I think most every everybody's fund is not $3 billion do they don't have them take 95% of the rounds um you know in order to be uh attractive so a lot of times we do team

00:25:20 up um I think in terms of a lot of these type of rounds and we always you know we're believer in syndication and we're always Believers in making sure that previous rounds of um investors always have their opportunity to take their prata um to be able to kind of kind of continue to um to support the companies so we're very collaborative kind of from that standpoint and we've done so with a lot of the funds already in town on a number of different deals so that's how that's how we do it no uh so I've I

00:25:48 built my career off of trying to eggy back off of everyone else's success and so you know I became friends with Rick and realized that was a bad idea um no I I but honestly like when I first started it it's hard you know when you're especially when you're starting a brand you have to to get into the best deals uh and to be competitive you have to provide value one uh but two you often have to make concessions and um I found that the the best success was when I was able to work effectively with other funds and and work together to

00:26:22 actually help build not only like momentum which I think is a huge part of this sometimes the more great people around the table or eyeballs you're going to get for momentum on a on a business which is unfortunately but realistically a large part of our job um so M13 does what everybody else does I think there's probably two things that we do that are relatively unique in the way that we we Source deals and and execute deals the first is and this was shocking to me when I joined the firm we throw events almost every other day like

00:26:50 M13 is throwing a dinner a summit a party co-hosting an event it is insane we have a full team their full-time job is to do events um and I've not seen it before in other funds it's kind of an amazingly unique piece of what we do and it's all just about creating value for the community um we do them in New York and in La primarily we have an office in New York it's about a third of the firm LA is a little bit more than half and then we also have um some full-time folks now in uh the valley as well and

00:27:18 so the event side is is really about bringing you know smart people together get great conversation happening introduce companies introduce Founders and then just sort of let that percolate in the world and let the good things that come out of that come out of that uh the second is just a very disciplined and very I would call it um analytically driven sort of Downstream and Upstream approach to making sure that we have the right relationships with the right investors um it is because we are by

00:27:43 Coastal because we're in multiple cities and we're not just an LA fund there's just a whole lot of coordination that has to happen around who has the relationships where making sure that coordination um sticks together for for the Venture Studio we're relatively new at this I joined like I said about a year and a half ago we've been doing this work for about a year it's a little bit different um we're trying to get to people who might start a company um I have this whole thesis on people that I

00:28:06 call Founders and waiting who are people who would be amazing Founders but they just haven't started a business yet because of Life whatever it is they got a kid in the mortgage or the job the golden handcuffs of the current job or or they are a celebrity or a corporate and they just don't know how to build or they don't have the time whatever it is they could be great Founders and they just haven't gotten to that point let us do that first 6 months 3 months year of of research to get you something that

00:28:29 isn't you quitting your job making Z and hoping that your thing in the garage works thanks everyone for listening really appreciate it catch us on the next one subscribe to our substack looking forward to it