Episode #173: Tom Williams, Heron Rock Fund, “I Want To Be That First Call In The Darkest Of Days”
Guest: Tom Williams is the founder of Heron Rock Fund, a venture fund with 32 current investments and 45 prior investments across various stages and sectors. Prior to Heron Rock, he founded BetterCompany, and co-founded Miavita, an online health & nutrition website that was later sold to Matria.
Date Recorded: 8/22/19
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Summary: In episode 173, we welcome our guest, Tom Williams. Tom and Meb get right into Tom’s background, moving to the Bay Area alone, and finding a job at the age of 15. He then spends some time on building BetterCompany, a mobile app designed to bring anonymity to sharing about work, and later, pivoting to enterprise.
Meb then asks about the beginning of Tom’s angel investing career. Tom walks through the progression of angel investing with a partner to launching his own fund, and how important it is to build a network.
Next, the pair dive into AngelList, syndicates, and how easy it has become to invest in startups. Tom dives further into venture, with an example of a fallacy that it is a zero-sum game. He describes technology driven disruption resulting in a democratization process where more and more companies taking their share of the market as a result.
Meb then asks Tom to explain his thought process on investing. Tom emphasizes his focus on macro. He then discusses a theme he’s been investing in, America losing its supremacy and how to fix that. He shares that he finds ethically run technology companies that are trying to “ladder up” the “trapped class” in America are looking very interesting.
Tom then spends some time talking about some portfolio investments. He walks through Grove Collaborative, already America’s largest independent brand for home and personal care, and the clear vision that the co-founder and CEO explained to him. Tom describes the vision being so obvious, he just had to go with it. He follows up with LogDNA, and Jumbotail.
As the conversation winds down, Tom reveals his plans for the future, including the idea of backing new angel investors.
All this and much more in episode 173, including Tom’s philanthropic work and his most memorable investment.
Links from the Episode:
- 0:50 – Welcome our guest, Tom Williams
- 4:04 – Tom’s background and early part of his career
- 15:22 – Tom’s start in angel investing
- 17:19 – The future of allocating money
- 20:48 – Finding deals
- 25:53 – Investor vs. a confidant to startups
- 29:38 – AngelList
- 34:46 – Price sensitivity in private deals
- 39:45 – Venture is not a zero sum game
- 44:42 – A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation (Nations)
- 45:00 – Political impacts on the current markets
- 47:11 – Tom’s process
- 50:22 – Tom’s investment in Wave
- 56:05 – Investing in media
- 57:40 – Venture investing is lonely
- 58:04 – Investing in Grove Collaborative
- 1:07:26 – Investment in Jumbotail
- 1:12:35 – Convenience tax
- 1:15:32 – Tom’s choice to invest solo, and his travel
- 1:18:30 – Relationship with his LPs
- 1:20:54 – Tom’s 10-year plan and backing the next angel investors
- 1:23:33 – How people should think about allocating
- 1:28:44 – The Meb Faber Show Podcast – Episode #165: Chris Mayer, “I Do Think The Biggest Challenge…Is Keeping It, Holding On To It”
- 1:28:45 – 100 Baggers: Stocks That Return 100-to-1 and How To Find Them (Mayer)
- 1:33:16 – Great resources for allocating and being alert
- 1:38:50 – Philanthropy
- 1:42:42 – Hustle 2.0
- 1:42:45 – Most memorable investment
- 1:47:15 – How to follow Tom: AngelList and Medium
Transcript of Episode 173:
Welcome Message: Welcome to the “Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser, better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on the podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information visit cambriainvestments.com.
Meb: Welcome the show podcast listeners. We got a great show for you today. Our guest is one of my favourite angel investors on the planet. Welcome to show, Tom Williams.
Tom: Thanks very much. Happy to be here.
Meb: Tom, you just told me you used to live in Los Angeles and have never been to Manhattan Beach. That’s the saddest thing I’ve ever heard.
Tom: It’s the most LA thing you said. And it’s true, right? Like where is LA? Where does it begin and where does it end?
Meb: I talked to my friends in Silverlake. I used to date a girl over there. And you’ll talk to people throughout the city and be like, “Hey, have you ever been to so and so?” I like, “I’ve never even heard of that.” It’s a lot easier now that they have live…how long ago were you here?
Tom: Early 2000s.
Meb: So it’s a lot LA pre-Uber and Lyft. Was kind of the most miserable city ever. And Taxi Magic. I was an angel investor at the time. But Taxi Magic was kind of the precursor here. I feel like the Uber and Lyft, so we used to take that. But the way you would get around and you go visit friends for a barbecue or something was if I was going to Silverlake which, listeners, is like an hour away but only like 10 miles probably as a crow flies. If you take a taxi home, it’d be $150. So back then, this is why I originally invest in HotelTonight because we’d go and just get a hotel room instead of having to pay $300 for taxis. Anyway, Manhattan Beach is the land of milk and honey. I’m glad you’re here.
Tom: Speaking of, we just have to complete the LA story. So I moved from New York to an apartment right on PCH, right on the highway. And I didn’t really…in New York, there’s cabs everywhere. So I was the idiot standing on PCH trying to hail cabs for about a couple weeks until I figured that out.
Meb: I would love to have seen that. So it’s funny we actually have…LA also has fairly awful public transportation. It’s getting better. But directly behind our office is the metro. But the problem is in LA you take the metro, you show up somewhere and then you still have to get somewhere else.
Tom: I travelled a lot by bus in Santa Monica. And they all looked at me like I was an undercover cop. They’re like, “Why are you on this? You shouldn’t be on this. It’s terrible.”
Meb: Well, it’s funny because it’s been great because the ride sharing companies have definitely been subsidised by VC here because they’re so cheap, but they’re starting to tick up in price. You’re noticing they’re getting a little more expensive. You’re originally Canadian, aren’t you?
Meb: Where about?
Tom: Vancouver Island.
Meb: I’m heading to Vancouver tomorrow morning.
Tom: You are?
Meb: Vancouver, British Columbia, but yeah. I’m going to be there for the weekend. Love it up there.
Tom: It’s gorgeous in the summer.
Meb: You know, I’ve always wanted to go to…I’m a terrible surfer. Listeners know this, but I grew up mostly in Colorado so I’m a skier, but I have a surfboard now that I live in LA..
Tom: You have to. Do you actually use it though?
Meb: I do. I do. And you got to stay out of my way because I will run over any small children. But there’s a supposed to be a great little surf town that I’ve been meaning…on my to-do list…
Meb: Yeah. Pretty cool?
Tom: Yes. Very. I mean, you’re used to it but it’s a shock for people who have not surfed in the Pacific Ocean because it is freaking cold.
Meb: And I’m kind of a baby about cold water. So my surf season here even though it’s LA is probably like six months because winter when it gets ice cream headaches, cold feet, I’m not a big fan. But I love that part of the world. There’s some pretty cool…some of the islands have been on my to-do list as well. We’ve got a lot of Canucks on the show lately. We’ve had a fair amount of Canadians. Oddly enough, they’re well represented. All right, so we’re going to talk about all things angel investing, VC, startup companies, entrepreneurship, all that fun stuff. But let’s hear a little bit about your background. I don’t know that much. Give me the rundown. Were you birthed out of the womb as an angel investor?
Tom: I was a terrible, terrible, terrible student in school. And I remember distinctively in third, fourth, and fifth grades in particular where I was…teachers, educators went out of their way to like shame me in that I was different. And thankfully, because I had great parents, I knew that I was very smart. But I never conformed to…I never lived in the box ever. And so being inside the box was so uncomfortable that I wanted to break free of it as quickly as possible. And so I figured out at around 10 or 11 that the primary kind of reason in which they tell you like stay in school is to get a good job. So I figured if I could hack that, that I could get out of school.
And so I became an entrepreneur when I was 12 years old. And what happened, I mean, people, kids these days, having a computer, you know, I’m 40, so having a computer in your home is a definite luxury and one that my parents wouldn’t have been able to afford. But my dad worked at the university where we grew up and so therefore he got a computer through university. And my parents hated…they weren’t Luddites, but they were also very aware of how gorping at the TV screen or video games was kind of destructive to the mind.
Meb: Apple IIe? Commodore 64?
Tom: It was a Mac LC with 2 megs of RAM and a 40-megabyte hard drive and a 12-inch monochrome. I still have it. And so they had this thing on the Mac called hypercare, sorry, HyperCard. HyperCare is a portfolio company. HyperCard, and I taught myself how to program on that. And the entrepreneurial mind was, well, a lot of other kids don’t have games. And so I was trying to sell these games to my friends. But what ended up happening was my mom calls it the last form of running away. And I don’t talk about it publicly because I talked about it publicly for so long. But I ended up getting a job in California when I was a teenager. And so I moved from Canada alone to the Bay Area in 1995. And now as a parent, I’m like 15-year-old. Terrible, terrible idea, terrible.
So I ended up getting a job. And then my parents were going through the divorce court in Canada. The debate between my parents lawyers was, well, the father is petitioning not to pay child support for the youngest son because the youngest son makes more than both the parents combined. And that became kind of like a headline story. And if you imagine like a little kid, right, I mean, you’re an idiot when you’re a kid, right? Like, now I know, I thought I was so smart. And when all this press started calling from like all over the world, I was like, “Wow, I have power that I can yield here.”
And so I ended up leveraging this kind of story for my own gain, and kind of getting into better and better and better jobs. I was working down here for a very well-known billionaire investor when I was 20 years old. But working for him at the time, I came to see that he was not very happy. And he was certainly not very satisfied. That was my observation of him at the time. And so in my little 22-year-old brain, I was like, having a lot of wealth will trap me and imprison me in a way that I don’t. So back to that wanting to be out of the box, I spent most of my 20s building a philanthropic organisation that was kind of the precursor to Kickstarter and Indiegogo and really trying to make meaning in my life.
And so long before TINYpulse or Glance, or all these like larger companies now in that space, I came up with this continuous anonymous survey called Happily. I remember distinctively because my first child was born on December 3rd, and December 27th, I just created the landing page. I hadn’t tried to market this and some blog called PSFK in the UK said, “This is the future of work.” My phone is typically turned off through those few weeks because I’m so on that I really need to have one break that I just try and be quiet about. And my wife who’s just an incredible partner, been with her for 17 years, she said, “Look, I was getting signup requests on this landing page from”…I won’t mention names, but like CEOs of massive companies.
And she said, “Tom, you gotta hop on this. Like these guys like are not going to…they’re on their break. If you don’t get on these calls right away, like you’re gonna miss the opportunity.” And so I did. And that long kind of parlayed into deciding, “Okay, I need…” I was living in Canada at the time. And I was like, “If I’m going to do this, I have to do that in the Valley.” And so I raised $7 million, before we even really launched the business that was called BetterCompany. And BetterCompany was a mobile app that was the most positive, anonymous community on the internet. So anonymity, if you think about at 4chan and so on and so on, anonymity even if you start off with the intent of neutrality, as soon as a troll comes in, it automatically starts to drag everybody down. And so we built this community that was about sharing about your work anonymously.
And so all you had to do is say I’m an investor and you’d be matched with other investors. And it was incredibly positive. We were growing. But we recognise that in consumer mobile, you needed about, you know, million MAU to become kind of to get to a Series B. And even if we’d put all of our money in customer acquisition, anonymity is incredibly difficult to scale. Because the only anonymous content that is kind of like viral is negative or sensational. And so positivity is not as viral as negativity. Anyway, I made a decision, which I still regret to this day to pivot from this consumer mobile app into the enterprise. It was the right thing to try and pursue value for our investors.
One of the first downsides of venture capital is you’re really not in control of your own destiny. And I think entrepreneurs start their businesses with the idea that I want to be free. They want to be out of the box. So I would say that, for me, I started angel investing with a very specific desire to learn from CEOs that I admired. So that was my kind of investing strategy was find CEOs that are better than me. And I was very good at doing that. And it was in the summer of 2016, where one of my first angel investments, a company that’s one of my best investments, I had built such a trusted relationship with him by that point two years in that he was very, very, very afraid. There was a moment that was very, very, very terrifying for him. And so…
Meb: In the entrepreneur world, we call that every morning.
Tom: Exactly. Yeah, and I think…
Meb: Ten years in were like that’s still Monday. Some worse than others.
Tom: There’s that saying that basically a business is born stillborn, and it’s your job to resuscitate it every single day until it kind of gets its own vitals or…which takes years. I don’t think people who have not been in that seat don’t understand that. So in any event, what was distinctive about that day was that we just had our second child within that year. Now I guess he’s a year and a half at this point. And we’re just kind of…it’s like our first or second date that we’ve had since he was born. And I was describing being very frustrated trying to manage a team member that worked for me in one moment. And my entire energy of that I’ve just like being so frustrated was palpable to her.
And then here’s money that we’re about to lose in my mind because this company is probably dead. And again, companies look like they’re about to die multiple times, if you’re up close and personal. But it looks like it’s going to die many times through the journey. And I was so excited, though, about the fact that he confided in me this moment. And I was able to help him through this perceived crisis. And she said, “Capture this moment. Capture this moment.” At the end of that year, we go to an island in Hawaii and we have a very intentional meeting. It happens on the golf course. She doesn’t golf, but we…and I’m not a great golfer, but it’s four hours of purposeful walking is how we look at it. What we do is we try and stop the things we don’t want to continue in the year and what do we want to create or drag forward into the new year. And my first thought was I want to be investing full time. But I, also, am never going to do it as a 2 in 20
Meb: And what was the reason behind that? What was the…
Tom: I didn’t know at the time but I think that management fees in this asset class are the crack cocaine, because what ends up happening is as a fund manager, you become incentivised. As far as I know, you may know others, but it’s the only contract in which for at least five years, you’re paid regardless of your performance. And that the LP has really no recourse other than may be fine secondary for their position. And so what ends up happening and I see it play out all the time is that the emerging manager goes and gets a bunch of LPs, convinces them that they’re the best. The LPs don’t really understand how to evaluate these managers. And that’s the biggest problem is most allocators know nothing about this asset class.
And so therefore, they get them and then they get a couple of markups, especially if you can buy kind of “name brand VCs.” And then they come back those LPs and like, “Look, this is working. Look at this. You’re up 3X in 1.5 years.” And so they try and raise as many funds. I have lots of dear, dear friends who are great managers, but for every person that is focused on making carry, when you’re making two, three, four million dollars a year. And the other part of it is I think about venture capital as kind of having been the most effective set of bullshit ever repeated because they also say, “Power lot, baby, 90% of these investments are going to zero. And you should look at me as a good manager with 90% of my peaks being failures and that’s okay.” And anybody that signs up for that story is just not somebody that sees the world the way that I do.
Meb: So let’s hear about how you see the world. Okay, so you started making kind of your first angel investments. This would have been mid late 2000s?
Tom: I started making my first angel investments only in 2013.
Meb: ’13. I don’t even know what you call this decade. So the early 20 teens. And what was the transition from….it was there. Did you start to do it on your own or did you immediately start to actually syndicate them? How did the whole progression from entrepreneur to investor to professional?
Tom: So my first angel investments through until I started my fund last year were with a partner. And it was basically kind of a great…I think we disagreed on maybe two investments for the whole time that we invested together. And we invested in some great companies. But it was only in 2018 that I started a fund. And then, again, I remember even the loads to call it a fund because effectively it’s an annual commitment that is a one-time fee for just set up costs. And last year, it was totally blind pool.
But in go-forward years because most of my investing now is follow-on where I know these companies intimately well, what I’m able to say to LPs is, “Hey, here’s the underlying basket that I’m going to try to allocate to. You can have time to actually understand what these companies are. And you can interrogate me as to whether you think that they’re good investments or not.” And then I’ll have 20% to 30% of the fund depending on the size each year reserved for just complete blind pool reacting to new opportunities and so on. But…
Meb: And explain the blind pool for the listeners if they’re not familiar with that?
Tom: Yeah, blind pool is your classic VC fund where you’re basically saying to the manager, “I’m giving you complete discretion within whatever the bounds of the LPA are, the limited partner agreement are, you can do whatever you want with that. Let me know 7 to 10 years from now how well you did.”
Meb: Sometimes it may be 15 years.
Tom: Right. So the idea too about the annual fund is I have to convince…I intentionally designed it to be the future of what allocators should do with any emerging manager, which is basically to say trust but verify. So, yes, I’m going to allocate to you. And I’m going to ask you to explain yourself on an annual basis. And if for whatever reason I choose not to allocate, I can cut at any point. There’s no obligation to invest in subsequent funds. But then I’ve got kind of first right of refusal. And then in addition, I’ll open up SPVs, special purpose vehicles, which will allow investors who want to double down on individual opportunities as those become available. And so, I mean, effectively, a few of my family offices, their allocators to do is to say, “Okay, the venture side of the house is going to be covered by Tom.”
And which is good because most allocators do not…if I gave professional allocators a set of companies and ask them to make bets on those companies and we looked at how those allocators what they would choose and what I would choose, they would be markedly different. But the problem with these emerging managers is that typically, in the typical structure, you’re committed, you’re committed to that fund and you’re paying fees on that and you just don’t know. So that was my intention. And then the other part of it is there’s now so much money flowing into this asset class. And it’s only going to keep flowing and flowing and flowing and flowing that you get all of these terrible managers. And so they need to deploy capital. And so there’s more and more bad companies being funded all the time.
And I was just talking to one of my mentors about this last night. And he was like, “You’ve kind of been saying this. And we’ve kind of been saying this each year.” And I was convinced by the way that America was going to implode next year from just on a kind of structural that side of things. But now I’m of the complete opposite view. I think we’re going to be in funny money, free money for decades to come. And so what that means is no yield or even worse or low yield, no yield, people are going to be kind of jumping into this. And what I also think is happening is that the banks are trying to figure out their play in. I think what you’re going to start to see a lot more SoftBank type funds.
A lot of people don’t understand that the SoftBank vision fund is paying a coupon. So Saudis money is debt, not equity. And so that’s why I think soft banks vision fund and SoftBank itself could very well implode. And that will cast a chill on the venture market for quite some time because “The Wall Street Journal” will be like printing article after article about, “Oh, my God, the guy that was supposed to be brilliant turned out not to be. And what does that mean for venture capital and…” But I think what the banks are going to start to do is trying to do some kind of like…there are going to be more blended public private funds who will try to offer some form of guaranteed rate of return or promised rate of return with some degree of greater liquidity in the position. I think you’re going to see a lot of financial engineering in this asset class with more and more banker types trying to get their share of this asset class.
Meb: Interesting. So talk to me a little bit about…all right, so the mid-teens is kind of an innovative structure you don’t hear about as much and as the world of SPV has really developed. My listeners have heard this, but my kind of personal investing in the private world really started about the same time. And the listeners who’ve been listening since the beginning have followed along this path of my experience, which has been from the get-go, I’m a public markets guy, but said, “I’m going to do this as an education. The goal is to hopefully not lose all my money. If it breaks even with the S&P, that’s great. If it makes money, gravy. But the goal would be to really learn.” So you’ve been one of my favourites but I would love to hear kind of your early days. How did this all get started? I mean, how did in the early 20 teens did you even get the deal flow or find these deals? Like how does someone kind of get even get off the starting line here?
Tom: Well, I won’t give away all my secrets, but I will…
Meb: Only the good ones.
Tom: Yeah, I think that what your approach that you just articulated is very, very important. I actually think that if you want to go into this properly and really learn, you should apply whatever that pool of capitalist is, that’s kind of your first two or three years as complete right off money, like complete right off money. Because it will allow you to be more detached in your self-analysis of what your decisions were and look back at that more as a true education than in the emotional… Nobody likes to lose money. Everybody hates to lose money. So for me, I think I started pretty haphazardly like I think most people do. You don’t really have…well, I’m sorry, that’s actually not true. Because as a founder you kind of innately already have some form of network, through conferences, and so on and so on.
Having been Canadian, I recognised that there were a lot of Canadians that were constantly coming to the Valley to fundraise. And that because I knew how to build a network…I know how to build a network. I’m very, very good. If you want to live out of the box, you have to be able to survive for yourself. And so that survival instinct teaches you how to rely on others to help you hunt and help you succeed. So I like to say that there’s only two ways to live life, as a king or as a pawn. And most people choose pawns. Because every move that you make as a king could get you killed. But what I mean by that is that most people would rather kind of stay in the box and stay in a lane and be okay with okay than try to take these big risks that could get you falling flat on your face.
Meb: Well, and genetics probably evolved to not run towards the tiger.
Tom: Right, 100%. And so therefore kind of have to be a little crazy, or certainly, just by crazy, just simply not normal to succeed. So back to my kind of early investing, I think that the fact that I had built this network and that I am naturally, you know, there’s that book, “Givers, Takers, and Matchers,” I’ve never read it because the title tells you everything you need to know. But I’m a giver. I love to be helpful to people. And that desire to be helpful allowed me to be helpful to other VCs and to other entrepreneurs. So what I started doing was kind of becoming a bit of a…you know, on planes, you see that it’s been there for like decades, where it’s like, “Hello, I’m Nancy. I’m a professional matchmaker. You know, I’ll find you your, you know, many happy couples.”
Meb: Somewhere in Sky Mall?
Tom: Exactly. So I was always playing the role of Matchmaker. Like I was at YC this week, and one of my favourite new managers who doesn’t really know is not well network, I was just like, “Hey, this is who you got to meet. This is who you got to meet.” I love doing that for people that I believe in. And so if I was investing in a company, clearly I believed in it and that person. And it was the power of those pom poms that made founders feel like I was…first of all, I was the smallest check. I was the smallest check. And therefore..I’m sorry, we were the smallest check. And what was interesting was that I would say to people, “We’re going to be the smallest check and we’re going to be the highest impact.”
And so I also looked at it like, this is the other thing that I think if you want to live in this business you have to do is you have to have a heart to serve. So instead of it being, “I’m giving you my money, you better report to me about how well you’re doing,” and have always taken the exact opposite. I would say, “Hey, how are you doing?” And as you know, there’s no easy day in the journey. And so when you have this person who is a trusted friend, the journey is so much better. I remember one of my youngest entrepreneurs I ever backed, he asked me one day, “Why do you do what you do?” And because I’ve never been kind of…or at least at that point in my life, I wasn’t very kind of strategic. I’ve always kind of just been a happy traveller on whatever the journey is. He said, “Why do you do what you do?” And I said, “If I had me when I needed me most, I’d be a billionaire today.” And I really believe that.
Meb: Yeah, I mean, I think the distinction you make between having someone who’s almost like a value added confidant versus someone who’s an investor and just will help when it’s easier help, when you’re already killing it, I think is a totally…it’s a different relationship.
Tom: Yeah, I like to say everybody could be me, but they won’t be because the other thing that it requires is tremendous. I would just to be a successful investor in this asset class, you require so much courage. All of my best investments looked like dog shit when I made them. And so I used to say I’m either batshit crazy or I’m the best and we won’t know for 15 years. And most investors don’t even get $1 billion company in their entire career. And I’m quite confident that I’m on the path to getting at least a few. And the main reason was courage and that hard to serve.
And by the way, all of my best companies, the companies that now are becoming known to everybody went through tremendous turbulence at some point. And so what I also try and do is I really actively want to be that first call in the darkest of days because when you are that call and you can support that person that you chose to believe in, there’s a reason why you if you’re a good picker, you chose the right person. And therefore, when they get through that, you won’t really…you can’t solve the problem. It’s their job always, right? Like I always like to say, if I’m the hero, if I’ve made a meaningful impact in the investment, I’ve made the wrong investment, I’ve chosen the wrong person, unless you’re doing…I’ve done a lot of intentionally first time founders and so and so on. But generally speaking, my best companies have done the least for.
But now, if I want to get into any deal, one of my CEOs will be a public company CEO. And he’s just today, I just saw one of the major financial rags listed at that company as the best, fastest growing company in San Francisco. And he’s going to be a public company CEO in a couple of years. And because of that loyalty, I can’t do it on every investment. But if ever I needed get into an investment, I can deploy those CEOs to say, “Listen, you know what? You don’t know, Tom. But let me tell you, here’s who else is on my cap table. And let me tell you that he ranks at or above.” I tell all my CEOs, “I want to be top three, worst case top five, as perceived by each CEO.”
And by the way, to the allocators that are listening, what I would say is like do the reference calls. Literally talk to every CEO that that manager has backed for two or more years. I’ve been a reference call for LPs and they’re taking a snapshot of a couple of companies. You have to do the work. And if you want to find who the best managers are, that’s all you have to do. You have to somehow, of course, have the trust that the CEO will say the right thing. But typically, if they’re not calling back, you also know that there’s a good reason. And so that’s it, super simple.
Meb: In the reference is funny, because in our experience, it’s such a simple thing to do that so many allocators, investors, people and just in life don’t do, we’ve had numerous service providers or people pitches work that were like getting ready to sign with say, “Okay, just send me a list of references.” And there’s been numerous that just don’t even send any back. They’re just like, “We know they’re all going to be terrible. We’re just done. We’re just gonna go ahead and just take ourselves out of the running,” which is astonishing to me. And then even some that would supply them, then you make the effort to call and say, “Wow, that was illuminating.” And you don’t get that going through the normal process of just chatting with them because they’re obviously good at marketing anyway. Okay. So let’s start to talk a little bit about, all right, because you’ve been doing this for a while, almost 100 investments at this point?
Tom: Yeah, yeah.
Meb: That’s awesome. So talk to us a little bit about…so they’ve all been deployed through AngelList or just some or…?
Tom: Now, everything has one.
Meb: And talk to us a little bit about the kind of evolution of how that’s worked and walk the listeners who aren’t on AngelList.
Tom: AngelList is the absolute best and absolute worst platform of all time. So what you get as an LP, as an investor is it’s like e-commerce for startups. Typically, what you have to do to get that deal flow is you have to do a lot of coffees, a lot of which are you kind of sit down and you know you’ve wasted your time before the meeting even starts. And so you get access to, for example, all of the investments that I make in a year and you can just click to backpackers. And suddenly, it’s 11pm, on a Friday night, you’re sitting in your underwear looking at investments that you would have had no ability to get into say for that manager that syndicate lead being able to invite you into the deal. So you pay a carry both to the platform and to the lead but you’re getting to choose deal by deal, which is excellent, right? Because you’re under no obligation. And you can sit on AngelList. You can’t sit on my syndicate and not make investments. But many, you could just sit there forever and just learn. I think that and you obviously know that the backers perspective way better than I do. But how many leads do you follow?
Meb: I sign up for all of them. Holy crap.
Tom: So how do you even sort?
Meb: It’s not as much as you would think. I, in general, again, go back to being an education. And I’ve invested not just on AngelList but about hundred private companies started in 2014.
Tom: So we started the exact same year?
Meb: Small amounts. And again, all my public stuff, listen to this ad nauseam is quant base so it’s running on auto. And this to me is a way to say, involved to learn. But also it’s such an optimistic experience. So if you follow global macro and a lot of stuff you’re talking about earlier and watch TV or read Twitter or whatever, all you want to do all day is just buy puts on the stock market and that’s it. This negative news flow. But then you follow kickass awesome entrepreneurs solving the best problems in the world and all you want to do is put all your money into all these companies. But I tell people, there’s an old tweet from years ago, I said, “If you’re ever bummed out, go read the ‘Entrepreneur Inc’ magazine when they profile like the top 50 growing companies,” whatever.
And you see these people doing the coolest things. I mean, you cannot help but be just optimistic about what’s going on the world. Inspired. Thank you. And so anyway, so I follow all of them. And it’s not as much of a flood as deal flow as you imagine. And, again, you start to find the ones you like. So there’s only about two or three. And I put you in this company where would I look at the deals you have, it’s the default is yes. And I’ve talked myself out of it. Whereas the others, it’s a 99% no, but have to talk myself into it. Fair.
Tom: I think that’s a good approach. I think, though, so the biggest problem is that I see is that I’ll get new backers and you actually in addition to you have to apply to backers syndicate, but I even have a now rigorous process of getting the people more than an average lead would than any lead actually does. And so partly because I have to protect what I’m very, very nervous about is funds trying to gain information through the stuff that I share.
Meb: In competing companies, too.
Tom: Yes, exactly right. And, by the way, think about the founder’s perspective of AngelList, right, which is, I have 700 plus backers. And so the idea of sharing, founders are paranoid. So the idea of sharing anything on anywhere with 100 plus people, it’s just absurd. So…
Meb: In particular because a lot of the companies you focus on and AngelList in general listeners is seed stage startups. So a lot of these are they don’t have to be stealth, but many of them are not. I mean, some of them are but many of them don’t have 10 million, 100 million in revenue established companies. A lot of these are literally startups where this information is fairly critical.
Tom: Yes, yes, absolutely. And so anyway, I’m a super paranoid because my founders are and so therefore I have to do what they want. The backer gets it basically, just like I said, e-commerce. The problem, though, is that a lot of my backers consider themselves angel investors when what they should consider themselves is as deal by deal LPs in an emerging manager, that they get to opt in or out of at any time. The difference being that as you trust your manager, therefore, you should trust their decisions more than your own. Going back to that comment in which I can go back and narrate the best companies in my portfolio, none of those companies were all of those companies were hard to finance, all of those companies were difficult because the non-courageous herd-like investors were over in these high P categories losing their shirts, and I was going and supporting these entrepreneurs and very, very lonely journeys. And, oh, by the way, getting incredible prices all along the way.
Meb: Which is really important. A lot of people both in public markets, it’s funny because people in public markets, I feel like understand this. Investors seem to understand this more. But you see so much less discipline in private markets, probably because of what you mentioned earlier about the a power law is going to solve everything, which it might but…
Tom: And I really want to talk about power law because it’s so important. But just on that particular price sensitivity, what I’ll say to when I’m negotiating price, which now increasingly, I’m leading deals. And so I said to a founder yesterday, I said, “There are people who will pay a higher price, they are not me and so therefore do your reference work.” And I believe that if the market is here, I deserve a discount to the market, which is like most VCs because their in FOMO. They’re like, “Well, I can’t miss out on that opportunity.” I’ve never been triggered. That’s not true, I’ve probably been triggered by FOMO two or three times, one of which is one of my only write offs. And the other two are doing okay, but I don’t have what I love to have, which is those relationships with those great entrepreneurs.
Bottom line is because I had to swallow a pill going like, “I know I don’t really want to support this person in the same way that I want to support all these other founders.” So anyway, that’s that. But on price, like I tell my founders, I have to do two very different things. I have to be the most loved and trusted investor to every CEO I serve. That’s that side of the house. And on the other side of the house, the only thing that matters that should matter to my LPs is cash on cash returns. Cash on cash. And so those things are often at odds, especially when you’re negotiating price. Because the founder is basically saying, “Well, you don’t value me the way that everybody else does. And this is at the beginning of our relationship. It’s way easier.”
Like I’m doing a follow-on one of my two…I’m actually doing follow-on my two best companies right now. And in the one I’m leading and the other actually put down a term sheet. But because it was an SPV, they’re like, “We can’t accept and the board wouldn’t accept for a very, very big SPV.” It was just too much risk for them to take. CEO tried. But in the other case, I said, “Give me bottom dollar. I deserve it. I don’t want you unhappy with this price. I don’t want that to empower our relationship but I want bottom dollar.” And if you build that relationship…and you know, by the way, great CEOs are going to go out and try and mark price. They’re going to try to be as non-dilutive as possible. That’s their incentive. You have as an investor and the founder, that’s the disaligned incentive.
And that’s why it’s harder for my strategy because I’m actually trying to allocate more and more and more and more capital as the companies. I try and take basically a kind of an inverted…well, I guess it’s an inverted funnel, basically, right? I’m trying to make more and more early stage bets and play power law there, which is not power law. I just know that the odds and mortality at early stage are higher, the companies that I’ve known for years and years and years, just to put all the capital that I can into those companies. So more and more as I become a pricing agent, these conversations become more difficult. However, once you’ve earned the trust with that founder. And also, by the way, in almost every fundraise, it takes the average is months to conclude any venture fundraise. Some happen in days or weeks, but most take months.
So the other part of it is, is that once my LPs, and some of my LP base, for example, one of the best companies in my portfolio, one of the top two, there have been LPs who have passed on every single round that could have invested at a the first round that could have invested in was had a 12 pre and we’re just closing this valuation of billion post. And now I’ve…
Tom: Thank you. And I’ve got now people who are like now clamouring in, which is great because they were able to see this company and they were able to get…and that’s the other thing that the SPV model allows presuming that you kind of are organised yourself, you can kind of look back and be like, “Well, what did Tom say about this company two years ago?”
Meb: It’s a diary.
Tom: Yeah, exactly.
Meb: Not to digress, but I think it’s interesting and instructive, the price paid, there’s a ton of academic research on late stage private. So like leveraged buyouts world. And we’ve had a few guests on the show that have talked about it that despite what KKR and everyone else would have you believe that they’re super value add and they magically transform companies. By far the biggest determinant of returns is simply the valuation. The same thing in public markets is you pay 50 PEs on companies over and over versus PEs of 5 and 10. Again, where the seed stage where there’s no E, so it’s a little different. But in general, being price sensitive, particularly in a world awash in money, where we kind of are now it’s still important to not lose that sort of guideposts.
Tom: Well, so let’s talk about one of the biggest fallacies in venture which is actually that you’re playing a zero sum game. And by that I mean that it’s a winner take all. And the whole market is one company. That’s kind of, again, another kind of key fallacy of venture. If you look at technology-driven disruptor, it’s actually causing a democratisation of wealth. There is actually more and more companies that are kind of taking their share of the market. Technology fundamentally is a democratising force. And it’s funny, Meb, because I’m actually like really of two minds. I’m like the biggest tech ball on one side, but I’m also very vividly aware of all of the downsides.
And I think we’re at a point in human history. I think if this could be recorded for…I was just in Egypt and seeing civilisations from 26 BC, if this were somehow able to be, I’m sure that at that point, this conversation will sound like hieroglyphics, right? We’ll be talking in some other advanced language. But what I’m getting at is, is that at society right now, we’re at a point in which we as humans have begun to lose control of our tools. Our tools are taking over us. And that’s a very, very scary place. That’s a whole kind of separate thing.
Meb: My wife would say, “Meb, you need to delete Twitter off your phone.”
Tom: Right. Totally. And I actually…yeah, [inaudible 00:41:03] on that. But suffice to say on the zero sum and you look at we were Uber, all these companies, what they do is they over raise to deflate competition because VCs are so lemming-like, capital is actually the best moat in venture. Because basically, it’s like, “Stay out. We can crush you with capital.” The problem with that approach is that if you don’t have great CEOs running these companies and you don’t have great boards keeping them accountable and kind of keeping them grounded, then they lose all notion of reality. And I would say that there’s a CEO about to go public right now that has no connection with reality.
Meb: But he’s got 700 million in his pocket.
Meb: If we’re talking about the same person.
Tom: Exactly. And so that’s actually the bad of tech, right? The bad of tech is basically that people are not courageous. Those investors are so eager and I’ve seen brand name firms put complete fill in the blanks in term sheets down. Complete fill in the blanks term sheet. So when you’re approaching venture like that, then what’s also happening in terms of how you enter a deal. It’s also how you manage a deal, you’re not actually willing to challenge these CEOs, and especially with these supermajority type companies. Here’s a weird thing that happens in venture because there’s so many bad managers, most entrepreneurs’ perception of VCs is terrible.
If you were to go and like, sit in a room with top founders and you talking about VCs, it’s like it’s an insult almost. And so because there’s so many bad managers, great CEOs who are in a situation where capital is the commodity, and they’re the prize asset, they then get to engineer never having to deal with VCs again. And so that’s why you have these situations where CEOs can kind of command the structures and they go, “Well, I know this company better than any investor will,” and that’s in most cases true. If I feel like I have more of a command on their market than they do, then that’s definitely not a CEO that I want back.
So those are the reasons why you end up with these structures. And I would like to see…I think what’s going to end up happening is we’re going to end up with the free market, if it runs away from itself, will get regulated always. And I think that where we’re at at a stage of capitalism and particularly tech capitalism is that there are so few companies wielding so much wealth and power that everybody is uncomfortable by that. And so what you’re starting to see is tech becoming the new Boogeyman. And I’m predicting and, I mean, you know, I’ve been predicting this for a long time.
But we’re now starting to see and we’re just starting to see the beginning of it is the regulatory pushback schema that’s coming. For example, David Marcus, truly thoughts that Facebook was going to create their own digital currency. The absurdity and the lack of any awareness that that company has about where and how they’re perceived by freaking everybody is like observable to everybody else.
Meb: You know, it’s funny I was reading a book last night called “A history of United States,” maybe a history the United States stock market I can’t remember in five crashes. So details 1907, 1929, 1987, 2000, 2008. Well, I haven’t written the whole thing yet so I can’t tell if it’s good or not. But I’m reading the first chapter and the first chapter is about 1907, which is about Roosevelt trust busting Standard Oil, bunch of the big monopolies and earliest 20th century. And it’s so, I mean, it’s like, almost reading a script for something 100 years later, but obviously, with different actors and different players, but fascinating nonetheless.
Tom: Can I give you my predictions for next year?
Meb: Let’s hear it.
Tom: So the markets will start to price and Warren as a possible if not likely next Democratic candidate. And so you’ll have tremendous market uncertainty starting around late February, right after Super Tuesday, which is actually mid-February. There will be a tremendous amount of market uncertainty between February and November effectively. So the swings that we’re starting to see now, I think there will be a deflationary sell off in that category. And then two, I think that she’ll win. That’s what I believe. And her message will eventually get distilled down to bringing fairness back to America. And by the way, I’m Canadian, so I have no dog in this race, right? And then she’ll get elected because it’s likely to be all female ticket is what I believe. If it’s not Cory Booker, it will be two candidates, two females. With one at the top. And then he won’t go. So the thing that a lot of Americans don’t even kind of remember is the election is an early November, but the inauguration is not till my birthday, January 20th. And so there’s this…
Meb: Hitting 40 this year, right?
Tom: I was 40 earlier, yeah.
Meb: Happy birthday.
Tom: Thank you. But so that moment, we’re looking at him as good for the markets, good for America, re-China, and a source of comedy. Because every good American has effectively lost so much trust in government. I’ll go further to predict that we’re going to start to see entire countries in our lifetime will become privatised. And by the way, I don’t own a single share of Bitcoin.
Meb: I should say it sounds like a poser for who is trying to build an offshore floating island. Is that Peter Thiel?
Tom: Yeah, yeah, yeah.
Meb: Okay. You probably up Warren on the bedding market. She’s probably plus 500 right now I think. There’s about six of those Democratic candidates that are all sort of jostling for, anyway, TBD. We’ll see. Back to investing. And so what do you look for in these companies? You’ve done almost 100. What has been some of the themes? By the way, listeners, if you sign up for Tom’s syndicate, if he lets you in, you get to read a lot of…one of the nice things you do is write. As a fellow writer, I love seeing the thesis whether I agree with it or not. But I love seeing the thought process behind the investment. What is it you’re looking for? What waters are you wading in? And listeners, as you answer this talk to a little bit about the market cap range and people say seed but they don’t really know what that means. So…
Tom: Yeah. So the reason that I talked about 2020 as an example, I think it’s my job to be able to see around corners. And so I’m approaching venture with a much more deliberate view of the macro than most venture investors. Most venture investors ignore macro, and I don’t. So I’ve been investing on a theme of America is dying for the last five years. So that’s why I looked at so much…and by dying, I simply mean losing its supremacy in the world. And so I’ve been looking at how do you fix that? So I’ve been very, very active as you know in healthcare. I wrote something it’s on medium called “Snakes and ladders,” which is this thesis that the Americans that we need to ladder up are the poor in this trap class of…which is the majority of this country. The majority of this country is poor. So I actually think that ethically run technology companies that are trying to ladder up the poor and…I call this trap class, have been very, very interesting dramatically for me. And, for example, I don’t know if you’ve joined me on Possible Finance?
Meb: I did.
Tom: Yeah. It’s great company. And…
Meb: I have to get all of mine pre-cleared every single deal we do because we deal a lot with the SEC. But particularly the ones that may be in FinTech, asset management, broad speaking finance. But yeah.
Tom: And it’s a more ethical lender for people that are seeking effectively payday loans. And so those companies have done very, very well. And I’m dramatically very interested in laddering America up and fixing incredibly significant costs in this country, right? I mean, I think that’s what technology…technology is greatest back that democratising powers to eliminate inefficiency, which creates cost and waste. And so another area thematically, too, is just like where do faxes still happen? In healthcare, for example, the way in which people communicate in hospitals are through pagers. Pagers. And like the amount of, you know, all that kind of stuff. So I look at…
Meb: There’s an entire subset listening to this that probably doesn’t know what a pager is.
Tom: Yeah, which I crazy.
Meb: Younger listeners. I’ve never owned a pager. I know. I don’t think I’ve ever owned one.
Tom: So then the future of how money gets made, like the future of commerce is a huge theme for me. And that was like Jumbotail and Grove and companies like that and plastic. And then kind of another big bucket would be attention. Did you do wave?
Meb: Why don’t you walk us through, for example, maybe to the extent you can a little bit about wave or pick any you want.
Tom: Wave is one of my best ways. So I did Brian, I invested in Brian on a phone call. And I’ve invested in…I’ve done that on a couple of ones where I just immediate high conviction. And our initial connecting point was LeBron James and Ohio, he’s from Ohio. And here he’s talking to a Silicon Valley investor. And I said to him, like beginning of the call, “I hate the warriors.” And so he just immediately loves me, right? We’re talking about this. And so I recognise because I’ve been very, very back to attention, I’ve been very, very focused on influencers and how the way in which people are discovering everything fundamentally has changed. Brand marketing is far less effective. We are trained now to look at brand marketing as noise to be ignored, classically, television, interstitials, etc., etc.
So you have to embed into the channel. That’s the future of kind of commerce at the core. And so I knew I am the least sports guy sports guy in the world. I know LeBron James and I don’t even remember I think was Kwame was the…I’m Canadian. I don’t know anybody. So I made this investment. And what I typically do is I look to share my investments with the people that I respect as kind of those 2 and 20 managers because they do the board work, they do all the hard work. And I get to do the fun work. They get to be the ass kickers and all that which is important. And I have a kind of a small group of people that I send things to.
So I sent it to them. And we’re having a closing dinner a couple of months later. One of the lead investors, the guy had written the largest check, he wasn’t actually the lead but he came in after. Anyway. We’re chit chatting about sports and he goes, “So, Tom, how about…what’s his name?” And I looked at him, I’m like, “I don’t know who you’re talking about.” And he became ghost white. And he said, “Wait a second, I followed you into the sports media company and you know nothing about sports?” And everybody else who knows me better is laughing. I’m like, “I’m not a sports guy but I know people.”
So for me in the early stage, what you’re actually betting on and what you as a backer don’t get any real feel for are the people that you’re betting on. And I can’t and won’t, I will or rather I can but I won’t share because this is my secret sauce how I pick people but it is very deliberate. And I have high, high instincts too. But it’s there are some deliberate processes that you can employ to kind of pick the right founders. And what you’re betting on, though is, is that that founder eventually will make a transition to become a great CEO, which frankly, most founders don’t make great CEOs. And so you either have to build around them an infrastructure of great people or the company is going to fail or they’re going to get replaced.
Meb: So you knew LeBron, hated the Warriors. Pick the head of this company as the horse to bet on. Tell listeners what the company actually does and how have they’ve grown over the last couple years?
Tom: Yeah. So when we…did you do the [inaudible 00:53:37]?
Meb: I had a different name written.
Tom: Yeah. I see that the first…wow, great.
Meb: It was one of those ideas to me that there’s lots that just immediately strike you and you just think that’s a really good concept.
Tom: Yeah. And I mean sports media is kind of for men and particularly young men is one of the greatest areas of content consumption.
Meb: I mean, growing up and I’m a big sports guy, I remember watching ESPN, there’d be nothing else on TV, you would watch Sports Center. I would just watch it again. The same exact show, you’ve already seen it you know exactly what the highlights are. But it’s that or I don’t know “Family Ties” or something. Like something terrible you’re going to watch. So people love to consume sports in general and highlights in general.
Tom: And sports are tribal. And that’s the piece that I understand is like so as a Canadian, my dad is Welsh. And so we would get lucky to go over to Europe. I think I did two trips. I did two trips of them as a kid. And in both, we went to soccer games, football games. And so like I understood sports tribalism incredibly well. And also thematically like I knew that around attention, people like there’s only a couple of things that get people like riled up. And that’s why I like to hate and so on has become so populist because it works to get people agitated. And so this was like a positive influence in that world. And so I made the investment, but it was also that he was a failed mobile consumer founder. And he had actually found that just before his first company failed, he started to realise that there was these teenagers who were building these kind of a sports tribute channels.
And that if you knew how to get to them, that they’d promote your app for nothing. And they would drive more downloads than any other kind of mechanism and for free or for low cost. So that was a huge, huge insight for him. And so he started just going to these mostly teenagers and saying, “Can I buy your channel?” And these kids would be like, “For how much?” “How about $10,000?” “Like $10,000?” So we continue to do this. I mean, these creators exist all over the world. And they’re super passionate and they understand what is meaning. They understand what is going to get other people’s attention. And so they’re just creating it.
And so there’s kind of like whack-a-mole of us just going and buying these channels. Back to like what Facebook did. I mean, we’re growing on all these platforms. But there’s a point in which you just kind of…so the wave brand now I think to creators, you don’t want to work with another digital media company or media company because they don’t understand you. They think that they do and they kind of try to talk cool. And then you realise their suits. And so it was a bet on them understanding and being native in this language and these creators being so powerful, that is truly the future of media. And he was able to articulate that crisply and concisely. And I was like, “Let’s go.” And it’s a media company, though.
And so the challenge is that media companies typically don’t trade adventure valuations. And so we’ve been throughout the whole kind of journey kind of been reminding everybody like, “Look, this is still a media company. It’s now I think the third largest media property in the world, we’re in billions of views. But its media company.” So venture investors typically don’t invest in media companies.
Tom: Yeah. I mean, you know, truly, Meb, yes. I mean, I think that there’s a guy who’s very, very like me doesn’t…I don’t do media. You’re a friend and I’m happy to do this, but I generally don’t talk other than to my backers. Which is also very intentional and not wanting a brand and still being able to get great access. Like I’m playing a long game that is so long that most people can’t even see it. But back to it, there’s a guy, his funders called Lead Edge. I’ve never met him but he seems to be quite like me in thought. And I remember reading a profile on him and he said, “To be a great venture investor means being very lonely, that for many, many years.” And you talk to people that I admire, the best companies in their portfolio were these companies that literally nobody else would touch. That’s how you make money in this asset class.
Meb: You talk about Grove being one that you invested in. I think it may have had a one or two million revenue in the beginning?
Tom: Yeah, yeah, yeah. So I left the hospital of the…it was the second day. So it wasn’t like I left well in delivery to meet Grove. And my mom at the time was like very deliberate in saying, “You’re a terrible husband and a terrible father. Like how dare you do this?” But my wife and our kids are both like, “Thank you so much.”
Meb: Hey, we did a podcast from the hospital after I had my first child so I can relate.
Tom: You have to have the other part of this business. To be a great manager in this business, you actually have to have a great partner because you have to jump on things when you need to jump on them. And a lot of your friends and family will look at you like you’re totally nuts. Anyway. So Grove’s run rate was at 1.9 million annualised four and a half years ago when I made that seed investment.
Meb: And tell the listeners what Grove is?
Tom: Grove is the already America’s largest independent brand for home and personal care. So your soap will do a little non-paid ad for Grove. So think about your soap, your bathroom tissue, these kinds of things. So Stu and Karthik of Jumbotail told me a clear vision that was so obvious that you just had to go. Two best CEOs on our portfolio. And what Stu said was, “In the rest of America that most of us never even been to, there are just as many people who care about the environment as in these coastal cities. And they equate if their heads of households with children, they equate what’s good for the environment as being what’s good for my kids.”
And so they can’t get access to the brands that we can get access to because there’s maybe one retailer that carries it, and it’s maybe 30 or 40 minutes away each way. That was very, very true. And still is for the most part of this country. Suburban is still a huge part of population in this country. And I think, again, why macro is so important is that most venture investors ignore the macro much to their peril. Anyway. So he says, “All these people need this product. And Amazon,” he said,” is always going to focus on lowest price, and they’re never going to care. They’re just going to like either lowest price or like what they were paid to sell that day.”
And so if we build this brand, it’s actually very much away from Amazon, but rather that we care and that we’re choosing the products in which are best for you and your family to buy that that would be the beginning of like a massive new brand. And so in the first few years, when we made the seed and the A investment, I think at the A, they might have had their first Grove branded product, which was like a sponge because it was cheap and easy to make. But the vision was always that we will replace, we’ll gradually replace these third party products with our own. That was like clear, as clear as day.
But the third point that he made was that CPG, the large industrial CPG companies, you know, they have multiple brands that are multibillion dollar businesses, individual brands tight is a multibillion dollar business. And he said that the problem with…and he’d come from CPG I think in grocery, so he knew the space intimately well. And what he said is like, “Look, tide is 95% water.” But in large part because of the fact that they have to merchandise from the store shelf, it meant that their kind of packaging and their form factor was never going to be efficient for ecommerce. But if you actually separated merchandising the point of sale online from the actual physical product, you could make massive innovations in the actual way and the product was packaged.
And so the reason why Grove, I think Grove will become the type of company that people look back on and go, “Man, if I had only own that one stock, I would have been set.” And so the thing of it is, is that the CPG companies cannot cannibalise those store sales. They cannot, will not. So they’re kind of stuck and so that’s why they’re trying to buy as much of this innovative products as possible. But it was also very clear to me because Stu came from…he had left a promising career in private equity where his peers are making tens of millions of dollars a year. And he chose to start the startup that success for him would look…I’m now giving you my secrets, unfortunately, but I knew that success for him because a lot of the time the best entrepreneurs will sell too early.
Unless you kind of properly support them through secondary and kind of really do that well, a lot of founders they’re like they have to sell. And so it’s the tin cup moment of most people layup, most people don’t go for it. One of my favourite movies in film history that moment in that movie. But that was Grove. And I had multiple friends of mine who are very venture investors. Tell me, “Tom, I see this coming getting to 100 million in two to three years.” That is clear at 10. And the A we did it about a $10 million run rate, which was 5X in 18 months. And people at the time said, “Oh, they’re too reliant on paid acquisition,” because bad consumer investors are like, “Well, if it’s going to be great, then there should be lots of organic. And Stu’s view was, “No, if we can efficiently acquire like brand advertise, it’s what we do. And if you can be efficient in that you can do that.”
So at this round where we had 5Xed, I had two investors say we’re going to get 200 million unquestionably. But since the comps in the category are 2X run, then how is this company ever going to get to a multibillion dollar company? Both of those investors now when I say like, “This is the next Grove,” like they’ll pay attention to everything in that respect. And I was just talking with one of them yesterday, he’s a friend and a mentor, even though, you know, he passed on… He goes, “Yeah, you know, that was my mistake is I didn’t look at him. I didn’t see who he was and what his motivations were. And I didn’t look closely enough at that.”
And also, the other thing that you have to do is, as an investor, is you have to get out of the mindset of, “Well, I would never use this. I would never do this.” That will get you out of almost every great investment. That I think is like the most obvious thing and venture or the most non-obvious thing is if you think you understand it, you’re probably about to make a bad investment.
Meb: As I look at both of those that I participated in, there’s a theme and it may not be the dominant theme. But it’s a theme that I keep coming back to in a lot of things that we talked about, which is so many people, it’s not just human curation, but they want something like in the case of the highlights for Wave, they didn’t care about watching it on TV. They don’t care about… What they care about is the content good? And so you find the passion creators who curate a channel that maybe about rugby or whatever, and then the people who watch it love it. And I subscribe to a lot of these types of channels on Instagram. And it sets concept of curation, too.
In a similar way, Grove it seems like people say, “Look, I don’t want to have to go to the store and try to figure out which of these 50 brands of toilet paper is the right one. Just tell me what’s a good one? What’s the source? What’s good for the environment? And I’m good. It may not be the single best, but there’s…” This is actually John Bogle quote is like, “I may not be the single best, but there’s infinite worse.” Then once you trust someone with that sort of, then you would buy everything from them, and which is clearly what people are doing.
Tom: Yeah. And by the less worse is a great approach to enterprise investing, right? Like Zoom is still like not great. It’s just less worse than everything else in the category. And so what’s also really interesting is, is that most startups that become successful become bloated bureaucratic organisations. And so what’s great about tech two is that, for example, you probably we didn’t do this one log DNA. So log…
Meb: But, however, this is the biotech?
Tom: No, that’s protein care, which is…
Meb: Oh, it’s here. What’s log DNA?
Tom: So log DNA is server logging. So you need to know, if you’re running computers, you need to know how your servers are performing because that’s basically the performance of your computer business. And so the publicly-traded competitor in the space is Splunk and Splunk is terrible. And everybody knows that Splunk is terrible. So then comes along Chris, Canadian, by the way, living in the Valley, and he’s like, “We’re just going to make a much, much better product.” By the way, the way that we’re going to sell it is through usage-based pricing. So if you’re a small startup, then, you know, it costs you almost nothing to have this great quality product. The usage-based piece was key to understanding that business. And so we’re just going to grow with these companies. And so enterprise some of the best…did you do Uneedo?
Tom: So some of the best investments in general prize look like the most boring like, I don’t know what this does, like…those are the commies just print money.
Meb: So we’d love to hear maybe one or two other companies. I know you can’t talk about ones that are currently in fundraising registration, but maybe any that you funded in the last year or even older, but that just you think are…
Tom: Yeah, the best investment I made and multiple other than Grove is this company called Jumbotail. And Jumbotail is based in Bangalore, India.
Meb: You went over there, right?
Meb: How long?
Tom: About I think two or three weeks.
Meb: I’ve never been. It’s on my to-do list.
Tom: Well, so here’s the thing is like LPs who have trusted me for years said to me, “Tom, we’ll follow you anywhere in anything except India.” And I had this very specific view and believe that India will actually be the largest country by GDP in the next decade. And India actually is the most stable, large population country on Earth. And so that’s just the facts. And these two entrepreneurs both met at Stanford doing their MBA. And so the thing that my LPs that did go into the deal would say to me is, “Oh, they’re just Stanford MBAs.” There’s this kind of perception that a lot of investors lost their shirts on backing these kind of industrial companies. And they were industrial companies, you had your cousins running them, etc. This is a software business.
And in India, the way that it works, grocery and food, so Grove is grocery and food, I kind of like, “What are the things everybody has to buy to survive it kind of like it’s a good macro theme,” right? So 300 billion of food and grocery sold in India a year, 95% of it is transacted through these little mom and pop shops that their grocery business has been like ours in the 20s. And so because there’s a lack of electricity, people only buy things like they buy two eggs. And this business is effectively a mobile ordering app for these Khurana stores that allow them to not only buy, but then also actually end up having all of the goods distributed straight to their store.
So instead of them going two hours out of the city in complete chaos. And what’s also happening, I think that it’s important that we talk about, too, is this generational shift towards laziness. The advent of the smartphone just made us inherently more lazy. You could say the positive attributes here is hardwired to pay for convenience. And so even somebody that’s poor, that’s of the next generation will say, “I’m willing to forgo a few rupees to pay a convenience tax.” Convenience tax is a highly, highly, highly, highly good businesses to be in. So that’s what Jumbotail is.
And, again, I’m just so proud of that courage because people who I truly deeply respect said to me, “Tom, you’ve worked so hard to build this reputation amongst people that know you. You’re about to throw it away.” That’s what they told me. And they said, “Also, too, why are you making life so hard on yourself? Don’t do it to you, don’t do it your family, don’t do to your LPs.” These are people that I deeply, deeply respect. And sometimes I think people might think that I’m reckless. It’s so calculated.
Meb: And so Jumbotail, what was it kind of stage where they were…
Tom: It was Series B.
Meb: Series B.
Tom: I led through an SPV the Series B, and it was the hardest financing that I ever did. And honestly…
Meb: Hardest in what sense? Convincing people to invest in it?
Tom: Well, yes. But then also, I had a bunch of commits lined up and December happened. Like the clothes was supposed to be before I went on my Hawaiian vacation. And then the market is just private. Yeah.
Meb: December of 2018?
Tom: Yeah. Priced, the certainty of that hike in and everybody fled. So I had a bunch of people say, “And the problem with SPV is, is until you sign the paperwork, there’s nothing.” So what I’m having to do with the SPV, which is the hardest part is that I’m having to sell capital to buy capital effectively. And that is incredibly taxing. It’s hard enough to be a good buyer. It’s another thing and that’s what AngelList does, right? As I click a button, they take care of the rest, which is fantastic.
Meb: There’s the convenience tax of…
Tom: They’re convenience tax.
Meb: …5% Carry.
Tom: It’s a huge tax on it, trust me,
Meb: You want to hear a funny story real quick, by the way, is that we, to my knowledge, maybe not the only asset manager that’s ever done this, but one of the only ones that I know of is we had raised…you can’t really call a crowdfunding round. But we raised an investment round from accredited investors for our company. And this was a few years ago. And originally we’re going to do an on AngelList. But the thing is, is like we’re all we want to do is basically open into our audience, say, “Hey, look, if you want to invest in our company, you can invest in it. You don’t want to, that’s fine.”
We wanted people who had been emailing us over the years would love to invest in ETFs company, blah, blah, blah, anyway. But we drew up all the docs here and said, “Hey, maybe we’ll use AngelList. Because it’s just a nice platform, convenience tax, people can click, they’re accredited, don’t want to deal with it.” And AngelList is like, “You know, you’re not a tech company so we don’t think it’s a good idea.” And I was like, “You guys like I’ve invested in like hair companies and smoothie companies and toilet paper companies.” I’m like, “Are you guys serious?” I’m like, “Whatever? I don’t care either way. I don’t want investors that big,” you know, because we’re doing the raising, right? We weren’t and I think it ended up raising like three million but I was laughed because I wanted to use them because the ease of it. And it’s really well done. But anyway, digression. Okay, so convenience tax of trying to do this on AngelList.
Tom: So the AngelList folks should be going out, and calling family offices like large family offices and saying, “Let’s either programmatically deploy capital or get somebody in your office to just put a good chunk of your technology investing through the platform.” And I think that because of the founder, they believe very much that like technology by itself will scale. And I think in the capital markets, it’s just not true. It’s a very relationship-driven business. So therefore they have people like yourself who are these entrepreneurial investors who love pouring over these notes and you’re the people like yourself are what allow me to do what I do.
But the problem is that when I talk to a lot of my backers, what they tell me is that it quickly get overwhelmed by opportunity. And even a lot of my large family offices, I’m so activated 44 financings last year, half on, half new. I’m slowing down the new stuff considerably because I have so much great stuff to pick from in my follow-ons. And, by the way, like imagine trying to do 44 financings, like without AngelList, it would have been insane. And I’m also not a steward of their capital. I’m actually technically a special advisor. And it’s trust and access that they provide and then I do all the work.
Meb: What’s the average kind of like…is it about 50 people in a deal or 100?
Tom: It’s far less than you’d think.
Meb: Is it it like the usual check size?
Tom: I impose a strict minimum, right? There are some people who are like 1,000 bucks and up. My minimum is 5,000. And the reason is, is that I’m trying to allocate serious, serious capital and on the law of numbers, you just can’t you can’t do it. But I hope that there’s a day. And if it’s not AngelList, it will be on other platforms, but that whomever figures out how to get big allocators on the platform will on a platform like this, will AngelList’s best positioned to do this for sure. They will figure out…that will be kind of the future of capital. I really believe that I would say I think it will be the future of this asset class for sure.
Meb: Interesting because you’ve seen a couple derivations, you’ve seen equities in kind of the late stage private. Jason Calacanis went off Angel list and kind of did his own thing. There’s so much development going on very quickly. It’s gonna be fun to watch.
Tom: Totally. And it is the natural progression of at least this part of alternatives because it is so much story-driven and founder-driven and so on and so. It lends itself well. Whereas if you’re doing some like complex real estate transaction. I don’t know if it necessarily…there’s a marketplace for everything. But I don’t know if those things will take off as much as on this equity side of things.
Meb: Sounds like you might need start hiring some people. Forty deals.
Tom: Never. Never. Never. Never. Never.
Meb: Is this a solo operation besides your poor wife and children?
Tom: Yeah. Yes. And it’s intentional that way. What I learned was I hate managing people. I love, love coaching people. So for me, I’m trying to stay a firm of one. Well, it’s true on the employee side. But in that I do want to spend…I spent so much time on the road, like so much time…
Meb: Just visiting companies or what?
Tom: Yeah. You just have to live on the road. Or you pick less places.
Meb: And so does that mean conferences?
Tom: No, never.
Meb: So when you say on the road, is this you just literally going to visit companies?
Tom: Yeah. So like a classic…for example, I have Seattle, LA, New York, Boston, Toronto, San Francisco, LA, Montreal, Dar, Tanzania, Bangalore, India, as my current portfolio. A few others scattered, but there’s good concentration.
Meb: So what percentage of the time is visiting the current companies versus sourcing neighbours.
Tom: It used to be almost kind of 50/50 and now it’s like 80% in service of the portfolio and 20%.
Meb: Which is cool because you’re not technically getting paid to do that.
Tom: No, it’s very expensive. So the other huge part of that though is and this is any angel investor that’s listening needs to understand this, I said in the beginning, is that a lot of investors have this approach that, “Well, I gave you money, and so therefore be accountable to me.” It doesn’t work that way here. You have to flip it. You have to be…and I just spoke with one of my probably I think one of the most valuable companies I invested in last year. And, for example, we’re supposed to have breakfast in San Francisco and text me at like 11:00 is like, “I’m still at the office. I’m not gonna be able to make 8:00 am and can we catch up later?” “No problem.” Texted me that morning, “Thanks so much for understanding. Why don’t we talk at noon?” Noon goes by doesn’t call. And I said, “Hey, you know, like, can you meet me at my favourite meeting place?” “No, let’s do a quick call.”
So if I didn’t stay on him, he would have gone through his day being busy and not called. And I spoke to him and I said, “You’re my most underserved founder right now and I hate that. Love this business and I hate that.” He goes, “You’re right.” You know, like I actually…and he’s not sending updates. He’s not doing anything. By the way, his board member is a dear, dear friend of mine and so I’m able to kind of triangulate through. But nevertheless, he was like, “Yeah, I don’t do a great job of engaging investors.” I said, “That’s okay. It’s my job to engage you and I’m just going to stay back when you…” And you could tell automatically that that started to kind of have him go, “Okay, this is a guy that’s in my corner. This is a guy that’s different than a lot of other investors.” And so that’s the beginning of hopefully a long-emerging trusted relationship.
Meb: One question, to what extent, and the answer could be zero, because I don’t know them, but are your LPs that invest in the deal ever additive or useful to the portfolio companies or the process in general? Do you have much of an interaction with a lot of them? Or is most of it…
Tom: Increasingly. Like what I’ve tried to do is get to know who my people are. At which AngelList makes…they don’t care to. They have not put any of that product in there other than like LinkedIn profile perhaps. And what does the LinkedIn profile tell you about anybody?
Meb: I log into LinkedIn, checked five spam emails and log out. And that’s the extent I use LinkedIn. We push our content to it, but…
Tom: Yes, exactly right.
Meb: So people read it. I don’t know why anyone goes there and reads it, but people read it.
Tom: I think because a lot of true professionals don’t have…I mean, I guess we’re excluded from this, but don’t have time for Twitter. And so they want to get a feed. They don’t want to go on Facebook, they don’t want to go on Twitter, they don’t want to go on Instagram. They want to see like what’s relevant to my business today? And they focused their feed on that. And they got very, very good at it. For me, when you check your top right, like the things that are highlighted as their new stories, are those pretty relevant for you or not?
Meb: I will check. I don’t know because I just don’t ever go on there. It has been a while. It may have changed over the years. It’s not what I have used but maybe we should.
Tom: I look at it, I mean, because I’m referencing people. I’m on it all the time. But yeah, I’ve noticed it’s gotten way, way, way, way better.
Meb: So LPs, you…
Tom: Yeah, LPs, for the most part, are…I mean, I tell my LPs specifically, you cannot communicate with these people without my permission. And so because, again, a founder is like, “Wait a second, what’s going on?” And then or worse…
Meb: Some guy put $1,000.
Tom: Yeah. He thinks that he has an opinion that should be listened to. My job is to be an efficient intermediary. And so that was a lesson that some of my backers didn’t really understand and now they understand.
Meb: I mean, an ideal scenario would be potentially one day where you actually have some LPs that you have a company and this…that actually could be they get an update and they say, “Oh, we’re looking for a new COO,” or…
Tom: Yeah, and I do do that. I do do that. Wherever there’s a request for help I share it out. But, I mean, on the offline side, my LPs are very reactive.
Meb: Yeah. Okay. We’re going to start to wind down here. We’ve kept over a long time. I’d love to stay for a few more hours. As you look to the horizon, what’s the next decade? What’s Tom in his 40s look like? What’s the plan over the next 10 years? It sounds like you’re transitioning a little more to you’ll still do new financing but a little more of financing your current companies?
Tom: Yeah, a lot of follow-on. Unfortunately, you do realise that as one human do have limits and it’s sad to admit when you start to feel like you’re coming to that upper bound. I love what I do so much. It’s my purpose in life is to be helpful to people that I believe in. And so you’ll see actually shortly that I’m going to start to back new Tom’s. That I’m going to be kind of more of the allocator to the next angels. And therefore I’m then coaching and even engaged in active feedback sessions with the CEO. So I’ll introduce myself and saying, “Hey, I’m keeping him accountable or her accountable. So if you’re not living my brand, you let me know.” And then what I’m doing is then saying, “I’m coaching them through how they think about the opportunity and they support that entrepreneur,” and so on, and so on.
But I’m getting all this information asymmetry, and that allows me then to go on and take the Series C or Series D financing, there will come a point where I’ll be able to maybe click a button and deploy $20 million into a single deal. And when that comes, then like look out. And so therefore, what all want to do is be doing what your classic, older, greyer VC is doing, which is the hard board work and deploying serious capital where I’m the Stuart. And then I get to do this baton…and see the other part of it is every angel has this upper bound. And so if you’re like me, which is building lifelong relationships, investing across every round of your best companies, you need a baton process.
And so for me, by the time that an angel goes from C to Series C and I take over at the C, I give that person bandwidth to be able to support another founder again. So that’s my long-term strategy. I think that you have to remember that this is an asset class that requires exceeding amounts of patients. And it’s why it’s just not well suited to a lot of investors and entrepreneurs who made their money by moving forward at the speed of light. You’re sitting…we’re talking about your hundred year fund, like it requires patience. To do stuff that is changing the world, like it’s not going to happen overnight. Like that’s the bottom line.
Meb: It’s interesting. There’s two things that spring to mind. One is one of the challenge for a lot of people is…I love to hear you talk about this for the people that are listening and who more individuals or advisers of individuals, so not family offices or endowments that probably have this covered already. But people would say probably entrepreneurs or people who are doing an angel investor or want to, how should they think about allocating or starting to? And then second, how should day and how do you think about a cell discipline? So there’s the ones you don’t have choice, the company goes out of business, the company gets acquired, but the one where they eventually say go public or you then have the choice yes or no to sell, how do they think about it? So a little bit wrapped in there. How should people think about allocating?
Tom: Well, let’s start with the selling question because I think that’s actually the most interesting. I spent a lot of time thinking about this and educating people about my approach, which is, so for example, in growth, there was a big secondary where some investors got and even other interesting thing about my SPVs is I can actually trade out individual LP units and keep the position whole. So what ended up happening was that my SPV LP, said, “Yeah, I’m up a lot. Let’s go.” And I said, “Hey, I’m on the other side of this, just in full transparency.” And he said, “No problem.” And so my job and I think you’ll also start to see lots of more…there was already starting to be kind of like shadow secondaries on AngelList and the secondary market is always in the shadows, a lot of stuff trades you don’t even know about.
But for me if I were to actually say to Stu, I think a billion dollars is the upper bounds of this business, the relationship would be over. So what I mean by that is you build a legend by going all the way. And if you try and trade out early, then you’re just capital. So for me, it’s about more managing the follow-on. Because what I learned, the biggest mistake I made an angel investing was I did not double, triple, or quadruple down on my companies that I had tremendous conviction. And, oh, man, I’ll never make that mistake. And we’re talking about that off the record. And so I course corrected on that big time, right?
Like now my strategy is actually higher loss rate early, but so long as I stop then I’ve learned a lot. And that goes back to we can talk about allocating is that the greatest amount of learning and the greatest amount of knowledge that you’ll get an instinct for the asset class is being early. Super, super, super, super duper early. That will train somebody instincts and that money you should just completely allocate to being a total right-off. And then what you’re trying to do then is find those companies that you now know, you know how well they’re doing. You actually can start to feel the pattern of the business. And hopefully, because you’ve done all these lunches and these dinners and these walks, you get to know what’s really going on. I have so much information asymmetry.
Meb: And it’s also a rare but magical experience when you do see a product market fit fly wheel just start to spin. It happened so many times, not just in private markets, but also public but it’s a really fun thing to see happen. I mean, granted as an investor, of course, it’s a fun thing. But so you’re saying to focus more on those where you have the insight and deploy more capital?
Tom: Yeah. And so on the sell side, I do say to people, I just had this conversation with somebody the other day is like, “Hey, if you want to go into funding money land, if you want to get SoftBank and run that process, odds are not going to be with you. And I’m going to find secondary as quickly as possible.” And for me, there is very few companies. I actually have I think only really one which I like very at the board, I don’t take board seats, but sometimes I’m board observer. And I’ve said like, “No, we should play zero sum here. It’s a massive, massive, massive market and we can actually use capitalist that moat.” The CEO, though, is not going to lose his mind. He’s incredibly, incredibly well adjusted. And he’s got a great board around him. And so he’s not gonna make that same mistake.
But in most cases, I say, there’s one, for example, right now that since it’s up, I can’t talk about but you may be in it or you might have looked at it where I know it’s not gonna be a multibillion dollar company. But there’s a high likelihood of it being still kind of 10X. And so the other thing about most investors don’t even really kind of…and in some cases, most investors won’t choose the 100. Using my LP as the example, who’s very, very smart. Very, very smart, one of my true mentors. And you know, his whole thing is the best way to make money is not to lose it. And so when he sees these things trade out get to…yeah, I can’t say but a lot, a lot, lot. He’s like, “Cool, I’m done. I don’t need to go any further.” And from a defensive perspective, that’s absolutely the right call. The thing for me and the thing for all managers that want to be legends among CEOs is you have to play offense. You can’t basically play. Once you’re in, you have to go all the way.
Meb: So Stan Druckenmiller theory, one of the best macro guys of all time. But we had another guy in the podcast who wrote a book. It’s kind of a cult classic because I feel like most people may never heard of it, Chris Mayer, who wrote a book called “100 Baggers,” and it was based on an old book called something like “101 in the Stock Market.” But he went and did a quant study of all the above stocks that did 100 bagger, so 100 times your money, not 100%, but 100 times your money and the characteristics over time. But it’s a little bit different the public markets because every day you can sell what he was trying to relate to people is that even if you invested in McDonald’s, Berkshire Hathaway’s, Amazons of the world, it’s really hard not to sell them along the way. Because you double your money, you’re like, “Oh, my God, I doubled my money. Let’s sell. Let’s by house.”
But every one of those stocks doubled and then tripled, quadrupled, you know, all the way up. And on top of that, you have the big draw down in private equity land, it’s easier is the wrong word. It’s because you’re often locked in you can’t sell, which is actually, you know, I’ve changed my mind over the years, I actually think is a mass…having managed money, we have 30,000 plus investors now. For long enough in the public markets, I know that it’s actually probably a net benefit. You just can’t sell as long as your private. You’re stuck with these companies, which allows them to compound versus the public markets, so it’s people, one of the biggest mistakes we see them make in the public market is selling too soon.
Tom: And I would say that, you know, a lot of founders, and I talk about because I had that confidence with them, to sell or not to sell. And the way that I heard it told to me by somebody that I greatly respect is if somebody is coming along and valuing the business at a greater valuation, that, you know, you’ll be like that far exceeds what you can operate into two years from now, you have to sell. In other words, that the premium is so great. And I think that that is broadly applicable to the right way to think about hold or sell given a secondary opportunity is it actually touches on Mayer’s book, which is like if growth is still happening and you know that you’re just at the beginning, why would you sell?
So it’s more looking at it from where is this going? And what am I…he wasn’t really a mentor, but he was a guy that every time I was with him I just lapped up what everything he said and he was a vice chairman of one of the biggest investment banks in Canada. And he said, “You know, Tom, the way in which to think about the public markets is when the markets are wrong, you buy.” In other words when there’s a sell off, but fundamentally, what you know about where the company is headed hasn’t changed, those are the best buying opportunities forever. And I feel like that to me is kind of the definition. That was said to me in my mid-20s and I think it was a very informational to how I think about venture is like I don’t want to be where everybody else is, I want to be where everybody isn’t.
And that’s why on price…and the other part of it is like being with people who are actually not…it’s sad to say that a lot of my CEOs aren’t charismatic, quite the opposite. But for whatever reason, the way they talk, like the way I talk most people…people feel would actually like having the ability to analyse how much of what I’ve said, will get retained. I know that the way that I talk is only like a very small percentage of what I actually say gets retained. I tried to fix it but you can’t change the way they talk without a lot of work. So…
Meb: You don’t say eh a lot for a Canadian.
Tom: I have not, yes. But I did hear myself be Canadian a few times. But anyway, with respect to the markets I think that and the way that I think about investing is you kind of have to…it goes back to that lead edge fellow that you just have to be okay being alone. And then these founders, the less charismatic they are or rather the less effective in communicating their vision early, the better buying opportunities you get. And so founders who kind of crush at fundraising means that you’re always going to be paying kind of top dollar for your follow-on.
I had that particular situation like one of the best founders…actually, some of the best founders, my portfolio, I’m always paying in the round that I’m following on to, I’m paying almost too high of a premium. But because I know that the growth is still we’re in early chapters I can pay up but people are looking at me going like, and that’s the problem with SPVs, they’re like, “Whoa, Tom, like traction, relative price, what are you doing?” And so top founders are always going to optimise your valuation. So you have to get very, very, very confident in who are your top and where you’re kidding yourself.
Meb: That’s not always obvious.
Meb: What are some resources? So people listening, they want to seriously start to allocate to this asset class. How do they get up to speed? Anything in particular stand out? It can be you already next conferences, books?
Tom: I may never get invited back. But I think that YC has become a place for very, very wealthy individuals, family offices, etc., who don’t have deal flow. And I would say that YC is absolutely unquestionably the best brand or accelerators in the world.
Meb: What does it get? Like 100 presenters?
Tom: Yeah, I just finished with them. It was crazy.
Meb: I’ve actually never been. It sounds kind of exhausting.
Tom: It is. But what’s happening now is, is that most of us who have deal flow go there. YC is very good at curating thematically. And because they have this incentive structure to pump up these companies, they’re coming out at 10, 15, 20 caps, valuation caps on companies that are barely alive.
Meb: So back in the day, this would have been like a $4 million?
Tom: Right. But if you’re trying to make money, you can’t. It’s just a terrible place to invest but it’s a great place to learn. So what’s happening is, is that the people that are actually chasing YC deals are people who are learning about technology and learning about what makes great entrepreneurs, and so on, and so on. So TechStars has got so many different accelerators all around the world. Probably anywhere in America, there’s now some form of accelerator. I’m surprised that people aren’t leveraging more of these opportunities zones to create kind of economic development accelerator type things. But nevertheless, I think that the number one lesson that I would apply to anybody that wants to allocate here is you have to either be yourself, confident in your ability to evaluate people, or you have hire somebody that is.
If you don’t believe that you have good people instincts, and/or if your track record in picking people turns out not to be that great, then you really shouldn’t be allocating here because so much of the entire value creation of this entire asset class is driven by people. You look at human capital, and I remember, the guy that I worked for, the billionaire talked a lot about human capital and he would explain in the first.com, but why are these companies were so much more to these hard asset companies? And his answer was effectively people. That these people possess particular sets of skills and knowledge that is actually highly, highly rarefied. And he was so, so right about that. So I learned a lot from him. And fundamentally, it’s people that create value in startups. And being able to pick the right people is everything. So for example, I’ll kind of maybe leave you with this…we don’t have to leave. But actually, I kind of do soon. But…
Meb: I have one more question.
Tom: I recently was in a portfolio company of mine. And the CEO invited me to spend time with his executive management team. And the company is doing well. But it’s had a lot of turnover. And a lot of investors were getting nervous and they ascribed it to his youthfulness and naivete, and it’s not. He’s one of the best founders in my portfolio. There’s a lot of turnover. So here, I’m with the executive team. I immediately recognised the source of all the problems. And it was clear to me in seconds, now it was so clear that I then spent the hour trying to convince myself I was wrong, but I just kept seeing it.
And I called him up that night. And I said, “This is the source. This is the problem.” And he goes, “You’re wrong. You’re absolutely wrong. This is not the problem.” And he said, “You know what? I’m so kind of troubled by the fact that you’re making this assessment and I so trust your instincts that I’m going to ask you to speak with several other people. And please, Tom, like, I know that you’re always right, but let me like, really, really stay open here.” And so I’m like, “Okay, I’m gonna stay open.” Next morning, I speak to one of the board members and the board member is like, “No, this is not a problem. I’m coaching this person. And, you know, there’s other sources and why don’t we focus on the real problem?”
I said, “Thank you very much.” And I called him back and I said, “I’m convinced that I’m right here.” And he’s like, “Yeah, yeah. Like, you know, we’ve been through this before and you are generally right, but this time you’re wrong.” About a month and a half goes by, and he calls me and he goes, “You were right. I’ll never make that mistake again.” Probably will. But for me, I don’t know where it comes from. But I believe that I can pick people and that…and I think, you know, what it comes from is that I was considered stupid. I mean, I was…they told me I was in a remedial class and I knew I wasn’t. And so what it left me with was this idea that like people are just asleep. And so if I can just stay alert that I will…and also, you know, the other thing I realised is deeply personal. But being that I was a kid living by myself, I was very afraid everywhere I went. And so…
Meb: You’re probably rightfully so.
Tom: Totally, you know, and I was totally afraid. And so those protective instincts made me recognise Friend or Foe very, very quickly. And I like to say because of where I spend all my time on my philanthropic side, which is in prison, which is for another day. I like to say that I grew up on the streets. And for me, I did. And so those people that had to had that feeling of survive and that their survival was much more kind of up to them, I think are just kind of innately better at picking people.
Meb: Yeah. Yeah, absolutely. Man, I’d love to get into the philanthropic side.
Tom: Well, let me just invite any…I have to talk about because the most important thing is my wife and my children. But I work in one of the most violent prisons in America. And I had the opportunity completely random, I don’t go to conferences. I was invited to a conference, I didn’t feel like I was…it was not the right Tom Williams. I got the wrong invitation. I met this woman. She brought me to this prison. And I met two men there the first day that I was like, “These guys are special. I’ve seen picking people.” And I’ve supported them and my wife and I and our whole family have watched these men evolve at such an incredible rate. And it’s plain to see for everybody, that any listener that wants to have the most incredible life-changing truly weekend of their lives, if they’re a good human, I would invite them to come to jail with me.
We do this exercise called step to the line. And it’s organised originally by Bernie Brown, organising principle by her. And the idea being that you’re on one side, all of us as volunteers on one side, and all of the folks who are incarcerated on the other side. And because they’re all gang members, you can’t survive in jail without being affiliated or controlled by one of these five gangs, you’re standing across somebody that has, you know, FU tattooed on his face. And you’re going through this exercise and it originally is designed to keep you in your biases. There were more than 50 books growing up 50 books in your home when you grew up, and so on, and so on.
And but then it gets progressively more intense. And when you realise it, we all have pain and shame. The human condition is pain and shame. And it’s our greatest limiter, that pain and shame. And so this exercise asks you to excise all of it. And what you find is, is that the stuff that you thought made you unlovable, the stuff that you thought nobody would ever look at you the same way if they knew, you find that the person who gives you that acceptance is the guy with FU tattooed on his face. And that you feel like you are in that moment more bonded together than bring a lot of my founders to this and my most special people I bring. And, you know, I said one of my founders, he’s like, “I just shared more with guys in prison that I have with my girlfriend of two years, you know.”
But it’s through that work, that I’ve also become deeply, deeply, deeply, deeply aware of the existence of people that we deliberately would avoid. And in America, not just the formerly incarcerated, but also to people that are poor, people that don’t talk normal or the right way, there’s more of these people in the world than any other population. Because of our biases, we’ve been taught this otherness and we’ve been taught that we are better and they are worse. I think what’s going to happen in our lifetime. I’m incredibly optimistic about humanity. I really do believe that each generation, we are better than our…I think humans basically just want to be less worse than our parents worst parts and better than our best parts. I think that’s humanity. I’m very nervous about our lack of control of our tools. But I’m very, very, very optimistic on the spirit of our species.
Meb: Well said, if people are interested in kind of some of the ideas you mentioned about the prison is that through an organisation or do you do it on your own?
Tom: Yeah, I’m the chairman of a nonprofit, which sponsors this work of an organisation called Hustle 2.0. at a particular prison.
Meb: It’s great, awesome. We’ll add a show note link, if there is one last question. I want to squeeze it in. I almost wanted to end there. Probably should have. But this is a quick question we ask in all the podcast now and you’re not allowed to say Grove. You’re not allowed to say Grove. You say anything else. But this can go back to your childhood. I related to that, as an entrepreneur, you talking about being an entrepreneur, child, except I would buy stink bombs and sell them to my friends and still get suspended. So early entrepreneurs. I was the distributor. Anyway. And in your career, this could be good, it could be bad, it could be stocks, it could be companies, it could be something else. Most memorable investment, good, bad. Just the one that sears in your brain, you’re not allowed to say, Grove, the unicorn or soon to be.
Tom: Most memorable. Probably a chemical plastic with a Q. And it’s really, really funny story. Because there’s so many of these might be many people listening that are like this, you know, these like, supposedly wealth managers who are just commission guys with an expense account. And I was so poor at this point in my life that I was like in the beginning of my last company and I was at this conference. And this is guy and I think the CEO of his company has kept his card because like we are going to buy him the most incredible dinner out. And he’s like, “Oh, like, you’re Canadian. That’s so great to know. Like do you want to…”
I’m like, “I’ve got nothing in my bank account. Please, like just, no, don’t waste your time on me.” And he’s like, “Oh, I know this.” And he was like me, he wanted to be helpful, right? He was just trying to make connections. And so he goes, “I know this other Canadian you got intact, you guys should meet.” That was his whole thing. And this was my third or fourth angel investment in my entire career. So we meet and we’re like both like, “Why are we meeting?” And I was actually with my wife at the time. And so she got to meet him the first day that I ever met him.
And so I didn’t understand the business whatsoever. But I was like, “I get you. I want to invest in you. I actually missed…” It was a bad read. I didn’t understand the business. But I believe in him and so let’s go. And so that business today does billions in transactions. Anything that doesn’t accept credit cards, you can pay with your credit card. There’s a sports owner who I think bought his new jet with plastic. I kid you not. And so if not, like I think lots of people are putting tens of millions of dollars to this. If you’ve got the right points card too, it makes perfect sense. And so that’s a business in which was totally hard to finance. Everybody missed on that investment except the lead investor, the two lead investors.
But, by the way, like the guy that led that investment, his LPs were like you are way over concentrated. What are you doing? He had enough backing that he could say, “I’m going here,” but he’s just he’s a legend in my books for having done that. Your LPs, especially in a standard 2 and 20, they’re paying you and they’re like, “If you’re pissing off your LPs, you’re not eating.” So that business was like so, so, so hard to finance. And then after burning then last year, I kid you not, like I don’t go to burning man teach their own but not for me. And so we had five term sheets in one week. Every major investor was kind of…you know, every brand name investor was stabbing each other to try and get it.
Meb: Because they all went to Burning Man and saw the light.
Tom: And we joke about that but that’s absolutely…
Meb: They’re all in the same tent.
Tom: So for me to be able to…and what makes that so special is that he recently celebrated his 30th birthday. And I was one of the only people on that trip that wasn’t a college or childhood friend.
Meb: Cool. And so did the company sells? They still in existence?
Tom: No. They’re very much in existence.
Meb: Awesome. That’s a fun story. But, you know, I think the beautiful part about that was just kind of the random happenstance of the situation where so many times and I can count this to personal relationships but also business relationships. So many people are afraid to have that conversation or don’t want to. And so many times we get emails where people will say, “Hey, maybe we’ll host a happy hour or drop in something.” And somebody hit me and say, “Meb, I really want to come say hey, but I just I just couldn’t,” or things like that. And our advice is always like make that extra effort. You never know what comes of it.
Tom: Our family motto is make your own luck.
Meb: That’s a good one. It’s on the Williams crest. Tom, this has been a blast. Thanks so much. Where can people follow you, find what you’re up to?
Tom: Find me on AngelList. I think I’m the only Tom Williams and that’s pretty much it. And medium. I kind of put a few things on Medium. But I really try to not build a brand because like I said I kind of when I was least genuine are the least accomplished in my life. I kind of so oversold that brand that now I’ve kind of swung the complete opposite end of that spectrum. And I really like being able to…and the other part of it is because I don’t have a brand. If I had a brand, it would mean that I would have to end up having a team of people that are just saying no, no, no all day. I get to traffic only in people that I know and that’s a much better place to be generally.
Meb: Well, Tom, thanks for joining us today.
Tom: Thanks, Meb.
Meb: Listeners, we’ll add show note links to mebfaber.com/podcast. Link to Tom syndicate. All these other good things we talked about today, some of the books. We’ll post links, everything else. Subscribe to show on iTunes leave us reviews shoot us firstname.lastname@example.org. We love listening to it, love reading it. Leave us review. Good bad in between. Thanks for listening friends and good investing.