Episode #331: Phil Nadel, Forefront Venture Partners, “The Best Companies Are Founded By Folks Who Personally Feel The Pain Point”
Guest: Phil Nadel co-founded Forefront Venture Partners (formerly Barbara Corcoran Venture Partners) in 2014 and has been its Managing Director ever since. Phil is also one of the investors on Gimlet Media’s The Pitch podcast.
Date Recorded: 6/29/2021 | Run-Time: 56:26
Summary: In today’s episode, we start with an update since Phil first appeared on the show more than three years ago. We touch on some of Phil’s portfolio companies, including names you’ve heard from directly on this podcast like Grove Collaborative, Ten Spot, PartySlate and Remoov.
After learning about Phil’s role on Gimlet’s podcast “The Pitch,” we hear why he chose to launch a rolling fund and the benefits a rolling fund provides to both founders and investors.
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Links from the Episode:
- 0:00 – Sponsor: NordVPN – use code MEB to get 73% off a 2-year plan plus 4 months for free
- 0:52 – Intro
- 1:02 – Episode #97: Phil Nadel, Forefront Venture Partners, “If You Try To Pick Winners, And You Only Invest In A Handful Of Companies, Odds Are You’re Going To Lose Your Money”
- 1:36 – Welcome to our guest, Phil Nadel
- 3:07 – Meural
- 4:46 – Hallmarks of Forefront’s angel investing process
- 10:19 – An update on Phil’s syndicate
- 12:37 – Grove Collaborative’s success story
- 14:33 – Phil’s portfolio companies doing well during the pandemic; GRIN, OpenReel
- 16:20 – Why diversification is crucial for angel investors
- 17:32 – What the pandemic taught Phil about companies and founders; Ten Spot
- 19:56 – Founder resilience through adversity; Episode #264: Sammy Courtright, Ten Spot, “How Do We Get People To Feel Like They Work For The Same Company When They’re No Longer In The Same Place?”
- 20:51 – How PartySlate pivoted from offline to online; Episode #211: Julie Novack, PartySlate, “We Know Who Works Together…We Can Amplify Those Real World Relationships…That Is Such A Powerful Network Effect”, PartySlate on Instagram
- 22:42 – Boundless’ resourcefulness through difficult political and economic periods
- 24:12 – Sponsor: NordVPN
- 25:31 – Finding new applications for your competitive advantage; Remoov
- 27:51 – Phil’s experience with The Pitch
- 28:30 – Phil’s pivot into rolling funds
- 29:47 – How a rolling fund works
- 34:53 – The state of the angel investing market
- 35:46 – Weighing a VC’s value add versus pure capital
- 38:12 – More information on syndicates
- 45:03 – Why Phil is excited about addapptation
- 47:35 – Unexpected use cases for NameCoach
- 49:50 – Why Phil looks for founders solving a personal pain point
- 51:00 – Automating antiquated spaces; Lawmatics
- 52:48 – Why the syndicate stays with seed and Series A rounds
- 55:17 – Learn more at forefrontvp.com; Phil Nadel on LinkedIn, Twitter, AngelList
Transcript of Episode 331:
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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 this 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: What’s up, friends? Today, we got another awesome show. Our returning guest is the co-founder of Forefront Venture Partners, one of the largest and most successful syndicates on AngelList. If you want to hear his first episode with us, scroll back to episode number 97, or simply click on the link in the show notes. In today’s episode, we start with an update on our guests when they first appeared almost three years ago. We touched on some of the guests’ portfolio companies including names you’ve heard directly on the podcast like the Unicorn Grove Collaborative, Ten Spot, PartySlate, and Remoov. After learning about our guest’s role on Gimlet podcast, “The Pitch,” we hear why he chose to launch a rolling fund and the benefits that a rolling fund provides to both founders and investors. Please enjoy this episode with Forefront Venture Partners’ Phil Nadel.
Meb: Phil, welcome back to the show.
Phil: Thank you, Meb. Good to be back.
Meb: You know, man, I don’t know how, but the last time we had you on was three years ago. Can you believe it?
Phil: No. It does not seem like it’s been that long. I can’t believe it. I think a lot has happened in those three years to say the least.
Meb: I know. Well, we’ll get to catch up quite a bit on it because I’ve been wanting to go to one of your founder’s startup breakfasts, and then a pandemic hit so I didn’t get to go. Have you started those back up again?
Phil: Not yet, but we’re planning the next one now. We’re in the early stages of planning it. But I think it’s going to be East Coast the first time, and then we’ll go West Coast.
Meb: That’s fine.
Phil: So I’m going to start on the East Coast when we’re doing it.
Meb: I may make a special exception for this because I’ve invested along with you and probably about…I mean, you’re one of the most prolific of the angel investors I follow. And it’s got to be around 15 investments.
Phil: Oh, it’s great. I appreciate the support. And I’d love to see you again at the breakfast. And we love doing those. That was something I really, really missed during the pandemic. And that’s why I’m scheduling one now.
Meb: So listeners, I would highly encourage you to go listen to the first show Phil and I did because we talked about his process and everything that they do, but also a number of portfolio companies. And it’s funny because so much has transpired. And there’s only a couple of short years with those portfolio companies we mentioned, including…the listeners can’t see this, but there is a beautiful digital painting in the background which we talked about, which was a startup company called Meural. It’s one of my favorite things I have in the house. And they got bought.
Phil: I love it. I love it. They did. They sold the company the next year. And it’s a great exit. And this company is doing well now. It’s part of Netgear. And I love having my Meural in the background here. I look at it almost every day. It’s great.
Meb: So if you, listeners, aren’t familiar, Meural is this beautiful digital frame that lets you have paintings, pictures, whatever from all the famous museums. But the cool part is that also you can wave your hand in front of it. It tells you who painted it, what year. It’s got that little placard. If you don’t like it, you can just walk up and swat it, say next like a Tinder swipe. But you can set it up custom too. I love it so much. Anyway, enough of a commercial.
Phil: Yeah, I customized mine a bit. And I didn’t do this, but you can upload your own content too. If your kids happen to be artistic, which mine aren’t, but if your kids are artistic or whatever, you can upload their stuff or photos of your family. But I don’t use it for that. I like getting the paintings from best museums around the world. And to me, the quality of the image is so good. It’s like you can feel the texture almost even though you can’t really, but the quality is so good.
Meb: All right. So, Phil, you’ve been a prolific angel. Why don’t you catch us up a little bit on what you guys have been up to the past couple of years? Give us kind of maybe the one minute overview of who you are, what you do for the new listeners, and then catch us up and what’s been going on the last few years.
Phil: Yeah, yeah, sure. So eight years ago, we launched the AngelList syndicate called Forefront Venture Partners, and we’ve just been doing the same old thing since then, which is to say we have a really strict process. We do typically 8 to 10 deals a year. And you know this, Meb, but for everyone else’s benefit, we do very, very thorough due diligence. And that’s sort of our hallmark, I would say. We do more due diligence at an early stage than any other investor I know of. But we also are really committed to communications, transparency and communications with our investors in our syndicate. So what that means in practice is we make all the companies we invest in sign an agreement in advance that not only will they help us to put together a really extensive deal memo, but they’ll do a webinar for our investors. And then after we invest, they commit to providing us with regular, detailed investor updates. These are usually monthly, sometimes quarterly. So that’s the kind of communication that our investors crave because they don’t get it anywhere else.
Before we started the syndicate, and maybe you had this experience too, but before we started the syndicate, I invested in companies directly. And let’s say 10 years ago, I maybe have never gotten an update in 10 years. And that’s very frustrating. I can’t do anything to help the company because I don’t know what they need help with. I don’t know what’s happening. And they certainly would not be inclined to invest further in those companies if they ever reached out and asked me. So it’s in the company’s best interest to communicate because they can get a lot of help from our syndicate investors. And it’s in the investors’ best interest, and the companies will also be able to raise additional capital in the future from them.
Meb: I think this is really important. And I follow probably 100 syndicates on AngelList as well as elsewhere and have seen kind of all the good, the bad behavior and in between. And it is consistently astonishing to me to see on either the VC angel syndicate side or the company side either a disinterest or unwillingness. And I’m excluding the 10% of the time where they’re not reaching out because of serious, competitive stealth confidentiality reasons. The vast majority of the time, like you said, the outreach, having a large group accredited by definition, so wealthy but likely highly accomplished investors and not utilizing that base is crazy to me. Like as an example, and you may know this, I think we talked about it a while back, I said, “Look, all these portfolio companies, I love their stories. If I invest in them, they’re welcome to come on the show. We’ll even give them a free radio ad and reach audiences.” I think it’s almost like 10 million downloads at this point. And people, a lot of them take us up on it. But anyway, it’s just weird.
Phil: Yeah, you’ve been great about that. So that’s one way that you’re able to help them. And you’ve been great about doing that. And our investors, including you, have found lots of ways to help portfolio companies. Mostly, it’s about customer referrals.
Meb: And hiring, yeah.
Phil: So hiring too. But I’d say, number one, is customer referral. So our portfolio companies, including the ones you’ve invested in, have gotten a lot of customers from our syndicate investors referring them. And they wouldn’t do that. They wouldn’t do that if they don’t know what kind of companies they’re looking for, if they don’t hear from those companies. So the communication is critical for the company. And I always tell them, “Communicate whether it’s good, bad, or ugly.” It doesn’t matter because in good times, you certainly want to spread the word. But when things are bad, you can’t hide under a rock. You have to let them know, and let them know how they can help. If you communicate regularly, everyone understands challenges, companies go through ups and downs. But if things get bad and you hide under a rock as a CEO, then that’s not excusable. And investors will not look past that.
Meb: Yeah. I say that actually a bunch. I say, “Look, this sort of ostrich mentality, it’s fine to fail. In fact, in Silicon Valley, in entrepreneurship, it’s like a badge of honor that if you were an entrepreneur, you failed and failed right, meaning with transparency, and dignity, and honor, and openness…”
Phil: And learned from it, hopefully.
Meb: Right. I mean, most investors I know would almost rather invest in some of those founders because they have the scars, and they’ve been through it. But the ones that just like turtle and disappear, you’re writing your own gravestone and you probably don’t know it yet.
Phil: Yeah. Yeah. It’s not a good way to go. So we really discourage that obviously. And that’s why we make them sign an agreement in advance saying that they’ll give us these updates regularly. And then when they see that it pays off for them, when they see the referrals that they get and the hiring help that they get, they’re quick to continue with it. They understand the value. Even during the syndication process, before we finalized our investment, they get a lot of benefit, a lot of referrals, things like that. So they see it right away.
Meb: Well, I mean, even to get some of these names on the cap table, if you look through and see who’s in this and it’s like a who’s who of investors but also operators like you mentioned at some of these companies, being able to get that access, it’s almost like the company should pay for it, not the other way around.
Phil: Yeah. No, the roster of investors we have in the syndicate is tremendous. I mean, so many of them work at huge tech companies, and they’re anxious to help, refer their own employers in to these portfolio companies. It’s worked out very well. There are a lot of synergies. But taking a step back, you would ask more generally sort of what’s been going on. And just to continue with that, still, we see tremendous deal flow probably now more than ever. So it’s an ongoing battle to keep up with the deal flow, calling out the good deals from the bad. You figure, we only do 8 to 10 a year on average. We look at thousands per year, literally thousands to get to those 8 or 10. So there’s a lot of calling out that has to happen, even before we start like serious due diligence. So there’s a lot of work that goes on there. And we invest across, as you know, a wide swath of sectors, really try to help our investors build a diversified portfolio. So we’re not focused on just one sector or one business model.
We really try to build a diversified portfolio because that’s how we and our investors get the best possible portfolio outcomes, the best possible returns is building that portfolio. Because if you just concentrated in one industry, one sector, and then all of a sudden that sector doesn’t do well for a while, then your portfolio is doomed. If you spread it out and diversify, you’ve got a better chance. But I’m preaching to the choir. I know you know this.
Meb: Right. So give us just some broad overview. I think last time we spoke, you’re one of the largest syndicates on AngelList. How many deals have you guys done so far?
Phil: We’ve done something like 80 initial investments, but then we do follow-on rounds as well. So if you include follow-on rounds, we’ve done over 100 rounds.
Phil: Yeah. We have the best syndicate community. I mean, our investors are amazing. And I call it a community because it is. I mean, we really are. And you mentioned the breakfasts, that’s just one way that we sort of build the community. But gathering together to help our portfolio companies is really another way.
Meb: Definitely, there’s a debt of gratitude, obviously a little luck sprinkled in. But one of my very first investments going way back, and I think my first with you was a company we talked about a little bit last time on the podcast, Grove. And we eventually had the founder, Stu, on the show. And they’ve been an absolute rocket ship, full unicorn status. So I don’t know if I would have followed through as much with my investing journey had not had that early companies. So that gold star gives you an extra look anytime one of the deals comes by. I’ll review it two or three times just to make sure. Thank you.
Phil: Yeah, Grove Collaborative has been a real success story. Stu, the CEO, the founder, is a real rock star. And here’s the story of a guy who’s really committed to the mission of the company. The company is doing good by making more sustainable products, healthier products, non-toxic products for your home. And the last valuation was $2 billion. We invested initially at a $12 million valuation. That’s where you first got in and I first got in. It’s gone from 12 million in our first investment. We’ve invested in every round since, and the last round’s $2 billion. I think that they’ll be IPO-ing soon. And I’ve been a customer since we invested. I think their products are great. So, yeah, that one has worked out very, very well. But we’ve had a lot of other winners too. So I’m really happy.
Meb: Why don’t we talk about a couple while we’re at it here to the extent you can? I know that you have 80 children. You’re not going to pick out any favorites. But are there any that you think are particularly interesting story, interesting founder, or something cool that’s been going on? Any fun news? Maybe let’s walk through a couple just to kind of give them a shout out.
Phil: Yeah, I’m happy to. I love talking about them. So if you will get sort of interesting things that evolved out of the pandemic, yeah, so I mean, GRIN is a great story. They’ve been killing it. And they help e-commerce companies to reach out and connect with influencers, but not only connect with them but to manage the relationships, payments, sending of samples, analytics for the relationships with influencers. Of course, e-commerce did exceedingly well, has continued to do well during the pandemic. And so GRIN’s business really took off like a rocket.
Another company that was an interesting beneficiary of COVID was OpenReel. And OpenReel is a technology that enables companies to get video off location, video at the highest quality level, and enables the companies to direct the video remotely. So in other words, big companies, pre-pandemic, when they wanted a testimonial, or a commercial, or something like that, they’d send a video crew out. And the video crew would set up, and they would have to travel, and they would do the whole film shoot. Now, with OpenReel, they don’t need to do that. These companies get the same quality remotely, and they can also direct the whole video, the whole shoot as if they were there. They can direct the lighting. They can change the lighting. They can change the angles. The whole thing, they can do remotely. So from the time that we invested, eight months later, the company was about 10x the revenue, 10x the ARR from when we invested. And it just took off because so many companies, obviously, had to stop travelling, but they still wanted the content more than ever. And so this enabled them to do it at really high quality remotely. So that’s another sort of interesting one.
Meb: Both of those are great examples of, in my mind, one of the reasons it’s so important to diversify. The pandemic has made this obvious, of course, in the past year. But as you think about the future, whether it’s recessions, expansions, low-interest rates, high-interest rates, yada, yada, whatever it may be, there will always be some companies positioned on the wrong foot and on the right foot to benefit that will struggle and fail, and last year I think accelerated a lot of those obvious changes pretty dramatically. Now granted, most companies probably that are startups, I would say the percentage was more in their favor simply because they often are tech-focused. But it’s a good example that so many early-stage angel investors want to bet the farm on only a few bets. And that’s one of the reasons you want to have a nice portfolio.
Phil: Yeah. Well, you bring up a good point I want to talk about a little bit, which is the pandemic had companies that benefited and companies that definitely did not benefit. And I brought up two that benefited. But I want to bring up a couple that did not benefit because what we found is that this pandemic really made it crystal clear to us which founders were resourceful, were smart, were able to adapt quickly to the changes, the very rapid changes that were going on. So when we look at portfolio companies that were 100% sort of dependent on in-person events, for example, and the pivots that they had to make, it highlights which founders are rock stars and which weren’t.
So a couple of great examples, there’s a company in our portfolio that was called Fit Spot. It’s now called Ten Spot. Their business used to be working with residential multifamily buildings in New York, or residential buildings, apartment buildings. And they would do yoga classes for the buildings. And they would work with the management company who’d have them come in and do classes for their tenants. And they get paid for that. Well, of course, COVID hit, nobody’s doing these in-person classes anymore. That whole business, the entire business, was shut down. So what did they do? In no time, they pivoted the entire business to an online model where all these companies now, instead of offering in-person yoga classes, now they could use this Ten Spot platform to engage with their remote employees online, do events for them, have all kinds of cool interactions with each other online to make them feel like a team-building exercises, things like that, all online. And the company’s doing better than ever in a short period because of the pivot. I mean, this was a real blessing in disguise. They never would have changed their model. They would have built a nice company I’m sure with Fit Spot in the in-person classes because they were doing great. But with Ten Spot, it just took off, but they had to quickly pivot.
And it’s hard. It’s hard for entrepreneurs to give up their dream. They had this dream and they’ve been working on it every day and night for years. And all of a sudden, at the drop of the hat, they have to just pivot into something completely different and go full force on that. And they did that. Jon and Sammy at Ten Spot did that to their credit.
Meb: Yeah. I mean, if you look at adversity, and we had Sammy on the show and it’s such a great story, people, that stressor, and it could be long recessions and bear markets, if you look at…I think Uber famously was founded in March of ’09 or something. And so going through those experiences and then the expectation and it’s okay, it’s not shameful to fail, but to watch some of those phoenixes where they’re capable of that pivot and making it through, it’s astonishing. I can never…too much work for me.
Phil: It’s a testament to the founder’s resilience because it would have been understandable…like you said, it would have been understandable to throw in the hat, just say, “You know what? Pandemic puts us out of business.” That’s an easy story to tell. “We were a completely offline company, pandemic hit, we went out of business.” But they didn’t do that. They did not settle for that. And another company that comes to mind is PartySlate. And PartySlate, Julie is the CEO there and the founder, completely offline business. They’re a SaaS company enabling party venues, caterers, florists, those are their clients. All that business, as you know, was shut down during COVID. And so what services do they provide any more to their customers, if they don’t have the events in person? Well, they showed them how to do marketing online, how to build their online presence, how to engage with prospects online so when COVID is over, post-pandemic they can plan their events. And they did all kinds of educational content for the customers online. So, again, they pivoted to providing real significant value to customers online. And now that events are starting to come back, that’s just a supplement to what they’re doing. It’s made their offering that much more valuable to their customers. Now, it’s incredibly valuable. So their stickiness is even better than it was before, their retention rates. Another testament to resilience with Julie at PartySlate, again, just saying, “Okay, what do we need to do? What do our customers need? What service can we provide that will be of value to them?”
Meb: Yeah. We had her on the podcast during the pandemic. It was like April or May. And you get to hear in the trenches, like, what’s going on. And listeners, you should definitely check out their Instagram. It’s super fun to see all the cool…
Phil: Oh, yeah. Yeah, they’re prolific posters there.
Meb: Yeah, all the cool party ideas.
Phil: So one more I just want to mention quickly because I think it’s…
Meb: Oh, we can do 10 more. I could do entrepreneur stories all day.
Phil: Yeah. No, I love talking about this too because our founders are so great. I mean, the company I’m thinking of is Boundless. Ciao is the founder and CEO. And the tough period that they went through was different than the pandemic, was partially pandemic, but it started before that because they help immigrants to become U.S. citizens. Well, when Donald Trump was in the White House and he shut down a lot of the immigration, you can imagine that that seriously impacted their business. But they had the staying power, the willpower, the resourcefulness to find opportunities even in that environment. And then to roll right into pandemic where travel and immigration is basically cut down to nothing, again, they’ve been resourceful. One thing they did, which was so smart, is to acquire another company in the space, a competitor, and to build out their business and their technology in anticipation of business opening back up. And that’s what’s happening. The company built out their scope of services by doing this acquisition. And they’ve really grown and positioned themselves nicely for more growth post-Trump, post-pandemic. So they had to really go through an even longer period of trudging through getting to a brighter future. And they’ve done a great job. Ciao has done a great job shepherding the company. So, yeah, there are so many great stories like that.
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Meb:One of my favorite ideas in the early stages in this trend, one of my favorite trends to invest in is this concept of sort of recycling and decreased consumption and the whole Remoov concept of picking up and selling your junk I think particularly as people get back into the world and think about all these people moving, particularly in San Fran and elsewhere. Check it out. It’s a fun story.
Phil: Yeah, Remoov is the company. Luis is the founder. It’s R-E-M-O-O-V. It’s an unconventional spelling. So my brother lives out in San Francisco, or just outside in Marin County. And his family just decided to move. Like a lot of people in San Francisco, they’re moving to the East Coast. And they just did the move last Friday. And I was talking to him and he’s like, “Ah, we have so much crap that we’ve saved over the years. And I don’t know what to do with all this stuff.” I said, “I have the answer for you. Contact Remoov. They’ll get rid of the stuff. They’ll either sell it for you and give you half the proceeds, or they’ll donate it and give you the receipts for your taxes, or they’ll recycle it, whatever, and they will dispose of it for you.” So he was like, “All right, I’ll call them.” So he did, and it worked out great. And again, during the pandemic, people weren’t moving, but they found ways to help…like companies that were downsizing and had to get rid of their office space, they needed Remoov. The companies were going remote and closing down their offices, they needed to get rid of all the junk in their offices, he worked with them. So he found opportunities even though their primary business was basically shut down. And now that things are coming back, for their primary business, they have this whole secondary corporate business. So another great example. He’s a great founder.
Meb: Yeah. And we’re just waiting for them to fully expand in LA and elsewhere because we’ve accumulated a lot of stuff. So as soon as that happens…
Phil: We have too. We’ve been in our house a long time. I always say to my wife, “We can never move.” We just have too much junk.
Meb: Well, there you go. You found a solution. So, okay, there’s been some blocking and tackling, the investing, everything that’s been going on the past couple of years. You guys have been successful. You’ve been doing the podcast, “Pitch.” Has that ever resulted in any investments, by the way?
Phil: Yes, many.
Meb: Oh, really?
Phil: Boundless, the company I mentioned, I met Ciao on “The Pitch.” I met Mike Slagh, the CEO of Shift on “The Pitch.” Let’s see which other ones, PartySlate, I met Julie on “The Pitch.” So there have been some other ones. Yeah, it’s been great. It’s been great. I love doing it. It’s a lot of fun. And actually, I’ll be probably doing a new show on this company we invested in recently called Looped. I’ll be doing probably a show with them very soon. So a lot of great opportunities and so many good companies out there.
You know, you asked me about the syndicate, but I want to point something out. So yeah, we’ve been doing great with the syndicate. But as we go along, there’s a regular problem that I’ve noticed. And that is that the syndicate model is not right for every company or every deal for a few reasons. And I’ve struggled over the years to try to find a way to invest in deals that I really love that weren’t a fit for the syndicate model. And when I say they weren’t a fit, it’s primarily because they’re closing the round in a week and they don’t have time to do the syndication, or they don’t have enough allocation for us. It’s a tight deal. There’s a couple hundred thousand dollars left. We need more than that for the syndicate, as you know. Or they say, “We have a lot of sensitive information. We can’t disclose to a broad group of people like a syndicate.” So for whatever reason, there are deals that we run into that we’re dying to get into that we can’t get into on a syndicate. And I’ve always had to just pass on those over the years. And so fairly recently, as you know, AngelList introduced this rolling fund concept. And I was like, “Ah, that could be the solution to my problem for when I can’t invest in a company through the syndicate, we can do it through the rolling fund.” And that’s what we did.
Meb: So explain to the listeners what that is. What does a rolling fund mean?
Phil: Yeah. So it’s an interesting hybrid of a traditional venture fund. Traditional venture funds, you have to commit a large amount of capital upfront, and then the general partner of the fund can call that commitment anytime they want. So it’s usually a half a million-dollar minimum or more. And that money has to be available for any time the general partner calls for it. And it’s usually over a 10-year period, 7 to 10-year period. But the rolling fund is completely different. It’s quarterly commitments, and it’s as little as $10,000 per quarter that you can commit to invest and you can cancel at any time. Investors can cancel whenever they want. So you can just literally do one quarter if you wanted to. Most investors sort of subscribe and continue every quarter. And it gives investors access to every deal we syndicate but also deals that we’re not able to syndicate like I mentioned. Some people like you are very busy and don’t have the time to review every single deal, so it saves them that time of having to do that without the risk of missing a deal. And they also get more portfolio diversification because they’re going to invest in more deals over time. So they get that.
And then another real financial benefit is that with a syndicate, the carry, the carried interest is paid on a deal by deal basis. So if you do really well on one deal, then you’re going to pay carry to us on that deal. And if you lose money on another deal, you don’t owe us any carry, but we’re not giving any carryback from…it’s all deal-by-deal basis. But that’s not the case on the rolling fund. Angels look at it as your whole subscription period. So if you subscribe for a year, the carry is figured out for that whole year. So the good and the bad deals will wash each other out, and you’ll end up paying probably less carry. Unless every deal is a winner, you’ll end up paying less carry overall than you would on a deal-by-deal basis. I realized the rolling fund is not for everyone, but it’s certainly for a lot of investors. And most of the investors, I think all of the investors in the fund do both the fund and the syndicate.
Meb: What’s the experience been like as far as from your side? Is it kind of check the boxes you thought ahead of time?
Phil: It’s new. It’s early days yet, just now finishing our first quarter of the fund. We only made a few investments. They were the deals that we syndicated. But right now, we have two, maybe three deals teed up to invest in that we can’t syndicate. One is a $150,000 investment, just too small for us to do through the syndicate. And another has to close very, very soon. So we’re likely to do those through the rolling fund, as well as any deals that we do syndicate. So we have a couple teed up to go.
Meb: That’s awesome. As you look forward, how have things changed over the past five years as far as companies you are looking at? You mentioned some of these $100,000, $200,000 are too small for the syndicate. Does that mean you guys are now deploying like into the millions? Or how did things change as you guys get more popular and then bigger?
Phil: Yeah, it grows over time. Our typical investment is $500,000 to $1 million. That’s our sweet spot. We really don’t like to get an allocation of less than $500,000 for the syndicate because if we do, we get some irate syndicate members who get frustrated because they get shut out of the deal. So we’d like to make at least $500,000 available. And we’ve had a few deals that have been $1 million and more.
Meb: I mean, can you just say first in, first out, like say, “Too bad guys, you don’t respond.”
Phil: Yeah, yeah. We can say, “First come, first serve.” But the problem is a lot of people are busy and don’t have time, and they say, “Oh, I didn’t get to it right away.”
Meb: We’ll say, “Stop complaining, go into the rolling fund.”
Phil: Right. Well, that’s the answer. The rolling fund helps. That’s what I was saying, for sure. But the syndicates become quite large, which is a really good thing. But we need to make sure we get proper allocation for them. And a lot of companies have no problem with it. So it gives us a lot of flexibility because we’re able to look at all different size deals now. We can look at deals where we can take down a $1 million a piece, as well as deals where we can invest $100,000. So it gives us a little bit like sort of broader array of size deals that we can look at, which is really nice.
Meb: What’s the environment like now? I tweeted the other day and I said, “Certainly the range of what you would consider to be a seed or maybe even Series A valuations has certainly expanded as markets have kind of ramped up.” Are you seeing a competitive push-pull on chatting with founders or the other…it’s part challenge and a good thing that there’s so many people coming into the angel world. Are you starting to get a lot of sharp elbows about too many investors wanting to invest? What’s the environment like?
Phil: Here’s the thing, it’s really interesting. I would sum it up this way. I would say there’s more supply and more demand. There are more startups seeking financing than ever before, and there are more early-stage investors, angels funds, small funds making investments than ever before. So there are more dollars chasing more deals. We have seen probably an uptick in overall evaluations. We absolutely will not chase deals. We will not chase valuations. We won’t overpay. But it can be tricky in trying to figure out what overpaying means because it’s very subjective at this early stage. But we have the luxury of being very picky and very selective with the deals. There are so many of them coming in and so many good quality deals that we have that luxury of being really, really selective. And it’s a great thing.
And even though there’s a lot of competition for the deals, I think that smart founders are looking for value-add investors. They realize that cash, the capital is more of a commodity. And they’re saying, “Who can add value beyond the capital? Yeah, okay, great. You got the capital. What else can you do for me?” And we are able to say that through the syndicate, we can help do an awful lot for you. We can help refer customers to you. We can help you hire talent. We can help with strategic advice, all kinds of things that our syndicate investors will do for the portfolio companies. Unfortunately, since we don’t just talk the talk, we walk the walk, our reputation for that precedes us and companies know that we’re able to help with that. And so they seek us out as investors. Being in this for a while now, that’s been something that’s really been nice to see that we’re getting a lot of founders to say, “Yeah, I’ve heard that about you. And that’s why we want you on our cap table.”
Meb: Yeah. I wonder how much of a trend that’s going to be on the competition of looking at VCs as something…the value add they bring, versus just capital, versus actual in a world of networks. And as you mentioned, syndicate members or fund members that could be value-add, it becomes actually like a pretty definable benefit versus something that’s just like, “Hey, we’ll get on your board and help you grow or…”
Phil: Yeah. Some of it is sort of definable and some is hard to define. For example, we help our portfolio companies all the time raise their next round. We’ll help connect them with lead investors for the next round. Like I can point to examples of that with our portfolio companies, but it’s sort of like they’re taking our word for it that I’m going to help them. There’s no way for me to guarantee that. But if they’re doing well and they’re looking to raise in A round or B round, we’ll help connect them to this lead investor, the VC who can lead the round. And we’ve done it time and time again. But there’s no way to sort of like define that in advance and guarantee that. That’s one of those things that just organically happens. And that’s something we’ve been good at. We have a nice network of VCs where they’ll send us deal flow. But when the portfolio companies get big enough, we’ll send the deals back to them to lead the larger rounds.
Meb: At this point, you guys are pretty established. You’ve done this through a hundred different companies, essentially almost. Where do you get most of deal flow these days?
Phil: Mostly from VCs.
Meb: Oh, really?
Phil: Yeah, mostly VCs who are leaving rounds and say, “Hey, would you want to join in for $500,000, or $1 million, or whatever?” It’s interesting, and I love this, more and more comes from founders, CEOs of our portfolio companies referring friends and other folks they I know who are founders. So we get a lot of that. And it’s become really organic. There’s just a lot of outreach. I always found this interesting, a lot of VCs shun inbound, cold emails, cold calls, that kind of thing, and say, you know, “Unless it’s a warm introduction, I’m not taking it.” The odds of investing in a company that comes to cold out of the blue, the odds are lower, but they’re not zero. So we welcome those kinds of inquiries and those kinds of outreach. It doesn’t take us long to do an initial screening, filtering to say whether it qualifies for us or not. If it’s a fit, then great. I don’t care if it came in as a warm introduction, a cold introduction, or no introduction. It doesn’t matter. So a lot of people reach out to us through our website, or through AngelList, or LinkedIn. And we have a lot of deal flow that way as well.
Meb: Tell me if this is still part of your process. But if you look at some of your early deal memos, and writings, and what we talked about last time, you certainly highlighted one of the things you’re looking for is a company that has a little bit of product or service revenue traction. Is that something you still want to see? And tell me kind of like for the companies out there listening, what are the main kind of bullet points you’re looking for in investments in 2021?
Phil: Yeah, that’s absolutely a hard and fast rule for us. Post-revenue companies only, sort of minimum, minimum $20,000 a month revenue is like a starting point. And why do we do that? Why do we do that? We think there’s this really big inflection point before a company generates their first revenue. It’s all speculation. It’s all a business plan. Will a customer actually be willing to part with their hard-earned money in exchange for that product or service? We don’t know until they do it, until they make it happen. So when I say there’s an inflection point, I mean that once they do and make those first few sales, the risk of investing dramatically decreases. It’s still high risk, to be clear, but it decreases dramatically from a pre-revenue company. But the increase in the valuation that you’ll pay to invest at that stage does not increase nearly as much.
So I’m willing to pay a little bit higher valuation for a post-revenue company versus pre-revenue because I’m de-risking the investment considerably. So that’s why we focus on post-revenue. We want to see some initial product-market fit. Are customers willing to pay for the product? Has the company started to figure out how to efficiently acquire customers? Have they started to figure out those channels that they’re going to use so that the money we invest can be fuel on the fire? If they figured out the channel and all they need is more money to pour on it and bring customers in, great. But if they haven’t yet figured out how to efficiently acquire customers, then it may be a little too early for us.
And we also don’t invest in companies that are not capital-efficient. So putting it another way, we only invest in capital-efficient companies. So a biotech company that has to do a ton of research and development and FDA approvals and years and years of all that, not going to be a fit for us. We want to see capital efficiency. We want to see them getting up to breakeven and cash flow positive relatively quickly. We don’t want them to have to raise another round. We want them to be able to raise a round if it’s going to help their growth but not require that just to survive. So those are some of our touchstones, the hallmarks of our criteria.
Meb: How often are you guys…or do you ever think of an idea that doesn’t exist where you want someone to do and then kind of seek that out? Is that something that’s part of your process or is it really just looking for founders to kind of show you what they’re doing?
Phil: I would say somewhere in between. Sometimes we’ll look for sectors we want to invest in. And then within that sector, we might try to identify the best few companies to invest in. So it’s not so much that we’re saying, “Here’s a particular problem that we want to solve. Let’s look for a company doing it.” That’s a little too needle in a haystack for us. We’ll look at a sector. For instance, we said, “We love the legal tech space. And we want to invest in more companies in the legal tech space.” So we vet around actually for a company called Lawmatics. We invested in that company. We’ve invested in a few other legal tech companies. Legalinc, we had an exit from, they were acquired, and some others. And we’ll continue to look for other opportunities in legal tech. That’s a sector we really like. But we didn’t go out saying, “We want to find a company solving this particular problem.”
But generally speaking, we look at all the deals that come in. And if they’re solving a real pain point, if they’re really solving a problem for their customers, and they’re doing it in a unique and differentiated way, then it’s going to get our interest no matter what kind of a niche they’re in as long as the market size is pretty reasonable.
Meb: You mentioned sort of legal tech. Is there any other areas particularly as you look forward to the horizon, 2022, 2023, that particularly you guys are interested, excited about?
Phil: There are so many areas that we invest in. But we’re looking for great companies in robotics. I think that’s a huge area and actively looking there. And we always are looking for smart applications of AI and blockchain. Whether the individual cryptocurrencies themselves end up being successful or not is not a game I want to play. But I do like some of the applications of blockchain generally. And I think that there are some companies who are deploying that in smart ways. And certainly, AI, every company says, “We’re an artificial intelligence company.” But if they’re using AI in a really smart way, then they’re gaining an advantage through AI. Not using it just to say, “We’re an AI company,” but using it as a tool to help their customers in some really differentiated way, then that catches our interest. So those kinds of areas, definitely.
But you know what? There are so many great opportunities in e-commerce and lots of SaaS companies. We just invested in a no-code development platform called Addapptation, which I’m really excited about. Sumner Vanderhoof is the CEO there. And the company is doing great, making it really easy for what he calls citizen developers to add apps to their company without knowing anything about coding, which is perfect for me because I don’t know how to code. You can go into this platform, and you don’t need to know any coding, and you can build an app on top of your database or CRM. And it’s integrated with HubSpot, Salesforce, and all the others to make it really easy. So that’s an interesting opportunity that came up. No-code is a huge growing field, and it’s going to grow even faster. But then just to make the point that these opportunities come around all the time that you’d never would think of, we invested…I don’t know if you’re in this deal, we invested recently in NameCoach.
Meb: Oh, I know what you’re talking about. This is a cool one. Tell the audience what this is.
Phil: Yeah, NameCoach is such a great story, right? So the founder, Praveen, went to his sister’s college graduation, pre-pandemic of course, and they completely butchered her name at the graduation. I mean, you go four years in college, this is a big day, your family’s they’re watching you graduate, and they butcher your name. So he was like, “Yeah, this is crazy.” So he built out a tool initially just for colleges to help them with name pronunciation for their students. But what he found was that companies wanted this too for lots of use cases. Internally, they want to use it so that the employees really feel like they’re part of the team and everyone knows how to say their name properly. And there are all these diversity and inclusivity initiatives out there. And this fits in perfectly there, making employees feel like they’re welcomed and part of the team and that they’re not outsiders or strangers. But also, companies are using it in sales. You reach out to prospects, and if you mangle their name on a cold call, forget it. You’re going to get a hang-up in your face.
Meb: Yeah. It’s one of those ideas, look, Meb, Mebin, I get it every morning at Starbucks. I don’t go to Starbucks, Pete’s, my local coffee shop, Two Guns. But it’s not something that you ever really feel as a slight. But deep down somewhere in your soul, it’s like a tiny little paper cut. But particularly, like you mentioned in sales capacity, if someone calls you and gets your name wrong, it’s a red flag already.
Phil: How about this use case? One of their customers is NetJets, very upscale, expensive corporate jet leasing and chartering, right? These are small planes, private planes. If the pilot comes out or the flight attendant comes out and mispronounces the name of a customer who’s paying $100,000, $200,000 a year to them or more, that customer feels slighted. It’s very important to NetJets to pronounce their customer’s names correctly every time. And NameCoach helps them do that. And so you’d never think of that kind of thing as being a problem, but it is, and NameCoach has built the largest, most accurate database of name pronunciations. And it’s always constantly learning from input from the customers too. So it’s growing like crazy in the corporate sector. They’ve already dominated the universities, college sector. But they’re really starting to gain a lot of traction with companies now for all kinds of interesting use cases.
So that’s one of those deals like I never would have thought of that. Even though everyone mangles my last name, I never would have thought of that. But Praveen did. He came along and said, “This is a problem I can solve.” And at first, I was like, “Okay, how big is the market for this?” And when I looked into it, it’s a huge market for companies who want this. And to your point, there have been all these studies of how it makes people feel when their name is mispronounced. It’s not like top of the mind. They’re not like outraged, but it’s a slight, and it’s like death by a thousand cuts. You hear that name mispronounced so many times, and it gets to you. So you want to hear it pronounced correctly.
Meb: And it’s almost like the converse is true. If you have a terribly difficult name, where everyday people mispronounce it and all of a sudden somebody calls you and gets it right, you’re like, “Whoa, wait a second.” It’s so obvious. But it’s like one of these classic frustration arbitrage ideas where the person, Joe Smith, is not going to ever found this company because they don’t go through that experience. But somebody with a crazy, challenging name to pronounce would.
Phil: That’s right, exactly. It goes to the point of the best companies are founded by folks who personally feel the pain point. They’re personally affected by the pain point and they go out to solve it for others like them. And that’s what we try to find, founders who are intimately familiar with the pain point that they’re solving and they’re providing like a real solution for that because they would have benefited from having that themselves. It’s like the same thing with like Lawmatics in a B2B sense, where Matt Spiegel, the founder there, came out of his own law firm where things were done so manually that he wanted an automated solution to onboarding customers and to marketing to them, communicating with them. And he developed Lawmatics as a way to do that. He was living the pain, the frustration that small and medium-sized law firms have and decided to solve it. And he certainly was not the only law firm feeling that. So, fortunately, there are lots of companies, lots of law firms who are still living in the dark ages and not automated and Lawmatics is helping them. So that’s another good example.
Meb: Yeah. I mean, the whole legal and real estate space, I mean, as we think of this antiquated, anything that’s still done on yellow rule notebook paper, there’s so much. And it’s kind of shocking like, how is there this much things that are still terrible that exists in this world? And it’s just huge opportunities. And if someone can figure it out, then boom, unicorn.
Phil: Any company automating antiquated spaces, come see us. I love that. I love automation in what is currently an antiquated manual industry. And there’s so many still, especially government. We invested in a company called DemandStar. And they help automate the whole procurement process for government entities and contractors. DemandStar is another great example. There you go. I mean, government is very antiquated on their processes.
Meb: Yeah. You got some deals you’re working on? I got some capital, Phil. I’m ready to put it to work.
Phil: Sit tight. I’m coming, sit tight.
Meb: This summer, this fall, this winter? Well, give me a look.
Phil: I’d say we have another one coming probably in about two, three weeks. We’re teeing up, getting ready, finishing our due diligence. We call customers. We do the whole thing. Speak to current investors, previous investors, previous employees that we try to find on our own and just make sure there’s nothing there that we don’t know about. But once we’re ready, we’ll get it out to the syndicate and/or the rolling fund. But, yeah, I figure the next deal, I think, will be probably within two to three weeks.
Meb: At what point does capacity become a problem for you? You keep coming on the “Meb Faber Show.” You keep having these big unicorns, doing “The pitch.” I mean, is there a time when you say, “Look, man, we got to start doing series A, series B, we’re getting too big for our breeches?”
Phil: I mean, why? Why should we? Why should we? There’s so many deals at this stage. We get the best ROI at this stage, I feel like. Just to be clear, we do plenty of series A deals. We don’t do beyond that as an initial investment, but as a follow-on investment, we do. Initially, we’ll invest seed or series A. But there are so many opportunities here. And this is where we have the best ROI. So why not invest just as much as we can here without having to look up market where ROI is not going to be as good? And plus, we have so many VC partners who are doing B rounds and later that I’d rather let them take it from there and then refer the deals at the earlier stages to us. It’s just a really nice symbiotic relationship we have.
Meb: Awesome. When can I put the next breakfast on the calendar? You think in fall time, in the summer?
Phil: Yeah, that’s what I’m thinking. Let’s see. I’m guessing probably September, maybe October. It takes a little while to plan these things.
Meb: Florida, Atlanta, New York? Where are you going to do it?
Phil: New York. So we have a lot of concentration of investors there. And so that’s one reason. Plus, my younger son just moved there. So I’m always looking for excuses to go to New York, visit him. We have a lot of portfolio companies there. So that’s helpful in terms of the presentations at the breakfast. But then we’ll do a West Coast. Now, we’ve always done San Francisco. You’re in LA, I’d like to do an LA one. We have a lot of investors in LA. We have some portfolio companies in Southern Cal. So I’d like to do one there. And then after that, next year, we’ll look at middle of the country, maybe Chicago, or maybe Atlanta, to come back to East Coast but south.
Meb: Good. We’ll co-host one with you in LA. So let me know. We haven’t done one in a while. It’s time to get back out in the world.
Phil: Oh, that’d be great. I’d love that. Yeah, we have some good portfolio companies there that will come and give us updates. We do the updates from the portfolio companies, and we try to get a couple of new companies in that we haven’t invested in yet and get them to present. If I can, I’d love to get Luis from Remoov to fly down to LA and do a presentation so we can hear his.
Meb: For sure. We can do a drop off with all your stuff and do a test case on how much money you save by getting rid of all your junk.
Phil: Yeah. Yeah, exactly. Yeah, I love doing them. I can’t wait to get back to doing them and looking forward to seeing you in person.
Meb: Where do people go if they want to send you some deals, they want to invest, they want to keep up with what you’re up to? What are all the spots?
Phil: Yeah, forefrontvp.com, forefrontvp.com. Forefront Venture Partners is one good place. That certainly, you can connect with us there. LinkedIn, Phil Nadel. I’m on LinkedIn. I’m on Twitter. AngelList is always great. So you can reach out to me on AngelList. But you can also find links to invest in the syndicate and the rolling find on AngelList. So just do a search for Forefront. You’ll find us. And they could always ask you to put them in touch too. I know you’ll do it.
Meb: Awesome. Phil, thanks so much for joining us today.
Phil: Oh, it’s my pleasure, Meb. I really appreciate you having me. It’s always great catching up with you, and looking forward to seeing you again soon.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at the mebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show, anywhere good podcasts are found. Thanks for listening, friends, and good investing.