Episode #348: Zach Coelius, Coelius Capital, “I Like To Play Where It’s Still Qualitative”

Episode #348: Zach Coelius, Coelius Capital, “I Like To Play Where It’s Still Qualitative”

 

 

 

 

 

 

 

Guest: Zach Coelius is the Managing Partner at Coelius Capital.

Date Recorded: 8/5/2021     |     Run-Time: 1:07:06


Summary: In today’s episode, we’re chatting angel investing with one of AngelList’s top syndicates. We talk about Zach’s transition from entrepreneur to investor and the difference between the two. Then we get into Zach’s investment philosophy and the benefits of being stage agnostic.

Be sure to stick around until the end when we talk about some of Zach’s portfolio companies, including $30 billion autonomous driving company Cruise and former podcast guest Shane Heath’s MUD/WTR.


Sponsor: AcreTrader – AcreTrader is an investment platform that makes it simple to own shares of farmland and earn passive income, and you can start investing in just minutes online. AcreTrader provides access, transparency, and liquidity to investors, while handling all aspects of administration and property management so that you can sit back and watch your investment grow.  If you’re interested in a deeper understanding, and for more information on how to become a farmland investor through their platform, please visit acretrader.com/meb.


Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159

Interested in sponsoring an episode? Email Justin at jb@cambriainvestments.com

Links from the Episode:

  • 0:39 – Sponsor: AcreTrader
  • 1:32 – Intro
  • 2:16 – Welcome to our guest, Zach Coelius
  • 2:30 – Episode #259: Shane Health, MUD/WTR
  • 6:41 – Getting gutted by Facebook in his early days
  • 8:24 – Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley by Antonio Garcia Martinez
  • 13:06 – A post-exit sabbatical and recovering from his losses
  • 15:45 – Hitting the lottery on one of his first angel investments
  • 18:37 – Becoming a full time angel investor
  • 21:45 – His investing philosophy, what he looks for, and early stage companies
  • 24:07 – The value unlock and advantage of seed stage investing
  • 26:50 – Journey to 100x (Faber); Why are there so few angel investors?
  • 30:28 – Sourcing deals
  • 36:20 – Breaking down a case study with MUD/WTR (promo code MEB for 15% off)
  • 41:51 – Breaking down a case study with CareRev
  • 46:48 – The benefits of an AngelList syndicate
  • 51:01 – What the future looks like for angel investors
  • 54:05 – A company he’s excited about
  • 58:22 – His most memorable investment
  • 1:00:03 – Learn more about Zach; Twitter @zachcoelius; LinkedIn

 

Transcript of Episode 348:  

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.

DisclaimerMeb 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.

Sponsor Message: Today’s episode is sponsored by AcreTrader. I personally invested on AcreTrader and can say it is a very easy way to access one of my favorite investment asset classes, farmland. AcreTrader is an investment platform that makes it simple to own shares of farmland and earn passive income, and you can start investing in just minutes online. AcreTrader provides access, transparency, and liquidity to investors while handling all aspects of administration and property management so you can sit back and watch your investment grow. We recently had the founder of the company, Carter Malloy, back on the podcast for a second time in Episode 312. Make sure you check out that great conversation. And if you’re interested in a deeper understanding, for more information on how to become a farmland investor through their platform, please visit acretrader.com/meb. And now back to our great episode.

Meb: What’s up, everybody? Really awesome show today. Our guest is the managing partner of Coelius Capital, an angel investor in early-stage startups. In today’s show, we’re chatting all about angel investing with one of AngelList’s very top syndicate leads. We talk about our guest transition from entrepreneur to getting squashed by Facebook and then on to investor and the difference between the two. We get into our guest’s investment philosophy and the benefits of being stage agnostic. Stick around because we talk about lots and lots of portfolio companies, including his early investment in billion-dollar autonomous driving company crews and former podcast alum, Shane Heath’s MUD/WTR. Please enjoy this episode with Coelius Capital’s Zack Coelius.

Zach, welcome to the show.

Zach: Thanks for having me. Longtime listener, first-time caller, huge fan of the work you do.

Meb: Good, man. Well, look, I’ve known you for a long time virtually. And in your honor, I poured myself a glass of MUD/WTR, which we can talk about later. But we had the founder on the podcast, I’m trying to remember about a year ago. We’ll add it to the show note links. He’s a local.

Zach: Shane.

Meb: Shane’s awesome. Fun story, listeners, it’s basically a mushroom coffee alternative. And I have sort of an issue, which is I love coffee but, like, to my detriment. So I’ve been trying to go kind of half MUD, half coffee as a segue to not drinking a pot a day in the morning. And it’s working so far. It’s a nice blend.

Zach: That’s awesome.

Meb: We’ll come back to MUD later.

Zach: MUD’s a great story. I love MUD.

Meb: So we’re going to talk about all things, angel investing, entrepreneurship, wing foiling, all sorts of odds and ends. You got a pretty… I’d say if there is a traditional path for angel or VC, you kind of have it, right? It’s the founder who starts out doing some companies and eventually starts investing? Was that sort of the right path for you?

Zach: Yeah, the only difference is the traditional path is you’re a founder, you start companies, you make a shit ton of money, and then you take that money, you don’t know what to do with it, and you start throwing in other things as an angel.

And my experience was, I’m a founder, start some companies, have Facebook rip my guts out and leave me dead and bleeding on the side of the street. And sort of like as I was crawling around, trying to figure out what to do with my life and, like, what to do next, I mean, I literally got gutted. I mean, it’s crazy. I’ll tell you the story but it’s a crazy story.

I stumbled into, back in 2015, the very beginning of AngelList, AngelList Syndicates. And one of the companies that I had been advising for a long time was a company called Branch Metrics, a mobile deep linking platform. And so I introduced them to Ben Narison who introduced them to NEA to do the seed. And then when the A happened, I was like, “Hey, you guys mind if I put a 200k allocation up on AngelList and see what happens?” And they were like, “Sure, go for it.” And so I, like, wrote the memo about how awesome it is. This is, like, literally January ’15 when AngelList Syndicates were nothing, put it out. I emailed all my best friends, I’m like, “Please look at this.” And 24 hours later, the allocation was full and I was like, “Oh, look at that. I’m an investor now.”

Meb: That’s funny. That’s commonplace today, but I feel like in the early days, it wasn’t that, like, instantaneous and ubiquitous, where the companies would raise that fast. Maybe it was. I mean, I had started investing at the exact same time but that seems to be more of a rarity in the early days.

Zach: I got really lucky. So, one of my buddies, LA-based, this guy named Sky Dayton, he basically took a big chunk of that right out of the bat. And then a lot of my other friends, like, they looked at that deal and they were like, “Well, Zach’s kind of an idiot but NEA’s smart. So we’ll put money in behind NEA here.” And so that really helped get me off the ground.

What ended happening is, the next deal I did was Cruise Automation, the self-driving car company, similar scenario like Kyle’s, an old buddy of mine and, like, I got in there because of that. And when that exit happened, GM bought them for a billion dollars, like, a year later. And then suddenly, everyone was like, “Oh, Zach knows what he’s doing,” which wasn’t true at all. And then so a whole bunch of capital sloshed over. My whole career as an investor was largely just built on luck and being at the right place at the right time.

Meb: There’s the old Julian Robertson, who ran the Tiger funds for a long time and one of the most famous fund managers of all time. He had a piece of advice, where he’s talking to younger new managers and they said, “What kind of advice can you give us?” And he said, “Get really lucky in your first year because everyone will think you’re a genius, you’ll raise a ton of money, and then you have to still deliver but that’s the best possible thing could happen.” So look, kudos for you.

I sort of had a similar entrance to the asset management space, different but a lot of serendipity and just timing, where had written an academic paper that came out before the financial crisis that kind of sailed through the financial crisis that had there been no financial crisis, no one would have read it. I mean, no one reads academic papers anyway, but few people would have read it anyway.

So it helps to be lucky. But you have to at least show up. I mean, had you not written that check, there would have been no luck anyway.

Let’s rewind. I want to talk about Facebook gutting you before we get into all things angel investing because that’s probably a lot of people can sympathize with that story. What does that mean? They steal your idea? They buy your business and shut it down? What happened?

Zach: The company we started was a company called Triggit and we started in 2015, my sister and I. We were one of the very first sort of ad tech platforms. And we got into sort of what is effectively now, we were one of the direct competitors with the Trade Desk, which is now I think a $30 billion business and a bunch of other folks in that sort of, like, figuring out programmatic advertising and retargeting and using data to drive online media.

And so right before, we got our butt kicked in the traditional VSP market, and kind of imagine, we were getting ejected out of the back of the pack, we started talking to one of my good buddies, a guy named Antonio Garcia Martinez who wrote this great book “Chaos Monkeys.” He was over at the Facebook ads team, along with … and a bunch of my other friends. And so, right before Facebook went public, they screwed up their earnings because they had built their ad platform really poorly. I mean, really, really badly. They just didn’t really understand what they were doing. And so they missed their earnings. And so, Zuck goes to the Facebook ads team, and this is right before they went public, Zuck goes to Facebook ads team and is like, “Guys, what are we going to do? I need your 10 best ideas.”

And so, they give him 10 best ideas, he greenlit all of them, which, like, up until then, Zuck had been like nothing… “No, no, we’re not doing any ads.” But suddenly, he was willing to take risk when it came down to going public. And one of the ideas was to open up Facebook to programmatic advertising.

And so we were one of the launch partners for that because we built… And I helped them kind of figure out how to design it. And the whole “Chaos Monkeys” book really kind of tells this whole story much better than I can. It’s an amazing story. I mean, there’s a reason why it was a “New York Times” bestseller. It’s like this great, well-written book, but we launched it with them. And I mean, we just crushed every metric they had.

I mean, so when we went in there, the average ad would get one click for every 3,000 ads. So we showed 3,000 ads, you get one click. And we were able to basically make it so that you got 10 clicks for every 1,000 ads. So, like, huge improvement, 30x improvement, just, like, right off the game. And the CPMs when we went in there were like 10 cents and we were in there bidding $1 plus to buy that same media. And so, Facebook then saw us just hoover up every single big customer they had to work with us versus working with Facebook directly. So, Best Buy, Home Depot, booking.com, which is the biggest online advertiser in the world, I mean, it was like all of these big guys basically started working with us.

And our revenue went from like a million to $30 million revenue in like 12 months, which was like vrooosh! We had $300 million in bookings, like, ready to go. I mean, we were just, like, off to the races.

And the Facebook team had this giant sort of debate internally of, like, okay, do we continue with this open strategy and let all these sort of, like, partners work with us or do we just, like, subsume their technology? And so we lost that debate. And so, they decided to basically rebuild what we had built internally and to… It was funny, like, they took the dial of the traffic they were giving us and they slowly turned it down and we were like, “Guys, we can see what’s happening here.” And they’re like, “No, no, no, no, it’s all good. Don’t worry about it. Like, we have the data.” We’re like, “Guys, we can see what you’re doing.” And they just were just like, “Ohhhhh.” As our business, our revenue, our customer rates is just going through the roof, we’re just watching our traffic just, like, slowly dying away. And it was brutal.

So in the end of 2015, we ended up selling the company to LinkedIn and another buyer in this crazy auction. And that was the end of 2014, beginning of 2015. That was the end of that story.

Meb: It was a sort of a melancholy ending. That’s the agony next to you being entrepreneurs. You have these moments of elation. This is a rocket ship. We’re taking over the world. And all of a sudden, there’s like Darth Vader Zuck over there, just sticking his fork in your side. Was it bittersweet selling it and kind of winding it down? What was the kind of experience?

Zach: Oh, God, it was excruciating. I mean, I like this analogy of having been gutted because, like, we were alive, but my guts were literally hanging on the floor and I knew we were dead but we were still alive and growing. I mean, these customers loved us, our revenue was increasing, like, our business was, like…If you looked at our business on any level, you could see that we were just going to do hundreds and millions in revenue.

But if you looked behind the curtains at what Facebook was doing, you knew we were dead. And so it was just like this really… That was brutal. I mean, that was a 10-year period of my life where all I did was think about how to make that business work and, like, I threw every ounce of my entire existence against that wall. And to finally have it stick and then to finally have it go, and to feel… That feeling of product-market fit is a… I mean, I’m grateful that I got to feel that, but to have that feeling and then to have it ripped away from you in, I think, a very sort of painful way, oh God, it was the most horrible moment in my life.

Just to give you a sense of how crazy that year was, that was my bad year, like my marriage ended, my mom died, my company got ripped away by Facebook, every bad thing you can imagine. And my house literally burned down. And in that moment, I was like, “Yeah, whatever.”

Meb: Yeah, right at that point, it’s like…

Zach: Now … is nothing compared to how bad that year was.

Meb: It was a country music song.

Zach: It was.

Meb: What year of vintage is this? Is this 2013-ish?

Zach: ’15.

Meb: 2015.

Zach: ’15 was my bad year. I’m glad I didn’t have a truck or a dog because my truck would have broke down and my dog would have run away. Like, it was just so bad.

Meb: So you made it through, you came out the other side, and so you actually started writing checks that same year? Was that the actual…?

Zach: Yeah. Yeah. So, like, basically 2014 was a gutted but not yet dead year. And then right in the spring of ’15 is when the exit happened, and then I was suddenly cast loose. And like I said, I was wandering around like a lost, wet, lonely puppy trying to figure out what to do with my life. And that’s when I started sort of, like, stumbling around writing checks. Not even… Writing checks, it’s like I was writing syndicates. I was writing memos about why other people should invest in these deals and then got lucky that people actually agreed with me.

Meb: And so, you take any sort of sabbatical? Did you have a plan at that time or it was more just like, “Look, I got a couple of friends, I want to write a check into what they’re doing?” What was the sort of vision or was there one?

Zach: No, there was no plan. My ex and I took this amazing three months vacation, went to Northern India and Nepal, Bhutan, went trekking, literally for like two months in the mountains. And that was awesome. But yeah, I know it’s… The hard part about, like, being an entrepreneur is, like, the entirety of everything is focused on one point. You have this point in the future that you’re executing against, and you literally, you subsume, and you subordinate your existence to that direction. And then whenever that ends, it’s incredibly challenging from just a mental sort of health perspective because that’s the foundation of so much of your life. Oftentimes it just crumbles. And when that happens, you find yourself on very unstable footing.

And so for me that year was very difficult. And thankfully, the investing side of things became a sort of path out of that, but it was not clear. And in the beginning, it was very much sort of something I was doing on the side maybe 25% of my time.

Meb: Well, if there’s any place in the world to recover and have some peace, Bhutan is probably the right one. I went there with my mom a handful of years ago to do a kind of a mother-son trip and extremely memorable. We still have… We brought back a bunch of peppers because they put peppers…

Zach: Nice.

Meb: …in everything. Like, it’s like the local heat and then there’s the tourist heat, and even at breakfast, every meal. Ema Datshi is… I can’t even remember the name of the dish, it’s something like Ema Datshi. So I have peppers growing here that I’m the only one that can eat em, my family says, “No chance,” but…

Zach: I love that.

Meb: It’s so good.

Zach: In Nepal and Bhutan, that was like the one breakthrough for me was I would be like, “No, I want it properly hot, like the way you eat it.” And they’d be like, “No, you’re crazy.” I’m like, “No, no, I want that.” And, like, oh, it makes the food tastes so much better.” Like, that’s the way it’s meant to be eaten. It’s just, like, so hot you cry.

Meb: I got so many fun stories from that trip. I would take a Pepto with every meal and just, like, sweat my way through it. You can’t be too serious about anything when half the country, the buildings just have giant phallus penises on them. If you’ve never been, you don’t understand my reference. But it’s funny. I highly recommend it.

Zach: But my favorite is the door handles that are truly giant, erect penises on their door handles, and they’re, like, in a nice person’s house. And it’s a weird Bhutanese thing. They love that. It’s like it’s their style.

Meb: It’s like the god of fertility who was also mischievous or something. I can’t even remember but special time for sure. So, you go to Bhutan, you start throwing in some investments, talk to us about the Cruise because, I mean, to hit sort of the lottery on one of your first three, that’s pretty rare. I think AngelList actually just came out with some stats and they say, “Look, it’s like 1% to 2% of the deals are, like, these big unicorn winners.” I think everyone expects all of them to be unicorns but particularly in 2021, maybe it feels like that number is a lot higher. But it’s rare. Talk to us about what that experience was like. Did that happen also 2015 or was that a few years later? I’m trying to remember when they got bought.

Zach: Yeah, what’s crazy is, like, the first three companies I invested in, Branch became a unicorn, Cruise sold for a billion. And the third one was One Signal, which I’m convinced if they don’t get bought too early will be a unicorn. So yeah, I think it was just like karmic sympathy. The world basically just felt sorry for how fucked my life was and decided to just throw me like a bone.

From a professional allocator perspective, I think what’s interesting in what I’ve learned, subsequently, is in this business, it’s very time driven. So you have these moments in venture where tremendous value is being created. And they’re very temporal. There’s new technologies. There’s new sort of, like, appropriate opportunities that emerge for those technologies. You have a new platform. You have these new things that enable tremendous value to be created. And what ends up happening and I’ve seen it over and over again, is you have sort of a cadre of people in Silicon Valley, and now scattered all over the world. They’re kind of like that Liam Neeson movie, where, like, they steal his daughter and he’s like, “I have the right skills to fucking make your life miserable.” There’s this group of people who have the right skills at the right time and the right energy, that they basically can basically see the opportunity and they can do it. Like, they know how to raise the money and they know how to build the technology, they know how to hire the team, they know how to recognize value and opportunity.

And so there’s moments in time where it all comes together.

And 2015, I mean, I think now is also that moment in time in a different way. But in 2015, there was this moment in time where, like, my group of people were just, like, they were bringing it. And they ended up bringing in creating just a tremendous amount of value. And that’s why when you look at venture funds, traditionally, you generally look at them as vintages. You’re like, “Okay, you’re a manager, you started deploying this year. Some of these other managers, how do you compare to other managers from that year?”

Because the difference between the investment landscape in 2015 and 2019 is totally different, both from a strategic and operational perspective. You have to think about it very differently. From a decision-making perspective, you have to think about it very differently. But just in terms of just, like, the zeitgeist changes so dramatically in this business. But yeah, ’15, it was a hot year. The wine was good that year.

Meb: And so, you have this feeling, this happens, was it then like, “Hey, look, maybe I’m good at this. Maybe this is what I enjoy doing. I never want to go back to be an entrepreneur, that was brutal. That’s too much work.” What were the next steps? Walk us through kind of the last five years post-Cruise?

Zach: When the Cruise thing happened, I knew and I’ve publicly said forever, I will always say it, it was just dumb luck. I’ve known Kyle, Kyle’s amazing, but I’m not an expert in autonomous cars and the underlying AI there. I’m not the guy who went in and did the analysis and came out said, “No, we must do this.” It was like, I know, Kyle. I like Kyle, I know … I like them. Okay, I’m going to do this deal.”

And so yeah, in the early years, for me, it was very much kind of learning my footing, learning this job, learning how to add value and how to basically get allocation, how to be a good partner for both the other VC firms that I invest alongside, for my entrepreneurs, for my investors, that ecosystem, how to use AngelList in a way that was productive.

It really for me, it was sort of like I slowly worked my way into it. So in the next year, I did maybe 50% of my time and I did some consulting to kind of pay the bills. And then eventually it became very clear that, like, oh, one, I love this job.

I like to say that being an entrepreneur is sort of like being a gladiator.

So, like, imagine, like, in the beginning of the Russell Crowe movie, and he’s a slave in the base of the little arena with all the other slaves and was terrified because they know they’re about to be gutted by, like, a dull knife. I can’t imagine how scary that would be. They’re all down there and you grab whatever weapons you can get, and they push you out in the middle, and you literally fight, and you sweat, and bleed until you die, where you maybe get to exit.

And it’s like, being an entrepreneur is like that. You get pushed out in the rain with whatever weapons you have, whatever team you can bring, and you’re fighting. And so like every problem that you pick, just like every opponent in the ring, you beat them, they send two at you. So you get one problem they send two at you. You beat them, they send four. You beat them, it’s like they shoot arrows at you and they come at you with chariots.

Each problem as an entrepreneur is an escalating series of complexity and difficulty and you keep going into infinity. And so you eventually run into the limits of your own competence. And it’s both the most personally fulfilling experience ever because it’s truly the expression of all of your entire entity against the problem set. But it’s also the most brutal experience because you’re constantly being pushed against whatever your limits of your capabilities are.

I did that job for 20 years. I love that job. It’s super fun. But now, I’m literally one of the douchebags in the stands, drinking a cold beer, betting on which entrepreneur is going to live or die. And that is in and of itself a very different job. But my favorite thing about the job is I get to, like, run out in the middle and, like, pretend like I’m still a Gladiator and help out. I’m like, “Oh, let me help out.” For, like, a few minutes. I’m like, “Hold on, my beer’s getting warm. I got to go back.”

But I love that there’s like the interface between where I sit in the investing stack and the entrepreneurs is that I love that I can be the participant in the game, whereas as a public market investor or a later-stage investor, you’re alone for the ride, but you’re not able to go into the middle and fight in the same way. I love that.

Meb: You sort of have the perfect resume, the experience. I mean, it’s hard to convey to someone the experience of being an entrepreneur and, again, the agony and ecstasy of it, if you haven’t been through it. It’s like trying to explain to a virgin what sex is like. It’s hard to convey with words.

And so, it gives you a certain appreciation. So talk to us a little bit about what’s your philosophy? What’s your framework? What sort of investments do you look for? Just like what’s the general process for your wheelhouse?

Zach: My personal expertise, B2B software, B2B, C, that’s where I spend all my time, early-stage. Basically, I like to play before you have month over month, sort of metrics, where any idiot VC can extend the line. Once you get to, like, three, six months, a month over month, you’ll get 20 guys will show up. They’ll extend the line and they’ll write the checks.

I like to play where it’s still qualitative, where you’re still, like, talking about value, you’re talking about competition. Nobody really knows yet how the business is going to play out.

MUD/WTR is, like, really one of the only exceptions to that, but we can get into the MUD/WTR story, which I love. But…

Meb: But so most would consider this to be a traditional pre-seed seed? Is that the right sort of genre?

Zach: Yeah, so I invest my energy and time is, sort of, from the very beginning. So the first check-in pre-seed through the seed, once you’ve got maybe like the beginnings of an idea and you’ve got maybe some product and, like, you’re starting to basically make contact with the market, all the way up through the series A, which is, like, where I basically call them the idiot line extenders, which is, like, that becomes a very different sort of investing game.

I continue to invest through the lifecycle of my businesses, which is that, like, once I’m inside, hopefully, I have a relationship with the CEO, where, like, they call me up when things are going wrong.

I’m the person who, like, loves to jump out of the stands of help. And so I want them to call me when, like, they’re having trouble because then what ends up happening is, like, you get to learn the real truth about these businesses, like you can actually see the dirty, nastiness, and it’s just the way execution works. And I get to invest with inside information because I know more in that capacity than any new investors showing up. And oftentimes, I know more than the board because the board gets this very carefully constructed narrative, whereas hopefully, I get to hear the truth.

I’ll keep writing checks all the way up until effectively until the IPO.

Meb: You hit on a really interesting topic or point I should say, as a public market investor, we talk all the time about what’s your edge? Where’s your value add? And it’s hard. It’s like the most competitive people trying to jostle over these companies that are worth $10, $100, $500 billion, and there’s a gazillion competitors. And inside information is technically illegal. Didn’t used to be really. It’s kind of a gray area 20 years ago, but now, it’s really hard. Whereas you have a very important point, which is if you’re a private market investor, particularly if you’re on the inside, so you already invested at the pre-seed seed and you get to see what’s going on behind the scenes, it is a massive value add.

And as someone who’s kind of seen this over the past seven years, it’s an insight that you can push your chips in and say, “Oh, man, this company is now a rocket ship, let me double, triple, quadruple down.” And if you don’t have a seat at the table, you never get to see that.

Zach: Or you’re at a huge disadvantage. So, I think one of the biggest inefficiencies of the traditional venture capital market is that, like, a lot of these firms, originally, they constructed themselves to only operate a certain stage. So there’s a Series A investor and then they’re going to hand the company off to the Series B investor, who’s going to hand the company after the series C investor. And the reason why that happened is that you have these partnerships, and no one really trusts each other in a lot of these partnerships. And so every individual partner has an incentive to support their own company. And so if you’re in a partnership, you’ve invested in a company in the series A, and then you go to your partners, like, “Hey, I want to back up the truck and write a big check into the Series B, a lot of your partners are going to be like me, ” Yeah, I don’t know if I trust you,” because your personal incentive as a VC becomes different than your partner’s incentive for the deployment of partnership capital.”

And the LPs, when they’re really measuring you as a firm. If you’re marking up your own deals, the LPs traditionally don’t really like that. They like to see that outside validation coming in of new investors with new pricing. And so the VC industry has traditionally operated and we’ve had access to inside information. We get to use it, but we just don’t. And so I think it’s like one of the really interesting opportunities in VC is, like, how do you become an insider in these businesses and then just, like, exploit in a good way, but use that information to deploy more capital in a way where you know… Because I mean, there’s no company where a new investor shows up, where I’m an insider in, where I don’t know way more than they do. Guarantee, there’s like, I know more, just because I’ve been there. I know what’s going on.

Meb: So this is one of the reasons, and we talked about this on a recent blog post I did called Journey to 100X, where I think I’m up over 250 private investments at this point, a handful I’ve done with you. And part of the original goal, and you can go back and listen to the podcast, five years ago, was to learn, and not just learn about investing in the private world as a public markets guy in that startup scene, but also to gain insights into what these companies are doing that may inform other parts of the world.

And I think certain people would say this, not necessarily derogatory, but say, “Look, that’s just a spray and pray methodology.” But from my standpoint, I’m acquiring a ton of knowledge. And just on AngelList alone, it’s almost 4,000 deals have reviewed, and not even including the ones you invest in. You invest in, and then you get further information, some of which, of course, don’t share. But to me, it’s been an amazing insight into what’s going on in the world, in general.

And then when you find the rare ones, and we’ve had a few of these on the show, MUD/WTR is a perfect example. Traditionally, my stance was to not to do follow on investments, unless it was just, like, so clear. But there have been those anyway. So, it’s not necessarily a unique insight, but it’s an insight that a lot of people don’t appreciate. And I think it’s a crucial insight to where you can benefit from this sort of behind the curtain knowledge that many just don’t see.

Zach: I’m actually surprised that, like, there aren’t more public market investors and folks who are on AngelList, like, just in every syndicate just sitting there watching what’s going on, because you can write $1,000, check into these early-stage companies. Now you’re effectively an insider and you’re going to be able to see what’s going on with these really high growth businesses and across any sector you want.

So, like, if you want to learn about space, let’s say you’re a public market investor, okay, I’m going to learn about space. There’s not a lot to do in the public markets but you go into AngelList, and you start looking at the space deals and you’re going to learn about satellites, you’re going to learn about launch vehicles, you’re going to learn about manufacturing. And you’re going to get this really interesting education that nobody’s publishing in blog posts, nobody is talking about on podcast. I kind of look at this… I mean, there are 3,200 people in my syndicate now. And I’m like…

Meb: Wow.

Zach: “…I don’t understand why there’s not, like, 32,000 because there’s just so much information that just gets constantly shared, that you don’t get anywhere else. So, it’s crazy how that…

Meb: We’ll see how many Meb Faber show listeners join you. I highly recommend it. There’s a good public markets analogy for the people listening who haven’t started to invest on the startup side. And that’s old school stock investors. Buffett used to talk about this and others where you could just go buy one share of a company and they’ll do it to track it. So I’ll say, “Look, I don’t want to invest in this company yet. I don’t know enough, but I’m going to buy one share, that way I get the annual reports. I get to read it every quarter. I get to follow along with all this information as a way to just keep it within your sphere of interest.”

And for me, I end up doing that a lot with some of these companies. For me, your job is actually the hardest, the pre-seed sort of qualitative, to me requires 10 or 100x more work. So I often, like, the seed or even tilting what now would probably be considered series A with evaluations, to me, that’s a lot easier, as a quant, you see the startup metrics. But often I’ll do a startup position to say, “I just want to follow this company in the hopes that if it does work and takes off, you can then really start to scale up and invest at that point and to track it.”

Zach: Yeah, it makes perfect sense.

Meb: So, you’re a little more plugged in, and having started doing a few deals, walk us through kind of how you started sourcing deals in the beginning. Was it just rubbing elbows with your buds in the mission and walking around Market Street or…? I used to live in San Francisco. I was just blanking on all the neighborhoods. Marina, Happy Hour, what was the process, then? And walk us forward to how you go about it now.

Zach: For me, it’s network-driven. So, you can think about… The venture business, you have kind of three ways of kind of executing this business. You can build a big brand, then that brand can be your personal brand or it can be the brand new build as a firm. So you got Sequoia on one hand or you’ve got Random Solo GP like me who out tweeting and making noise and telling the world what I think about things, that’s useful. You get a lot of deal flow because of brand. Quality tends to be very mixed.

So I’ll get dozens of emails every day about new companies and they’re not very good but you get some good stuff from brand.

The second category is network. So, it’s all about your personal reputation and the people you know and the value that you’ve added. And so, that for me is everything. Like, my friends send me great deals every day and I’m like, “Oh my God, that’s so cool.” And it’s just over and over again, how… Because your friends, they know you. They know what kind of stuff you’d like to invest in. They kind of act as a filter and they can really bring high-quality stuff. So my friends, whether they’re the ones starting the company or whether they’re introducing the person who’s starting the company, that’s where the real sweet honey is.

And so for me, I wrote this big tweet storm about this back to the beginning of the year. For me, my strategy is all about adding leverage value in the ecosystem. So I want to help people where the value that they get is 100x more than what it costs me to do. So am I going to introduce you to another VC who does the deal? Well, guess what? You both owe me a favor. I gave that guy a deal and I gave the founder the introduction. Or if I can introduce you to a customer or an employee, or if I can, like, provide some information or do something where literally, it takes me a few minutes or seconds, and for you, it’s way more valuable, I do that all day. I give as freely as I can into the ecosystem to the people that I can work with around adding value.

So that in the hopes that, like, people are, like, “Oh, that’s that guy. He’s an idiot but he’s useful. Let’s get him involved,” then they call me up, and they let me join their cap table or they let me continue to be involved in their businesses.

And then the third sort of category is traditional sourcing, which is you sit down, you’re looking for businesses in certain areas and you basically reach out to them, you’re like, “Hey, I want to talk to you.” That’s super time-intensive. And you need really a lot more sort of, like, the early stage stuff where I play. No one even knows about it yet. It’s literally like my buddy calls me up and is like, “Hey, I got this idea.” And, like, that moment in time, that’s not public yet. So the sourcing, you don’t get to that. It’s really for later stage guys and starts to make sense when you’re late. But like in that early stage, it’s not very effective.

Meb: All right, so, you have roughly 3,000 syndicate investors, how many deals you looking to do a year? I’m sure it’s time-dependent on just what you see but is there a kind of ballpark number that you’re tackling and what sort of checks are you guys typically writing?

Zach: I also raised a proper fund. I worked with the industry of interest guys, and now some new LPs are joining this proper vehicle. We announced last summer as a $45 million fund that I work off of.

Meb: Congratulations.

Zach: Thank you. I got lucky there. The first deal I did with industry, I’d written this term sheets to HelloSign, to like give them a little bridge. And Brad from Foundry found out about me and called me up, he’s like, “Zach, can we turn this into a B?” And I was like, “Yeah,” because I mean, Brad’s like one of my heroes. He’s like one of the best venture investors of all time. To invest alongside the Foundry guys was, like, super cool.

So I had this slug and this fee as a result, and the industry guys were like, “Oh, we’ll do that with you.” And so we did the deal and I got lucky. Like, a year later, we sold it to Dropbox. And so the industry guys were just like, “Oh, here’s some more rope, go hang yourself.” They’ve been amazing partners. I’ve been really, really, really, really appreciative of working with them.

Meb: I mean, look, I mean, this is… You hit upon a point that I think goes back as long as there’s been markets that if you make money for someone, they’re not forever in your debt, but they forever sort of love you. And so a good example is, like, there’s about five or 10 AngelList Syndicates that I invested in over the years that have done really well. I put you in this category that, most of the time, like, I only end up investing about 5% of the deals you see, but there’s this category of, like, Hall of Fame that I’m going to give it a second, third, fourth look. I spend a lot more time on it than you would. And the same thing I think applies to anything is if someone finds you or does really well on investing, whether it’s real estate, whether it’s job, anything, it creates a relationship that wouldn’t be there, it was the opposite. You just lose someone’s all their money.

Okay. So you got this fund and then you have the syndicate, what’s the typical check size? I’m sure it’s changed over the years.

Zach: It’s grown. Yeah, I’ve got the fund, the syndicate, and then I also have a rolling fun. AngelList launched this rolling fund vehicle, which is literally the most LP friendly thing ever. You can join for a quarter. And then if you decide I’m an idiot, you can leave. If you like it, you’re like, “Oh, I just sold something that I got more money. You can increase your commitment. You can decrease your commitment. It’s like 10k a quarter, I think right now is the minimum. So it’s really lightweight. And so folks join that. They ride along with me if with my deals via the rolling fund.

And so between those three vehicles, generally, for early-stage, my checks will be anywhere from like a million, or $500 to 1.5. And then once we get into the later stage, sort of A and later, the checks can get bigger. So we can go $2 to $5 million. I don’t take board seats. It’s very much for me about, like, being the helpful guy on your cap table but not being the guy who’s going to try to be your boss.

Meb: You’re like a cell phone board seat. You’re like, “Look, you want to ring me up and chat with me, you want to text.” To me, that’s way better. All right, so let’s go through a few names as sort of a case study on how you thought about it at the time? What was the thesis? Why did this fit your sort of investment methodology? And then kind of walk for the outcomes. I’ll let you pick. Any names you feel are particularly interesting from the vintage?

Zach: Yeah, well, I mean, let’s start with MUD because we’ve been talking about MUD. MUD is a great start.

Meb: I’m down to the MUD.

Zach: Nice.

Meb: YouTubers can see it. I actually add a little bit of chocolate in mine too.

Zach: Nice.

Meb: So I have a definite mushroom chocolate mush at the bottom of this. All right, what was the attraction? Because this is a pretty unique story.

Zach: MUD’s totally off thesis this for me. I don’t really do consumer. So, basically what happened is that Shane and Paul, the founders of MUD had done a business before that was a SDR, sales development rep as a service business. So, I was an advisor to the company and helped them kind of through the years. And they were just amazingly hard workers, focused, really sort of metrics-driven, like, the kind of folks that, like, you just love to be part of their journey.

And unfortunately, that business went sideways and just really struggled to kind of get out of the gate but they worked really hard at it. And so, Shane was a designer on the team is like, “Fuck it, I’m going to go to paint.” So it goes to go to paint. And over there, he’s always been into mushroom tea because it’s really good for you. And the problem is, it tastes like shit. Raw mushroom tea tastes horrible.

So he gets into, like, the sort of Indian Chai blending techniques where you bring cinnamon, and cardamom, and black pepper and cacao and all these ingredients to make it take normal chai tea tastes kind of like coffee in a way. You can blend this interesting blend to make it good. And so he starts messing around with that, with mushroom tea. And he comes up with this blend that tastes good, like, tastes really good.

Like you can drink MUD/WTR and you’re like, “Oh, this is good stuff.” And so he comes back, and they call MUD/WTR because it has this particular matter, mushrooms do not sort of disintegrate in the water. So there’s going to be a particular matter at the bottom. And his friends were like, “Oh, we want to buy this.” And so he puts it up on the Shopify page. And first month he sells, like it’s April a couple years ago. So it’s like $5,000 of the tea, and then in May so the $10,000 of the tea. And then in June, he sells like $20,000 of the tea.

So they call me up and they’re like, “Zach, we got this thing and we don’t know what we’re doing. I mean, we know we’re doing but we need some help.” So I reached out to the syndicate, I’m like, “Guys, does anybody know CPG.” And we find a bunch of great CPG people and I make a bunch of introductions just generally just trying to be useful. And so the next month, they do $40,000 worth of tea. And they’re like, “Zach, we got inventory problems. We’re scaling too fast. We’ve go not money. We’re running out of credit cards.” And I was like, “Okay, guys, I love you. I invest in people. This is a no brainer for me.” And so we wrote a 400k note at a 5 cap.

Meb: Wow.

Zach: And some other investors joined us. But it was very much when I wrote the memo to the syndicate members, I was like, “Guys, I don’t know anything about mushroom tea. I’m not an expert in CPG. But here’s what we’re looking at. This is the deal.” And everyone just piled in, which is a testament to how smart the syndicate is. It’s interesting. This is really weird wisdom of crowds thing where, like, they see my worst deals and they’re like, “Yeah.” They’re like my best deals, they just pile into it, and I’m like, it’s eerie how powerful they are.

Meb: There’s something magical about when there is that product-market fit, you experienced it briefly as an entrepreneur, you see it in other companies. MUD/WTR a classic example, where it just seems so obvious. There’s the metrics, which are obvious. There’s the category and product. And one of the challenges I love to invest in some of these product companies, I always like to try them first because some of them I’m like, “Uh.” Some of them, I’m like, “Oh my God, how is this not a billion thing?” And that was the reaction with MUD/WTR. And there’s times when it seems like the perfect moment in time. That was the case, it seems like was their opportunity.

Zach: It’s like lightning hit in that bottle. And the cool thing is that deal, you can think about the timing there, they needed cash in weeks, and there’s no time to go out to the VC firms and go through a traditional VC process. It’s just growing like crazy. And so that’s where relationships really drive the value capture in this venture investing business. It’s like, you want to be the guy that they call when they need you.

We invested in that round, and then they’ve been off to the races ever since. I mean, they’re now a global brand. I mean, they’re going to do hundreds of millions of dollars in revenue in the next couple of years at the rate they’re growing. I’m not going to publicly say their number this year, but it’s like, they’re close to that now. I mean, it’s just crazy how well they’re doing.

Meb: It’s a great story too because, like, I mean, he literally just started making it in his kitchen. It’s one of these entrepreneur things where 99.9% of us would have this idea, make it in your kitchen for your friends. And that would be the end of it. And then there’s the crazy 0.1% who’d like, “You know what? I’m going to actually make this a business,” and then they’re like, “Oh, wait, there’s all these regulatory food safety, production. Forget it.” But then the 0.01 keep doing it. And then obviously, that’s why they breakthrough. By the way, listeners, when we had Shane on the podcast, they had a promo code Meb, M-E-B for 15% off.

Zach: I would add to anyone who needs an alternative to coffee, this is your thing. Now, not everybody loves it because it’s still mushroom tea and it’s got a unique flavor but, like, there’s a good chance that it’ll be your jam.

Meb: You can do the Meb recipe, half coffee, half MUD/WTR and a sprinkling of chocolate.

Zach: Nice. That sounds good.

Meb: It’s delicious. Okay, so that slightly off-brand, but was a perfect investment. It’s done really well, it’s continuing to grow. They’re adding more products. Walk us through another one.

Zach: I’ll give you another example. So I’m an investor in a company called CareRev. So CareRev basically provides on-demand nursing, staffing for hospitals. And what’s really interesting about the way hospitals work, my mom was a nurse, I got to kind of watch this when I was a kid. Hospitals from their staffing perspective, they have their traditional sort of employees or staff, union employees almost always, really inflexible, really expensive over time. And you’ve got on your side and sort of supply, but then the demand, you have really, really dramatically changing demand, like, something happened and your beds are full and you need staff on the spot. And then something else can happen and you don’t need them.

You kind of got this weird problem where staffing demand can move up and down. But traditional staffing supply because of union regulations tends to be very inflexible and really struggles to sort of meet up with demand. And sort of traditionally, you’ve had that, your employee base. And then you’ve had a traditional staffing agency, which literally is like you call them and maybe they can get you somebody and like you got a 10% hit rate, and it’s a huge pain in the butt. And then staffing agencies are very small, they don’t have scale, and like, they’re not optimal for solving your, I need somebody today problem.

And then you have a travel nurse, which is like you’ll hire a nurse to come work for your team for, like, three or four months. And up through that, that’s about all you had. And so hospitals have always struggled with nurses. So, I got introduced to Will through some good buddies of mine who were fellows ambassadors. He went through YC. And their initial model, their KREV model was, use the cell phone to enable on-demand staffing for nurses. Basically, we need a nurse, and then boom, it goes out to hundreds or thousands or tens of thousands of nurses who could be able to fill the role and be like, “Hey, we have a job tonight at this hospital. Here’s how much it pays. Here are the requirements. And if you want to say yes, push the button and we’ll bring you in.”

So it’s the good thing about this traditional Uber-ization of nursing. So I got introduced to Will, the founder, through… And he used to be a nurse. So, like, he went business school and everything else but, like, he was a nurse, he understands the problem really well, through some good buddies of mine. And it was one of those deals where it’s like they were still kind of fighting in with the inertia of hospitals because these hospitals had these traditional ways of staffing and, like, you’re trying to get them to change. And it’s like it’s really, really difficult.

But it was clear that that’s the model. That’s the right answer. Push-button, get a nurse. And as your demand moves up and down, you can move staffing up and down. And I was, like, I fell in love with Will because he’s literally one of the scrappiest guys you ever met. And so, I invested at I think a $15 million valuation and did a syndicate and, like, got involved with the company. And it was like one of these, “Oh my God, this guy, he’s just so aggressively working at this problem. I love this guy.”

And so we’ve invested in every single round since and now on a pretty significant portion of the company. And it’s just been so much fun to watch, because once they figured out how to get into these hospitals and help these hospitals really change the way they do their business… And it’s funny, it’s so obvious in retrospect but the answer to that problem was software. They built SAS software that these hospitals could use to solve their internal staffing problems and suddenly SAS software in this staffing unit suddenly made their lives easier, which made it possible to use CareRev. And so then their whole business totally went off to the races. And it’s well on its way to being a multi billion-dollar business.

It’s a good example of, sort of, like, how I got to jump out of the stands and run out in the middle and help a little bit. And, like, I just fell in love with the entrepreneur and how they do their job. And, like, it’s super fun.

Meb: This is such a great example of… I mean, look, everyone talks about software eating the world and the challenges there. But anytime there’s an industry that’s just still done on yellow notebook paper or there’s major, just roadblocks to inefficiencies, hospitals, great example, government, of course, emerging markets is a huge one where people still do stuff literally on pen and paper. And this is a good example where if you can just plow through and wedge your way in and just, like, get it to the point where you get through all the bureaucracy, like you mentioned, then it’s just a billion-dollar possibility.

The struggle is, like, the months or years of that initial challenge of getting it to work is so hard. But once you do, it’s magical. And this is a classic industry. I’ve known plenty of nurses. And I imagine the last year plus the trends now of labor shortages. Nursing is like the all-time, like, it’s always a shortage and a problem. I imagine that business is like you said, like, just pure rocket ship over the next year or two.

Zach: It’s been really fun to watch. Every month we get a new update. And this is, like, I mean, it’s growing at incredible month over month growth rates, even though it’s already pretty good-sized business. And you look at, like, their competitors. I mean, they’re public marketing companies and they have no technical capabilities whatsoever. I’m bullish on that one.

Meb: You mentioned that syndicate as a resource, has there ever been a scenario where you email out and say, “Hey, I got this deal,” and then somebody writes back, and they’re like, “Zach, dude, are you serious? Do you know this founder? Like, he’s a habitual liar. He’s had securities fraud. Did you know X, Y, Z?” And you’re like, “Oh, just kidding. We’re not going to do this.”

Zach: Yeah, absolutely. It just happened to me.

Meb: Oh, really?

Zach: We had a deal where I fell in love with the founder, just a really scrappy guy. And I fell in love with the story and the business model. And the growth is great and there are other fellow investors who introduced me and, like, everything was looking really good. And I was like, “Let’s do this deal. I like it.” The thing about my job is that there’s this really interesting balance between the known and the unknown, in that, like, where I sit, there’s a lot of unknown, and there’s some knowns, but speed, moving quickly and making decisions quickly is of the essence in this business. This is not a business where, like, diligence and time is your friend. It’s like diligence and time, invariably will cause you to basically be too slow or be unable to do the deals where you have a lot of, sort of, risk in the unknown.

So, I operationalize around moving quickly and making decisions very rapidly because founders, they demand that. If you don’t do that, you don’t get to be in the deal. So, anyway, I committed to doing this deal. And I sent out the memo to the syndicate backers, and the great thing is when you got 3,000 eyes on a problem, somebody is going to figure out every little hidden thing, and someone did.

And I got this email. And then I actually got a couple of emails and people were like, “Check this out.” And so I did some digging, and it was hidden, like, my initial diligence, like I do diligence, I went and I reviewed a bunch of stuff, but I didn’t find this and these guys did. And I was like, “Oh, no, no, we’re not doing this.” And literally, I wrote an email to founder was like, “I love you, bro but, like, what you told me and this are not the same.” We got on the call and he, like, did the song and dance and I’m like, “You’ve made a lot of excuses.” And I was like, “No, I’m not invested in that.” And so we pulled the plug.

I hate doing that but, like, the problem you have with early stage is that every entrepreneur, because there’s so much unknown, there’s a lot of them who are just liars. Now, there are the evil liars, and then there are the people who exaggerate, and then there are the people who will spin a narrative to make it seem really pretty. And I think one of the most important parts of my job is sussing those things out and identifying what is truth and what is bullshit. And trying to figure out how to be with the people who are, like, what they’re doing is working so well, they don’t need to lie to you, and get rid of the people who, like, will lie to you.

So, in this case, I was like, I don’t know if the guy was lying to me or if he was just kind of like shading it in a certain way but I was, like, “I don’t want to do this deal. So we cancelled it.

Meb: There can be competing interests and incentives across all these and you talk about it. If you look at some of the greatest entrepreneurs in history, you have this scenario many times of the fake it till you make it. I mean, my God, look at the names you could just go down the list. Elon Musk on one hand, and then the Theranos girl on the other hand, Adam Newman, on and on and on, and on and on. Sometimes it works out. Sometimes it doesn’t, and then try and decide if it’s intentional or if it’s just like, “Hey, I really believe this outcome but I’m just delusional.”

It makes the qualitative part of your job important, particularly where you operate versus the later stages. As you look kind of to the horizon, so you’ve invested in probably a couple of dozen companies at this point?

Zach: So there are about 50 companies in the portfolio, over five-and-a-half years now, deployed about $55 million of total capital so far.

Meb: Awesome.

Zach: And I look at this very much as. like, I’m learning and growing. We all aspire to be sort of the horizon of imagine you have unlimited capital, and you’re just, you go in and you write huge checks, and you make dreams come alive. We all aspire to that but there is the operational sort of reality of, like, you actually getting this job, you learn, and then you move up, and then you see… I used to, like, play some professional poker, you look at, like, the little one, two table, and then you move to, like, 5, 10 table, and it’s a very different game. And then you look over the 10, 20 table and you’re like, “Oh, my God,” And so it’s a similar thing in venture. It’s like, each stage you move up to, each check size up to, it’s harder, it’s a different game, and you got to, like, figure out if you can do it or not, and on that path and see where you end up.

Meb: As you kind of look around, it’s 2021. Obviously, the venture space is changed over the last three, four years. You’ve seen entrants, like, my world, where Tiger and other people have started moving down the chain and I mean, that technical phrase, just throwing bags of cash everywhere, maybe? How has this impacted what you do? And in the same sort of question, what do you think the future looks like for your world?

There’s been some… Again, AngelList didn’t exist really a decade ago. So, what are the main thoughts on today and then tomorrow?

Zach: We’ve been making way too much money in the venture industry for way too long as a group, I mean, my portfolio is running at, like, 46% IRR, like, every year.

Meb: Come on, you can’t get that 50? Come on, Zach, you need to step it up a little bit.

Zach: I got a big markup that literally, like, as soon as we can put this on the sheet, like, it’s kind of close to, like, the term sheet, it’s all going to close. And, like that, I think will keep me up over 50. But the problem is, like, then the next leg, so, like, we got to get CareRev to go raise a billion, MUD to raise a billion and keep going.

But yeah, I mean, we’ve all made way too much money for way too long.

And so, like, the Tigers of the world who are super happy with, like, a 15% IRR, if they can run a consistent 15% IRR against the kind of capital they deploy, they’re going to do that all day long, they’re coming down, and they’re like, “Hold on a second.” You hogs are too fat. We are going to slaughter some hogs.

And so they’re bringing their acumen and their ability to move rapidly and their balance sheet effectively or their fund sizes to really put a lot of pressure on the top end of the venture markets. If you’re a late-stage VC who’s used to running 30%, good luck with that.

And then the bottom end, they can’t play where I play because it’s more qualitative, you can’t come in and just run a quant engine against the company’s metrics and make a decision. Like, it’s very qualitative. It’s very network-driven. We in the bottom end are more insulated from those folks. But on the other hand, there’s been this amazing profusion of new managers who are like me who have a network and can move rapidly and who don’t have all the sort of, like, institutional hurdles that you get with a traditional VC firm, that are really eating the lunch of a traditional VC firm.

Like, if we’re coming in, grabbing 10+% percent ownership stakes in these companies, before they get to the sequoias of the world and before, they would have showed up and been able to write a check at a $20 million valuation. But now, by the time we deliver the company to the VC firms, the company is much bigger, it’s more established, revenues are bigger, it’s growing faster, and the valuations will be $50 to $200 million.

And so, they have to write a bigger check and they’ve got to go later. And so for the VC ecosystem, there’s just tremendous compression coming from the bottom end and from the top end. And it’s good. I mean, the industry is largely operating sort of like a cottage industry for many years. And it’s very sort of, like, old boys network and closed off and people made slow decisions and they really kind of took advantage of entrepreneurs. And, like, now we’re putting some pressure on those fools and I like it.

Meb: No, it’s great. You’ve had a lot of rocket ships, we didn’t get to touch on Booksy. That was another one’s been on the podcast a lot.

Zach: Yeah, Booksy is awesome.

Meb: Give us an idea, an early-stage company, look, I know you got dozens and this is, like, choosing from all your children, but of a company that you’re excited about that hasn’t yet exploded upward or hasn’t had the massive move, but just some ways early-stage, you’re like, “Oh, shit, this is a bomber idea. I’m really excited about this company.”

Zach: Well, the problem is, is that if I tell you that, then all the VCs are going to go invest in it and then I’m not going to not able to invest it, but I’ll give you one that’s really crushing it that is like it’s a little bit further along. Okay.

Meb: Take your time.

Zach: I’ll give you a great story. So, I’m an investor in a company called SINAI Technologies. And SINAI, basically, they build carbon tracking software for big corporations.

So, traditionally, if you’re a big corporation, let’s say you’re a big steel company, and you wanted to know what your carbon footprint is, you’d go hire a bunch of consultants, they go and they’d basically figure out all the places that you’re spewing carbon in the atmosphere that make you a book. They hand you the book, like, “Here you go. Here’s your entire carbon footprint,” which makes no sense because these businesses, they change over time. They grow, they add factories, remove factories. They sell more steel, they sell less steel.

And so, SINAI went in and built software for businesses like that, where you can plug in all the inputs and you can basically write the rules for how your business basically will change and evolve over time, and you can move stuff in and out. And so effectively, they built back end software for understanding carbon footprint, which makes perfect sense.

But the story, it all started with this young woman I met who had just moved to Silicon Valley from Brazil. And she’s literally one of the world’s climate experts. She speaks on panels in the UN. Maria is truly, like, one of the smartest people you ever met around carbon.

And she wanted to build this, but she had to figure out how to do it. And I met her at this networking event at this woman’s co-working space, and I, like, fell in love with her. I’m like, “Wow, she’s awesome. Like, she’s going to save the world.” And just started helping out and just trying to be useful and introducing her to people. And then she found this amazing co-founder who came out of Uber, who’s, like, super technical, and he made his money and he just wanted to go save the world. And so together, they started building. They got to the YC interview. And so, I introduced her to a bunch of my friends who are YC and they all did the block interviews. And she and I sat down and I was like, “Look, think about it this way. Imagine we put the proper price on carbon, that if we had to remove from the atmosphere, how much carbon would cost? And that’s like 50 bucks a ton. And then, like, let’s measure all the carbon that we’re currently releasing in the atmosphere, just a shit ton.”

So then you like, say,” How big is the carbon market?” It’s like many, many trillions of dollars. And right now that market is zero. And so, like, you literally are going into a market that will be worth trillions of dollars because we have to price carbon, otherwise, our world is fucked. Like, we have to price it or we’re fucked. So, like, in this case, you basically are at the first ending of a multitrillion-dollar market that’s currently virtually zeros. I’m like, “Oh, my God, like, that is the coolest thing ever.”

And so, I invested in the company, they got into YC, and they crushed it. And they went and they’ve raised money from great people like Lee Fix, the one addition is like, minus plus one of the best investors ever and a bunch of other great people, and they’re off to the races. But, like, they’re still sub $100 million valuation.

But, like, relative to the multitrillion-dollar market, that is going to be there, like, they’re just in the beginning. I look at a company like that and, like, there’s a long way to go. Like, you’ve got software to build, which is hard, you got customers to work with, which is hard, you got to, like, scale. There are all these hard things. But, like, you can look at that path and be like, “Oh, my God it can be so big, like, so big.”

Meb: Those are fun. The exciting ones, when you talk about, there’s a handful of companies where it comes, like, across your plate and you think, “Oh, man, either, like, I’ve never even thought about that. That’s amazing” or, “I’ve always wanted someone to do this. Finally, there is someone tackling it.” And for me those ideas, it’s a lot lower bar, where I’m like, I don’t know that you’re going to be the right person. This case, it sounds like the exact right person, but someone is going to win with this idea and finally, someone’s tackling it. I love those. Those get me so, so excited. You don’t see them a lot, but they do. As you sort of look back, what’s been the most memorable investment, and I have an idea what you’re going to say, but anything stick out in your mind? It could be good, it could be bad, anything just seared into your brain?

Zach: I’ve got, like, the sort of famous deals, but I’ll give you a different story. One of my favorite deals is I invested in this company called Loom.ai. So Loom.ai II, these two guys out of DreamWorks and Industrial Light and Magic, they literally invented the computer vision technology that power of Shrek. They built supercomputers and, like, all these super fancy cameras. So, like, you put an actor in front of the screen, you tell them to make sad faces, and they do. And then they pull that into the computer and then they use that to power the animation for Shrek.

And so these guys are like rocket scientists, they’re super smart. And they won an Academy Award for it. They literally have an Oscar, which is cool as hell. But anyway, they decided they want to build a startup and I met them 2016 and just two guys, and they’re just like, “We’re going to do this.” And they didn’t really know where they’re going to go. And they’re like, “We’re just trying to figure it all out.” And I fell in love. I’m like, “These guys are amazing.” I don’t know what it is. It’s just like, you just want to love these people.

I lead the seed round, put in, like, 400k and then just got to work really closely with them over the years, while they built this amazing team. They actually powered the Samsung AR emojis. The technologies they built was on your cell phone. They would take a picture of your face and then it would use that to basically create the underlying technology for creating a really, really high-quality avatar for you. And they really just built some of the best technology in the industry to do that.

And so the end of last year, Roblox shows up and is like “Hey, we want to… Like, we’re going to buy this company.” And so, like, they called me. So I got some part of the sale process and, like, all the negotiations and, like, which is always I enjoy. It’s like, it’s this fun like eyewear dance where, like, on one side is tremendous wealth and the other side is sadness if you fail. It’s fun to do that dance. We sold it to Roblox.

And there was a moment at the very end when we all signed it, and it was all COVID so, like, we did it over video, and they were sitting in their backyard. I didn’t cry, but I just felt like it because it was just, like, this emotionally just as amazing journey for these guys because they went through this ride. Now their families are going to well supported for the rest of their lives. And now they’re doing amazing stuff with Roblox. Like, Roblox technology, it really just acquired this tremendous capability to take it to the next level. I just love that. I love these journeys.

Meb: And I tell people, I say one of the most challenging parts of my world, the public world, I feel like it’s a constant deluge of negative information. You watch “CNBC,” and “Bloomberg,” which I love you guys, not throwing you under the bus, the “Financial Times,” “The Wall Street Journal,” listen to podcasts, and consistent just sort of negative macro news flow, the Fed, interest rates, yada, yada, just on and on. And it can be a little disheartening or depressing.

And then on the flip side, you have these amazing stories of entrepreneurs that are working 24/7, risking their life. And on top of that, a lot of the ideas are world changing and cool. And so you get to cheer for them and participate in what they’re up to. And it’s such a nice foil to the world of sort of public market investing that, again, I tell a lot of people, it’s not like you have to put all your money in. But even if you’re doing these, like, little $1,000 checks, it can be a big difference in your life.

And if you hit one and make a lot of money, gravy too, but it’s a very positive, optimistic experience. And it’s fun. That’s the biggest one, it’s a lot of fun. We’ll eventually have a bear market and cycle through everything and clean out. But that’s a lot of great companies get founded then too.

Zach: It’s a positive EV lottery ticket. If you make enough investments at the early stage, on average, you’re probably going to make money. And at the end of the day, you’re also like, it’s a positive EQ, like a lottery ticket. Like, it truly is, like, your emotional quality as investment. It’s like no more interesting, like, you’d believe this little tiny company. You’re like, “I’m helping those guys.”

Meb: And on top of that you get to be an early adopter, and the amount of companies that I’ve included into my own business, I’ve passed along to friends, I mean, the Main Street story was one I love to tweet about because we love to help people find free money and they’ve found like hundreds of millions of dollars for companies.

Zach: Can’t believe I missed that.

Meb: What do people like more than finding free money? It’s free money from the government. It’s like a dual.

Zach: Beautiful. I should have done that deal. I love those guys too. I was like, “Oh, it sounds like a great deal and I just didn’t get it done.”

Meb: We’ve had Doug on the podcast a few times.

Zach: That was awesome.

Meb: I love that story. Resources, so if people want to follow you, if they want to learn more about Angel investing in general, what’s the best places? Do you have a website? Is it AngelList? Where do they go?

Zach: So AngelList is a great place if you want to invest small amounts of capital or medium-sized amounts of capital. Institutional investors, you got to talk to me directly, which I’m sure will suck, but sorry. AngelList is great for my syndicate or my rolling fund. They’re both a great resource. I tweet a lot. So Twitter works really well. I find that’s a fun place to play. LinkedIn, I write a lot of stuff on LinkedIn.

Meb: You’re very at base, now the world’s reopening, you got any travel plans? Heading anywhere the rest of this year? Are all the companies you look at domestic, by the way, or do you ever venture outside the U.S.?

Zach: Booksy is in Warsaw.

Meb: That’s right. Poland.

Zach: ..in Berlin. Anki is London. Latin America. I look all over the world. I mean, I’ve got Canada and I’ll go anywhere. Great ideas, they know no barriers. Yeah, I’m headed to Lisbon on…what day is it today? On Sunday. So I’m excited for that. And I just got my third shot. So I’m, like, feeling like superhuman. Hopefully, dodged the mid.

Meb: When we get together in person, I’ll tell you my Lisbon stories. I have some fun ones.

Zach: Nice.

Meb: From surfing up and down, Portugal. It’s been a blast. Thanks so much for joining us today.

Zach: Thanks for having me. It’s an honor because I love listening to your podcast. It’s like, long-time listener.

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 feedback@themebfabershow.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.