Nick Moran is the General Partner at New Stack Ventures. Prior to New Stack, Nick worked for Danaher (NYSE: DHR). After a few years in M&A, Nick led breakthrough innovation, developing one of the most successful products in the company’s history — an IoT solution w/ a novel method for testing compounds in drinking water. In addition to investing, Nick founded the 1st Venture Capital podcast, The Full Ratchet.
This episode we talk about:
- Why join or start an angel syndicate?
- Suggestions for first time Venture Capitalist to connect with Limited Partners
- How can one transition from being an employee to becoming a General Partner at a Venture Capitalist fund?
- How does a new Venture Capitalist build their network within the Venture Community?
- What are some of the disadvantages and advantages of a Venture Capitalist fund being based in Chicago?
- Secrets to getting access to the best Startups as a Venture Capitalist?
Help us out!
Help us reach new listeners by leaving us a rating and review! It takes less than 30 seconds and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it!
Learn more about Nick Moran
- Website New Stack Ventures
- The Full Ratchet Podcast
- Email Team@newstack.vc
- mailto:nick@newstack.vc
CONNECT WITH SHAWN:
https://linktr.ee/ShawnflynnSV
- Shawn Flynn’s Twitter Account
- Shawn Flynn’s LinkedIn Account
- Silicon Valley LinkedIn Group Account
- Shawn Flynn’s Facebook Account
- Email Shawn@thesiliconvalleypodcast.com
Pre-Intro 0:00
You’re listening to the Silicon Valley podcast.
Shawn Flynn 0:02
On today’s show, we sit down with Nick Moran, who is the general partner at New stack ventures. Prior to the new stack, Nick worked for Danaher. After a few years of mergers and acquisitions, Nick led breakthrough innovation developing one of the most successful products in the company’s history, an IoT solution with a novel method for testing compounds and drinking water. In addition to investing, Nick founded the first venture capitals podcast, The Full Ratchet. On today’s show, we talk about why join or start an angel syndicate. Suggestions for first time venture capitalist to connect with limited partners. How do new venture capitalists build their network within the venture community? What are some of the advantages or disadvantages of a venture capitalist fund being based in Chicago? And what are some of the secrets to getting access to the best startups as a venture capitalist? This and much more today’s episode of Silicon Valley. And remember, please write a review on iTunes and share in your network to encourage us to create great content like this in the future. All right now let’s see start the show. Enjoy.
Intro 1:04
Welcome to the Silicon Valley podcast with your host, Shawn Flynn, who interviews famous entrepreneurs, venture capitalists and leaders in tech. Learn their secrets and see tomorrow’s world today.
Shawn 1:22
Nick, thank you for taking the time today to be on Silicon Valley.
Nick Moran 1:24
You got it. Happy to be here, Shawn.
Shawn 1:27
Nick, I’ve been a huge fan of you for years. Your podcast, the full ratchet really inspired me to do this podcast just for everyone at home. Can you talk a little bit about your career up to this point?
Nick Moran 1:37
Yeah, of course. So I started my career as a developer, so designing systems and a variety of different coding languages. Then I went to business school, subsequently got involved in strategy work in m&a, acquiring early stage technology companies on behalf of a large conglomerate. After that, I transitioned into a product management role. Where I had pitched the organization on a sort of transformational technology platform was a big risky sort of endeavor. But fortunately, my pitch got approved. We put a lot of funding into it. We hired an r&d team of about 30 folks. Chemists and, and engineers for this product. And I spent three years of my life sort of as a, an entrepreneur, taking this from just an idea on a napkin to a product launch, got really fortunate and lucky with that product, and it became a banner success. And I subsequently I was able to retire about 32 not real retirement, but sort of pseudo early retirement. You know, I made enough money to kind of take a break for a while and figure out my next step. So I moved back to Chicago with my wife, and that was the beginning of my career as a startup investor.
Shawn Flynn 2:55
Wow. And then when you started your career, I’m guessing you were writing individual checks, but from my research, you have an amazing Angel syndicate on Angel List. What was the decision to do that syndicate on? Angel List?
Nick Moran 3:08
Yes, good question. So I did start out as an independent Angel, I was investing 25 K to 50k checks primarily into technology startups based in Chicago, but some outside and quickly realized that I needed to make more significant investments, we needed to get more money into these startups to make a meaningful contribution. They couldn’t do a whole lot with 25 K or 50 K, but with 100 K or 200 K, that can be a meaningful check at the very early stages. So it became apparent that it would make a lot more sense for us for angel investors in Chicago to team up and start co investing with each other. So me and one other partner started kind of assembling a group of early-stage investors. People that we’d met around town we were sharing deal flow already, and we get together for lunch. We get together for cocktails and share deals and start to co invest together and put a lot more money to work. So that was kind of our first iteration of an angel group, so to speak, very informal in nature, but worked really well. And then when Angel list launched their syndicates platform, I don’t know, you know how much your listeners know about that. But it’s essentially a way for angels to invest very seamlessly very easily. It’s all the back office in a box. So wires are all handled by Angel list, creation of the LLCs and the SPVs are all taken care of all the diligence information is there, you can get deals done very quickly in less than two weeks. And it’s really cost effective. So no longer with you know, my little informal group in Chicago 30 or 40 angels have to hire an attorney and spend a bunch of money for every deal we worked on. We can do everything through Angel List. So that became a natural place for us to kind of migrate our group and move online. And from there, just, you know, between this podcast that I host and some other efforts, it’s just started growing far beyond what we expected.
Shawn Flynn 5:08
Now, if someone is brand new to the startup ecosystem, how can one use an angel group or an angel syndicate to test the waters when it comes to investing in startups for the first time?
Nick Moran 5:19
Yeah. If you’re a brand new angel investor, at least when I was a brand new angel investor, you know, I thought I knew a lot about business. And I thought I could just step into these early stage companies and make really smart bets. And the reality was, I had a tremendous amount to learn. variability in the types of startups you see the business models, the customer markets, the profiles of the founders, it’s just wide ranging. There’s a big spectrum and high variability of different types of startups. So it takes a lot of time to develop a proficiency and doing this and to have confidence that You’re making the right investments. So a really good way to start is to make small investments and only invest in startups that have been vetted and diligenced by established credible venture investors. So one way to do that is through the angel list platform. And I think that’s why there’s so many folks that have joined our group, you know, we have, I think, close to 1000 members, if not more than that now. And these are all independent angel investors that want to see all the deals we’re doing, you know, we invest from our venture fund into a startup. And then we also make some room available for angels to invest direct via the platform. And it’s a really good way that independent angels can do a small check, call it 2500 or 5000, into an opportunity that’s been fully vetted by our venture firm. So they’re not just you know, picking whatever startup happens to be in their backyard and cutting a really large check like $50k, but they can look at a wide variety of Well vetted opportunities and make smaller investments in those to get some diversification.
Shawn Flynn 7:07
You’d mentioned when you first started investing How surprising that whole ecosystem and the knowledge needed was, some of the other things that really surprised you the most when you started to invest?
Nick Moran 7 :18
Yeah, I guess the surprising thing is, well, at first that the biggest surprise to me was how uncomfortable I was. I thought, as I mentioned earlier, I went in with a lot of confidence, thinking that, you know, this is something I could be really successful in. And if I stuck just to my area of expertise, that was the case. So I could evaluate opportunities that synced up with my background pretty quickly and confidently, but the number of opportunities you get are wide ranging. And I couldn’t just stick to my background because they’re just, there weren’t enough opportunities. And I was trying to actively look at water deals, and even deals in the broader water space, we’re like, outside of my expertise, right? There’s so much in that broad vertical that, you know, goes well beyond analytics. So what I realized very quickly is that if I wanted to do this, and I wanted to do it well, I would have to expand my thesis, you know, expand the set of startups that I was interested in investing in. And the only way I could do that well was to develop a lot of knowledge and proficiency on how do you invest in really good strong opportunities, in verticals and in spaces that you have no background in. So that was probably the biggest surprise to me, trying to figure out, holy crap, you know, if I want to do this and do it, well, I’m really going to have to kind of get out of my comfort zone.
Shawn Flynn 8:45
And what are some of the resources out there that you took advantage of to learn this knowledge or that you could recommend to people out there to get a little bit more insight?
Nick Moran 8:56
You know, honestly, Shawn at the time, I mean, you and I spoke years ago. So I don’t remember exactly when that was. But I think you probably ran into this too. But there was a total lack of really transparent information out there. When I started angel investing full time, it was pretty bad. There were a couple bloggers that were doing it and doing it well. But there wasn’t a whole lot of great information on early stage angel investing. So that was part of the reason why I started my podcast, which you’re familiar with the full ratchet. The whole design of that show was to help early stage investors, whether it be an angel or a venture capitalist or an aspiring venture capitalist, anyone that was really interested in startup investing as, as you know, a vocation or, or a side hustle. That’s why I started the show. And that became my Crash Course, you know, and how to learn how to do this. So interviewing these experts. I mean, not only is the content that I publish, you know, there’s a lot of value in that, but the prep work that I have to do to know the questions to ask, you know, these are reputable prominent VCs that really helped me kind of get smart about the segment. So yeah, that’s why I created the full ratchet because there wasn’t much now there’s a lot more. I mean, there’s I started the first venture capital podcast, but now I think there’s more than 70 Jason Calacanis. I just had him on my program, he wrote a fantastic book called Angel, which I think if you’re interested in angel investing, and you want to be good at it, that’s kind of a must read. And then just to get a good overview of how venture capital works, which is, you know, angel investing is really a subcomponent of venture. There’s a great book by Mahendra Ramsinghani, called the business of venture capital. So that’s one that I typically recommend to folks.
Shawn Flynn 10:43
And then the path that you took to form your venture capital fund, I mean it’s not the typical path. I mean, most people are analysts and associates work their way up over years, build this network. Do you recommend the more traditional route or the route that you took?
Nick Moran 11:00
I don’t recommend or suggest anything to anybody to be honest, everyone’s kind of had, you know, everyone has to find their own way. And if this is the eventual destination, I think that’s great. But you know, venture is not a place for most people. I mean, it really requires somebody that, you know, has high appetite for risk, can live with high degree of uncertainty can sleep easy at night, because many of these bets can just go to zero. So it’s not a great fit for everyone. But there are like three standard paths in you mentioned, you know, the apprentice model. So go work for a big venture firm like Accel or Sequoia or Kleiner. And then, you know, if you establish enough credibility there and source deals and close really good deals, then you can split off and start your own fund. That’s probably what I see most often, people splitting off of larger funds to start their own. The second method is the operator model. So these are technologists, startup founders that have tremendous success. And after that big success, they decide they want to run a venture fund, and invest in other founders for a living. So you see a lot of that. And then the third main path is kind of the one I took, which is you start investing on your own as an angel, you build a track record as an angel investor, and that if that track record is strong enough, you may have an opportunity to raise a fund. I don’t know what the breakdown is of those three, I don’t know how common it is for you know, independent angels to turn that into a venture fund. But you know, that’s what I did. In my case, we can talk more about how one starts it’s on but you know, those are kind of the three main methods in.
Shawn Flynn 12:41
I definitely want to continue on starting a fund, but before even that, can we go into the basics of a venture capital fund for people that are brand new to this, what are the roles of each person and the number of people in a typical VC fund, a fund around 10 million 50 million and under 250 we’ll keep it those numbers just for simplicity.
Nick Moran 13:03
Every fund is really different, right? So I can’t just say here are the rules that, you know, here are the titles that are necessary are the number of people very generically, you don’t often see funds that manage over 100 million dollars and only have one GP. GP stands for general partner. So usually when a fund gets over 50 million or over 100 million, you’ll see the GP expand. And then there’s more than one general partner. But I think of it more in terms of the fundamental roles that need to be done and the responsibilities at the firm, and then kind of work into the talent in the needs, you know, from a title standpoint based on that. So if we start there, like there’s three main pillars for every venture fund, those three are deal flow, capital raising, and then helping companies what we refer to as portfolio company management. So those are Like the three traditional pillars of venture, every firm needs those three things very recently, kind of a fourth pillar has entered. Some firms consider it strategic, some firms don’t. But the third one, I would call thought leadership and branding, so that one can really contribute to the rest of the three. And it’s becoming more and more necessary. You know, capital is kind of a commodity. And so a huge part of the differentiation and value for a firm is the way they think about thought leadership. But yeah, going back to the kind of these three to four pillars, you need people that are proficient in each of these areas, you cannot really run a successful franchise, meaning you know, a firm that has more than three funds, and has a lot of success with those funds. You cannot have that without optimizing around all three. So it’s really a matter of like, how many folks does it take to become excellent in each of those three categories, right, if you’ve got one general partner or one partner that can raise capital, like a boss, that is great at deal flow, you know, sourcing investments, selecting investments, negotiating investments, and you’ve got somebody that has great operating experience and is great working with CEOs and helping CEOs and helping them, fundraise and hire, think about strategy. If you get one person that can do all three of those branches and do them really well, then you don’t really need multiple partners at a firm. But you’ll see a lot of firms have multiple partners, because there’s, you know, one gal that’s really great at fundraising, and raising capital from limited partners. There’s one gal that’s really great at, you know, the deal flow side of things. And maybe there’s a guy that’s really good at working with the companies. So it all depends on the firm, but those are kind of the roles and responsibilities that are required for any firm.
Shawn Flynn 15:49
Now the reason that capital would you say, cause, I mean, there’s some very successful entrepreneurs out there and people that go out and try to raise a fund but they just aren’t successful. from your experience, why do some people aren’t able to do it while others seem to do it quite easily?
Shawn Flynn 16:07
Well, first off, you know, people want to get into venture for the vanity of it right? They try and get in for the wrong reasons. And I’ve seen plenty of this because we hire, we have like a pretty robust internship program we’ve, we’ve had over I think, 30 interns at this point. And so I see a lot of young people that come into my organization. And after working with them for a couple months, you can quickly determine who’s in it for the long haul. And who is just addicted and obsessive about early stage startups and learning everything they can and getting better and better. And you see those people that are dabblers, right, I call them dabblers. But they want to get VC on the resume. They want to play Shark Tank, they think it’s really cool. Like, you know, vetting startup founders or maybe they get a power trip out a meeting with these, you know, founders and evaluating them. I don’t know what it is, but there’s a lot of people that want to get in in this industry for the wrong reasons, and those people are not going to have success. I mean, sometimes you see them raising one fund, but it doesn’t last much beyond then. So, you know, how do you have success in raising the fund, I think it’s just like anything like a startup, if you’re truly committed to it. If you’ve built credibility, if you’ve built a track record, if you’ve built networks, if you can show that, you know, you can deliver value, and you have a compelling thesis, you know, you have a compelling view on the world and what you want to invest in that’s going to produce outsized returns, then you’ve got a really good shot of raising money. You know, quite honestly, with you, Shawn, I am not a salesperson. So when I embarked on my first fundraise, I had a lot to learn. I did not know how to sell and it took me a little over a year to kind of get better at that. And really, I still don’t claim to be good at it, but I’m way better than I was. But I had 400 plus at bats, you know, with limited partner, potential investors in my fund and I closed 42 of them I think we have 42 investors in the fund. So, I mean, about 10 percentage, but that’s a lot of meetings, right? That’s a lot of no’s, I mean, I took my lumps. And fortunately, I’ve got thick skin and didn’t let it faze me. But, you know, a lot of people just can’t raise capital because it’s really hard to raise, right? Like if you’re sensitive. If you don’t like hearing No, if you don’t have any sales skills, like myself at the beginning, it’s really hard to get up every morning and try and find these high net worth individuals, family offices, in some cases, institutions and pitch them. So yeah, a lot of people are not going to have success in this because it’s really hard to fundraise. One of the biggest differences between a venture fund and a startup is a venture fund has no bright shiny object to dangle, right? There’s no product, there’s no cool business. There’s no sexy sector that You’re entering, it’s really just you, you’re selling yourself as an individual and your philosophy. And that’s a hard thing for a lot of people to do.
Shawn Flynn 19:12
Can you talk about kind of Who are these people you mean? Are they family offices, super angels and for all the limited partners, and what’s the advantage of taking money from one group versus another, or disadvantage?
Nick Moran 19:26
To give you a quick sense, like I had a good leg up. So I’d spent years building my network. I had built this podcast so I had a brand I had a lot of listeners. So if you think of, you know, my LP prospects, my investor prospects as a funnel, like the mouth of that funnel was my podcast. Many, many of them are angel investors, high net worth individuals, family offices and institutions. So when I sufficiently built a relationship with those people, and they got confidence in what I was doing, often what happens is they join the syndicate that we talked about before on Angel list, and they might begin investing in our deals on a deal-by-deal basis. So as they come up, and then as they build more confidence, their likelihood to invest in the fund itself, when we decided to raise that goes way up, right? So I already had kind of the assemblance of a funnel process. I had targets I had people I’d been working with for years, I had folks that I was building rapport and credibility with in terms of who are they. So there’s a lot of high net worth individuals, some of which actively were angel investing, you know, the ultra high net worth crowd. So those are like family offices, multifamily offices. So those folks often have a mandate to deploy a certain percentage of their capital into venture as an asset class. So assuming they’re not over allocated to venture, then they’re a really good target. And then you’ve also got the institutional crowd. So those are folks like sovereign wealth funds pension funds, endowments foundations fund of funds. So we don’t, I don’t think we have any of those. No we don’t have any of those in fund one, we will have some of those in fund, two. But yeah, our first fund was a handful of family offices and a lot of individuals, a lot of high net worth individuals.
Shawn Flynn 21:12
So if someone doesn’t have a podcast, they don’t have that. Those connections, some suggestions for first time venture capitalists, to connect with limited partners or people that might want to invest in their fund or be able to?
Nick Moran 21:26
well, this is a long process, right? Like I told you, I’m six to seven years in, and we haven’t even started raising our fund two yet. So this is a really long game. It’s much longer than the startup game, right? Like, I feel like my venture firm is still kind of at the seed stage. And we’re at seven years in, right? Like a startup at this point, if it’s still alive would be at the B or the growth route. So it’s a really long effort, and it’s not for everyone. And so my recommendation would be to look at the three pathways in right you can either go apprentice at a venture firm, you could become an operator. So maybe you found a company, you have success there. And then then if you have enough success, you can get into the investment side afterwards. Or you can build your own track record. So become an angel investor, start doing deals, figure out what you like, figure out what you’re good at, monitor what’s working and what’s not. And if you do enough of that, and build enough proficiency, while you’re building a network, then you’ll have plenty of people to call on when you’re ready to raise everyone that you meet, doesn’t need to be a potential investor or potential LP, right, I’ve got a whole section of my CRM, and that I have labeled as connectors. So these are people that are very, very well connected in the capital ecosystem or the venture ecosystem. And they’re probably not targets to invest in my fund. But if I tell them, Hey, I’m raising a fund, you know, do you know any family offices, do you know any institutions or do you know any ultra high net worth individuals that are actively looking for venture funds to allocate too often the answer is yes. You know, people if they like you, you build credibility, they trust you, they’re going to be happy to, you know, send you on to other people, they’re not going to make a decision for those folks. They’ll make an introduction, you have to go and pitch just like anything else. And you got to convince that LP target to invest money. If you build a big enough network, and you build a really good reputation, people are super helpful.
Shawn 23:29
Wait, Nick a lot of entrepreneurs, they have that ideal investor in their in their mind. Maybe it’s because of the person’s connections or maybe it’s the investors experience or just the brand is there also an ideal limited partner for a fund?
Nick Moran 23:44
broadly speaking, I would say no, in certain instances, if it’s a hyper specialized fund, with expertise in a very specific sector, and there’s large corporates that are very active in those sectors and really want venture exposure that can be A really good fit. So I’ve seen a number of funds that are either single LP, or very short list of LPs, that are large corporates, right, that are providing all the funding for a venture fund. Outside of that, you know, it’s a lot like startups, I mean, you can meet some limited partners that feel like they’re going to be a great fit and can provide some strategic value, and then they totally ghost you and like disappear, right? And then you can meet some targets that the meeting doesn’t go well, and they don’t seem all that interested and they’re, you know, scrutinizing every little thing and then they email you a week later and say I’m in for a million bucks. I mean, it’s just, you just got to take your lumps you got to take your past and you have to go for it. Of course, there are certain LPs that can provide strategic value and then there are certain LPs that are attacks you know, all they do is suck value. And so you want to avoid the ladder of course, and if you can find people that provide strategic value, great, but in general, you know, there’s going to be a lot in the middle A lot that don’t provide a ton of value, and don’t extract value or waste a bunch of your time, but they’re just they’re interested in a return. And they’re interested in being a part of something really exciting and all this new innovation.
Shawn Flynn 25:13
Now say someone is actually able to raise their fund. What happens if, you know, maybe they just don’t have the access to the best deal flow? I mean, fund one, maybe they don’t have that huge network just yet compared to some of the more established players out there. How does a new venture capitalist get access to these tier one top companies?
Nick Moran 25:32
Well, it’s really tough, right? You need to bring something to the table of significant value aside from capital, right? So before I mentioned, like these funds that have hyper expertise, so let’s say there’s a fund that has a lot of expertise around mobility and AI, so think like, you know, smart driving technology, if there’s a fund that’s specifically designed for smart driving and mobility technology, and let’s say they don’t have deal flow and they don’t have sourcing to those opportunities. They can call on a bunch of larger venture firms, like I mentioned before the sequoias and decliners and the excels of the world in the NEAs and say, Hey, you know, we are great experts in this segment. We have LPs at large automotives, we understand mobility better than anyone else. If you are investing in a mobility deal, let us know. And we can chip in and we’ll help in ways that nobody else can. So that’s one way that like, some very specialized venture funds can get into good deals at some of the bigger firms, because they’re bringing something to the table, right? something significant to the table. The same goes for other types of specialties, right, like so there can be a fund that has functional expertise, like let’s say hiring, let’s say there’s a fund that’s just got really good networks in the developer community, and really good networks in the engineering community, and really good networks in the growth, like sales and marketing talent, community, and if there’s a fund, that’s just like, excellent, I just talked to one in New York actually. But if they’re really excellent on the talent side of things, that’s a huge challenge for founders. And so that’s a way that, you know, that fun can provide a very specific type of expertise and help and could warrant, you know, getting access to deals that otherwise they shouldn’t be in. And that’s what I look for. I mean, at New stack, we lead the majority of our deals, meaning, you know, we price them we put together the deals and negotiate with the entrepreneurs. And then we have to find other VCs and other angels to jump in with us to complete the rest of like the entire round. And we’re looking for value added partners. We’re looking for VCs that bring something tangible to the table. We’re looking for VCs, where I can call the portfolio companies that startup founders and they sing the praises. They’re like these guys or gals are the best because they Do X Y and Z, you know, really specific value. And so that’s a really good way to get in is if you develop partnerships with other investors out there. And you can articulate here is our value add. And that’s a good way to get into deals.
Shawn Flynn 28:14
Now let’s talk about your fund just for a moment, New Stack Ventures. You’re based in Chicago and not here in Silicon Valley. What are some of the advantages that you might have? Or maybe disadvantages to the location for your fund?
Nick Moran 28:28
Well, I mean, the disadvantages are probably clear, the majority of the action is happening in the Bay Area and New York City to some degree, and we’re not there. The advantages, of course, are that there’s very few people like us, between the coasts, I believe we are the only firm that will lead IoT deals at seed stage between the coasts. So another way of looking at that is we have a proprietary channel of deal flow in that category. Like if you’re an IoT company, raising a seed deal and you’re not in San Francisco or New York City, you don’t have very many places to go. So there’s a very high percentage likelihood that your startup ends up in my inbox, right? Your pitch deck ends up with us, and we can engage with you. So yeah, being in an underserved market has a ton of advantages. We can corner a lot of deal flow, we get to see a huge proportion of it. We are very differentiated in the Midwest. We’ve got the show, we’ve got the syndicate, we’ve got a compelling funds. And if I was in the Bay Area, I would probably be just another guy. But in Chicago, we can be unique and special. That’s a huge advantage. And then valuations are better, right? We might not have the talent that has the same level of experience as folks in the Bay Area, but we certainly have talent that has the same level of capability. We get the good fortune of investing at lower valuations so we can get more ownership and we can get better multiples on our money. The most recent multiple report MOIC so multiple on invested capital, the multiples are better for the Midwest than they are for the coasts. So investors get higher multiples on their invested capital. If you were to index everything that was done. So index all the deals that were done in the Great Lakes region versus the West Coast versus the East Coast, the highest multiples in the country are in the middle of the country. And a huge part of that is being able to get in at really competitive valuations competitive prices. It’s not like we’re beating these entrepreneurs up and you know, getting a screaming Good deal. It’s just, they can’t get funding from the coastal firms. And everything on the coast is overpriced, because there’s so much competition, you know, when 10 to 20 DCs are fighting to get into a deal that pushes up the valuation and the terms really high. And so the multiples the, you know, the IRR on those investments goes down. We don’t have as much competition in the Midwest, so it’s a huge advantage. Speaking of multiples, I’ve heard from venture capitalists in the past that one of the roles of a VC is to help their portfolio companies, the companies they’ve invested in, raise their next round of funding or make the introductions or that are encouraged or help out any way they can. Do you agree or disagree with this? And why or why not? Yeah, hundred percent. I mean, not every firm helps. And honestly, every firm says they’re going to help. And then there’s a lot out there that just don’t do much. They might have, you know, their core, four or five firms they love to work with. It’s series A, let’s say, and they’ll try and get you in front of them. But there’s a lot of VCs that over promise and under deliver. When it comes to fundraising. You know, that’s kind of what we consider our superpower when we work with founders. So we put together the strategy we call the NRP, the next round plan, it’s a really intentional and proactive approach to what VCs are we targeting, what valuation do we think we can raise at based on our traction? What VCs have a thesis that syncs up with the type of business we’re doing. So back in the mobility example, you know, if you got a startup that’s doing mobility and AI, or let’s say there’s some software as a service Incorporated, let’s say there’s location-based services, let’s figure out all those categorical descriptors that apply to the startup. And let’s find all the VCs that identify themselves in their thesis as being focused on those areas. So we put together this whole plan and this whole spreadsheet that says, you know, here are the VCs that are in range for you for the next round. And we always aspire to do at least 10x more qualified introductions than any other investor. So we make a we end up making a lot of introductions. And so far, you know, that’s been really fruitful for us and our portfolio companies. So yeah, everyone promises it, some do a really good job with it. Some just kind of invest and are much more passive then they probably should be.
Shawn Flynn 32:53
So to go back to the managing partners of a fund, I mean, entrepreneurs, startups there’s a high failure rate. I mean, some say nine out of 10, fail, some say higher, some say lower. But it’s pretty astonishing. Is that similar with venture capitalists? What’s kind of the career life of most of these VC firms?
Nick Moran 33:11
Oh that’s good question. I don’t know the stats on the exact failure rate, but it’s pretty high. Yeah, I can say anecdotally. So I run this breakfast in Chicago. It’s an informal quarterly breakfast for founding partners of VC firms. And there’s like 29 of us in Chicago. And we get together once a quarter and kind of chat about deals and stuff. And I would say amongst that group, less than half of people that raise the fund one will raise a fund two, probably right around half or less than half that raised the fund two will raise a fund three. It’s sobering, right? When I look around the table and people start disappearing and they get out of the business, because they’re, you know, unable to raise subsequent funds. It happens. It happens at a high rate, you know, venture, there are fewer investors in venture capital than there are professional athletes in the Big Four right? So this is one of the hardest industries ever to get into as a professional. And so it attracts some of the smartest people, smartest and most ambitious people out there. But even that being the case, there’s 50% plus of people that do this for a living that just the returns are not good, right? The top quartile, so the top 25% of VCs really drives all the returns for the asset class. So there’s a lot of people that just haven’t cracked this nut. It’s not because they’re not smart. It’s just this is a, a complicated, multivariate, you know, problem. And a lot of venture capitalists fail at it. And it’s actually it’s not the skill set that one kind of acquires in being a VC is not like super translatable to a lot of other jobs. So, yeah, you’ll see a lot of people kind of doing a variety of things after being a VC, they might go found another company or they get involved on the service provider sides, but it’s tough.
Shawn Flynn 34:57
So on a lighter note, a little bit more positive. Can talk to us about one of your portfolio companies and the problems you’re solving and why you decided to invest in them.
Nick Moran 35:07
I’ll mention the two I most recently chatted with on the phone. So yesterday I spoke with David Raby. He runs a company called Tovala. This is a fun one to talk about, because it’s consumer. So most people can get a sense for it. But basically, we looked at all these meal kit companies out there, like Blue Apron and HelloFresh, and home chef and all these companies that are sending these meal kits to consumers. They were, you know, exploding, attracting tremendous amounts of venture capital. And we saw a huge fatal flaw in all these companies which was retention. They had an astonishing ability to acquire customers and get people to buy into their product and sell the dream, but they could not keep people in their system. People would sign up for Blue Apron they’d get a couple shipments and you know people would get sick of all the time it took to make the food And the food ends up sitting in the fridge and going bad and so yeah, retention was terrible and churn was exceptionally high and that’s something we often look for it new stack is what are really overfunded categories, where VCs are putting dollars in, but the solution is just fundamentally flawed. And in this instance, we felt like you know, they were promising easy dinner, right. You don’t have to procure the ingredients, it’s really easy to cook etc. And it wasn’t easy. You know, it still took people 45 minutes to cook they have to clean all the pots and pans um the only stress it removed was actually procuring the ingredients. So we invested in this company called Tovala that makes dinner as simple as it possibly could be. So no more prep, no more cooking, no more cleanup. That was the promise that Tovala delivered on now the way they do it is their meal kit all arrives in little aluminum trays, and they sell a combination oven so a steam oven with their meal kit service. So you have this little toaster oven looking thing on your countertop, and all you do is put the little trays in and you scan a barcode and 15 minutes later, you’ve got restaurant quality meal that comes out. So yeah, we invested in this company years ago, five plus years ago. And it’s been, I mean, a roaring success. They’ve had their challenges along the way. And they had a ton of people that just would talk down on them say, Oh, you know, who wants to buy this toaster oven and hardware is so hard, etc. etc. But they have just exploded in success, their retention is crazy high. I think it’s north of 60 – 65%. Whereas Blue Apron is, I think less than 8%. So yeah, they’ve just been enormously successful. And we’re super happy with that one. But that’s one example of a founder I talked to yesterday and investment we made some time ago and we’ve been really happy to see them succeed as well as they have. And if you could change anything about the relationship between startups and venture capitalists, what would it be? Well, honestly, we’re in the financial services industry. So we are service providers. But that’s not how VCs often act. You know, VCs, many VCs want to Lord over the startup, want to tell them what to do want to dictate strategy, want to top grade or replace the management team, certain types of VCs in this industry can cause the entire industry to acquire a bad reputation. I would like to see more VCs focus on the service element, right? We are the servant to the founder. You need to be careful in selecting the founders you work with. But once you select those founders that you’re going to work with all of your efforts should be to amplify and accelerate what that founder is trying to do. You should come at it from a place of help and accelerating not as a tax not as somebody coming in to tell you what to do and to limit your momentum. So I think that’s the biggest frustration I have with some VCs is that still at least half the industry acts more like the boss instead of the server. And then what advice is a venture capitalist would you give to a startup founder? Like in order to get funding or what stage are we talking here?
Shawn Flynn 39:18
How about the best advice for a startup founder to work with a venture capitalist to manage that relationship? How should that work?
Nick Moran 39:27
Well, it depends. I mean, if you got a board seat, you know, you’re going to have regular check ins. Everyone’s got a different style, and every VC has a different value add. We talked about a bunch of those value ads before. So it really depends on the relationship. It really depends on what you’re doing to provide value. I tell all my founders like we are here if you need us, if we can help with anything hiring or pitch deck reviews or fundraising or whatever you can reach out at any time and we’ll be there immediately. To help. We do not get in the founders’ way. We do not ask for a lot. We do not require a bunch of specialty reporting. And we don’t need to check in on a weekly basis because we don’t want to be a drag on the founder. So we have more of a reactive style where we make ourselves available anytime that the founder needs us. I don’t know if that really answers the question you were getting after. But that’s the approach we take.
Shawn Flynn 40:18
I’ve learned a ton I know everyone listening has learned a great deal. If anyone wants to find out more about you New Stack Ventures what you’re working on, what’s the best way to go about doing it?
Nick Moran 40:29
Yeah, newstack.vc That’s our website. You can follow me on Twitter. I’m @thefullratchet T H E F U L L R A T C H E T. So you find me there on Twitter. I’m also on LinkedIn. So and you can email me if you’re a founder and you’re looking to raise capital and you’ve got a deck ready, feel free to email, email me Nick@newstack.vc or our team. Our deal flow team is Team@newstack.vc
Shawn Flynn 40:55
Great we’ll have all that information in the show notes. Give us a review on iTunes that will help us encourage us to make more great content like this and once again, Nick, I want to thank you for your time today on Silicon Valley.
Nick Moran 41:05
You got it, Shawn, this was a lot of fun.
Outro 41:10
Thank you for listening to the Silicon Valley podcast. To access our resources, visit us at TheSiliconValleyPodcast.com and follow our hosts on Twitter, Facebook and LinkedIn @ShawnFlynnSV This show is for entertainment purposes only and is licensed by the investors Podcast Network. Before making any decisions, consult a professional.
