Announcer:
From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're inside the ICE House. Our podcasts from Intercontinental Exchange on markets, leadership and vision and global business. The dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week we feature stories of those who hatch plans, create jobs and harness the engine of capitalism. Right here, right now at the NYSE and at ICE's exchanges and clearing houses around the world. And now, welcome Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
Stephen Hawking, the English theoretical physicist who died three years ago near his home in Cambridge once wrote that the best evidence we have that time travel into the past is not possible and never will be is that we've not been invaded of hordes of tourists from the future. But, if Hawking was wrong and Outlander was right, I imagine millions of vaccinated time travelers would have returned in 2020 to see Earth at a standstill. Crowds gone at all the wonders of the world.
Josh King:
Now, across the globe millions of people are planning what's being called revenge travel as cases drop domestically and summer is on the doorstep. A better description of the current state of affairs is maybe Albert Einstein's theory that time is relative. As many of us head back into the office and resume communal activities, it seems like time was frozen, waiting for society to pick up where it left off. But, even during our period of somewhat suspended animation, time has accelerated into the future, medical breakthroughs that seemed years away found their way into the point of a needle mere months later. Remote work and it's related technology leaped forward by leaps and bounds. The adoption of the online economy and platforms like Twitter, that's NYSE took a symbol TWTR, SnapChat ticker symbol SNAP, and DoorDash, DASH, blew past their growth projections and new companies entered the public space, like Clubhouse, raising the bar on immersive experiences from the convenience of your couch. Anyone who's a parent will appreciate the time warp that I'll experience when I retrieve my son from school after a year away. Another year closer to adulthood, while I don't see myself even a day older from the day that he was born. When we board a plane and cast a fly line into the Missouri River next month, I think it will feel like no time has passed at all.
Josh King:
Our guest today, David Frankel is the co-founder and managing partner of Founder Collective. David has the uncanny knack for seeing into the future and using that insight to seed some of the largest companies in the world. He joins the show today to talk about the past, present and future of providing the financial spark to light the next big thing. Our conversation with David Frankel on his career, his process for identifying and advising founders and how, for Founder Collective, investing means so much more than just writing a check. That's all coming up right after this.
Announcer:
Whether it's markets, exchanges or networks, connection makes everything possible. The connection between data and technology, innovation and expertise, and most of all between people and opportunity. For over 20 years ICE has transformed markets, products and processes to make things work better, faster, smarter from modernizing energy and commodity trading to revolutionizing the bond market. Whether it's the world's largest stock exchange or the dream of home ownership, we do more than see the big picture, we create it. You may not know our name, but we bet you know our network. ICE, make the connection.
Josh King:
David Frankel is co-founder and managing partner of Founder Collective, a seed stage VC fund based in Boston and New York. He first found success as the co-founder and CEO of Internet Solutions, the largest ISP and private data carrier in Africa. In 2000, he was voted the Self African Technology Achiever of the Century by the Financial Mail. David, welcome Inside the ICE House. Thanks for joining us.
David Frankel:
Thanks so much, Josh, such a pleasure to be here with you. And really, I have to shout out to John and Zach at the New York Stock Exchange for reaching out and extending this invitation after a very surreal meeting. We had had two companies IPO within the space of a week, very luckily, Coupang and Olo and I was lucky enough to be with John and Zach live at the New York Stock Exchange in a very eerie, surreal environment where you contemplate crowds of people there, and traders and a buzz and it was just, it felt deserted, but it did give an amazing intimacy and that's why I'm here and thank you so much.
Josh King:
So great to have you and great to have you at the Exchange anytime. David, I peeked over at SeatGeek, speaking of crowds, while preparing for this episode and tickets for two June match ups between the Yankees and the Red Socks are already going for several hundred dollars. Jack Groetzinger who founded SeatGeek is part of Founders Collective. As we're seeing stadiums fill again, what do you think the legacy of the last 15 months will be for live events?
David Frankel:
If I think of the spectrum of our portfolio, SeatGeek has to have been, for the most obvious reasons, in one of the toughest spaces just given what COVID did to Live. I find myself maybe being over optimistic. I think the US is in a different place altogether to the rest of the world and I think we have to be very grateful about that. But, we're certainly seeing pre-sales for Live, so if we look even into NFL season, we're seeing a pretty good uptick and that's macro. As you even see the percentage of seats available in stadiums, the percentage of populations across the US that is vaccinated, I'm pretty upbeat. I think that whole industry is being tremendously resilient. I think it's a credit to relieving capital that felt that we'd get out of this in a reasonable time frame. And frankly, highly resilient management teams across the board, and I'm biased, but I think Jack is one of the cheerleaders of that. I feel like I've used the phrase, "cautiously optimistic," for the last 15 months, Josh, but certainly in that, I think there is reason to be cautiously optimistic.
Josh King:
I think at one point last year it was a slight tweak of that, David. You called yourself a worried optimist. And maybe that's a little bit more paranoid and appropriately so given where we've come from.
David Frankel:
My barometer is my wife. She was hard hit early on by COVID. I'd say she is easily classified as long COVID and when I mention there's a Maroon Five concert happening at TD in September, she was all in. So, I think if that's a barometer, there is a pent up excitement for what will come.
Josh King:
Over your career, David, you've spent countless hours in the air, first traversing from South Africa to Virginia to wrangle more bandwidth and in recent years your work as an investor. Would the rise of virtual meeting and platforms like Clubhouse and your wife traveling again, do you expect to ever reach the peak of the past where you were always constantly in a seat?
David Frankel:
As recent vaccinees, we are dipping our toes in. I have not ventured internationally, except for one trip which was required. I think that's a fair barometer for what people will do. I think to think that we will travel as much as we did, certainly for business travel, I don't see that happening. I think that it's going to take special events. I think that the repercussions of these last 15 months on travel, commercial property, what we're prepared to do virtually, what will actually capitalize us to travel will have decades long ramifications. So, I'm excited to be in our office in SoHo. I'm excited to be with entrepreneurs. I'm going for a walk with an entrepreneur straight after this. But, I think a lot of that is still being done outside and we're seeing the canary in the coal mine, if you want, are places like Australia and Israel where people are back at work.
Josh King:
You recently wrote on Twitter, David, that every $1B company starts out as a $1M company which first has to be a $1K company. I read that you started your first business at age 15 and used some of those proceeds to seed what would eventually become Internet Solutions. Where did your entrepreneurial interests really stem from?
David Frankel:
You're taking me far back here, Josh, but my wife grew up in a family of multi-generational doctors and her and her brother both became doctors. I think that the influence of your home environment can't be underestimated and I was lucky to have a tremendous mentor in my grandfather who was a real entrepreneur and toughed it out and hustled it out, and came from a place of adversity given where he was. He had an entrance to study at Oxford and his father died suddenly and there was a tiny business that he needed to take over to support his sister and his mother.
Josh King:
What was that business?
David Frankel:
That was in the food space, but literally that was a business where they had, I think it was quite literally two carts and four donkeys that was hauling food supplies for the animals on the mines in South Africa. This was really European immigrants, post gold rush and in a way, perverbally selling picks and shovels to the gold diggers, but the animals needed to be fed, and that's the business that he went into. Given the cards that he was dealt, played that out into a significant list of diversified foods group. I grew up with that kind chatter in the home and certainly that was a catalyst towards a journey to entrepreneurship.
David Frankel:
I also had a very close friend. We had a friend that immigrated and we needed to make some money when we were 15, so we started off in flea markets. We started off selling whatever moved and I think, I still go back to saying some of my best lessons in sales came from that experience. But, we saved up to buy tickets and be able, at age 16, insanely I don't know what our parents were thinking, to fly to visit a friend of ours in Toronto. And that led to an appetite for more and, in fact, that friend and my brother were my co-founders at Internet Solutions.
David Frankel:
It was very organic in retrospect and tremendously, tremendously lucky in that we... I was an engineer in 1992. My closest friend's brother was doing computer science. This was pre-Mosaic, pre-Netscape, but we were using the internet and we had a tremendous edge in that. He, to his credit, reached out to some companies that had mainframes at the time. In fact, there was a company that most people won't remember called, Amdahl, which was an IBM competitor and he said, "Instead of FedExing the magnetic tapes to do your patching, we can get this for you over the internet." That was how Internet Solutions started. Again, pre-Mosaic, pre-market and pre-Netscape and we really thought this would be an interesting tech kind of business. I joined actually about six months after it was founded, because he'd run out of money. Because literally the server that cost, it is crazy but with the current exchange, about $400. He needed another server and he couldn't find anyone to come up with capital for that. So, my best friend and partner, we provided the capital. I moved in full-time, but I also had deferred it much to business school and had just graduated, was very risk seeking and figured if this didn't work out, well, what was the worse case? I'd go to business school.
David Frankel:
But there's a rewind, Josh, and that is that I applied to business school straight out of electrical engineering. I'd got in on this deferment admits and really I think being contrarian has served me very well, and following my gut has served me incredibly well and been very reinforcing. So, I actually came to the US, had a deferred admits, the business school that I got into kind of sends you a list of 50 companies that are employing these people for two years. I got some terrific, two terrific offers on Wall Street. I got nagged by Walt Disney. They didn't take me, but then post these offers, I had met the woman who would become my wife and it was really a Wall Street, which in some ways seemed like the obvious choice, by actually going back to South Africa to be with her and that act actually set a lot in motion. So, had I not truly followed my heart and gone back because I wanted to be with her, IS would never have happened. And the truth always sounds like the truth. We hear it, but we try to rationalize it away. We try to ignore it. And a lot of our journey at Founder Collective has been trying to find entrepreneurs and go on the journey with them to trust their own, kind of gut, to trust their own conviction. To realize that the noise out there is not always in your best interest.
David Frankel:
So, Internet Solutions and that move really at the age of 22, we started IS and the rest of it was just being at the right place at the right time. So, if you had started an ISP in '93, '94 and you had no other obligations and you could literally sleep at the office when you needed to and do all the Silicon Valley cliché stuff and put your heart and soul into this thing, then you stood a chance. It also seeded a mantra that we speak about a lot which is capital efficiency, going back to your question and my partner, Eric Paley, has been particularly verbal on Twitter and other places about this. But, we're an incredibly capital rich environment at the moment and that is not necessarily good for investors and not necessarily good at all for entrepreneurs because I think of capital as kind of cogs and resourcefulness, I guess for lack of a better word, as green leafy vegetables and fish. But when you don't have capital, you tough it out and you find ways of doing stuff and we had no external capital, really.
Josh King:
Sticking with those early days at Internet Solutions, you had the opportunity to put the capital that you did earn as a profitable from day one business to work and I think that allowed you to expand horizontally as well as vertically. What did you learn from these early investor opportunities?
David Frankel:
So, we were lucky to have a small amount of capital that we'd saved up literally from flea market businesses and other. We had paying customers that became profitable. Literally, we were selling bandwidth and we were marking up bandwidth and that gave us call options on a whole range of businesses which would sound entirely obvious now, but that was hosting, so hosting websites, building websites, security. Everything that you've come to take for granted, we built an AWS-like business quickly and we built an internet exchange business to try to bring the whole country closer. And then, we were in the position to make acquisitions.
David Frankel:
At the same time, given that we were infrastructure rich, we had a lot of early companies coming to us and asking us to invest because they wanted our infrastructure. And we made many, many mistakes. We took good cash flow and we funded lots of businesses that shouldn't have been funded. I guess early on, the better bets were thinking of atoms to bits and going, look, we'd enable a bunch of financial service companies, so we had done the first online banking sites in South Africa. We couldn't compete, so we had analysts come in and look at adjacent verticals that were algorithmically similar and we came up with healthcare and of course, paper billing versus online billing and payments, that enabled us to build what became one of the largest financial healthcare players very quickly, and still is the largest in Africa. But we made many mistakes and I think hindsight's very precise. When I'm asked, "How do you know?" The accurate and even more humble answer is, "Even right now, we don't know." But in some ways the answer, a little bit now is, "20 years in 20 minutes."
David Frankel:
If you're able to kind of gut check, reflect on the mistakes you made over the last 20 years and there are so many of them, then your gut instinct with an entrepreneur is quicker. Now, we talk about this in terms of you've got up the mountain quickly, so I go, "Oh, my God, Josh, you're blowing me away. You know so much about your space." I come out of the meeting and I'm just on a high. What we've got to do is go down the other side of the mountain and really, kind of then be rigorous about the questioning we're applying. We're always kind of mile wide, inch deep and we're hoping that you're a mile deep. And, we're hoping that we can ask the kind of questions that surface that and in that even get another level of human excitement going. But, if we can't come up the other side of the mountain pretty quickly through questions and analysis and trying to understand the context in which you're doing what you're doing, we generally don't get there. By the way, the highest accolade for an entrepreneur at Founder Collective is "all over it." So, when someone turns around and they go, "How was she?" "Well, she was absolutely all over it." Can't get a higher accolade.
Josh King:
Like many of those founders that you work with, David, now, back when you were at Internet Solutions, eventually the day did come when you decided to hand the company off and look for what would become your next adventure. Do you think your own experience divesting from Internet Solutions impacts how you talk with those founders today who are, as you say, all over it?
David Frankel:
I think I bring a subjective view which is we sold too early. So, we were in our mid-20s. There was a significant offer and our advisors really, really kind of encouraged us to take that offer. At the same time, my partner and I, frankly, were worried about the geopolitics in South Africa and sought international experience and we ended up selling prematurely. So, the net result of that is I don't like to sell much, and I tend to be the one who kind of says, "Let's really tough it out." And, the reinforcing experience there has been for the most part and I think the last 10 years have been an extraordinary period of growth, so one has to be objective about reflecting everything is up and to the right.
David Frankel:
In fact, I think this week we're starting to feel, certainly jitters, if you look at where the markets are today and what's happened this week. But every time we were close to an M&A deal and that fell through, it ended up being better for us. So, PayPal nearly bought Olo, on and on and on. In our portfolio, every time some kind of M&A activity has fallen through or some kind of financing activity has fallen through, generally it's been for the better. So, my predisposition is, to offer founders secondary to say, "Look, if we are in a very accretive situation and I have to talk about the phases, because if we are in a accretive situation, why don't we try to get even more alignment by putting some dollars in your pocket and kind of getting you as de-risked as we are because of our portfolio.
David Frankel:
It brings me to a point, Josh, where we talk about capital efficiency and we've been discussing that, and I've had others say to us, "Well, Coupang took in billions of dollars, Uber, which my partner, Eric Paley, was lucky enough to co-seed, took in billions of dollars, how do you square that up? What we say is, "You've got to capital efficient up front, you've got to build the business with the right habits and have the right infrastructure." When you get to the point where the fire is burning bright, throw as much gasoline on it as you want, but throw the gas onto a business model that's working. And, the privilege of Internet Solutions was we had product market very early on where customers would pay us premium and that was how we were financing the business. What we see just as much and we make these mistakes is companies where the foundations are not strong enough early on and yet this environment is pouring capital in which can mask over early cracks. Before you know it the house can fall down.
Josh King:
That's the way the situation is today, David. But, sticking with this trajectory that you were on, most people don't accomplish in a lifetime what you did before you turned 30 and yet, after eight years of building a multi-billion dollar global business, you've decided to head to Harvard for that degree that you had thought about pursuing back when you were 21 and got the deferral. Why was that, and did they really make you reapply for the program?
David Frankel:
So, Josh, we both want to be in a small part of what became a multi-billion dollar London listed company before it's acquisition by NTT and that was Dimension Data, and certainly the part that we built grew and grew and grew and became a more meaningful part. But, we had sold 25% of the business and then two years later we sold the remaining 75% with a three year earn out. I was on the board and when we listed at London I joined the London listed board, but three years, I had a service agreement and it became pretty clear to both my partner in that business and I, that we would not stay on. That the kind of entrepreneurs in us would not really be able to work for a conglomerate.
David Frankel:
After that, honestly, this is where a career is a roller coaster. I think I hit one of the lowest lows in my career ever. There was a very existential time where I felt like the best of my career was behind me. That I'd never have this high again and we made a few investments and then I remember, kind of being quite down and saying to my wife, we were living still in a tiny apartment. The apartment that I had moved into when we moved out of home. I was sitting on the carpet and I said, "This HBS thing could be unfinished business and I really need, I just need something that is kind of a binary change in my life." I needed to get out of a funk, to be honest, and I took a chance and, yes, they required a full re-application. Being an options junkie, which I think is a good trait to have in the venture business, I try to keep that deferred admit alive for as long as I could and then at some point they said, "Get out of here." So, I reapplied completely to one school. Got in. And then it's kind of like, careful what you wish for. I got in and I was like, "Oh, my God, what have I done here?"
David Frankel:
I went to business school, my wife was finishing as a neurologist. She was finishing her residency, so we were not together. Arrived at business school, kind of after flying around the world doing acquisitions for Dimension Data. We acquired veraciously in Asia. We had a 70 PE. Imagine that, we were actually talking about a, we don't know what the word earnings means in this environment, but... Next thing, I was kind of in boot camp at business school and thought I'd made a terrible decision. But, the silver lining was that I met people like Chris Dixon, who's a partner at A16Z. I met Eric Paley, who is my extraordinary partner. Micah Rosenbloom, who is my amazing New York based partner and I was lucky enough to have some capital and got to know the handful of entrepreneurs because we joke that B2B meant bank to banking. B2C meant back to consulting. And less than 1% of our class actually did anything entrepreneurial. So 800 people, 1%, roughly eight people did something entrepreneurial and I was lucky enough to have just under two years with the entrepreneurs and hanging out. So talk about getting to know people, in my mind thinking, "I almost wouldn't care what that person does. I want to be in business with him." And certainly that's how I felt about Eric and Micah.
David Frankel:
Very quickly was able to give seed capital to my partners, Eric and Micah, who did a 3D inter-oral scanning business which they sold shortly, within a space of about three years to 3M. Gave Chris Dixon his first term sheet and he started a business called Sight Advisor. Now, nobody was funding consumer internet at that point. It's insane to think that, but the VCs were not, and this goes back to the contrarian point is, Boston based VCs were spoiled with telecoms and infrastructure. They'd become wealthy beyond their... And consumer internet. Chris didn't have a whole lot of places to go on Sight Advisor and when he sold that to McAfee for about $95M, less than one year after founding. So, we thought we can't get it wrong and, of course, we then got slapped in the face. But I was able to fund HBS classmates who were exceptional. The signal to noise ratio was very high because they introduced me to previous college roommates who were doing startups, so you had a very high kind of social fabric signal. The people were the signal ahead of what they were doing and I think that has fed, again, into Founder Collective.
David Frankel:
This sounds so cliché but we are people first. We're looking for energy and hustle and in many respects I think my partners and I are looking for what we kind of were trying to be. We're looking for resilience, as well. The B2C, B2B has morphed backed into doing something entrepreneurial and everybody wants to do something entrepreneurial in a way, particularly out of the feeder business schools until they realize often on the job, how tough this is. And how much you have to tough it out. Resilience and tenacity are key, key determinants, but I was lucky to have that. I ended up, before Founder Collective, making about 28 investments and people like Chris and Eric and Micah and Todd Krizelman in New York who started Media Radar, they were incredible catalysts to the next set of entrepreneurs. And really, that took us in a pretty organic way to starting Founder Collective.
Josh King:
I mean, people are one thing, timing is another, David. You're there with Eric and Micah at Founder Collective, but then the financial crises hit between your decision to move to the States permanently and getting that first fund off the ground. What impact did the events of 2008 have on your plan and how were you able to adjust when some of the institutions and individual investors began to pull out?
David Frankel:
Well, Josh, you just nailed timing. I use the word, lackalot, but timing is part and parcel of that package. Again, back to consumer internet in 2001, it was a very post .com crash. Ended up in retrospect being a good time to invest. And 2008 was an echo of that because Eric and I, in about August, decided, "Let's do this." Eric quit his job. I had actually gone back to live in South Africa for five years post-business school and was traveling to the US with very high frequency. In fact, in 2008 I made, I think it was 10 trips from Johannesburg, Cape Town to San Francisco. That's quite a round trip.
David Frankel:
So, we thought we would do this. For instance, John Powers who was head of the Stanford Management Company and was on our board and we knew each other there. So we went down to Stanford, we went to see a whole bunch of LPs in funds that had become later stage investors in Bronte's. We had two high net worth families and, in fact, we had two commitments of about $20M each. One from an ultra-high net worth family. One verbally from Stanford and was certainly it was still subject to diligence and then Lehman happened. I remember Eric and my kind of trip to the Bay Area and to London round about the same and it just kind of dried up. We both took some time off at the end of the year and then as we'd committed, I moved to the US and on the 2nd of February, Eric and I, literally my family and I landed on the 1st of February 2009.
David Frankel:
On the 2nd of February, Eric and I had breakfast together. We looked at each other and we said, "Look, you've quit, I'm here." And we started Founder Collective with the $32M that we had scraped together and we had worked very, very, very hard to raise that capital. Because Q1, 2009, it wasn't that people liked us, they were just sitting on their hands. There was a state of, "I don't know what the world will bring." Turns out we were lucky in a second close to take that up to $50M for Founder Collective One. But it turns out again, similarly to the period of 2001, 2003 that 2009 and 2010 were extraordinary, extraordinary times to invest because it was not a particularly capital rich environment and yet the infrastructure that brought us startups and enabled startups.
David Frankel:
So, what was going in mobile, really if you think about it, the advent of the iPhone or the popularity of the iPhone, the beginnings of real cloud enablement. You look at it in retrospect and murmurs of what would become social, the faintest ever murmurs. Everything that I've done in my career that's been successful has in retrospect had a kind of wave of sea change behind it. You set out asking about SeatGeek and what I would say is, SeatGeek's forerunner StubHub was born of the internet. Ticketmaster kind of was born decades before. StubHub was born of the internet. SeatGeek was born of mobile. Had there not been that enormous mobile wave, which we totally take for granted today, there was no SeatGeek. And so, everything in technology feels like it happens incredibly slowly and then it feels like it just a step change.
David Frankel:
Of course, it's never the step change because a lot is being put in place for that. You look at Amazon's prowess today and you look at how much of their profitability comes from AWS. I think AWS is about 12% of their revenue and 75% or 70% and I could be a little out here, but of their profitability. Well, in some ways in IS hosting, we were building an AWS-like business which was extremely profitable and we were selling picks and shovels to the gold diggers. So, again, we're looking, and I'm sorry to kind of contextualize this a little bit in the present, but we're looking as well for some of those modes. While we're known for our consumer investments, and we're incredibly grateful for it, some of our best investment that they're just not well known are, in fact, picks and shovels to the gold diggers.
David Frankel:
Companies that provide nano second, credit card assurance to e-commerce merchants, companies that allow you to load data into spreadsheets and allow programmers to upload data very quickly and efficiently, in a way, like we've seen a lot before and yet, we kind of feel like what's coming down the pike now is going to be extraordinary.
Josh King:
After the break, David Frankel, the co-founder and managing partner of Founder Collective and I are going to discuss more about the present day. How Founder Collective's process has been honed to help seed stage companies to get off the ground. That's all coming up right after this.
Announcer:
Historical data can offer insight into the direction of markets. Yet, data processing, collection and storage can be challenging and costly. To simplify your data access needs and help find efficiencies, we launched ICE DataVault, a cloud based platform that enables you to access tick history for global exchanges as well as our proprietary data, source from our real time feed. Back test your trading strategies to assess performance and viability. Conduct transaction cost analysis and support compliance requirements. Input data into surveillance systems to help detect and prevent abusive or illegal trading activities. Access over 10 years of D-tick history across asset classes. Get tick data for an entire market or an underlying list of instruments. Access additional securities as needed with flexible delivery options to compliment your work flow. Simplify your historical data management with ICE DataVault.
Josh King:
Welcome back. Before the break, David Frankel, the co-founder and managing partner of Founders Collective were discussing his career arc from South Africa to the States. David, when you started Founders Collective, money was tight due to the financial crises that we were talking about before the break. But the most recent crisis has sort of seen a flip side to that. You mentioned a little bit, at the beginning of our conversation, "Capital is the cheapest it's been in the 230 year history of the New York Stock Exchange." Does the competition among VCs, your competitors, traditional capital avenues and also recent trends like Stax fundamentally change the power dynamics between an investor and an inventor?
David Frankel:
It's a great question and I would say the headline is that there's never been a better time for entrepreneurs. We're in a very highly capital available environment and certainly deals go quickly. Not just the scale of the financing's at every stage, but how swiftly they consummate. I think that the entire industry, again at every stage. I mean, we talk to investors who are investing $50M and they can't believe how quickly how those rounds are going and where they're being priced. So, I think the headline would be, "There's never been a better time to be an entrepreneur."
David Frankel:
I think that the danger there, and I alluded to this earlier, is that too much capital before you've found your product market fertile, you've found your mojo, or you found what you're doing can be very dangerous too. And I think that pace expectations that come with that capital can very destortive as well. When investors put in, and we're as guilty as anyone, we have an expectation of how fast the treadmill should go, so you shouldn't sign up for VC capital unless you kind of want to go faster. It's almost like the efficient frontier of debt.
David Frankel:
There is an efficient frontier to this, so I think being pushed and being, is terrific for some entrepreneurs. I think that the efficient frontier breaks at some point where you're being pushed to hard, you're making hires that you shouldn't be making. I have seen this, and frankly, this is not that new but the Series A capital comes in and that used to be five on twenty. Now, it's probably 10 on 40 and with that is an expectation that you will hire a VP of Sales, VP Marketing, VP Engineering that your C-suite will be fulled out quickly. You've got a head hunter because you've got more capital than you know what to do with and you start to make hires and unless the culture of the company is very robust and unless the what you're selling is very clear and you're at that point of accelerating, this is when lots of problems can start to materialize. And we've seen that.
David Frankel:
Sometimes this is the learning of second time entrepreneurs is they're a little more cautious and they go a little slower to try and get it right before they amplify. But there is no question that entrepreneurs sometimes find out the hard way the demands that come with that capital.
Josh King:
You mentioned before the break how Founder Collective does do some follow-on funding to de-risk those funders, but typically you've taken this seed investor position and looked to make the largest impact from that vantage point so early on. When did you realize that your skill set was best suited to that part of the business cycle to them?
David Frankel:
Josh, I give my partner, Eric, tremendous credit for this. When we were kicking off there were hundreds of Series A funds or there were already hundreds of funds that would invest across the entire stage spectrum. I recollect walks together and car drives and Eric was pedantic about how do we do something distinctive. His feeling at that time and we started to meet with people, was that that seed institutional had really taken root on the West Coast but there was nothing like that in the New York, Boston area. So, forerunners of us includes someone like Mike Maples at FloodGate and frankly, they were mentors to us. Josh Kopelman at First Round.
David Frankel:
The difference was you can understand how a fund deploys their capital, and I don't particularly like that phrase, but you can understand how they invest across the spectrum by their reserve policy. And forgive some of the inside baseball, what that means is for every dollar that you invest at seed stage, how much do you reserve for later stages? And most funds reserve three to four dollars. What that means is, that they'll invest, let's say, half a million dollars at the seed stage and then they will be able to take up their pro-rata share of the next stage of the investment. That's another subject. I don't think pro-rata is very good for, I think it's great for investors. I think it's an option, a one way option that actually works against entrepreneurs.
David Frankel:
The short thing is we had no reserve strategy. We had one to zero which really meant we were going to invest the entire fund at the seed stage, and that's pretty much what we did with Fund One. What we did find was that there was some very difficult situations where companies could not secure follow-on funding and we actually needed to write a check out of the first fund. What we found when we looked back at it was, there was actually a negative correlation bias. We were not investing in follow-on in our best or most promising rounds of companies, because you don't know how they're going to end up.
David Frankel:
Now, some of those turned out to be rather good. The Trade Desk which my partner, Eric, is still on the board of, needed capital. I mean talk about a company that did a lot. I think that Trade Desk, which is $36B company, raised less than $20M of primary capital in its life, over its entire existence. But, that needed money, so that turned out okay. What we evolved to in Fund Two is that we would never lead a Series A, we would only lead seed, but that we would participate with quite tight parameters. And those parameters for us, given that we had and have, drunk from the seed stage Koolaid, where we've been lucky in one together with entrepreneurs has certainly been reinforcing. So, there are plenty of ways to do this, but that's reinforcing of our model, is we agreed in Series A to have more of a one to one reserve strategy which meant that if we could participate and the pre-money, or the post-money was within our parameters that kept the average dollars that we invested in a company below a certain amount, that we would follow-on.
David Frankel:
Now, most VCs are financially driven and percentage ownership means a lot. We have never, ever, we never discuss or obsess about percentage ownership. What we think about a lot in terms of returning our fund to our investors is the post-money average dollar in. If in a $50M fund, you can keep that roughly to $10M, and these numbers have changed, then you have a good chance of returning that fund. You have a better chance of getting a two to three X. But, the difficulty in our environment is, the common refrain is, "Back your winners." But, of course, you only know who your winners are in the rear view mirror.
Josh King:
We recently had on this show a VC from somewhat later stages, that's Riverwood Capital's, Francisco Alvarez-Demalde. He talked in depth about looking for opportunities to grow, to work with founders looking to scale globally after those initial months and years. A great example of that is an investment that you made in Bom Kim, who founded Coupang which recently listed here on the New York Stock Exchange. What stood out about him when you met him in Harvard Square and what do you look for when deciding if you're going to align with a founder or in Bom Kim's case, a potential founder?
David Frankel:
Yeah, so I should say we get none for the ones that work out. When I made that investment is most likely that the entrepreneur that I met just before Bom and the entrepreneur that I met just after Bom, I was equally excited about all three of them. That's very seductive to extrapolate success and say, "I knew." I didn't know. What did I know? Bom exhibited a few traits which I think are important. The first thing is he was backing himself completely. When I met Bom, he was dropping out of business school. That was not as popular then as, and I'm not saying it should be popular now, but he was completely backing himself.
David Frankel:
Bom had entrepreneurial experience, so he had founded a magazine called 02138, which I think he had sold for a small amount to News Week, but he'd done that while he was in college. It felt at the time, so just to remind you, is what Bom started off with Coupang, which is equivalent to Amazon in South Korea. He started off as a daily deals site. It was daily deals, fewer or time and he felt that he could do this in Seoul, not even in South Korea, but he felt that he could do. And when he painted the density of Seoul and who some of his investors and partners, one of the families that owned the W Hotels, that owned night clubs, he painted a picture where you went, "Look, Bom has an unfair advantage." He is backing himself completely in terms of what he's doing with his human capital and we were allergic to daily deals, besides we thought they generally were a house of cards. But, I remember coming back afterwards and just saying to Eric, "This is an extraordinary founder. There is just tremendous energy."
David Frankel:
He was also very, very buttoned up. So, Bom was the first entrepreneur that pitched me with an iPad. He had this beautiful presentation on an iPad, so he was very crisp in his messaging. When you probed Bom, you felt that his clarity on his execution path was quite perfect. The fact that he was executing on something that we had concerns about, spoke to how energizing he was and really speaks to, at times, we and other investors can be guilty of talking ourselves out of our gut feel. I go back to that, your conviction, your gut feel, your being contrarian, even your disagreeing with some of your own central tenants at times can be useful. Not always. The credit in a way, I think goes to my partner Eric, who trusted my judgment despite a rigorous discussion about how we felt about the sector and how that went.
David Frankel:
Of course, Bom luckily and true to our hunch about him evolved very quickly out of the daily deals. I think you see so much strategy retrofitted and success retrofitted. The truth was that we did our homework, we were careful, but the entrepreneur shown through and if you look at Bom's fundraising trajectory from that point onward, his ability to energize a room and his ability to clarify how he will plan is completely self-evident now.
Josh King:
Talking about extraordinary founders like Bom, over time you've built out a roster of founder partners. Do they all come from businesses that you've invested in and how do you identify someone as not only being a successful entrepreneur like Bom, but also having the skill set to teach others how to succeed?
David Frankel:
The ingredients for a founder partner, actually more difficult. Firstly, we look for someone who's been a temple in their community that other entrepreneurs will come to. So, Elliot Cohen out of PillPack, a lot of consumer medical. PillPack was acquired by Amazon, but a lot of consume medical entrepreneurs and even further afield, bio-tech, data driven entrepreneurs, would come to Elliot. If you take someone like Jack Groetzinger, sports. The answer is a lot of this is based on the pre-Founder Collective experience, where entrepreneurs like Eric and Chris Dixon, and I'd say Chris Dixon was kind of prototypical here for us, Would attract entrepreneurs. The difficulty is there are great entrepreneurs out there who are very focused on their businesses and have no interest in seed investing. That doesn't work very well for us.
David Frankel:
There's a sweet spot for us which is someone who had an entrepreneurial journey, is contemplating another one but has sold their business and is meeting with other entrepreneurs partially to inform their own views of what they should do. Or, they are considering becoming a professional investor but they're not there yet. This is quite a good sweet spot. If you want to be a full-time VC, then a founder partner role is not very good for us. But, Bill Trenchard, for instance, who is partner at First Round, was a fantastic founder partner at Founder Collective. He was a temple in his community given his entrepreneurial success. Scott Belsky has been a founder partner, Nadia Boujarwah, in terms of if you look at consumer apparel. So there's a point at which, if you're an entrepreneur and you're interested in seed investing or interested in meeting other entrepreneurs because you even think that that experience will feed back into your own company, that is an interesting route as a founder partner.
David Frankel:
The minute you want to become a professional investor, it's no longer a very good fit and we're proud of the fact that, very proud of the fact that many of our founder partners have gone on to become partners at platinum funds, so benchmark A16Z, First Round, they were with us first and those friendships, frankly, have continued to vibrate.
Josh King:
I mean, talk about the entrepreneurial journey teaching the longevity of friendships, David, your Twitter page reads like a how to manual for potential entrepreneurs. You're teaching every couple of hours when you send out a tweet. How does social media and maybe even more interactive platforms like we're seeing today, like Club House, help you connect with maybe the next potential company, idea or technology?
David Frankel:
Josh, firstly, I give Joseph Flaherty, who heads content and community for Founder Collective. I give him tremendous kudos for how he has pushed the partners and principles at Founder Collective over a period now to dip their toes into various forms of social media. I would say that as a VC, a lot of what you do is B+ activity, whether that is social, whether that is attending conferences, the meetings that you take. There is very little that feels in terms of our day to day jobs, like an A+ activity. That being said, I think that everybody defaults to doing what they enjoy and certainly I have enjoyed tweet storms. I've enjoyed ideating with Joe. I've enjoyed taking the discussion that happens, it's probably been the negative over the last 15 months for me, but all of those kind of corridor discussions that would happen so organically at Founder Collective. We take it so for granted, but let's put that out there.
David Frankel:
A lot of what we've been doing over the years is trying to capture those conversations that take place, even after walking out of meeting an entrepreneur and going, "She would have had this perfectly, but she did this. Let's mention that to other entrepreneurs." It has to be organic and you have to enjoy it. It's like everything, I guess, in our career, in our personal lives, it's a marathon not a sprint and if you're going to be charged up about it, it's got to be something that's burning. So social has been there. And again, credit to Joe for exploring different forms of social which are evolving quickly with ClubHouse being really a new theater.
Josh King:
What advice do you have for someone looking to get their foot in the door with someone like Founders Collective?
David Frankel:
Firstly, it's know yourself and really try to figure out if you're up for the journey, because it's a marathon. I think there's a kind of Hollywoodization of entrepreneurship where everybody looks at, I don't know, Facebook and says, "I'm going to be that." And I think there is a terrific pro in that because it's very energizing. But, I think you've got to kind of figure out if you're up for it. A lot of the job for an entrepreneur, frankly, is to build a world class team and energize them and energize your investors if you're going the VC route.
David Frankel:
Then, I think, having a very strong thesis on something. If I look at some of the strongest entrepreneurs we've been involved in, their unfair advantage came from the unique circumstances of their past. TJ Parker who founded PillPack had worked in his dad's pharmacy when he was 16. There are so many stories of, Jack Groetzinger had been an econometrics major and he really came to the sports tickets business through data science. Kind of concentrating on and recognizing your own unique past and how you package that into something that is uniquely suited to what you may pitch and what you may do. The theme here is, before you pitch a VC, be very clear on what you're doing.
David Frankel:
The other thing is, most good institutional investors will probe, so be ready for difficult probing questions, and some of the best answers that we come across are not the slide that says, "Here are the five closest competitors," but it's the statement that says, "Not only is this tough, but apathy and the inability to leave a very complex spreadsheet, that is really tough. More than anything, I'm fighting inertia." We're looking for those kind of insights which go beyond the kind of down low, best seed deck on Google and go back to "all over it." I would say the partner that you choose to discuss your startup with matters, so understanding not only which firm you think may be predisposed, so there are some firms that do only consumer mobile or only consumer internet or retail. There are some that specialize in software as a service. Figuring out who would be most excited by what you're doing and then which partner?
David Frankel:
I'll tell you, Eric and Micah, my partners, did a dental startup and we saw plenty of dental startups, a few of which went on to do extremely well, but for the life of me, we could not get to fund a dental startup. Likely, if you had shown me a number of ISPs, I think the difficulty is if you've been an operator, you also think that you threaded the needle a bit. I don't want to represent this as simple, but really be all over your subject material. Understand the context and the contextual shift in which you're starting up and why that is valuable. What are you bringing that's unique? We look at the unique opportunity often born of the context so contextual shift in cloud or social or crypto is a huge contextual shift and there are many startups born of crypto. AI, machine learning, it's all coming. Even the confluence now of something like data and crypto, so machine learning, AI and bio-tech.
David Frankel:
What's so exciting about what we do is we're on the threshold of more. Be all over it. And frankly, we look and most investors look at the deal lost. If you're excited about the entrepreneur in the context and opportunity, most of the time you can get the deal to work or you will accept a deal that's maybe outside of your parameters but you're excited enough.
Josh King:
Well, if we take away anything from this conversation, David, at least for me, for the rest of the day, it is, be all over it. I can't wait to see the next founder you bring to the New York Stock Exchange ready for their IPO and I can't thank you enough for spending this time talking about your philosophy and your own entrepreneurial journey with us inside the ICE House. Thanks so much for joining us.
David Frankel:
Josh, thank you so much for affording me this opportunity. It's been a real pleasure.
Josh King:
That is our conversation for this week. Our guest was David Frankel, co-founder and managing partner of Founder Collective. If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us @icehousepodcast. Our show is produced by Pete Ashe with production assistants Ken Able and Ian Wolfe. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. We'll talk to you next week.
Announcer:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor it's affiliates make any representations or warranties express or implied as to the accuracy or completeness of the information and do not sponsor, approve or endorse any of the content herein. All of which is presented solely for information only and educational purposes. Nothing herein constitutes an offer to sell a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.
