In the latest Venture Confidential, Peter is joined by Boldstart’s Ed Sim to discuss community-building between founders and investors, and more.
About the Guests
Ed Sim is founder of Boldstart Ventures and co-founder of Dawntreader Ventures. He currently focuses on investments in cloud native infrastructure, intelligent automation, decentralized computing and cybersecurity, among other areas. Ed is currently on the boards of Kustomer, Hypr Biometric, Snyk, BigID, and Manifold.
Peter Chapman: Ed, welcome to Venture Confidential.
Ed Sim: Thanks for having me.
Peter: You're in good company. You're the second guest that I've interviewed who's drinking a beer with me, and I appreciate that.
Peter: Guest number one was Tammy Camp. We talked about blockchain. I was in too deep.
Ed: Blockchain is always an exciting and fun topic, for sure.
Peter: You've been doing venture for a while now. How did you get into it?
Ed: I've been a VC since 1996 and out of New York, which is quite interesting in and of itself. I got into it because I was at JP Morgan and I was helping build quantitative trading applications and we were using Excel spreadsheets.
Frankly, I was a data entry person, having to enter all this data every day to make trades. I started learning Visual Basic to try to automate my job away and I had a big-ass book that was as thick as the Yellow Pages. Learned how to code and basically automate a lot of the routine stuff that we did.
While I was there the portfolio manager said, "Hey, why don't we turn this into a real-time trading application? So I started grabbing data. I had the Mosaic browser. Yes, Mosaic before it was Netscape in 1995. I started grabbing data and I said, "This is absolutely amazing." I thought I wanted to become a VC.
Peter: What came next?
Ed: You know, back in the day, venture capital was a very closed kind of group. Everyone that was a VC either went to Harvard or Stanford Business School, which I think today you'd probably be better off not having gone to business school and actually having done something.
But back in the day, that was the mid '90s, that was the path. So I said, well, I guess I have to apply to these business schools, and I did. I did not get into Harvard or Stanford but I got into Wharton in Chicago.
I just said, "You know what? I'm just going to figure out what to do next." I saw an ad in the Wall Street Journal, and once again I'm dating myself here because it said, "Looking for a technology associate at a venture capital firm in New York." Mind you, in 1996 there was no venture capital in New York, let alone technology startups in New York.
I faxed my resume in, don't laugh at me please, and within an hour they called me back and said, "Please come meet me." That was the beginning.
I ended up not going to business school. I worked at a small shop called Prospect Street Ventures, which in 1996 had money from the New York City government to turn it into a "high-tech sector." That was about as technical as they wanted to be. And absolutely fascinating.
I was there for two years and then the challenge for me was investing only in New York companies, trying to create jobs around that, and that was a tough kind of proposition. So I was going to go back to business school.
I did get into Harvard Business School in 1998 and I became friends with a legendary investment banker on Wall Street. His name was Bob Lessin. Bob was vice chairman of Morgan Stanley & Smith Barney. He ended up becoming one of the single biggest angels on the East Coast. I think he probably put about $15 million of his own money into startups between '96 and '98.
He came to me one day and said, "Hey, Ed. Been tracking you for a while. Would love to start a new fund and want you to run it for me." I was like, "Okay, let's do this." That was 1998 and we started a firm called Dawntreader Ventures, named after The Chronicles of Narnia: The Voyage of the Dawn Treader, which is a fascinating book in and of itself. That was the beginning.
Since 1998 I started Dawntreader and the idea, being in New York, was to bring a founder- or product-oriented perspective to investing in startups, versus a back in the New York days, it was an Excel approach.
People were always interested in looking at numbers. We were more interested in looking at people and products and how we could shape and influence their growth and trajectory.
Bob, having been on Wall Street, had tons of corporate relationships, Fortune-500 relationships. I feel like iteration number one in 1998 was these companies trying to figure out how not to be Amazon. Back in '98 that was a different kind of perspective of how not to be Amazon, because you could say the same thing today from every aspect, whether it's a large Fortune 500 or whether it's a developer-led startup as well.
That was quite an interesting perspective, taking these internet companies back in the day, software companies, and bring them into Fortune 500s. Trying to figure out how to marry the two together.
Peter: What prompted you to start Boldstart?
Ed: Well, in 2010 we just came off one of our biggest exits. I had been the initial founding investor in a company called Greenplum and we had quite a ride. That was a 10 year ride. We ended up selling that to EMC.
Right around that time a bunch of startups kept coming to me saying, "Hey, the power of the cloud is absolutely amazing and everyone's doing consumer stuff. But you're an enterprise guy. Let's figure out how we can take a little bit of capital, let's say a million or two million dollars, and create an enterprise business around that, leveraging that platform."
I started seeing a lot of my friends coming back after they had exits. I'd also sold GoToMeeting four or five years before that, I was the first investor there. LivePerson, which is still a public company. There was no capital for early enterprise and taking the risk. It was all consumer in 2010.
That's when I said, Okay, why don't we go out and try to start a fund around this? We had no idea if there would be enough opportunity. It was still pretty early looking at that and people used to think it cost three to five million dollars to get an enterprise company off the ground with the amount of software you had to build.
Peter: How much does it actually cost?
Ed: Well, today it depends on how complicated. But you can do it from anywhere from a million dollars to three million dollars, depending on the complexity, meaning to get your first couple pilot customers.
Peter: Tell us a little bit more about Boldstart's thesis. You said early-stage enterprise. What else defines how you invest?
Ed: Yeah, so I'll go narrow. I think the one thing that's super confusing is the world has become stratified in the venture space. There's pre-seed, there's seed, there's post-seed.
My partner Eliot Durbin and I just said, Let's just cut to the chase. We own a URL firstcheck.vc. Basically the bottom line from our perspective is, I think if you look at the last 20 companies we invested in, most of them are 10 slides and a tremendous idea.
The most important part for us is founder/market fit. What have the founders done before, from an engineering-build perspective? How are they leveraging that knowledge and all those relationships to move forward? How much value can we add?
We say we help founders get from founder/market fit to product market fit. We want to help them get their first three to four large customers and we have a very active CIO advisory board of 20 CIOs, senior IT execs from the largest banks, insurance companies, ad agencies, who are constantly interested in vetting new technology. That's kind of our unique spin on things.
Peter: We had an earlier guest that talked about the importance of founder/market fit. She's on the investment team at Maveron and she talked about Allbirds. She talked about how the founders, I'm going to misquote her, I think one of them was a material science guy and one of them was a sports guy. And together they were able to produce this awesome shoe because they brought all this collective domain expertise. What does founder market/fit look like for enterprise tech?
Ed: Rule number one,
we want to fund amazing, product-driven engineers. We only invest in engineers.
The reason being is just that I think you have to have an opinionated view of what you're building, and you also have to be able to believe in creating a mission-oriented business.
Meaning that I have this wonderful, wonderful idea, I want to build a tremendous product. I'm on a mission to get it out to market and actually change how people work or do things. I think from that perspective a person like that will always weather the up and downs in a startup. There's so much stuff that can happen that doesn't go well, and you've got to keep waking up every day and be focused on a bigger vision than just making money.
Peter: What's a recent mission-oriented business that you funded?
Ed: Well, I can say that one company that is super interesting is a company called Catalytic up in Chicago. The founder actually had previously been CTO and co-founder of Fieldglass and he went through an up and down run and they ended up selling to SAP for over a billion dollars a few years ago.
He came out of that experience and said, "Look, I want to actually take all this big company stuff and create a way for people to have a better workflow experience. How do I automate routine business workflows? How do I create software that's super easy to use, that's intelligent and that helps people do that?"
That could be anything from HR onboarding, Think about the HR onboarding process, how many different people in the systems it may touch. How do I create a routine and process around that? How do I leverage modern technologies like Slack and email and SMS and alert people about them taking too much time? How do I alert them to go into DocuSign with an API?
We think about it as connecting people and processes together, but he was on a mission to change how a business is done and to do it much faster using everything they know. That's exciting to us.
Peter: I want to shift gears here a little bit. I'm particularly excited about this interview because you and I play in the same space. One of the things I admire a lot about you is how good you are at sourcing. It feels like all the cool dev tool companies are talking to Boldstart. What's the secret sauce here? How do you foster such great connections with these early-stage dev-tool companies?
Ed: I think first is hanging out with guys like you. You see a ton of amazing companies, and we have one of our portfolio companies working with you. Snyk, Snyk.io.
Peter: Check out their podcasts.
Ed: The Secure Developer, Guy Podjarny, rocks. He's awesome. Actually, Guy is an interesting story because he's a second-time founder that we backed. We backed him before when he started a company called Blaze and sold it to Akamai. He became one of the two CTOs at Akamai, and I kept calling him up every month and said, "Hey, Guy, when are you leaving? What do you got in your mind?"
I don't know if Guy wants me to tell, he had three different ideas. I said, Guy, if you do idea number three, I have a check waiting for you. That was Snyk.
Ed: That's how we got going.
Peter: Okay, so one strategy is you're talking to interesting founders before they're even founders.
Ed: Yes, that's a big piece of our strategy. The other piece is that founders talk. No offense to VCs, but we were kind of joking earlier, I love spending time with founders who are creating new things, who are way smarter than I am, who are incredibly passionate about a new product. And I think 90% of our deal flow comes from the founders in our network.
I think part of it is based on a few different ideas. One is we genuinely love what we do.
We feel like we're a startup ourselves. We're not a billion-dollar fund. We're scrappy. We love working with founders. We have an opinionated view of the world.
I think I told you that we have a thesis-driven perspective. I would love to hear from you, Peter, how many infrastructure seed guys do you know that want to actually lead and be the first check in, versus being the last check in and waiting for customers and things like that? That's what we don't look for.
Peter: How many people want to be the first check in? I think the good ones tend to want to lead.
Ed: Interesting, yeah.
Peter: Do you disagree?
Ed: No, no, I think you have to have conviction and courage, and you have to have a view of the market and the founder/market fit piece is the most important piece. Our founders are our best value-add for us, so by having seven or eight dev-tool related companies, they just keep talking with their friends and that's how we see great opportunities.
I feel very fortunate to have, we have a Slack channel called the Boldstart Family where everyone kind of participates in there and upvotes on Hacker News and things like that. I think that's been a great way for us to work with cool companies.
Peter: What are some of the things you do to foster a sense of community among your founders?
Ed: Well, I think during even the diligence process we'll have companies and founders talk to the founders that we're actually potentially going to invest in. Some of them actually like to co-invest with us in certain opportunities as well. So that's been a great, great source of, I guess, intelligence for us and a source of community-building.
The other thing we do is we host regular dinners every month or so around themed topics. We've done stuff like applied AI in the enterprise, we've brought four of our portfolio companies together. Those same companies we took on road trips, to corporate companies like P&G or Bank of New York or Capital One, and we're trying to understand the themes that these large corporate enterprises have and the pain points that they have and try to bring three or four companies together. So that's another opportunity for everyone to work with one another.
Then I think that Slack channel that we have is very active. Founders are constantly sharing feedback with each other, tips on marketing, tips on working with developers, tips on getting their product out to open source. "Which license do I use, is it Apache II or BSD," or something like that, right, Berkeley. It's been a wonderful opportunity for us to learn and build that community.
Peter: You're kind of talking about two communities here. You have this great community of founders talking to each other and you have this other community of CTOs and CIOs and technical leaders at large companies that you're connecting to your founders. I'd love to hear more about that. How do you build a community of CIOs?
Ed: You can't just wake up and say you want to do it. My partner and I have been doing it for quite a long time and we basically have a ton of relationships and we've gone to a few of our core friends, let's say the senior VP of IT at TIA, and really understood their pain points and asked them, who else do you have as friends that would be interested in working with startups?
The big question for a company is, what is the definition of a startup to a large Fortune 500?
Is it a company that is three people or a company that has 100 people and is cash flow positive? I think it's important to vet out what a startup means and how innovative they're willing to be and what kind of a vet that that enterprise is willing to make on your company.
We spend a lot of time fostering community around that. We just hosted, for example, three weeks ago a breakfast on enterprise peer innovation. These folks never get a chance to connect with one another: "What's your model? How do you bring new technologies in? What's the best way? Do you have a P&L owner as part of it? Do you write checks as part of it? Do you have your own engineering staff that's outside of the core team?"
By putting all these folks together, we're adding value for them, connecting them, building bridges and we just get to sit there as a fly on the wall and understand who is willing to work with a startup today and which areas may take more time.
Peter: A lot of really early companies that I talk to struggle to sell to large enterprises because there's so much legal hassle. These large companies want to know that you have enough runway, that the technology's going to be around in a couple of years. Is this a problem you run into?
Ed: I would say that every company is different. We need to understand which companies are the ones that care about what's on your balance sheet, because we won't bring them in. There's other ones who are more willing to work earlier.
I think you and I chatted right before this. About 10 years ago if I tried this, people would laugh at us because there's this tendency to have one throat to choke and everyone thought buying IBM or Microsoft or Cisco was the way to go.
People thought just very simplistically of best-of-breed software, and startups were the ones that were supposed to provide best-of-breed software. But it's very hard for them to get in, because Cisco would just say, " Oh, we will give this to you for free. It might not be as good as what you have."
Fast forward to today,
I think that the pace of innovation is so rapid and the pace of software development is so rapid that the smarter larger companies, if they don't innovate and they don't work with startups, they can't do it all by themselves.
A lot of these large corporates have outreach opportunities. They have IT executives reaching out and working with startups. They have innovation groups, which I think can be a dirty word, because a lot of times we say you don't want to get stuck in innovation.
But there are some innovation groups that are amazing, and I'll say guys like Capital One. Capital One is such an efficient machine to work with startups and there's others that aren't as good, so you can't generalize anything. It's different based on which company it is, but it's been a cool thing that's happened over the last 10 years.
Peter: What are some of the things you look for in your network of larger companies?
Ed: I love building a relationship with folks and understanding their pain points. What are the top three priorities you have? What are you trying to do? Then thinking through, which portfolio companies do we have that might match that? And then quietly working them into the room or organizing a dinner around, let's say, DevOps or cloud native infrastructure, and getting everyone in a room together.
Once again, as I said, 10 years ago it would be very hard to do but it's getting easier and easier because
people know that if they don't spend on new technology, if they don't work with startups, that they're going to die.
Peter: What are some of those common pain points? Are there any themes that have emerged over the last couple years?
Ed: I think we have some opinionated views of the world. I think that we'll call one bucket cloud native infrastructure, and it's a theme that Heavybit, I know is pretty involved in as well. If you think about the 30,000-ft. perspective and you believe that every company is, and I'll use kind of buzzwords, is a digital company and that's what these Fortune 500s use, then they believe that they need to create their own software.
They need to codify their own business processes and they can't buy off-the-shelf software. There's been stats out there that says 85% of software deployed at corporations are going to be created by themselves. What does that mean? That means developers become really, really important in that whole food chain.
We've been investing a lot, like Heavybit has, in developer-led companies. We love to say, "Go find and build the developer love but find budget elsewhere." That's another topic altogether, but that's been a big theme is, how do I move from one monolithic architecture to a agile infrastructure, which means I'm using microservices. Where are the holes around that? How do I put code into deployment faster? How do I secure my developer code like Snyk's doing, like security DevOps? How do I manage that better?
There's a whole bunch of problems that are being created as you actually do this replatforming of corporate America.
When you have companies like Kroger, who is a big grocery store, talking about their IT spend and going to a cloud native infrastructure, that to me is quite fascinating. You would never think about that.
That's one. The other areas that we hear about obviously are security. Look at what's happening every day. Our approach to security has been, rather than taking something that already exists, we've been always looking at new attack vectors. Outside of the fact that we did Snyk a few years ago, looking at the rise of developers and how they would have to build security into their pipeline without bothering their day-top-day efficiency.
We also invested in a company called SecurityScorecard which just announced their series C today, that is helping large enterprises understand the risks from their third-party vendors. If you believe in the world that you're only as secure as your least secure partner, then how do you actually understand the security posture of 5,000 or 10,000 vendors? It's impossible.
You've got to take a data driven, data-science driven approach to it. That's what they started with three years ago and now it's become a category. We did the seed about three or four years ago, Sequoia did the A, which was kind of unheard of in New York, Google Ventures did the B, and then we just did the C round today. So that's been another area.
The final area is a buzzy word. You talked about it earlier, it's blockchain. In New York there's a lot of blockchain tourism. That's people just piloting out software and not doing anything with it because their board says we got to do something crypto or blockchain. That's kind of true. I still think that there's a lot of BS out there.
But we took an approach by partnering with IBM and we're creating a customer growth lab or a customer experience lab on the Hyperledger Fabric, which is an open source blockchain protocol that's I think part of a Linux foundation, and IBM is a big contributor to it.
What many people don't know is that they have 400 customers across the world using Hyperledger Fabric in some way, shape, or form. I won't say they're all in production, but I do know for a fact they've got some very large projects in production. That could be ranging from supply chain opportunities to finance opportunities, and so we're partnering with them to understand the pain points and to bring startups closer to that whole platform.
Peter: I want to come back to something you said earlier. You said, "Sell to developers but find budget elsewhere."
Peter: Where is the budget?
Ed: It's super, super interesting, right? I always look at how Pivotal Cloud Foundry sells. I'm very close with them because Greenplum, which sold into EMC, spun back out as assets of Pivotal, Greenplum, and VMware. Two of my closest friends are now senior executives over there.
I remember a few years ago they took an approach saying that rather than sell infrastructure to infrastructure people, I'm going to go after the P&L owner and try to understand. They have bigger budgets, they have bigger pains, and I'm going to try to understand what their business problems and just say, "Hey, in order to do that you've got to have an agile infrastructure."
They took a lot of lumps trying to do that for a while and eventually they figured out that sales motion. An example could be, what if a board said, "Hey, bank. I'm going to create the omnichannel bank of the future." What the hell does that mean?
Answer number one could be the retail branch as we have it today just should not exist. Why not have 10 kiosks in that branch and put all the latest cool technology on it, biometric sensors, and have maybe one person sitting in there managing those 10 kiosks if someone really needs service.
If you think about that concept, that is perfect to put in an agile infrastructure behind it because it's just a different front end but it should be the same back end as your mobile and also as your web, and the kiosk should be appended off of that.
That happened about three years ago and you start with a new project typically and then you roll it out to a much larger play over time. Finding new development opportunities, wedge yourself in, because there's a massive pain for speed. You don't have to get caught up in legacy stuff and once you prove out that one project works then you get a second or third project.
Budgets mean, so that's a P&L budget. Other budgets could be like, Snyk is going after developers but getting a budget from security, Chief of Security officers. Then I think the hard part is trying to get budget from VPs of engineering. I think that's always a challenging one. I would love to hear your perspectives as well, what you're seeing. Developers have a tendency to try everything and then actually not pay for anything either.
Peter: Yeah, I'd love to get a little bit more tactical here because we're talking about founders that are engineers themselves and that have an easy time talking to other engineers. How do they then make the bridge from, "I'm talking to an engineer but I have to find someone else in the organization to sponsor this?"
Ed: I'll give you a great example.
I view it as a bottom-up/top-down assault. I think about it as two different ways. I think about dev evangelism is different from enterprise marketing.
Developer evangelism is what you absolutely necessarily need to have if you're a developer-led company, so that is where you always start and that means getting your blog posts out there, getting on Hacker News, speaking at conferences, creating hackathons and doing all that. That's just a must-have, and it's usually the founder to start with but then eventually you get someone to be an evangelist.
Then what happens is that over time if you've done that successfully you start seeing larger companies reaching out to you and saying, Hey, how do I get this from a developer to a team? I always look at the whole thing is get developer love and then you go create teams and then eventually you do orgs. When you get to orgs that's when you're kind of hitting the holy grail. You can see that trend in every amazing company, even at GitHub, right?
We always talk to our founders, "Developers, developers first. Never get distracted." Then it's like, okay, now let's create some team functionality. Manifold is another great example of that. That's a company that we funded. Its founder is Jevon MacDonald. We backed him before.
He sold his company to Salesforce and he's creating a, we'll call it a developer services marketplace. He wants to separate out the developer services that you bring into your organization from the underlying cloud provider like AWS or Google Cloud or Microsoft. He started out with an individual developer productivity play and he just announced teams, and eventually he can go to org.
So how do you do that? You've got to build that grass roots, bottoms-up movement. You see that, let's say, a large bank is using this with 10 different people and they've expanded within the team from one to 10. Then you think about how do we get executive sponsorship? Do I go to the CIO, the CTO? That's kind of where we can help. We can go to some of these large people and say, "Hey, what are your problems?"
One problem I see at a lot of large companies is, "How do I consolidate all my code in one place?" When you start knowing that that person's responsible for that, you're like, "Okay, how about this? What if you wanted to control the rogue developer services that are being brought into your organization? Would that be pretty cool? Yeah, well guess what? I have something that might help solve that problem."
Then they start checking on the developers and 10 or 12 of these people are using it right now. That's why I call it bottom up and then top down. You've got to have some understanding of how to do that together. It's probably hard to get more than 2K, 3K, per month if it's just bottom up. If you want to get some of the bigger budgets eventually you're going to need that big IT pool spend that may not necessarily come from developer expense, but it comes from the CTO's budget or the CIO's budget where there's a massive pain point.
On the enterprise marketing side, why I say dev evangelism is different from enterprise marketing, if you get into that sales motion that's a time-consuming sales motion, first and foremost. Secondly, they'll ask you questions like, Who are your competitors? Put that out on a chart for me. Well, a Gartner says this, Forrester says this. Well, guess what? A dev evangelist is not going to know anything about Gartner or Forrester, right?
Ed: Then providing a one-pager. If you hire your first two inside-sales folks and they're calling, having that script. What is that product marketing script that they can use? Once again that's not what an evangelist is going to do. They're going to work with the developers. The enterprise marketing folks are going to help you figure out how to unlock bigger budgets and how to explain that in a way that makes sense before you get down to that. That's kind of why I see it as two different things.
Peter: I want to continue talking about this journey from developers to teams to organizations, and particularly I want to talk about pricing. When you first go after developers, a really common strategy is to have a really affordable product. You're just aiming for usage. When you go after orgs in order to sponsor a sales team, all of a sudden you need to put a really hefty price tag on things. How do you figure out what that number is?
Ed: I think there's no right answer, first and foremost. I think the best answer that I've thought about is maybe not put pricing up to start with.
I think the most important thing is to make sure that people absolutely love what they do, and it's an indispensable part of their life.
I think the second that you start getting one dollar in, you're on that gravy train. Let's face it, all the companies that are probably listening to this right now are thinking about how do I start working on, let's say Heavybit, and then how do I get my next round of funding?
I think once you start taking a dollar in, then the only thing that the next round of VC is going to look at is how does that grow every day, every week, every month? But if you don't take the dollar and you're focused on just developer love and just making sure that people are using it and looking at the churn, and I think that's a metric that is product driven and I think that's something that you can control a little bit better.
My only perspective would be the second you put that pricing page up, then you're on that gravy train of generating revenue, and just be very careful that when you do it, you know that you have not just one customer who's waiting in the backstop, but 10 to 20 or 30 that are going to be willing to pay for that product. That maybe doesn't answer your question, but I think about it that way.
Peter: You were saying it's important to not start generating revenue too early.
Peter: That's such a venture-specific piece of advice, sort of like optics of revenue. I'd love to break that down a little bit more. What's wrong with early revenue?
Ed: I think that once you start getting a dollar of revenue, that that's the number one metric that your next round of investors is going to look at. I don't necessarily think that's the best metric to look at initially, because
you might get one or two large paying customers, but then if no one else is really using or loves your products it doesn't fricking matter what kind of money you're generating.
However, if you have a ton of developer usage or just rabid usage and expansion from developers to teams and you can see that viral coefficient kicking in, you can see low churn rates, and it doesn't have to be a million users.
I think the number varies and depends on what kind of developer-led product you have. I think that is the more important metric that sets you up for longer term success. When it comes to pricing and all the other things, look, I can give you all the basics and you probably have better advice from the Heavybit content that you have here.
Look at what your competitors are doing, look at what the substitute products are. I can give you all that advice, but the reality of it is I can just tell you. And then if you go look at large enterprises, look, at the end of the day you can throw out a big number, it's going to be a discount because they're going to be your first two or three paying customers and you're going to want to extract a case study from them.
There's a whole bunch of tricks and techniques you're going to want to have to grab.
The only reason I say don't charge money too early is because then that's all you think about and you might lose sight of how to build an amazing product that your constituency is going to love.
I think it's more important to think about, where is my evolution going to be about how do I extract budgets? Which is how do I get individuals? How do I get teams? Meaning that those individuals that worked so hard to get onto my platform, sharing it with their other folks, because then that reduces your cost of acquisition. And then from there if I have one or two teams inside of a large company using it, how do I get an organization, an enterprise-wide opportunity around that? That's a different story altogether.
Peter: Earlier you alluded to the fact that Boldstart is a really product- and team-driven venture fund. How important are metrics for you when you look at making an investment?
Ed: I have to be honest with you. I'm looking at fund three now. I think we have 18 investments. Many of them haven't even been announced yet because they're so early. Most of them are 10 to 15 slides. There's not even a single piece of code written or maybe just a little code written and that's it.
It's founder/market fit. These founders, we have to absolutely love them. They have to love us. They have to love our portfolio. They have to love how we do things. I was just with a founder right before this, I can't say who. You know who it is. Pretty awesome founder.
Peter: Super early.
Ed: Yeah, super early, right? When we invested he had initial vision and then two weeks later he honed it and then three weeks after that it got honed a little bit more. Then I just got to see the demo today, four months later of just an early, early prototype and absolute blown away.
That to me is one of the most, that's why I do this job. It is so exciting to work with founders that have an amazing idea and it's a piece of paper, and you know they've built it before. This founder has built something amazing, built some amazing technical products before, and to see it and actually I was at the keyboard and I'm playing around with it, I was like...
Then he saw my eyes light up when he had this API piece coming in and he's like, "Why that aha moment?" That to me was the most exciting part. That's what I love, so that's what we do. That doesn't mean it's pre-seed or seed. Some of these founders, I think about pre-seed as raising 500K or something.
The problem I have with pre-seed, and I think it's great for some folks, is that not every founder should do pre-seed because pre-seed presupposes you have a seed round after that.
That means it's more dilution. Pre-seed means there's a C round and then there's an A round. That's just another layer of dilution. If you're a founder you can raise two to two and a half or three million right out of the gates, why wouldn't you? Gives you more opportunity, more runway to build, more flexibility. That's kind of why I just say first check.
Peter: Are you seeing a trend of larger checks happening earlier and earlier in a company's life cycle?
Ed: I think that it depends on the founder. Knock on wood, I feel fortunate that we have some amazing founders in our portfolio. We've done a couple things that are non-developer led, like as SaaS company called Kustomer with a K, where the two founders previously were the CTO and chief architect of Assistly, and that sold to Salesforce and became Desk.com.
That was their third customer-support startup that they just created, Kustomer, and they have a clear view of how the world's going to work. It's a very crowded space but these founders are tremendous and they had 15 slides and they're off to the races now.
We did the C, they did an A, and they're signing up some of their first big customers. That founder/market fit once again is like, okay, you're doing your third or fourth. It doesn't mean that if it's two engineers that are young, too, we're happy to take a bet on those folks too. They just have to have had a track record of building something out of the gates and understanding that cadence and having an opinionated view of what's next. That's what's really important.
Peter: Boldstart's been around for seven years now and I think you said you're on your third fund. Is that right?
Peter: What's changed in that time? How has the fund evolved?
Ed: I would say that we started out with a million dollar fund. I view our sales, on this leg, a startup in and of itself. Our seed round was a million dollar fund we started, and the proof that we had to measure was, are there enough enterprise seed companies in 2010 where you can actually have a focused "VC" around that?
Peter: Hold on, a million dollar fund? That's tiny.
Peter: What size checks are you writing there?
Ed: We wrote 10 $100,000 checks and the highest pre-money we paid was six million at a time.
Ed: Yeah. We had to prove out a thesis. Are there enough great enterprise startups and how the hell are you doing it out of New York? Are you guys insane? You should be in the valley doing this or San Francisco.
Peter: Yeah, come on, Ed.
Ed: I know. I've always been a crazy guy, so I figured why not? Let's try this out. Fast forward, 2012 I think we had three exits all in 2012 and it's not like we invest in companies looking to get an exit before they get their A round done.
It just happened to work out and they were pretty solid, so we were like okay, maybe we can actually create something out of this. Fund two, we closed on $10 million and we ended up closing about $16 dollars in fund two. That was 2013 and check sizes got a little bit bigger. Let's say 250 to 350.
We are actually reserving for pro rata, which is a very important thing for early stage seed VCs, and built out a pretty nice portfolio there. Then we raised fund three, first close in 2015 and second close last year of close to $50 million.
The biggest gap that we saw, and we've had a plan all along, was that a lot of people want to follow but they don't want to lead.
The fund three was all about leading and co-leading these seed rounds and taking a, we call it a high-conviction, high-concentration portfolio approach, meaning that we want to have 18 to 20 investments and for every dollar we put to work we want to reserve two, three, four dollars in the follow on and really stick with these companies through a period of time and be active with them.
Take board seats, take board observer seats, and engage with them. Help them get customer feedback. Help them get their first pilots. Take them down to large corporations. That's been our evolution.
The other thing that's happened is that over time you build a reputation. I've been doing this for 20 years. My partner and I have only been doing this for seven together. Just the quality of founders that keep coming back, I think that's our NPS score. I think we've backed seven founders that we previously had backed before, and having founders round trip from fund one to fund two or fund three, that to us is the most meaningful perspective that I can say in terms of why we love what we do.
Rahul from Superhuman, we backed his first company, Rapportive, that sold to LinkedIn. He's reinventing how people do email. We also have Guy Podjarny who we backed in fund one from Blaze to Akamai, and then he ended up being one of the two CTOs at Akamai. So we got to lead, we were fortunate enough to lead his fund three investment.
Jevon was from fund one, sold his company to Salesforce. He's chairman of MPM, I think still. We led the seed round or co-led the seed round of Manifold. That to us is what's the evolution. When people keep coming back to you, then you know that you're doing I think something well.
Peter: 20 years is a long time to be a VC.
Ed: Yeah, you see the gray hair?
Peter: You look good, man.
Ed: You know what's funny? My son played football for a year. He was a hockey/lacrosse player. Now he's a rower, but he played football for a year. His coach one day said, "Football is not a full contact sport. It's a collision sport."
I was joking with my partner Elliot when we started Boldstart. I said, "Startups are not a full contact sport. It's a collision sport." You wake up, you have an idea, you run 100 miles an hour and you hit a brick wall and you fall flat on your face. You get back up again, you sprint at the wall, you fall flat on your face.
The next time you sprint through it and you just break the wall down, and that's why we call it a collision sport. It's a really, really hard thing to do. It's not for the faint of heart. It's not for everybody.
Seed is really not for everybody. You really have to love what you're doing and love the founders you're working with, love the technologies that you're bringing to market.
That's why I think about it almost like running through brick walls every day and trying to pick yourself up off the ground and finding a way around it, over it, through it, however way you can do it, but that's kind of what it takes.
Peter: What are some of the things that have been hard for you?
Ed: I would just say hard for me or hard for the founders, I just think that, I'll give you a great example. We just funded a company that's in stealth mode, loved the founder, we had a very particular view of the market that aligned with the founder's view, and he had three engineers he was waiting to hire and didn't want to lose them.
So we were like, "Hey, you know what? We're going to lead a $2.5 million round now. We'll give you a million dollars now and we'll find the rest. I'm not worried about waiting for all the money to come." The first three weeks he was out just hiring the people, getting it all together, and then we introduced him to three or four folks and like, "Well, how big's the market? How big's that, how big's this?"
It's definitely tough being lonely out there and then all of a sudden you fast forward three weeks after that, he's oversubscribed. But it's that kind of, "Here you go because we didn't want him to wait." We had belief in it but then--
Peter: You're a high conviction fund.
Ed: Yeah, and then you have three of your buddies pass on it and then all of a sudden you keep plowing away and now he's oversubscribed. That happens a lot and so
you've got to have the faith in the founders, you have to have faith in yourself and faith in your process, whatever that might be.
There is less to look at when you're looking at 15 slides.
Peter: Yeah, right? We've talked a little bit about diligence on this podcast and it think it's easy to have a really thorough diligence process when you have a ton of metrics and a large team and customers that can be references. What does diligence look like for a two-person company with a 10-slide deck?
Ed: Well, I'll give you a great example. It's another company I can't name but it's out here. A very close friend of mine from Storm Ventures had sent it over to me and we were on a board together about 15 years.
He's like, "Hey, Ed. The weirdest thing is I love this founder, I didn't make a ton of money with him but I just feel like they're ready for their next big thing." He's like, "I know that you've looked at some companies in this space."
I'll be generic in the sense that, think about when you build a product, there's very few products that are built where everything is stored somewhere, meaning the software development process. That is completely digital end to end.
Everything that someone does can be found and seen, and yet people are spending tons of money building new software but there's no visibility into how I'm doing. This person had an opinionated view of, I want to work with large companies and executives, helping them understand what their developers are doing.
How much time is being spent on innovation versus maintenance?
What does that mean? That means you probably have to go back into your GitHub or Bitbucket or whatever, maybe go into ZenDesk and look at the customer support queries that are coming in. How do you tie together all the data from different pieces to get a really interesting view of what's innovation, what's maintenance?
If you think about the microservices aspect, now you have 50 different teams. How do I make sure that they're all on track, all on time? This person had an interesting view of that. During the diligence process we introduced him to three of our CIO advisors.
During the process, actually one of them said, "Guess what? Let me send you my spreadsheet. Every week I have someone pulling out data from my 200 developers in three different locations and I'm grabbing a lot of the similar data. But it's such a pain in the ass." I introduced the founder to one of our advisors and he said, "Okay, I'm willing to be your first pilot, or one of your first two pilots."
Fast forward four months later. That ended up being an oversubscribe round. We got some great diligence from a trusted friend who has actually rearchitected a number of, he was a Pfizer, Diageo, Pearson, now he's at Shutterstock, CTO at Shutterstock, and known him forever, trust his opinion. The fact that he just jumped right in and did that and then we tested it out with two other people and they're like, "Yep, I have the same problem. If he's ready, let us know."
We'd like to look at three, four, and five. Part of it was spending time with the founder, obviously. He flew out to New York, we spent some good time together, I walked him through some of our advisors and had him talk to some of our other founders. That's kind of how you do it.
How do you instrument and orchestrate new technologies and processes by working with some of our buyers and trying to figure out is this something you would ever use? It doesn't always happen that it signs up as a pilot, but that's our perspective. That's why, by the way, people ask us, "Why is almost half your portfolio out in the West Coast?"
I felt like 20 years ago, when I started as a VC trying to pitch this whole corporate angle which I learned from my mentor Bob Lissen by working with large corporations, people didn't give a shit. People out here were like, "I only want to go out," this was the mid '90s, "I only want to go out to New York when I'm signing up Goldman or Morgan to do my IPO. Other than that I don't really give a crap."
If you're an enterprise investor and you're an enterprise company, eventually you want to get companies that aren't 10 companies, as your customers.
You want to get some feedback from, what would it take? I'm not saying that you should go out and sell to an enterprise today. But let's say a year from now, if I wanted to what does it take? What am I going to have to build? What are the features? What does it take to be enterprise ready?
I'll give a plug to Grant Miller at Replicated, who you know. He's got EnterpriseReady.io which helps SaaS companies. He's working with a lot of the, probably, Heavybit companies right now helping them take their cloud based products and bringing them on-prem and make it secure, auditable, and everything else.
The point is is that in today's day and age I can convince easier a founder and say, "Hey, you should take a West Coast lead and an East Coast co-lead where we can provide a different Rolodex for you." It's been resonating a lot more over the last few years than it was 20 years ago, for sure, and that's been a big piece of what we've been doing is trying to find, those folks that want that aspect.
Peter: Ed, this has been such a pleasure. Thank you so much.
Ed: Oh, thank you.
Peter: Where can our listeners find you?
Ed: Well, I can be hanging out in New York. They can find me.
Peter: They can wander around the streets of Manhattan calling your name.
Ed: Exactly, they can find me at Twitter.com. My handle is @edsim. I have a blog, BeyondVC.com which I haven't kept up to date lately. But I started blogging in 2003 so I think there might be some gems out there, and obviously at Boldstart.vc.
Peter: Who should be getting in touch with you?
Ed: Well, you heard the story from before. I love engineers who are building amazing products and trying to do something that's revolutionary, like two, three years, four years ahead of the curve. And for the Heavybit folks, I love developers, developer-led platforms.
The best way to find me though is by reaching out to some of our founders in the portfolio companies. If you know them, then that's an easier way for us to get vetted and we'll put you to the top of the list and chat and hear everything about you.