Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
Amy Coveny is Managing Partner at Quake Capital Partners. She has extensive experience building revenue, products, and market strategies for startup companies. Since the beginning of her career at the newly-launched Fox News Channel, she has contributed to six acquisitions, three IPOs, and two early-stage fundraising cycles. During her tenure as the Global Head of Audio for Rubicon Project, she worked with Spotify to extend programmatic audio to international audiences. Her years as Vice President of Catch5 saw her develop a video content syndication model in the health and wellness space in order to customize brand experience. Amy has been an adviser to Quake Capital since the launch of its accelerator program in 2017, providing market insights and tips to companies including eSports One, DataGran, and Frenzy.
I’ve been an operator before in my career and helped to grow all different stage companies. In the Fund 1 of a Quake, from 2017 to 2018, I was an advisor helping to find different companies. I knew Glenn Argenbright, the founding partner of Quake, from a previous position at Catch5 Media. We became friends – he was a mentor to me. When he started Quake, he asked me to be an advisor for his companies. And I loved it, went to all the events, and just really resonated with all that community. When they expanded offices to Los Angeles and Austin, TX, Glen asked me to be managing partner of New York because he wanted to build out the team. I jumped at the opportunity and for the past 3.5 years, I’ve been managing partner of New York and now East Coast operations for Quake Capital.
Honestly, the venture community in New York was very welcoming. I did not expect that. You always hear that VC is a very competitive environment. In New York, there’s a very tight community and I think it is so welcoming because people in venture capital want to build it out, create a really strong ecosystem. They are open to expanding networks and supporting everything from founders to other VCs. I found that surprising, yet wonderful at the same time.
We’re cross-industry, so we have everything from Agricultural technology to Advertising technology, everything from B2B SaaS to consumer goods, although consumer goods is not a huge focus for us. The most exotic one – and it has been one of our most successful ones – was a company called BBy from our first fund. It was for mothers who either can’t breastfeed or have adopted and the breast milk isn’t viable for their child, so it’s a way for them to get other breastmilk. It’s a marketplace connecting nursing mothers. Kind of Uber for breastmilk. It was started by a doctor that had a patient that almost lost your baby because they couldn’t find the right nourishment for the baby. He was able to find the breastmilk for that baby and saved the life. Now he acquired a company in South America that enables him to take breast milk, dehydrate it to make it more storable and that could provide the ability to do that with other bodily fluids like blood. It’s done very well, and it’s one of the more exotic companies.
Quake receives about 1000 projects a month. We have a process in which we go through the applications and then we come down to top companies that we take through 5 stage interview process for due diligence.
80 companies came through our first filter. We took a quick 15-minute interview with these companies and took 4 companies out of those initial 1000 applications.
BioTech. It’s such a hard industry. It’s one that none of our partners has expertise in, we don’t have a vet lab. That is the industry that we’ve not ever done. But it’s a very hot industry and it’s growing exponentially.
Quake’s thesis is that we invest in companies that have traction, so we really look at numbers, traction, and metrics. But that does not discount the ability to present and a team. It is about 50% traction, then 30% team. and 20% market size.
It takes about 3 months. We are known to move faster over the final stages of our process for a cohort. If we see a phenomenal company, we will take them through the process quicker.
We do have a high confidence fund, so that’s something that we do twice a year. We invested in about 170 companies as of today and we take about 10% of our entire portfolio for confidence. It’s a very competitive process. The size of checks for high confidence companies is anywhere from $25K and $500K.
Traction is, definitely, one. We have taken companies at the pre-seed stage that swing for the fences when we really believe in the founders, we believe in the technology, we believe in the company. But traction is the biggest lens through which we look. We do not take idea-stage companies, just because in our process, in our network, and what we developed we don’t do as well with those companies. We can’t truly accelerate them, can’t plug into the ecosystem – they’re just too early. The accelerator is a little bit of water down the term, meaning they’re so many of them out there today. One: we invest and some accelerators don’t. summer. Two: we focus on growing from seed to Series A stage and we are focused on hitting those benchmarks and setting them up for the Series A. And traction is a huge lens for us.
Emotional intelligence, for sure. I know that it is a marathon, it is really really really hard and is getting harder because there are so many startups out there. The founder needs to have domain expertise and have found their product-market fit, but also needs to have the right kind of emotional intelligence in order to sustain being a founder and getting through all of the trials and tribulations.
They both bring something different to the table. I think, what we offer is the ability to help build our team. If you have a founder who is a Steve Jobs type, you probably need to have more support from more of the operator side, while with Steve Wozniak you, maybe, want to have them with some of the creative sides. Building out the right team is essential, but to identify that kind of raw talent is in front of you is a part of the process of what we do. We would invest in both.
Yes, we have. It is done with a little bit more hesitation. In later stages one of the things that any VC does is that we look at the ability to work with others, and having a founder that is opened up to bringing on other folks into the business, giving them a good equity stake is important because no one can do this on their own. Part of our interview process is to review their desire to bring others into the organization and give them equity in order to keep them in the game and have the same level of dedication.
Churn. There’s a big red flag and something that we look very close to. If there’s a high level of churn without a pivot or the ability to really identify the reason for it, that’s a huge red flag. A founder without the right kind of emotional intelligence is a huge red flag. These 2 things are the most important at the early stage.
Well, we have a $100M fund and we’re really looking at a 10 to 20x return. It’s hard to identify that as much as their earlier stage. You can do it based on benchmarks of other companies, but it’s always a guess. That’s what we’re focused on – on bringing them the right metrics to hit Series A level, to be in the upper limits to get the best chance of getting those types of returns.
We take a small percentage, anywhere from 4 to 7% depending on valuation. At Series A you’re looking at about 20% of giving away your company, no more than 30%. That helps you to keep more control until later stages. They’re all different types of levers that you can use in order to not give up too much.
We haven’t rejected, because we are not that far along yet. We had been in a spot where we just closed out a cohort and we don’t have the dry powder to invest in a phenomenal company. It was just a few months ago. It wasn’t a rejection, more timing reasons.
Yes. We’ve always looked for recession-proof businesses: a lot of our companies are support legacy businesses and disrupting and innovating against legacy businesses. We are definitely more aligned with making sure that companies have the right redundancy if they are relying on manufactury out of Southeast Asia or other parts of the world, making sure that they have a backup, that they have planned for the best/worst case scenario, that they are very conservative in their burn rates (in line with the stage of the company), that they have enough runway. The runway is huge, it’s a very important metric that we look at. Going back to the red flags, that will be my third red flag: if the company has no runway, there’s no point. It’s important to have it least 6 to 12 months of runway in the seed-stage and then at the next stage. In Series A, you need to have at least 12 to 18 months of runway.
There is a lot of incredible startups. Amazon tremendously impacted our everyday life, as well as Google and Facebook. I don’t know if it’s a good impact necessarily overall but it’s an impact for sure. Social media change the way that we interact and engage in marketing all of it. I know those are very straightforward. Then you look at companies like Lemonade and it’s pretty phenomenal how quickly they grew. From the metric standpoint companies like that are super impressive and very focused on being 10 times better, 10 times faster early on. And I should mention Apple, for sure. And Tesla is basically a software company that turned on automotive. It’s incredible to see what Tesla has done. They have more market share now than any other automobile maker. That’s just to name a few. And these are the companies that you couldn’t replicate – they broke the mold in a lot of senses.
WeWork. I don’t even understand how that happened. I don’t understand how somebody can let that go for so long. And a payout they got – a ridiculous amount of money for plummeting a company. WeWork by far is one of the biggest failures.
I love what I do, absolutely love it. I love helping founders, I love building an outright ecosystem. To say that I’ll do it forever and ever – I just don’t know, but I love it for right now. Maybe I’ll go back to being on the operator side, but I think I’ll always be an investor, maybe an angel investor. I don’t see that change any time soon.
It’s 3-dimensional chess!
Do your homework when you’re meeting with people – whether it being an investor or a potential new strategic partner, even if it’s a quick link. I’ve gotten so many calls from founders who didn’t understand, didn’t understand my background. It’s a lost opportunity because it shows and it’s quickly apparent.
When we launched in Cologne, Germany, Priscilla Pesci, our managing partner, put together the program with Deutsche Telekom, RTL, a number of other corporate sponsors. It was a different ecosystem that we set up just because we brought corporate partners for that launch of IG program. It’s hard to align differences because it was focused on the ecosystem that we work with. It went really well. We work with 7 companies, all of them were invested in by DT, RTL, some of them both. Still, it’s hard to say the differences, because we don’t work like that in the United States. It was a different approach.