Adrian Lloyd (Episode 1 Ventures): We want to see people who clearly could get extremely highly paid jobs in other technology firms, but have chosen this one.
02 Sep, 2021
Ira Weiss is a partner at Hyde Park Venture Partners and a professor at the University of Chicago Booth School of Business (he holds a Ph.D. in accounting), where he teaches MBA students. Ira has a rich experience as an angel and venture investor and is primarily interested in tech-enabled services in the Mid-continent.
I’m an academic professor by training. I had a Ph.D. in accounting and I’ve started teaching at Columbia Business School in New York in 1999. A lot of my students were going off to work at technology startups, and together with my colleague, I started investing in technology startups on the side of being a professor. I just really fell in love with early-stage companies, with entrepreneurs, with the excitement of working on the next great thing. I was thinking of how the world is going to look like 3–5 years down the line just to pace it with how the early stage-startups iterate.
Then I ended up joining with a colleague of mine and forming a group called RK Ventures which was a pledge fund. There was a pledge fund structure where people would commit to investing in companies on the deal by opportunity by opportunity basis, so, a startup by startup. Each startup would have its own entity. We did that for 6 or 7 years with this colleague of mine, and we’ve made a bunch of investments including probably the best-known company called Rackspace. We had a few other investments that did extremely well. One was a fintech company called Axioma that was just sold this last year for 850 million dollars. And the company called Avid Radiopharmaceuticals, that was bought by Eli Lilly for about 800 million dollars. Then we did a couple of other good exits. So I really enjoyed it, and we did a pretty good job at it, particularly given the time.
I’m from Chicago originally, so I moved back to teach at the University of Chicago and ended up running an angel investing group called Hyde Park Angels, and then branched off with a venture fund called Hyde Park Venture Partners. And so, now it’s me and a few partners who run a venture fund in Chicago called Hyde Park Venture Partners. It’s our third fund, it’s a hundred million dollars fund, and we do early-stage technology investing primarily throughout the Midwest plus Toronto, Canada. And we have invested in a handful of companies that have become and have gone on to be really exciting opportunities.
For example, there is a company FourKites that provides supply chain visibility software and has raised about 100 million dollars, it’s the leader in its space. A company called G2, which provides reviews of software. A lot of people have known it as G2 Labs formerly, and now it’s G2 Crowd. It is also a big competitor and it has also raised about 100 million dollars. There’s a company called ShipBob which provides e-commerce fulfillment, and ShipBob has also raised about 100 million dollars. We have a handful of other companies that end up really, really well, but those few are the stars.
Our first screening is geography. We look for the Midwest first because we are a geo-focused fund. And then, within that, there’s a lot of classic things that funds usually look for: we want to make sure that that’s a large or quickly growing market, so the markets expected to be large.
We want really, really passionate entrepreneurs. We prefer founders who either are repeat entrepreneurs or have actually been domain experts, so they come from a certain market, and they know that market really, really well. We don’t always need that, but it’s nice to have if they know the market really well because they’ve worked in it for a while.
We tend to look for companies that have network effects and virality. We have primarily done B2B investing, so, enterprise software – we are usually focused on business markets. We’ve also invested in a few companies that are tech-enabled services, ShipBob being one of them, it’s an e-commerce network, a mix of a software and a service. And then, we really, really want founders who are extremely persistent.
We also tend to look at very sticky software: we want to know how many people within the organization are using the software, how regularly they are going to be using it. We’re using a lot of our companies to display our use of AI in different ways. We don’t tend for specific companies that use AI per se, but a lot of our companies are using it.
We tend to be geo-focused and we don’t want to have industry constraints, but we tend to be thematic investors. We primarily try to invest in things that the Midwest or Midcontinent would have an advantage over the rest of the country. And that could be software for the farming industry (and Middle West has lots of farms), it could be software for manufacturing (Midwest is probably the biggest area in the country for it). Moreover, I think, tending to invest into things where the Midwest has an advantage partially brought us to investing in logistics. We have a few very successful investments in logistics space. And because the Midwest is in the center of the country, because of the few industries that have grown up here such as the trucking brokerage industry, and a lot of logistics flows trough Chicago and through the Middle West. That is the market that we’re gravitating to, that’s why we ended up with investments in FourKites and ShipBob, both of which have done really well. We also have a third investment company called Roadsync which is payments for the logistics industry, usually miscellaneous payments like lump repayments and payments for all the miscellaneous things that trucking carriers usually need to pay for.
Someone needs to know their market really well and have a compelling value proposition. I tend to like entrepreneurs that are deep domain experts. I like to ask about people’s backgrounds to understand how they came to whatever they are doing and have a really good understanding of their history of life: why they’ve decided to start a company. I like the founding story and I like it to be very compelling.
Probably the classic example for me is a company called FourKites. The founder of FourKites, Mathew Elenjickal, worked in the company called I2 Software that eventually got acquired by JDA Software, and then eventually went to work at Oracle. And he was deploying large software systems called TMS (Transportation Management Software Systems) into a software system that actually helps orchestrate the span and the transportation usually for mid-sized or very large organizations that spend a lot on transportation freight (e.g. Procter & Gamble or Unilever).
And in his 7 years of working for software companies JDA and Oracle there was one pain point that he identified as the key pain point, and that was that people really wanted to know where their stuff was when it was en route. Like you’re a large shipper like WallMart or Caterpillar, or Heinz, so you may ship hundreds of large shipments a day. And the challenge you have is: from the moments it gets on the truck to the moment it shows on the other hand, usually you don’t know where it is and you really don’t know if it’s going to show up on time.
And so, there was a regulatory shift that required all trucking companies to now have a device called ELD device on their trucks which actually would allow you to see where the trucks are. Once the trucks had tracking devices on them, Matt thought “Oh, I can now start a company that will tell me where the trucks are and I can sell the biggest pain point that my customers base has been asking me for.” And he went off to start FourKites. I don’t think he fully knew exactly what to do to start a company, so he actually went to get an MBA at Kellogg at Northwestern, and while he was getting his MBA, he spent all his time working on this startup.
I loved that founding story because Mathew Elenjickal is a domain expert, he identified the pain point that he cared about and that customers were telling him they needed. And that is the company that tends to have a very large network effect and virality, so it kind of checked most of the boxes that we would want to be checked. He was the first-time entrepreneur, but the rest of the boxes were so good, and probably 2/3 of our investments are first-time entrepreneurs, so we made an investment when it was Matt and three other people on the team, it was really pre-launch. they had a couple of pilot customers. And now it’s a very large company with almost 500 people working for it, and it has become thoroughly the leader of the space.
I’ve also invested early out into a company called G2 which is Yelp for business software. The idea is if people go to make blind decisions for software historically they might use Gartner reports as an example to try to figure out what software to use for their business. So, for anyone out there, if you buy accounting software or you’re buying customer relationship management software, how do you figure out what software to buy? Historically, maybe you’d go to the Gartner reports. And the founding team for G2 (who now are serial tech entrepreneurs) has started a company called Big Machines, and when they started it, they were a small company, it was really hard for them to get exposure and tell the word out there about what they were doing. It was really hard for them to get the voice of their customers (based on that their customers were very happy with the software they’re providing) out into the world.
And the world is shifting. Look at the way the world is now: if you go to buy an oven, you look on Amazon and get 500 reviews of an oven. If you go to a restaurant (not that we’re going to restaurants right now) you typically look up the reviews and get about 150 of them. But yet, if you go to buy software you check the report written by an analyst as opposed to really getting other customers and how they are really using the software. And businesses could spend 50 000–100 000 or even 200 000 dollars a year on software. That is why they’ve started G2.
The other thing that made G2 visible is actually LinkedIn. Because part of what you really want with software reviews is knowing if there are companies like yours, that are using similar software. So, let’s say I’m a bank, Comerica or Capital One, JPMorgan or Goldman Sachs, I may want to know what’s the right customer relationship management software to use. And what I really want to know in that blind decision is what are other people using and how happy they are with it. And not just what are other people using, what are the groups that are like my group, what do other big banks use. And who is really happy, what do they like, what don’t they like, and G2 allows you to do that. And you really couldn’t do that before G2. And so, as G2 becomes the leader in its space, it has at this point over a million software reviews. And if you’re going to buy software, that’s the place to go.
We review about a thousand a year, we probably talk to 500 entrepreneurs a year, and we end up investing in 10, maybe 15 projects a year. But even for the ones that we don’t end up investing in, we always try to add value and to be helpful. We’re pretty active.
We do find some of them, we’re pretty involved up on sourcing structure to look for all these startups, and we mine social media. Because we are geo-focused, we tend to look at things in cities within the region. The other way is companies start to find out about us because we’ve developed a little bit of a brand: due to some of the investments we’ve made people certainly got to know us, and I think that helps with certain inbound opportunities.
I always recommend this when you are approaching any VC (and that includes us): try to find a warm introduction that could be through the CEO of one of our portfolio companies, it could be through someone who’s closely connected with us that we’ve worked with in the past, advisors, informal advisors. There are many different ways to get a warm introduction. It doesn’t mean we don’t look at the opportunity that’s not a warm introduction, but I think it just always helps you to kind of get to the top of the pile.
We learn a lot about the company, so it usually starts with some information about the company before we talk to the entrepreneurs. If it’s a warm introduction, we don’t need any materials, bit if it’s not a warm introduction, usually, it’s a short description of the company or even a short investor deck. We will review that, we’ll have a call with the founder and try to get a better idea of what the company is about.
What we tend to do during our due diligence process is we don’t tend to call credit customers, we tend to try to add value with things like introducing that company to possible new customers, making kind of value-add introductions, and then learning along the way what those introductions say to the potential customers, are they interested in buying it. For us it’s like: add value during the due diligence process, and the questions that we tend to want to be answered will get answered while we’re adding value. It’s the way we tend to think about it.
Now, that changes once we get very close to the term sheet. As we get close to term sheet we will dig through data, we take a step back and look at the market, what’s going on there, we have questions about the customer base if the company has customers in some cases where we hear they’ve invested pre-launch. But I think that’s a process where we try to add value where we can, and ideally use the least amount of time from the entrepreneurs that we can. Because we know their amount of time is valuable. We do make a lot of investments, but the amount of time that an entrepreneur should spend with anyone investing in anything – they should be careful about it, so we try to be careful about that ourselves. We don’t want to spend too much time with them if we don’t think that it is going to go anywhere for us.
Our initial check size could be from 500 000 to 4 million, and then we tend to reserve a kind of dollar for dollar. So, for every dollar we invest, we tend to reserve another dollar
I think we’re less excited about a founding pair, like a husband and spouse team or a couple starting a company together. Not that I think that it is not a really good thing to do. It’s more I think that’s something that can create problems down the road. So that’s a question mark for us. And I think that’s sometimes true with close family members as well.
We like it when people mostly have good relationships with their prior partners or prior employers. So we do want to make reference calls and we tend to check references pretty carefully. And, I think, if someone has a few different instances where they’ve had a pretty complicated breakup and situations have occurred, that could be red flags for us.
There are other things, not about the entrepreneur: red flags about the market, things like if you have a platform dependency like depending on Google or Facebook, Amazon or whatever it is – if there’s some dependency on one platform, that is something that tends to turn us off because we’re just worried about how much value that platform is taking from your company. That can become a little bit of a red flag for us – too much platform dependency.
And then there are things like small markets. We don’t mind a small initial market as long as the product market they’re tacking is much larger. Then that’s okay, the initial market can be a little bit small as long as the product market is large.
I think it’s mostly a threat, but for some entrepreneurs, it could be an opportunity. From the investing standpoint, it’s an opportunity because now it’s the best time for investing, but for our own portfolio companies – we’re clearly in the recession. And it’s going to be a very deep recession for at least a quarter. And I actually think even with all these governments stimulus packages we’re going to be unfortunately in the hole for a while because of that pervasive nature of Coronavirus.
I think it is mostly negative for almost all companies but there are select pockets, Zoom as an example, communication. I think there are pockets that it is an opportunity for, and usually in downmarket of the many, many amazing companies. I think it is a good time to be thinking about something new because the opportunity cost of what people were doing probably has gone down since the environment is poor right now.
Oh, yeah! I’m very happy with my career. I love working with early-stage companies, the excitement about that, I love learning about new markets. I love living ups and downs of the startup world. And the other thing I do is I still teach, I teach MBA students at the University of Chicago, and I really love doing both: I love teaching students and I love working with startups. So I’m very, very happy with my career.