Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
John Frankel is the Founding Partner of ff Venture Capital. He founded the firm in 2008 and has been a seed and early-stage investor since late 1999. Prior to founding ffVC, John worked at Goldman Sachs for 21 years in a variety of roles that involved technology development, reengineering, and capital markets. At Goldman Sachs, he worked closely with some of the world’s leading hedge fund managers and developed a keen understanding of emerging technologies and portfolio risk/return management.
Venture capital is a peculiar business. It gets a lot of column inches and a lot of interest out there, but it’s really very small industry. I sort of stumbled into it because I started angel investing about 20 years ago, when I was still at Goldman Sachs, and by the time that I left Goldman I found that I’ve been fairly successful as an angel investor and thought that maybe it was a time to make it professional, to dedicate it 100% of my time. In 2008 I founded ff Venture Capital. It was a great time to found a venture capital fund – the market was falling apart, Lehmann went bankrupt, and we were out in the market looking to raise money from limited partners. It was probably the most illiquid of the market of capital that you can raise! We raise the fund and we have 5 funds now under our belt.
You know, I have 5 children and we have 75 portfolio companies and investing in 130 – you’re kind of asking what’s your favorite child. Everyone is unique and special in its own way. We have some really interesting companies out there: we invested in Indiegogo, which is just a phenomenal crowdfunding platform. The company is doing great, it’s changed the lives of millions of people, it’s enabled people that raise money for causes, for products, for movies – it’s really touched so many people in so many ways. It’s an amazing company! But then there are more esoteric companies, like InteraXon. They create a meditation headband, and currently on version 3 of it, to quantify meditating, and I found it an amazing product. Or Owlet Baby Care: they developed a little sock that you put on a newborn baby to monitor them, so they don’t die of heart or lung issues. There is a whole series of companies out there. One of our earliest investments was a company called Cornerstone OnDemand; they went public in 2011 and have now approached 40 million enterprise seats worldwide. Everyone is special.
A very good friend of mine, Lou Kerner, who is now one of the leading influencers in crypto, was an analyst at Goldman Sachs and left it to run theTV company. The country of Tuvalu happens to have the .TV domain, and the .TV company paid them $25M to buy all rights to issue .TV names. Tuvalu, actually, used that money to join the UN. This is an example of when the DotCom Boom really helped to change a part of the analog world in a way the people never really knew or thought about. The .TV is one of the premium domain names still out there, they are doing incredibly well. So, yes, we invested in it reacted, exited in 2003, and actually made money, which was quite unusual for any company in this area you invested in during that time.
We review 2,500 projects. We probably end up investing, in a good year, in about a dozen companies.
We have a very broad network; we’ve been doing this for 12 years and we have hundreds of founders and hundreds of other VCs and Angels we’ve invested with. We get a lot of inbound through our network, but we’re always willing to look at something that comes from outside of that network. Usually, the best way to serendipitously reach me, if you can’t find a way through the network, is by Twitter which I recently active on.
It’s a fascinating process, and I don’t think you can reduce it – yet – to a computer algorithm or list of questions. Ultimately, you’re looking for very strong teams who are in interesting spaces where they can build a business that can be very big. That sounds general, and it is at some level. We have areas we lean into – we’re very interested in FinTech, Applied AI, Drones, and Robotics, and, probably, three-quarters of investments are Enterprise nowadays. We look for really capable teams and if it’s a capable team in a space a little bit out of our areas, we’re willing to engage with them. And then we look for companies we think we can make a difference: we’re not looking just to cut a check, we’re looking to see if we can change the outcome. I’ll share some statistics with you which really helps distinguish the results of an engagement as a VC. In the industry in the US each year there are about 3,000 companies that managed to raise a seed round. And about 300 of them end up raising not only Series A but also Series B, it’s about 10% of seed funding companies. In our portfolio, because we got 12 years of data, it is closer to 50% for the companies we funded at the seed round – about five times the average. We’re very engaged VCs, we do a lot of work with our portfolio companies, we don’t just cut a check and sit back.
Seed. There were some exceptions on the A round because of the opportunity, but we generally like the seed round. It’s where we think we can make the most difference. We tend to stop investing at the rounds about a $50M valuation, it is where a lot of VCs just start.
Predominantly, companies that want to execute within the US. We have some based in Israel, in Europe, and in Continental America outside the US, but all of them are interested in exploring the US market, which is where we think we can be really helpful.
I can say the average but I think it’s highly variable – some deals are much faster than others. We are a pain as investors, we do a lot of diligence, so there will be no surprises down the line for us. When we talk to Series A and Series B investors, they know that the diligence we do is very intense and because of that, they feel comfortable looking at outlined numbers, looking at the company itself that they won’t get surprised. We really deal with a lot of diligence risks. Usually, it takes 4-6 weeks from issuing a term sheet to closing a deal.
Well we like to put in a check from $300K to $700K for 10% of a company.
A 1000x! Do we get it? No. It is a portfolio construction approach. The common understanding is that ⅓ of your companies will fail and ⅓ will be relatively boring in terms of returns. And then it’s the last ⅓ that generates most of the returns with 10% of your companies would generate 85% of your return. It is very concentrated, so you want your best companies to be in the portfolio for the longest period of time. If we make 10 to 30 times on money on an investment, that’s generally a good place to be but we love to make more. And honestly, sometimes we make a lot, a lot less.
We are generally looking for about 10%.
We looking for domain experts; for people that, you think, can make good micro-decisions in a day in and day out to execute to a good exit; for people who can actually sell their product; and people who really care about what they’re doing.
We have. It’s kind of interesting: when you have left a team of 3 and all of them have equal ownership, that can be a really big problem, because in no company do you have 3 people who are equal. One person is CEO, one person is CTO… And if that is not sorted out early in the game, it causes problems later on. The other issue you have is that each round you are diluted. You want to make sure that there’s enough equity for the team but the more people on the team, the more difficult it becomes to ensure that there is enough equity.
Things not being disclosed are a red flag. Also a lack of focus on revenue. We think revenue is really important because of the information content embedded in revenue. We really like companies that can get early revenues and CEOs and teams that appreciate it.
You kind of regret everyone that doesn’t work out. It’s human nature. You have to accept – and it comes with the territory of investing in early stage companies – that there are so many unknowns. But I’m not in the business of regrets – I’m in the business of trying to help the companies we work with and doing our best to help them succeed.
People love to talk about the anti-portfolio and the deals missed. Who here wouldn’t buy Amazon for $3 a share and then sell it before it fell 8% just now? Anybody could have done this. We had great companies that we miss. But the thing to understand about great companies is much too often for a lot of great companies that first round as a difficult round to get done – it’s just not that evident. And companies pivot from what they do. Yes, there are definitely some great companies we passed on. It couldn’t be otherwise if you look at 25000 companies a decade. And the reasons why you miss? You can miss it because you didn’t like the people at the time, and 3 years later there was a managing change and the whole company was different. There’s a whole series of things. And I think spending time thinking about the anti portfolio is just not healthy. You don’t know the outcome until the company exits. It is actually funny: my wife likes to say about the public stock market, “You don’t make your money when you sell it.” This compares to what my father used to say, “You make your money when you buy a stock, not when you sell it.” My wife, however, says, very wisely, “You only making money when you spend it.” Because otherwise, you are just investing in the next company.
Healthcare is amazing, but we just don’t understand it well enough to be able to invest in it. The intersection of information technology and the digitalization of Healthcare is going to unlock enormous value for society and for the people who get it right.
I don’t think so. We keep investing. I was looking at the data and I think on average nothing is changed. However, volatility has peaked up. One of the things that I look at is how much money of our portfolio companies raised year-to-date vs year-to-date last year – pretty much the same amount. And we got the outcome on revenues for Q2, which I thought would be flat, were up 30%. But that was just on average: some went down 95%, others went up massively. It’s like a bowl of porridge when you say the temperature is just right but when you look at its boiling hot porridge with ice cubes in it.
Opportunity for the venture business. Depending on a startup it has been a massive accelerator or it has been a pause for businesses. We tend not to invest in secular businesses that, we think, can take a hit. We still got the secondary and tertiary economic impacts to live with.
Yes. We invested in Skycatch which is a leading drone company for real-time surveys for mining and construction. The CEO came to us with one idea (I can’t even remember what it was), and we like him but we didn’t like the idea. When he came back with Skycatch, we invested, joined the board, and have been very engaged with them over the last 7 years.
I grew up during a time when there were no cool movies about tech or startups. Maybe the closest thing you got was the technology was James Bond movie. The cool movie was Wall Street and all of my generations wanted to go and work on Wall Street has seen that movie. Many thought, “Wow! There’s a lot of psychopaths in this business, and it’s evil, and is there some people make a lot of money there.” Then in 2010, The Social Network came out and it was the first movie about startups. You watch the movie: this guy’s a bit of a sociopath, and bad things happen, he is surrounded by people who want to sue him, and half a movie happens in a lawyer’s office, and he made a lot of money. I think, a lot of people walk away with an idea that you make a lot of money in startups. There is Justin Timberlake’s character. When in his first scene the girl says, “What are you doing?” He answers, “I’m an entrepreneur,” and she says, “Oh, you’re unemployed!” In 2008 that was a very fair reading. Not today. Things have really, really changed over the last decade in terms of standing and how people think of startups. But I still go back to The Social Network as a really good cultural understanding of startups.
That’s really not about startups but an aggregation of a bunch of different hedge fund founders and how they would like to think they behave.
You have to pick a company like Intel, as one of them. The commercialization of chips, Moore’s Law have been fundamental. The second one I would pick will be Apple. Not so much the Apple we have today, but what Steve Jobs did was an enormous amount of information embedded in art, in calligraphy, in the artistry of doing things that are not in computers. Because of him, we have fonts, typecases, and beautiful interfaces. That was incredibly influential. And then they get a second class because they completely reinvented touch interfaces, so mobile computing could work. Apple has to be there as well. The third one is probably Microsoft. What Microsoft did to bring the computer into the office, standardize, and increase the efficiency of businesses worldwide has been amazing. But there are lots of new companies around who are doing amazing things as well – just look at Amazon or Google, look at what Tesla is doing, and the like. Still, if I have to pick 3, without those 3 you wouldn’t have the others.
It’s not chess, because chess is purely intellectual. It’s not checkers, because the degree of chance to it it’s much more opaque. It’s tough to know: you can have a company and you can make every decision correct for the first 10 years and in year 11 two bad decisions destroy the company. The venture is only based on the money you put and the money you get out at the end – it’s a lot you don’t control. It’s probably closer to running a football team.
Patience. Willingness to listen. A desire to help others. And the ability to review enormous amounts of information and surf through them to find out what the real decision needs to be. And then all of the other aspects which are the ability to pick good companies, invest in good companies, not just be right but help convince people to move in the right direction. There are lots of qualities that jump out.
When I was in my 20s, I listened on the Radio to Sir Thomas Sopwith who was in his late 80s. He had been a world-class yachtsman and sailor for the first part of this life. Then he founded Sopwith Aviation Company, and they produced airplanes in the First World War. Later he co-founded Hawker Siddeley. Later he became a consultant. And he said that he really thinks you should never retire in life – you should have three distinct careers. That’s what keeps you young and that’s a great way to live your life. I think he’s right. I’m really enjoying what I’m doing and I’m going to be doing this for quite another long period of time – I can see myself doing this into my 70s. After then I might want to go and do something different and I don’t know what that would be. I think it’s good for now to not know what it would be, and I’ll probably start on the bottom run of whatever I’ll do. I think it’s a good way to live. The notion of stopping work and chasing golf balls doesn’t appeal to me; I think if you do that, you age dramatically in a short period of time. I’m a non-retire kind of person. Right here right now I can’t imagine doing anything more fun, more enjoyable, more engaging than working as a VC with the startups we have in front of us.
What is fascinating about Indiegogo is that, like Kickstarter, they started as a crowdfunding platform. The whole underlined notion is that the crowd is smarter than the individual. This is the non-gatekeeper solution: you go on Indiegogo, you list your project, you do what you can to get traffic to it, but if it takes off, it takes off, and if it doesn’t, it doesn’t. A couple of years ago one of the largest projects they had was a beehive! People raised almost $15M selling beehives. The unique design was that it literally had a honey tap on it: you can turn something, it will crack the wax inside, and the honey would drop out, and you would have honey coming out of your beehive. For whatever reason, this really appealed to people. They’ve sold a ton of it and came back for a second version. I don’t know if anyone would have backed a beehive like that, but the crowd did. There’ve been a lot of projects like that that have been able to get life and change people in amazing ways because of the platform, which is great. What I think is interesting about Indiegogo is that they didn’t just do crowdfunding – they said that entrepreneurs need help. They build a suite of services around entrepreneurs, centered around crowdfunding but all the other aspects they can do to help entrepreneurs, and the company is sort of going from strength to strength right now. It’s doing incredibly well because they really understand who their customer is. I would tell anyone who is thinking of starting a company: Think about this from the customer side. What is it the customer is looking for and what is it we can do to deliver them an amazing experience. If you do that, you’ll be successful. Indiegogo is a really good example of that.
I’d only lived in two cities, so my second favorite city is Oxford. I was there for 3 years, I’ve got my Masters in Mathematics and Philosophy from there. What I loved about Oxford is how peaceful and quiet it is. I was at New College that got its name in the year 1379 when it was founded because it doubled the size of Oxford. You can walk around parts of a college that have not changed in 200 years, 400 years, and even 600 years. And the quieter you get walking through quads, or by the ramparts, or another part of it, where you know that people from so many generations ago so the same thing and had the identical experience you having in that moment of time – that to me was amazing. It was a very fun time full of lots of wonderful things. If I go back there today (and I hadn’t been there for 10 years or something like that), I guess, it is identical to how it was when I was an undergrad, with people running around doing the things I was doing then. It is a microcosm of time. I love Oxford as a place because of those aspects.
The first piece of advice is: If you really have a good idea, why would you let anybody else execute against it? If you’re going to dominate this idea, this space, how are you going to do that? Really think strategically about why you’re doing it, etc. But! Don’t get stuck in so much analysis that you never move forward. The second piece of advice is: Being a CEO being a founder is incredibly lonely. There are so many decisions you have to make yourself, and it is very high pressure. Maybe you’re the founder who can raise money very easily and convince customers to open their wallets very easily, but for most people, it takes a lot of hard work and a lot of energy. So thirdly: When choosing partners to work with, whether they are VCs or others, chose those with who you enjoy spending time. Don’t pick someone up because they got a great reputation but you don’t like them. Work with people that you really like. That is the number one thing in life. Life is short – spend it doing things you enjoy with people you really enjoy.