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Karl Alomar of M13: 5 Things I Need To See Before Making A VC Investment

An Interview With Orlando Zayas

Data Trends and Track Record: Data should clearly illustrate that the company’s momentum is sustainable and repeatable. I often see companies that are in the midst of a big swing. Their numbers look incredible, and they have impressive success, but they don’t have a significant track record. Without enough data, it’s impossible to ascertain whether the success is due to a momentary flash. For example, with the opportunity for viral videos and marketing campaigns, I’ve seen companies experience extreme demand in as little as a week, go to market, and raise a large round at an outsized valuation based simply on that demand. Three months later, the demand is trending down as the hype fades. There needs to be sufficient data to gauge the longer-term trends of a business and make sure there is reliable information to base a decision on.

As part of our series about “5 Things I Need To See Before Making A VC Investment” I had the pleasure of interviewing Karl Alomar.

Karl Alomar serves as Managing Partner of M13. Karl brings over two decades of executive-level experience building and growing technology businesses and spends his time at M13 across all functions of the business, specifically overseeing the Propulsion Team and running the firm. Karl is a serial entrepreneur, tech investor, and startup adviser. Most recently, he served as COO of cloud infrastructure provider DigitalOcean, where he scaled the company from 10 to 500 employees and from <$10M to $250M ARR in five years.

Karl received his MBA from Columbia and founded and exited two companies, holding the role of CEO/Founder in both, which led him to his most recent role as COO at DigitalOcean. Having also held positions as Board Member, Advisor, Mentor and Investor in his career, Karl serves as a powerful addition to the M13 team and brings the depth and perspective of multiple experiences in the start-up ecosystem to support founders and entrepreneurs.

Thank you so much for joining us in this interview series! Before we dig in, our readers would like to get to know you a bit. Can you please share with us the “backstory” behind what brought you to this specific career path?

I studied electrical engineering at Imperial College London, but I’ve always been an entrepreneur at my core.

At the age of 24, I partnered with three other co-founders to create a tech startup and took the role of CEO. It was 1997, we were in the middle of the dot-com bubble, and I had never done anything like this before. What we lacked in experience, we made up for in passion, grit, and determination. Those three components go a long way when starting a business, and we were able to raise substantial capital and grow the business. In 2000, we sold the company just as we saw the market start to crash. Our timing was lucky, but we definitely felt the early effects of the crash.

With my first entrepreneurial venture under my belt, I wanted to fill in the many gaps in my knowledge. I left the company a year later and moved to New York, where I completed my MBA at Columbia.

In 2004, now armed with an MBA, I partnered with a friend from my UK school days who had built a very significant business in the seafood industry. All of the manufacturing work for his company was done in China, and he identified a gaping hole in the financial tools available to people manufacturing there. It was an opportunity to build a solution, and I jumped on it, taking the CEO role again. We built a FinTech platform from the ground up that facilitated more effective credit and trade terms for CPG brands sourcing from or manufacturing in China. We grew the business to roughly $137 million in revenue in 2009 and sold it early the following year.

After focusing on international markets for several years, I switched my focus to the US tech community. I took seats on a handful of boards, made angel investments in promising companies, and advised founders along the way. In early 2013, I was approached by a venture firm that was considering an investment in DigitalOcean. I was introduced to the founders and ultimately came on board to clean up and structure the business for that investment, their first institutional capital. I spent two to three months on restructuring the business, developing the growth plan, and building some leasing frameworks to facilitate their core data center infrastructure — essentially setting them up to scale. They closed the round, after which I formally joined the team full-time as COO to help scale the overall business. When I left six years later, we had reached $250 million Annual Recurring Revenue (ARR) and over 500 employees. Today, they are a public company (DOCN) trading on the New York Stock Exchange. DigitalOcean was a great growth opportunity for me as I gained a massive amount of operating experience and saw the business from the first product right through to IPO readiness.

I’d known the Reum brothers, Carter and Courtney, for six or seven years when they approached me to discuss their Fund II strategy. I began working with them in an advisory capacity through 2018. I ultimately left DigitalOcean to join M13 as managing partner at the end of that year to help launch Fund II and run the firm’s day-to-day operation. M13 was specifically interesting because of the stage they were at, the amount of influence I could have on the organization, and the firm’s unique ability to impact the market above and beyond what I saw elsewhere. After spending my career doing the hard, exhaustive work of starting and building individual companies, I wanted to pay it forward and help the next generation of inspiring entrepreneurs on their journey. It was an exciting opportunity that I couldn’t pass up.

Is there a particular book that made a significant impact on you? Can you share a story or explain why it resonated with you so much?

The Lean Startup by Eric Ries. This book is a best seller now and standard general practice across the tech industry, but at the time, it presented a relatively unique way of thinking about innovation.

I read the book during the time I took between selling my second startup and joining DigitalOcean, and it reshaped the way I thought about building a business and its products.

Before reading the book, I leaned toward a more traditional waterfall or Kanban approach to product/business methodology. In hindsight, I can see that we didn’t get enough feedback. We were trying to build a giant monolith of a product before releasing it and making all the classic mistakes in traditional product development.

The Lean Startup made me completely rethink my approach to product development, but more importantly, it made me rethink my approach to business as a whole. It taught me a new method of building solutions that didn’t require you to have everything figured out from the start but instead focused on market feedback and an iterative agile approach towards building.

Do you have a favorite “Life Lesson Quote”? Do you have a story about how that was relevant in your life or your work?

I’m a dad now, and any parent will tell you that having children profoundly changes your world views and priorities. Let me offer an unexpected quote as a unique point of inspiration. I recently saw a video posted by the musician Andy Grammer of all people. Within the video, he told a story about the best advice he got from his father when he was a child and worried about not being popular in school. The gist was that he was overly concerned with always trying to just get close to the “cool kids” at a young age. As he came home upset from time to time, his father pointed out that the world is not what it seems at the moment, as everything constantly evolves and changes over time. In a year, all school politics would change, and those kids won’t be cool any longer. His father very astutely advised him that instead of focusing his attention on the people he deemed important at that moment, just be kind to everyone as you never know how things will evolve. The truly valuable friendships will evolve with those that have the strongest fundamentals.

As a father, that message touched me, and I’ve applied it to the way I guide my children. But interestingly, there is a more profound message I take from this in business.

It is very easy in all aspects of business to be distracted by the immediate satisfaction of the big shiny object, whether it relates to making decisions on how to build your business or making investments in competitive deals. The reality is it’s rare that the big shiny object has endurance for the long haul, and generally, the best decisions actually come down to the long-term benefits rather than the short.

Although all opportunities deserve consideration, I have always found myself looking for the fundamentals and where the true value is found. So, with Andy Grammar’s guidance, I am kind to all opportunities but focus on building my relationships with the ones that have the fundamentals to create far greater long-term rewards.

How do you define “Leadership”? Can you explain what you mean or give an example?

For me, leadership is all about optimized empowerment. A great leader is one that can build the best team and empower them to perform at their highest level.

How have you used your success to bring goodness to the world?

This really boils down to a person’s perception of “goodness.” For me, bringing goodness to the world is all about helping others achieve, and surpass, the success I’ve had. I’m focused on doing what I can to make sure the next generation of entrepreneurs, builders, and innovators achieve their goals.

I’ve experienced many hurdles in my career, and most of them were due to my lack of experience and knowledge. There are no shortcuts to success and no matter how much experience and knowledge you have, you will always encounter hurdles, but having the right support and mentorship can be an incredible boon.

This is actually why I was so excited to join M13. The guiding principle of the firm is leveraging the experience and knowledge of seasoned entrepreneurs to provide support and partnership to the up-and-coming founders who are building the next generation of consumer tech businesses.

Ok, thank you for that. Let’s now jump to the main part of our discussion. The United States is currently facing a very important self-reckoning about race, diversity, equality and inclusion. This is of course a huge topic. But briefly, can you share a few things that need to be done on a broader societal level to expand VC opportunities for women, minorities, and people of color?

At M13, we are very focused on this issue, and we have a good amount of diversity in our team and our portfolio. As a firm, we truly benefit from those diverse backgrounds and outlooks, as do the founders we support.

That said, the overall lack of diversity across venture is certainly subject to the systemic issues that limit opportunities for underrepresented groups.

This begins way earlier in the journey, where minorities and underrepresented groups are discouraged, often subconsciously, from pursuing their ‘lofty’ or ‘impossible’ dreams. Promotion and support of these potential future leaders needs to begin far earlier in life to bring some balance to the funnel of investment opportunities a typical VC might see.

Having said that, as an industry, we also have a lot of work to do to remove unconscious biases from our process and make a conscientious effort to look at minority and women-led businesses to build more balanced portfolios.

At M13, we actively work with organizations that focus on supporting young minority and under-represented founders to ensure that their businesses have as much of a voice in our investment considerations as all others.

Can you share a story with us about your most successful Angel or VC investment? What was its lesson?

I’ve only been formally investing for the past two and a half years, so my direct investments as a VC are still in their early innings. However, I would likely define DigitalOcean as my most successful personal investment. Not only from a capital investment point of view through exercising options, but also the time and commitment I made to building the business over the six years I was there. The outcome is a public company value approaching $10 billion and climbing.

The greatest lesson I learned from this experience was the importance of delegation and empowerment across a diverse team of talent. The experience formed the critical aspects of what I look for in founders and companies that we invest in at M13 today.

Can you share a story of an Angel or VC funding failure of yours? What was its lesson?

About ten years ago, I invested in a young startup named Cinematique as an angel investor. My investment was modest, but I committed a lot of time to helping the founders find their way and sat on the company’s board.

Cinematique created a tool that allowed for tracking objects in a video and provided enriched data and content around that object. It was a novel concept at the time, and the team managed to build a robust technology to support the thesis. They were also able to establish a number of fashion and media partnerships that offered an incredible opportunity to roll the technology out into the market.

Unfortunately, the company could not establish sufficient traction, with the capital raised, to secure follow-on investment. Over time, they could no longer sustain the business and were forced to close.

The key lesson I took away was that venture-backed companies are truly driven by their ability to achieve defined targets and goals from one round of funding to the next. Since we were not effective at defining the clear goals to achieve the follow-on round, the team was never able to create the traction necessary to overcome that hurdle. As a result, one of the key conversations I have now with founders is how they define their targets for the next round of funding to set up their goals and initiatives accordingly.

Can you share a story with us about a problem that one of your portfolio companies encountered and how you helped to correct the problem? We’d love to hear the details and what its lesson was.

Our philosophy at M13 is not to take action on behalf of founders but rather to empower founders, with our experience and guidance, to move their companies in the right direction. This is all about making better day-to-day decisions and solving challenges more efficiently.

One great example of this was in working with Pinata. Pinata is a task flow management SaaS tool that helps remote teams in the field execute and report on small, high-volume, highly distributed tasks. Pinata’s core business was focused on managing and tracking field marketing activities for CPG and Liquor brands nationally. The company had great traction until COVID hit, at which point all field marketing activities were put on hold for about a year, and the company looked like it was destined for failure.

We worked closely with the team at Pinata to help reshape the approach to market and evolve the platform to be a more general solution that would accommodate all forms of remote in-field task management. The founders then set out to prove that there was a demand for the offering on a wider basis than simply field marketing. We helped shape the full story and reintroduction of the business into the market as a SaaS tool rather than a tool purely for field marketing. With this in hand, the company quickly proved that there was far wider demand and began signing contracts for applications beyond field marketing.

Now that field marketing is coming back online, as the country continues to grapple with COVID, Pinata is already accelerating through pre-COVID metrics. It looks to have far more traction with a broader offering for the market. Our key lesson was that creativity is key to solving problems. Whereas many investors would have deemed the situation impossible, we saw the opportunity to salvage the business through the crisis and have successfully guided the company back to growth and a more valuable overall proposition.

Is there a company that you turned down, but now regret? Can you share the story? What lesson did you learn from that story?

In the very early days of the burgeoning NFT market, an NFT platform called NBA Topshop, approached us with an opportunity to buy $1 million in coins rather than a traditional equity investment. Although we understood the potential and thought incredibly highly of the business, one of our founding principles at M13 was to stick to investing in platforms for equity rather than buying coins. We passed on the opportunity. Fast forward nine months and those same coins we had the opportunity to buy for $1 million are now worth $360 million in under a year. It was an eye-opening experience that caused us to rethink the original guardrails we established for investing.

The lesson I took from the experience is that we are operating in a bleeding-edge environment that is evolving as quickly as the companies we invest in. Understanding the dynamics of value creation, and staying open to new ideas and opportunities, is critical to our success. Yes, it’s important to have a set of principles we follow, but it’s just as important to remember that no set of principles is absolute.

Super. Here is the main question of this interview. What are your “5 things I need to see before making a VC investment” and why. Please share a story or example for each.

  1. Data Trends and Track Record: Data should clearly illustrate that the company’s momentum is sustainable and repeatable. I often see companies that are in the midst of a big swing. Their numbers look incredible, and they have impressive success, but they don’t have a significant track record. Without enough data, it’s impossible to ascertain whether the success is due to a momentary flash. For example, with the opportunity for viral videos and marketing campaigns, I’ve seen companies experience extreme demand in as little as a week, go to market, and raise a large round at an outsized valuation based simply on that demand. Three months later, the demand is trending down as the hype fades. There needs to be sufficient data to gauge the longer-term trends of a business and make sure there is reliable information to base a decision on.
  2. Economics of the Business Model: Critical to the longer-term success of a business is the fundamentals of the underlying business model. It is important to understand the economics of the business at the time of investment and also in the future when at scale. Short-term economics will drive capital needs to get to scale, and economics at scale will demonstrate whether the company can achieve maturity and profitability when an exit opportunity is on the horizon.
  3. A Scalable Solution: Several businesses and product offerings work incredibly well in the early days, showing strong product-market fit and engagement with their customers. However, the value I seek can only be realized at scale. Therefore, it’s critical to ensure that the product or service offering is effectively set up to scale. This could be driven by a number of variables, including i) MARKET: is the offering niche, and if so, is the opportunity large enough within that niche, or will the offering have to break out? ii) OPERATIONS: how scalable/automated is the product itself, and what are the predictable bottlenecks the company will face as they try to scale through them? These could be anything from human resource requirements to underlying infrastructure or manufacturing limitations. iii) MODEL: often, I will consider what a company needs to look like at $100M ARR. As such, you can determine what size of audience and penetration would be needed to build a business at scale. Sometimes, although the fundamentals look strong, the volume of business needed to get to scale is an unrealistic expectation.
  4. The People: Ultimately, I believe in execution, and as such, I have to believe in the founder’s ability to build something of real value. I look for signs that the people behind the business have the drive to move the company forward because building a business is hard work. When speaking with founders, I look for commitment and knowledge of the industry. i) Are they experts in their space? ii) Are they passionate about their goals? iii) Do they understand their customers? iv) Do they demonstrate fundamental leadership qualities? A founder is only as good as the team they build, so I also look to understand whether they can inspire others and whether I can see this person leading a team of 100–200+ people. What is each founder’s special skill? Each person has a superpower, so I evaluate whether each founder’s personal superpower fills a critical need of the business.
  5. The Macro Opportunity: Beyond the details, it is crucial to believe that the company is playing into the current of change and providing a solution that can live into the future rather than focusing on a category stuck in the past. Often, dying categories create strong revenue-generating shorter-term opportunities. Still, suppose a company is not set up to bring a category or industry into the future. In that case, the profitable opportunity can be short-lived, and the fundamental business opportunity will die over time. On the other end of the scale, when businesses are purely focused on hot trends of the day, I must ensure that I believe there is a future world where demand will spread to a mass audience while also ensuring that the timing is right to catch that breakout and ride the wave to scale. If you miss the wave, there is a good chance the business will not make it, and a later entrant could ultimately own that same burgeoning category.

You are a person of enormous influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. :-)

If there were one movement I could inspire, it would be a tax code movement focused on giving value and credit to people committed to distributing wealth while making it easier financially for employees to keep what they earned by avoiding tax penalties until liquidity is realized. Doing so would change the whole wealth balance across the country.

I firmly believe that there’s far too much concentration of wealth at the top of every organization, and I’m a big proponent of wealth distribution within organizations, often through more tax-efficient equity sharing programs.

Every single employee at a company should have some ownership. At DigitalOcean, every employee — from the engineering team to the cleaning crew — had equity in the company and the opportunity to benefit from the company’s success.

Although more significant equity sharing programs would be key, the current tax infrastructure for employees receiving equity benefits is debilitating. It is designed to block wealth creation before it can be realized. This is heavily driven through the Alternative Minimum Tax (AMT), which often makes it impossible for employees to keep their options when they leave a company, let alone profit from them through a future exit.

My proposed solution would come in two parts: First, I would give tax breaks to founders and owners who benefit from the greatest equity value gains, based on how much they distribute their gains across the entire employee base. The goal would be to heavily drive the distribution of ownership through incentive structures that allow employees to share in the value of what they are building more actively. Second, I would change the tax code to allow the receiving parties meaningful tax breaks and minimum penalties until liquidity is actually realized so that all employees are encouraged to keep the options/equity they have earned even after they leave a company to benefit from the longer-term value creation that offers them.

We are very blessed that some of the biggest names in Business, VC funding, Sports, and Entertainment read this column. Is there a person in the world, or in the US whom you would love to have a private breakfast or lunch with, and why? He or she might see this. :-)

Nelson Mandela. We live in a society that largely measures success based on material items like capital and wealth. Especially in my early career, I was very focused on these measures of success and working hard to build a comfortable life for myself and my immediate loved ones.

As I’ve gotten older and started building a family, I find myself questioning and reevaluating the definition of success created by our capitalistic society. Nelson Mandela is the embodiment of kindness, forgiveness, and charity. I would love to sit down with him to learn more about how he defines success, how he views the world, and how he maintained his focus on doing good for the world without getting sucked into the trappings of capitalistic opportunities and fame.

This was really meaningful! Thank you so much for your time.

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