Looking at VC, Startups and Bubbles: Podcast + Notes from Being Interviewed by Jay Kim
I enjoyed being a guest on Jay Kim’s podcast to discuss my views venture capital, startups and bubbles, plus a few other things.
You can listen to the whole episode in less time than it takes to complete a short spacewalk and also below is a lightly edited transcript of some of my favourite parts of the show.
Jay Kim: How big is your team now at Fresco? You mentioned you had three managing partners in the US, Tokyo and in Hong Kong.
Tytus Michalski: We’ve got eight people in total and then we also have a network of folks we call impact partners who help our portfolio companies in that they do everything from helping with coaching teams to business partnerships and then finally, core to our model is working with strategic partners in our local countries, so some of these strategics are investors in our funds and they value not only the fund itself in terms of returns and money but also the business opportunity. Because what’s happened is a lot of these traditional businesses, they might be in business for over 100 years and they realize that their traditional business is going to transform in the next 20 years and they better figure out what’s going on. So by investing in our fund and working with us, it’s not only just the returns that they can get, but also the actual transformation of their business.
Jay Kim: Okay, that makes sense, and how many portfolio companies do you guys have now?
Tytus Michalski: We’re at just under 50 companies, mostly headquartered in the US but all with very global cross-border perspective and so, we typically are helping our US companies come to Asia across different countries. We also have companies headquartered in Asia that are going global either within Asia or to other markets, and then finally even in our portfolio we have a number of companies that do have European offices as well so we really do end up with a pretty global perspective.
Jay Kim: Right, and is the reason why the majority of your companies are sort of US-based is just because that’s where the talent is and that’s where you see the opportunity from these guys when they’re expanding globally, that you can play a role in their global expansion into say China or Japan. Is that why your portfolio has shaped up the way it has?
Tytus Michalski: Yeah, I think it’s tied back to the history of the startup ecosystems and so our exposure has a pretty reasonable map to the majority of the ecosystem so the Bay Area is the biggest and that’s no surprise. New York is also a big one for us and then it just becomes much more case-by-case, where we have a presence and where we don’t.
And then finally, the big swing factor is the cross-border emphasis. So right now, we have more companies based in the US coming to Asia. As the ecosystems in Asia become more mature over the next 10 years, over the long-term, we definitely see more of our portfolio companies being headquartered in Asia and going global. So we do think there is going to be a shift, but we’re just going to let the opportunity set decide the timing of that shift.
Jay Kim: Interesting…interesting idea. I think one of the other challenges that — when you talk about private funding — one of the challenges that I have seen and sort of observed is with the education and the sort of mentality…the old money in Hong Kong has all been made basically off property. One of the challenges that I saw earlier on was that…private investors…thought that investing into a startup was just throwing your money away. And to be fair, as an angel investor, a lot of the times it is, but if you really kind of study it and know what you’re doing you can probably have a higher chance of success as an investor right?
Tytus Michalski: So I think the good news is, in the last few years there was a lot more people interested in investing in startups and as you said there is a lot of people in Hong Kong that do have money and maybe were in other areas, whether real estate or finance and are now getting more involved in startups as investors. The challenge from my perspective sometimes is that the constraint on investing in startups is not money. The constraint is actually time. If people have the time, I think they could do it, but usually people don’t have the time and so if they’re doing it as a hobby…I think that’s where your run into some challenges. And to put it into perspective, for us as a fund, we look at more than 100 opportunities for every one investment that we make.
Jay Kim: Wow.
Tytus Michalski: And so that’s, you know, at least 99 times that we’re saying no. And then there’s statistics out there about what does it take to succeed as an early stage investor and the numbers are pretty clear. If you do less than 20 hours of due diligence, your average expected return is essentially 1x, so you can get your money back which is not great. If you do 20 hours or more, your expected return is more than 5x. And so when you then say…even if you don’t do that amount of due diligence on all 100 companies — even if it’s some fraction — that’s still a lot of time on just filtering the inflow. And then when it comes to early-stage investing one of the other key points is you need a diversified portfolio. So you shouldn’t just be investing in one company…probably at least 10…probably closer to 20, 30.
And so when you start to do that and then the fact that you have to help the companies after you invest, suddenly you come to the conclusion that this should be a full-time job! And that’s essentially the conclusion…you know, that was the learning process I went through and I said, yeah, I’m really excited because I think there’s a huge opportunity.
Jay Kim: Wow.
Tytus Michalski: So I think what we need is…we do need more people that take it seriously. So people ask me do you want more funds that are doing early-stage investing and I say yes, and that surprises people because they say, you know, well isn’t that competition? And I say no…I would rather have high-quality investors who really know what they’re doing; I think that’s good for the ecosystem. But to the extent that people don’t want to commit to time? Then yes, they should be investing and supporting people that are. So investing in funds or in other structures where those casual investors, they can still participate but they also are appreciative of the time commitments and as you said, if you’re an early stage founder and you’re working night and day and you’re getting these random emails from your investor that may not be as helpful, it’s not necessarily going to support the business as much as somebody who’s doing it full-time.
Jay Kim: Right, yeah absolutely…I haven’t heard that metric before…the 20-hour metric but when you put it in that context, you know, let’s say you’re working a 40-hour week and you’re devoting let’s say, two companies that you can look at per week and so if you look at 100 companies every what…50 days…you can make one investment. So you’re making like five a year if you’re a full-time, you know…and you’re doing your proper due diligence, right?
Tytus Michalski: Yeah, it’s not easy, right? I think that’s what people don’t realize. They think it’s about money but it’s actually about time.
Jay Kim: Very interesting point…that’s awesome. So okay, let’s dive into some of this now. Some of the other stuff that probably a lot of our audience wants to hear.
So when Fresco Capital looks to make their investments, what are they looking for specifically? What can a startup founder do, if anything, to increase his or her chances of being noticed by your team?
Tytus Michalski: Yeah so at the high level we do advise founders to find the right investors for their company and for many situations we’re just not the right fit. There are certain things that we focus on and there are certain things we don’t. We’re pretty transparent in the areas that we focus on so education technology, digital health and how technology is changing work. When you look at those three areas, the thing that they all have in common is these are industries and opportunities where technology has had less of an impact in the last 15 years. So when you think about it as a consumer, you have these amazing consumer apps and wonderful experiences and then you go to the office and you work with, you know, usually pretty crappy software and similarly in healthcare and education, the overall experience for people working there and for the users is sub-optimal to say the least.
Those are the areas of opportunity that we are focused on and so when it comes to people that are building, let’s say, the next consumer social network, we’re just not going to be a great fit. That’s the high level overview. And then on the specific process, we look at the team first and of course we have some specifics that we’re looking for but a lot of times what we’re really focused on is the fit between the team and the product in the market, so we call it founder-market fit.
Jay Kim: Uh, nice.
Tytus Michalski: And so that’s an important thing. And then yes, there has to be a sustainable business opportunity and then finally, of course we do look at the deal structure itself. So we go through a process but we’re able to go through it pretty quickly.
Jay Kim: You’ve seen a lot of ups and downs in the market…you’ve seen bubbles and you’ve seen them pop. So, how do you feel about the state of early stage investing right now? Are we in a bubble? Are we going to be in a bubble or not…are we out of the woods?
Tytus Michalski: Yeah we’re fortunate that we get to see what’s going on in different markets and different parts of the world and so I think a lot of emphasis is on what’s going on in the Bay Area and at the same time there’s other markets, whether it’s China or even Japan, that have actually at some point seen higher valuations, so those markets sometimes have been actually more cyclical.
The good thing with the Bay Area is that there’s a pretty mature market and so while valuations can get excessive at the early stage, people have been through cycles and so it’s maybe not quite as extreme. Where I think there were more challenges was late stage investing. So the pre-IPO growth stage investing area clearly got a little overheated and now it’s come back. At the earliest stage for us, we just feel like ultimately investing through the cycle is the right way to go and similarly with founders building a business through the cycle is definitely the right strategy.
And so in a market where capital is abundant, people think that’s a great time but what people forget about is that if everyone has money, then what that means is your competitors are probably cutting prices aggressively and there’s this massive war for talent, right? So that’s not actually good for companies. And then when the fundraising market is tough, people think that’s negative but the benefits are costs are down, employee availability and retention is much better and when you’re going to see customers there is a lot less competition.
So I think founders and investors that are appreciate the upsides of softer fundraising markets are the ones that can really build large companies and on the flip side when things are good, sometimes the danger is you don’t want to believe your own hype, so don’t get too caught up in all the stories and the awards.
Those are some of my favourite parts of the podcast and there’s more if you listen to the entire episode.
Make sure to check out Jay’s website for all of his interviews with successful investors and founders.
