Interview #2: Michael Lee

Curious, friendly, and sweaty

are three attributes Michael Lee — analyst at Red&Blue Ventures, and alumnus of the University of Pennsylvania uses to describe himself. I had a chance to learn more about his background and experiences:

You are currently a fellow at Venture for America. Tell me about where you’ve been placed and what you’ve been up to.

Venture for America provides a platform to match students to startups in need. Currently, I am an analyst at Red&Blue Ventures (I met my current managing director through VFA), which is a seed/early stage VC fund managed by UPenn alumni. What really stood out about Red&Blue is the really cool portfolio of companies that they’ve invested in so far, the experience of the managing partners and large network!

As an analyst, my responsibilities revolve around networking, due diligence, market research, and special projects.

It sounds like VFA was able to give you an opportunity that a lot of people are seeking — I know a lot of recent graduates that are trying to get their foot in the door within this space.

I think it’s worth mentioning that I’ve been pretty entrepreneurial all my life. I started my first skateboard company when I was sixteen, and I’ve gone on to pursue other ventures throughout the following years. When it comes to early stage VC firms, they really prioritize working with people that have previous founder experience given that they understand firsthand what it’s like building a company.

I like describing the world of finance as Hollywood. You have the aspiring entrepreneurs which are the actors, and then you have VC/Private Equity firms with capital which are the producers (buy side), and then you have investment banks and financial consultants between the two parties that act as middlemen which are akin to agents.

One of the challenges working as an analyst at an early stage firm specifically is the lack data and history that can be used for valuation. In terms of quantitative valuation, there are all of approaches you can take (comps, multiples, VC method, discount expected cash flows etc.). Is there an approach that you’ve found particularly fruitful?

I’d say none of them. When I was hired, I was told that in the early stage VC world, venture capital is a people job, not necessarily a finance job. Although there are a few financial elements in what I do, the basic framework that I follow is:

Market + Money + Management + Product

In terms of evaluating opportunities, one of the key elements is considering the market, and evaluating if the market is big enough. This is probably one of the most quantitative parts of what I do, when I dig through market reports and use comps for a top down analysis. In addition, I also take a bottom up approach to calculating unit economics and modelling revenue on a per unit basis.

Ensuring that the market is is big enough is important because in VC, for example, you’ll have five companies that end up being worth nothing, 3 that sell for maybe 1.5x, and then 1 that exits for 10x. The opportunity and market has to be big enough so that every investment is a potential 10x return, as you need big wins to make up for all the failures.

In essence, I’d say that valuation is primarily used as a tool to determine price and ownership, but ends up being determined qualitatively by the market (as opposed to rigorous quantitative methods).

Additionally, in terms of management, I’ve seen instances where the entire team is built up of engineers because they feel like having business people adds minimal value. As a result, they struggle in situations where they’re expected to sell or negotiate, and I think its really important have a balanced team.

With regards to product, my managing directors usually like to talk to customers and see demos of the product to get a better sense of what we’re investing in. On the money side of things, the funding round has to have favorable economics and control terms to make it a worthwhile investment. It seems to be more art than science.

Along with entrepreneurial management, you studied statistics at UPenn. Have you been able to leverage this skillset in any regard?

I haven’t used a lot of statistics in my job, at least from a technical perspective. But in terms of understanding the probabilities and dynamics of how portfolio returns work and are distributed, having a statistical background has been incredibly helpful.

Give me a prediction or outlook on a trend, technology, or business model that will emerge in the coming years.

I want make a disclaimer that I am by no means an expert on this topic, so take what I say with a grain of salt. That being said, as we see the world change, I think there is a more of an emphasis on the protection of sensitive information. As a result, I think encryption and cryptography are going play a very large role in helping people reclaim their human rights over the next twenty years. In addition, I think secure privacy online is going to be taken a lot more seriously, at least here in the United States.

All in all, you’ve dabbled in entrepreneurship and venture capital — what’s next for you?

I do want to get back on the operating side at one point. I really do enjoying building and designing products and services from the ground up. That being said, I can see myself coming back to venture capital and being involved with venture capital throughout my career, but I don’t think I would consider myself a career venture capitalist or a career investor per se.

Learn more about Michael!