Talking Shop With Rising VC Daniel Gulati
“My starting point is thinking through how the product or service creates value for consumers.”
I recently had the pleasure of interviewing Daniel Gulati, who was first introduced to me as a rising star in VC. Daniel was just promoted to Partner at Comcast Ventures and focuses on early stage consumer investing. Since joining the fund, he has made 10 investments, and his portfolio includes several high-flyers. Earlier this week, I sat down with Daniel in his San Francisco office. In quick-fire style, he shared his thoughts on his portfolio, investment criteria and companies he admires.
Yitzi: Tell me a bit about your backstory.
I wound my way into venture capital. I started my career as a consultant at BCG, and got the entrepreneurial itch. After BCG, I started a venture-backed company called FashionStake that was acquired by Fab.com. I went on to run Fab’s fashion business after the acquisition. Most people remember Fab as an e-commerce company focused on homewares and furniture, but fashion grew to be their largest vertical. After leaving Fab, I started thinking through my next startup, and in the process became curious about life on the other side of the table. So in early 2014 I joined the Comcast Ventures team in New York as an Entrepreneur in Residence, and became a full-time Principal in 2015.
Yitzi: What is one company in your portfolio that you are excited about?
I am excited about our investment in Away, a direct-to-consumer travel brand. The team there has really hit their stride this year, so much so that it’s easy to forget that it’s only their second year of operating. We were seed investors, and invested more in successive financing rounds. Although their numbers are significant, Away is still in it’s infancy, and there is so much growth ahead. As far as lessons for future investments go, the first lesson there is that an obsessive attention to detail on the product side is critical. Let’s spend hundreds of hours designing and testing inner suitcase zippers and obscure wheel components, that kind of thing. Secondly, first time founders can be the best kind to back. They enter the arena with no preconceptions. Finally, acknowledging the power of brands. Brands are intangible and can be hard for VCs to wrap their heads around, but nailing brand execution is a real source of advantage.
Yitzi: That’s an interesting notion- that brands can be tricky to value in the early stages. For every successful brand, though, there are many more that fail. More generally, how do you know when a startup is going to fail?
One of the leading indicators of failure I have observed is slow cycle times. Generally, companies biasing for speed- faster product releases, thoughtfully and rapidly building out the team, aggressively landing first customers- those companies are more likely to succeed because early results are just so disproportionately motivating, and the team gets the chance to build on that initial momentum.
Conversely, if companies are moving slowly, usually there are underlying issues that tend to drag the team away from reaching escape velocity. In those circumstances, enthusiasm wanes, people second guess themselves (or quit), and cash withers away. So these days, I’m really honed in on speed of execution.
Yitzi: There is another type of VC failure: companies you turned down that are now successful. Can you shed some light there?
Too many to mention! For the most part, the lessons drill down to not over-analyzing an opportunity (there are always reasons not to invest), recognizing the value of a brilliant founder over a “good enough” founder and passing based on a valuation that seemed too high at the time.
Yitzi: Changing gears now. What companies do you most admire?
As far as companies go, it’s hard to top Amazon. In markets as disparate as movies, cloud computing and diapers, they are a leading player. Their ability to bundle around Prime is truly unique. And the consumer surplus they have generated is immense. Amazon creates orders of magnitude more value than it extracts.
I also admire Airbnb. They are unquestionably mission driven, but will also prove to be fundamentally healthy in the long run. For a marketplace nerd like me, Airbnb tops the list.
Yitzi: You mentioned the concept of companies creating consumer surplus. How have you used your position to bring goodness to the world?
My focus right now is really to help entrepreneurs as much as I can, whether I am a small investor, a large investor or haven’t invested a dime. As a VC, you are really exercising your superpowers through the entrepreneurs that you come into contact with. It is really about helping empower them to go after their dreams.
Yitzi: When making an investment, what are the things you need to see?
Some of the key questions I ask myself before making an investment are:
Is the consumer value proposition compelling? My starting point is thinking through how the product or service creates value for consumers. Are you going for a cost leadership position to drive down price? Are you aiming to differentiate on non-price factors? Or are you maniacally focused on a particular segment? Often, the best companies hit all three: cost, differentiation and focus. Uber is cheaper than a cab, because it’s cost structure is fundamentally lower. It basically created a real-time GUI for ground transportation, providing a fundamentally different (and better) user experience. And it was originally focused on busy city dwelling professionals that valued certainty, before expanding to ever larger customer segments.
What is the endgame? The best founders spend time building an initial foundation that they can use to pursue more ambitious things. I am interested in the foundation, but more interested in the ambitious things. Ultimately, I am trying to understand how big the business could be if the founder executes on her vision.
How compelling are the founders? Founder “compellingness” is a leading indicator for overall team quality, because the best talent gravitates towards the best founders. Also, founder quality underwrites the entire strategy.
Does this business get better over time? Some businesses have natural network effects that create a layer of defensibility against the competition, and deliver increasing value to users as they scale. These companies can make fantastic investments.
How will they extract value? Create value without extracting any and you’ve got something akin to a public good. I am interested in the founder’s theory on how the business monetizes, either now or some time in the future.
Things I absolutely don’t need to see to get excited about investing are product/market fit (ideally, I’d like to invest before it’s obvious to others that you have reached this point), crazy momentum (this can lead to investor pile-on that can have devastating effects down the road), or a fancy pitch deck and presentation (I’m more interested in the substance behind you and what you are building than how polished you are as a presenter).
Yitzi: Who do you most want to have a one-on-one dinner with, and why?
I’m a basketball nut. My jump shot from the elbow has been fading to the left recently, so I’d love to sit down with LeBron James and get some pointers.