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ABOUT THIS EPISODE

Jerry Neumann is one of New York's leading angel investors with a portfolio including the likes of The Trade Desk (IPO: 2016), Datadog and Flurry (acquired by Yahoo) just to name a few. Prior to angel investing, Jerry built the first open market for the pricing and exchange of real-time consumer data in the form of Root Markets. Jerry was also the Managing Director @ Omnicom's Venture Capital Division where he enjoyed an incredible 5 IPOs from the portfolio.

In Today’s Episode You Will Learn:

1.) How Jerry made his way into the world of VC in the 90s and why it was difficult to lose money in venture at that time?

2.) Why does Jerry believe that the vast portfolio construction model is "wrong" and a "dead end"? In what circumstances does Jerry believe "spray and pray" investing can work? Why does Jerry believe you can only have as many companies as you can actively help? How does this lead Jerry's thinking on his own portfolio construction?

3.) Why does Jerry believe that startups must have a board from Day 1? What are the inherent benefits of having a board so early? In the earliest of stages, how should those board meetings be run? Who are the best board members Jerry has worked with? Why were they so exceptional? How does Jerry think about building board intimacy?

4.) Why does Jerry disagree with the conventional wisdom of Silicon Valley that price does not matter because the exit will either be huge or a zero? How has Jerry seen the best firms in their thinking on market price vs indicated discount price? How has Jerry's thinking on price sensitivity changed over the years?

5.) Why does Jerry believe that the follow-on investment is always a much better investment? How does the risk-reward ratio change from initial to follow-on investment? How does Jerry assess and prioritize future financing risk when investing in an opportunity? How does he mitigate that as much as possible?

Items Mentioned In Today’s Show:

Jerry's Fave Book: Console Wars by Blake Harris

Jerry’s Most Recent Investment: Edmit

As always you can follow HarryThe Twenty Minute VC and Jerry on Twitter here!

Likewise, you can follow Harry on Instagram here for mojito madness and all things 20VC.

We also speak about Movidiam - as brands turn to smarter ways of creating video and digital content, the Movidiam platform offers faster turnarounds whilst maintaining or improving quality. They’re already working with some of the biggest, most innovative companies to help compare teams and freelancers across the global curated network of creative talent. Producers and marketers looking for the best creatives can get a shortlist from Movidiam’s account managers in hours - tailored to their project’s needs. Submit a brief or check out the platform at Movidiam.com.

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TRANSCRIPT

00:00:00welcome back to another week in the world of the 20-minute BC with me Harry stebbings nerdlove see you on Instagram at age that means 1996 things behind the scenes from us and you can submit questions on gas for future episodes I'd love to see that instruction but it's been lasting on managing a successful portfolio he's right here on Reaction Wheel. Chromecast and continues to teach me with every piece and you really must chat line out so I'm very welcome to the whole seat State. Jerry is one of New York's leading Angel Investors for the portfolio including the lights of the trade desk which I appeared in 2016 Taste of dog and flurry which was acquired by Yahoo just to name a few projects which I was managing director cenikor Investments I'm a Fool. Jerry built the first open market for the pricing and exchange of real time-consuming it in the form of Fruit markets
00:00:59capsule division by hand Droid Incredible 5 IPOs from the pool I really do appreciate about Fred 4 episodes Browns and I'll turn into small two ways of creating video and digital content distribution channels symbol for Brian's on agency's to connect with the very best creations for that projects in the video is already working some of the biggest forward-thinking companies to save time and costs planner in comparison of the global Network to create a talent weigh the global Network that well place to continue to expand steak on the walls come time to Mom's produces the most his looking for the best creative and got a short list remove idioms account managers in an hour's Taylor to that project sneeze when we need to submit a breath today will check out the platform of idiom don't come home to some of the biggest names in the industry and I'm supposed to the 20-minute BC also comes from one of the capsule the easiest way
00:01:59scale solar energy projects across the u.s. with one that you can own up to seven and a half Centennial eat while helping to finance renewable energy projects and you can get some glasses won the capital Y impact investing needs capitalism but that's quite enough for me so now I'm thrilled to hand over to Jerry Newman
00:02:25you have now arrived at your destination Jerry is such a wonderful friend thank you so much for joining me stay Jerry while I will pay you lazy bastards out there did it on purpose and the rest of us got into it by accident when I went to work for a company called Omnicom group back in the 90s and they wanted to build a portfolio of internet companies and they hired me to help him do that and it turned out at the time you couldn't buy any good internet company anybody who is good wouldn't sell to you by accident nobody there so it was an interesting experience so there was a lot of room to make mistakes and still make money
00:03:25last time will it it's embarrassing to think about the first few deals we did because they had none of the usual protections a venture deal did he normally has there was no preference they were just plain I hate will buy 20% of your Equity embarrassing ended up working out fine Fact one of them a razorfish it wasn't the deal we probably made the most money on it was not a smart way of doing it there was a lot of learning a lot of going and talking to other BC's you know we're not especially impressed with corporate they say so they took the meetings and I'm I'm glad they did because I looked I learned a lot I don't think they learned anything foundational and you said before that I was wrong and that dead end
00:04:25cellular structure makes sense of the ones who look at venture-capital Mark and more like the stock market where you invest in a company and you try to make smart Investments and then you sit back and see how it does not forming the way you want to you stop investing it can exit the way you can with the stock market but you can even stop investing Venture generally been making a lot of Investments makes sense even more Investments you make with generally the higher the average investment return will be and that's because of the way that their power lettuce and a couple of posts about that but generally it's not like a normal curve where the more Investments you make them more closely you align to be average return the top of the bell curve with the Powerball the more Investments you make the higher your average the same in terms of quality
00:05:25work to help a company succeed extraordinary Gardens of the ones where the gardener that is how to work it can't just say that if I plant a garden is going to be a lady Investments and 800 Investments that works if the Investments you make of the ones where you're following people who are doing the work so if you make 100 in decimals in companies that were led by Sequoia and Benchmark and Union Square Ventures yes that's a great strategy you can do that if you're making a hundred vestments where you are the lead or there is no lead and nobody is helping me out for dinner then I think that's not going to work so yeah I'm a Believer in a more Hands-On in being there to help you out when I needed it is only certain types of Health Adventure capitalist can really give a portfolio company and I can't dig in and program or do the work of the company itself has to do but they can help with strategies
00:06:25iron with raising and I follow on rounds all those things are critical and I found over my career and it's been 20 years now maybe Sunday, then I will not be coming on for during the night over 20 years ago that only come then I added some time in between when I started my own company and then I've been Angel Investing after 10 years in my experience is the company's where there is nobody involved from the beginning on the board helping me on Corner tend to do a lot worse in a cup is where there is something so you can actively help the Johnsons. Up success and if so and I have examples although I'm not going to name companies not going to take any credit from the founders who built those companies they deserve all the credit so there was a company where I was the first investor and the board was me and I found it now this was very
00:07:25early-stage and every month we sit down and we can say alright well I would ask him what have you done this month okay great what do you plan to do next month and this was our monthly board meeting for a 6 months and continue driving I know that it's easy to get lost in the weeds and fixing some small elements of the code for a month because focus on details right but we need to continue having major improvements made every month so you're moving towards Market that you're sticking to your plan that you're doing what you told me you were going to do and I'm not the person in the back cracking the whip but I'm just helping them do what they said they were going to do and that I think is important for Founders to do
00:08:25you should have a board from day one and I know that's not the popular opinion especially with Founders what's the typical conversation I had with Sounders is looking need a board oh well you know it's a lot of work so you know they shouldn't be a lot of work what you should show the board in the first year is the same kinds of things that you're looking at and you have a product plan you have a wireframe you have something that your building and you should be keeping track of what you feel is right in there there should be some structure to what you're trying to do and then you should be keeping track of what's getting done right and obviously so show the board exactly what you're looking at and talk about it that's all it's not like you have to show complete your projections and emotions and that kind of thing it's all you need to do is sit down and talk to somebody once a month because it adds an element accountability that helps you get things done and you and your dog and hopefully your dog likes you better than me that's fine but you need somebody right it does not be me could be anybody who's not part of the company who is an outsider who knows what they're doing I don't care I just want you to
00:09:25talk to somebody every month about what is actually happening in and be forced to talk to somebody because of the board regular scheduled meeting between found a how do you think about that in those very very early days and having that kind of truly trusted relationship you as a board member I am responsible for the investors interest in the company then that's part of that stuff anushya responsibility but also as an early-stage board member I'm there to help the company succeed by helping the sound or succeed and for me you know the way I do it as I say look I'm going to take off this how to put on that I will be explicit about whose interests I'm representing in any given time versation their conversations where I'm not speaking as a board member right now just speaking as a friend of yours and it looking out for your interest
00:10:24which role you're playing depending on what you're saying is important appreciate knowing that they do know that as a board member yes you have a duty to look out for your shareholders responsibility colors Investments and by saying that but you need to treat the fact that Cheryl this fairly and here's what you need to do that they at least know where you're coming from when you were saying something else I found the first will you have to be company first but my experience is when you remove the founder from a company the company almost always does worse okay if you're at the series C and you decide to bring in a professional see because the founder doesn't want to manage people or whatever fine maybe I don't know because I'm an early stage investor the first few years I company you almost never bring in somebody who's going to do better than that founder would have done who are you going to hire in a company which is clearly not doing well because that's why you're removing the founder that is going to be more motivated to make that company work than the founder was and even from a purely selfish point of view
00:11:24is more of a mercenary than a Visionary I would have a 02 you with somebody who really helps him get off the ground so it hurts both the company and it hurts the investor as well that's the last 20 years were the founder has left the company because we brought in a new CIO and they didn't want to be second fiddle a minute ago and I'm going to swing by as many Founders and fellow board members so fast so you can use that way then why do you think they were so good great and Josh Kaufman has was awesome loaded aboard with him for awhile socialism because he had their premises from a base of experience at at also because when he did so he didn't do it by in a way that the founder of would have a hard time accepting it never made the founders defensive you could leave them to the right answer your Matt Harris Bank Capital was
00:12:24he was in the board of simple with me up inside company and we would have discussions where the founder of start talking about something that was early Arcane and they would start talking to them and it would be like they were all speaking Greek sitting there staring at him he knew his sucks and is also the kind of person wearing you never doubt that he is on your side and wants you to succeed because I think he's news always on your side wants to see them easy is just so sincere those two great guy is Rodger Ehrenberg was No Nonsense new exactly what the company should be doing to make it more valuable capacity to I love his writing but I do want to go to jump a few steps back going from surround conversation. Jason lemkin said to me before they Fred Wilson and steals to win I guess
00:13:24founder and I pitched a TV series to raise my round mainly because the idea ended up really I should be a very bad idea but we didn't realize it two steps to winning a deal one is being one of the first people that talk to the right thing top of their list and 2 is having an open and transparent and Rapid process to come into a decision so how did we figure out which species were going to talk to you first well we went down the list of these sees that we knew I was and said who who would be interested in this company would actually take a meeting with us and no we're talking about and not waste our time and we made that list and then we went down that list we said alright which of these these these are just complete assholes and we took that half out and then the other half we set up which of these people can we get a warm introduction to getting warm directions to all of them but some of them we got warm directions to immediately and son we got warm and directions to later as we went through the process
00:14:24it's longer so I found her talks too I think you need a couple things one you need to be interested in what they're doing and they need to know that you're interested what do it right so what technologies are doing what markets are going after what you have her feet are in the stage they're at right they need to know those things so you need to broadcast that you need to have a good reputation among other entrepreneurs because they're going to ask which of these people should we talk to him we couldn't who should we waste our time on so you need the reputation and then they need to be able to get to you right so you need to have a way that I can reach you quickly but not so quickly that the people who really aren't qualified love you with details right so you need a filtered mechanism for them to reach you immediately once they decide to introducing the two Founders and a lot of it comes down to just making sure that they know that you're the person who they should talk to so is that hustle yeah it's partly hustle partly it's hard work
00:15:24think that it's impossible to actually do overtime to build it up so the right people get to you and I can't agree more on the groceries that I have a lot of Divergence paintings on the show is price sensitivity Silicon Valley has been sir talking about for the past 10 years that you know doesn't matter what the entry price is because the outcome is either going to be huge or nothing I think that even if that were true if you have a bunch of binary decisions you end up with a binomial distribution right so it does matter what the price is that said it it's hard to know exactly what the price should be a lot of pricing decisions are taken as what is the market paying for the Serta company now alright that's what I need to pay the only time that a couple of years ago I just every company I saw was overpriced and I ended up passing on the minute not because I didn't like the company but because I would say that I can't make money
00:16:24investing at this price that you want average so I have to walk away then usually was a bad somebody else would promised them that price and I said you know that's great you should take it but not for me the exits in the markets that I'm in so I have a spreadsheet of hundreds of exits in Enterprise software and I I kind of have a feel having done all that research for what the sweet spot for an exit is depending on what type of caffeine is how many customers there are how big the customers are that's what I've been so when it comes to this sort of company could exit for your sweet spot 600 million + is there how long does it take to get there you can work out a reasonable price for today and that's your typical Venture Capital method valuation that doesn't she look at the best-performing Venture funds in history at least seed stage like things like us a 2004 you will find that they started investing in a market where are the market price was below the indigo
00:17:24discounted price Wendy Market is above where the indicated discounted prices those funds to do worse so you know what I do try to put some sort of analysis in there in addition to having an idea of what the market is paying I have so much respect for using x a kind of investment decision making baking soda and doesn't change with time and we kind of the development of species and day so that you just mentioned to tell you that you're making a stupid decision either an entreprenuer or an investor is by nature an optimist mean you have to be I find it I'll take a meeting with a company almost any company and I will walk away from that meeting taking that is so awesome it's amazing it's the best thing I've ever heard of so I have a rule that I have to sleep on everything because the next day things seem more normal so I'll look back at what questions do I have my never make a snap decision because if I make snap decisions I would
00:18:24always say yes do you have any other ways to check your own thinking to come every assassin's come in for the tea what's the market what do I expect to happen here I talk to investors who might son to the next round so I'll call up a series a investor and say hey what do you think it's way too early for us not be too early for you what would have to look like for it to not be too early and if you do that you can actually start to send goal posts for the company is okay he's going to need five million dollars and ARR to raise series a capital at least according to the couple people I talk to you how do we get to five million dollars in a r r with the money that we're putting into this rant is it possible can is company get to getting the series a rest that's not saying the company will end up being successful but it at least eliminates of some of the financing wrist that you face an antenna as a financing
00:19:24can you always tells me that hair even sees about changing a product to sell them to the next guy for more money would that be a fair assessment in a very mechanical normal human way it sound like you're trying to build a lily right now you're trying to sell them something that's not actually true I do think that you need to know what the company needs to look like a raise more money in it and some sense that's equivalent to guide the company to that place got a lot of conversations I have in the first year was Founders are along the lines of your company needs to look like this you need to get there or else we can't raise more money so is that packaging I think it's not packaging so much as it actually making progress towards with a company needs to be making noise fascinates me is the second part being the phone
00:20:24Carreta in a company because I think 52nd and Dustin is a much better investment in the first investment made the people on investing in typically have never started the company before they never run a company before there is a lot that you need to learn about what they're doing the only way to learn it is to buy watching them do it so if you spend a year with the founder then you have a much better idea about whether or not you want to put money in their company you can't spend a year with the founder and let's get money to the company so the way I look at it is my first check is sized so that I have enough money to make a substantial investment in the second round what about ends up being called so I have twice as much money in second round is first round obviously the first round investment has a better multiple in the end it's just that's how it works but the second round of best man is much better risk-return investment so I'm a huge believer in doing follow-ups you say semester I spoke to Mike Maples and he said that often to bridge to nowhere around especially for those stages
00:21:24I realize that if I was going to write a seed check it was called to see check back then I guess we'll be pre-seed now that I was also going to have to write a second check to keep the company going because the gap between rounds and grown so large so is it a bridge to nowhere I don't consider that a bridge so much as a trench to investment and I think there's a difference around size for the earliest rounds should be larger than it is but because people tend to continue doing things the way they had been done they just isn't so crazy pre-seed round if I work at your most certainly going to need at least another million to get to the series I so there's a second round maybe a third round know what they're called get a changes but it is really a transgender I'm putting a little bit of money in the beginning and reserving more so the company is actually doing what they say they're going to do that I can put more money at you know I think part of the reason that my returns have been I haven't lost a lot of money cuz you concern counseling because my first check is smaller than most companies fail in the first year so into photo on light many phones they will always write the second check
00:22:24part of that is because I can't leave the second round so if they have a lead to the second round. I think I have always invested I don't tell them I always will but I have always so that means they have to convince somebody else of the company is worth investing it so it is a little easier for me to not have to make a decision I'm not I can't leave the second round to be able to say yes or no corners you have to let them know up front what it is you're looking for it you're going to leave the second round that's the only fair way but you have to have done these things you have to have gotten this far and it's always a bit hard and I think you know where is it coming from it's always hard when they're like well we haven't done those things but we're months away just breathe just to getting that done and then it's a question of all right will your a month away is this real or is it that you're not it just isn't happening companies that always say we have the contract isn't legal at the giant client in my experience somebody you know if the contract is an illegal for a couple of weeks that means it's not happening so
00:23:24it's a hard game but I just want to dive into my favorite of any and she being the quick. We should do this in person and you one day at a Nintendo and how it conquered the video game business back when you know Jack Wilson said there's no such thing as work-life balance there are only trade-offs and I think maybe I like to include my kids in my discussions about work sometime
00:24:24I believe the world is getting better which is hard to believe sometimes these days in America but I do believe that the world is unattractive getting better over time you know two steps forward one step back but I believe that changing VC in startups taking more risks in trying to help Founders who are inventing really new things that you change Industries as opposed to just trying to find things that might make them some money in the short-term but I don't think that's a great strategy Anna I don't think it does much for anybody else is uncertainty said to you how many personal computers will be sold in this country because he gave a number it was it was a lot of uncertainty there was no way of knowing it was all right so I do think that DC is investing uncertainty not risk and if you
00:25:24send it to risk then you're fooling yourself or I think he should invest uncertainty and not risk but they're quantitatively different concepts to truly Rich Steven incredible New York for 20 years although only 40% of my investments have been in New York Cycles I think back in 1997 you could get every entrepreneur in New York City in to one bar and and people did that now it's enormous the ecosystem in a well ahead of any other place except for the San Francisco Bay Area it's amazing to me how much a market for shredding companies over the next 10 years I think they can a little two steps forward one step back last couple of years I've been a little quiet I'm looking forward to the next 5 years
00:26:24ecosystem but I do want to finish today on your most recent publicly announced investment my you said yes Nick to cough and his co-founders for years and was impressed with them they knew their industry really profoundly they had found a problem which people are solving in a small inefficient way and decided that it can be solved in an efficient way and create an entirely new and very large market and the problem they were solving is a pretty profound problem paying for a college education to spray team big idea Newmarket that can grow quickly and big problem it's been such a pleasure to have you on the show
00:27:19I said was so special type Jerry on the show you that and as I said Reaction Wheel Jordan that is one of the best blogs on the bench Kathleen the street Cherry one of the deepest think is that I've ever come across he's been incredibly kind and helpful to me am I so appreciate his friendship say thank you so much for that Jerry but before we leave you stay Browns and I'll turn into small Subways and crazy video and Digital Underground spell maintaining or improving the quality of bronze and agencies to Vegas for thinking companies to save time and costs planner in comparison of the global Network who created creative Talent Global not like that well place to continue to respond to take on the welds cone time to Mom's produces ammo boxes looking for the best creative can get the shortest term of idioms account managers and Alice Taylor to that project needs and we need to submit a brief today
00:28:19industry one supposed to the 20-minute BC also comes from one of the capsule the easiest way to invest in Los scale solar energy projects with one that you can turn your Blu energy projects and 20 minute VC investing needs capitalism as I can always bring you an incredible episode on Friday with Jesse Genet at Lummi

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